“Get greedy when others are fearful …”

“… and fearful when others are greedy”. This quote from Warren Buffet applies not only to stock markets but also for precious metals. Precious metals dropped on the first and the last trading day of this week. However, the economic outlook is better than the markets are currently pricing in. Thus, we regard the current weakness as a buying opportunity and not as a reason to sell.

The drop on Monday, where gold fell more than 1% while silver and palladium dropped around 1.7% and platinum plunged 2.2%, was attributed to selling by funds, which took profits. This view is supported by the statistics on holdings of the underlying metal by the biggest ETF for gold and silver. The SPDR Gold Trust ETF recorded a decline of gold holdings by almost 7 tons on Monday to 1,333.9 tons on Monday. Silver holdings in the iShare Silver Trust ETF fell by around 9 tons to 9,885.5 tons. Also the CFTC report on the “commitment of traders” showed a strong drop of long positions in gold futures held by the large speculators. They fell by 14,413 to 232,988 contracts in the week ending October 16. As the non-commercials also increased the short positions, the net long position declined even stronger by 17,329 to 194,020 contracts. In silver, the large speculators reduced the long position only slightly, nevertheless, the net-long position even increased by 303 to 40,128 contracts as closing short-positions was stronger.  

The drop of precious metals prices on Friday was triggered by the fall of stock prices on Wall Street. While the S&P 500 index manage to post a small gain in the comparison with the close of the week before, the index lost almost 1.7% from the previous day. It was not the 25^th anniversary of the crash in 1987, which drove prices lower, but disappointment about earning reports. Even if a company met earnings expectations, analysts wrote negative comments based on some figures being lower than estimated. Also the cautious outlook given by the companies weighed on sentiment. Investors feared the economic outlook would darken and uncertainties would rise.

However, this pessimism is not justified by the economic data released during the week. US retail sales in September rose 1.1% from the previous month while the consensus expected an increase of 0.7% only. Industrial production increased by 0.4%, twice as fast as the consensus predicted. Headline CPI inflation rose 0.6% compared with a forecast of 0.4% and core inflation was a modest 0.1%. This should be negative for US Treasury notes, but positive for precious metals. Furthermore, data from the housing sector also surprised on the upside with housing starts and permits coming in stronger than expected. Also the Philly Fed manufacturing Index rose far stronger than the consensus forecast. Beside positive data in the US, also the ZEW sentiment index for Germany and for the eurozone increased further.

Thus, the economic data indicates that the economic situation is improving and not worsening. As pointed out already in the article last week, companies provide often a more cautious outlook to lower earnings expectations. If analysts then revise down their earnings estimates, it would be easier for the companies to beat the lower earnings estimate. Therefore, we put more emphasis on the economic data, which is pointing towards stronger growth. This should be positive for the risky assets and negative for the so-called safe havens of US Treasuries and German Bunds, which offer yields below the headline inflation rates. These negative real yields are another argument to prefer real assets like precious metals as the opportunity costs are rather low. Also the risk/reward perspectives are more promising for precious metals than for safe government bonds. Thus, we regard the current weakness as a buying opportunity.