Fed and US labor market report lift precious metals

After a weaker start, precious metals recovered lost ground. Only platinum failed to end the week higher. Last week, the precious metals decoupled somewhat from the movements of the safe haven government bonds. The influence of the usual major fundamental factors became stronger again.

There were two major events, which had an impact on precious metals, the FOMC meeting and statement as well as the US labor market report. For financial and commodity markets, the most important phrase of the FOMC statement was: “To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.”

Markets were relieved that the FOMC continues quantitative easing. However, a rational investor should have priced in this decision by the voting members. The vast majority of the FOMC already voted for these measures in December. The US economy has slowed lately somewhat due to weather related disruptions as the FOMC noted also in the statement. Therefore, it was rather unlikely that a majority of voting members would now terminate QE only one meeting later. The FOMC will not stop quantitative easing also at the next couple of meetings; bar there would be a miracle in the US economy.

Nevertheless, we still expect that the minutes will also show that the discussion about the risks of quantitative easing for the balance sheet of the Fed and for the political independence of the Fed will go on. Yields on 10yr US Treasury notes have touched the 2% mark several times last week. The risk of a break through this resistance level is increasing. A break above this resistance could lead to a rise by another 25 basis points to 2.25%. Given the low coupon and the high duration of the on-the-run issue, such a small yield rise is sufficient to produce capital losses, which wipe out the coupon income of more than one year. Thus, rising yields pose a risk for the profit and loss statement of the Fed. Like any other bond investor, also the Fed would have to consider this risk seriously.

Even in the case that the FOMC would already decide to terminate buying bonds in the second half of this year, this would not change its interest rate policy. The target for the Fed Funds rate would remain at the exceptionally low level until one of the two thresholds, either for inflation or unemployment rate, are reached. Normally, this should still be positive for precious metals. However, as many investors have the wrong belief that QE would be necessary for rising prices of precious metals, discussions about an end of QE could cap attempts of precious metal prices to move higher.

Precious metal prices also rose after the release of the US labor market report. However, it was somewhat strange that also stock and bonds markets rallied after the figures were out. The report of January is always a bit difficult to interpret due to the annual benchmark revisions. Nevertheless, the report was not that bad to justify a rally in the bond markets. The non-farm payroll figure was slightly below consensus, but preceding months had been revised higher. Thus, overall, there were more new jobs created than economists predicted. Benchmark revisions also had an impact on the household survey. The increase of the unemployment rate from 7.8 to 7.9% was the result of annual population adjustments as the number of unemployed persons was little changed at 12.3 million. That the labor market report does not change the short-term outlook for the Fed policy did not justify the rally. Later during the trading session, US Treasury note and bond futures pared the gains and fell even below price level prevailing before the release of the labor market report. This pulled also precious metals lower again, but they managed to close higher on the day.

We still regard the major fundamental factors as positive for the precious metals. However, during the first month of 2013, gold and silver were more influenced by the movements of the safe haven government bonds, the US Treasuries and the German Bunds. These bond markets could continue to correct and yields increasing further. This could have a negative impact on gold and silver and might even more than compensate positive fundamentals.