Precious metals re-bounced but danger is ahead

It was a trading week with two different halves for precious metals. All four precious metals ended the week higher compared to the Friday before. However, at the start of the week, especially gold was weaker and fell to 1.277$/oz, the lowest level since February 11, 2014. Thus, gold corrected more than 50% of the rise from the low of this year. While silver traded sideways at the start of the week, the PGMs already continued to recover.

On the one hand, the weakness of gold at the start of the week could be explained by the fall below the 1,300$/oz level, which triggered further selling and physical demand in Asia was not sufficient to prevent the slide. However, it was also the development of stock markets, which weighed on gold as investors switched funds from gold into equities. This could be seen by the gold holdings of the SPDR Gold Trust ETF, which declined by 6 tons in total on Monday and Tuesday to 800.9 tons.

What has driven US stocks higher and gold lower on Monday was a speech given by Fed chair, Mrs. Yellen. She stated that the US economy would still need support by a monetary stimulus. Some analysts and traders interpreted this statement as an indication that the Fed might not hike the Fed Funds target rate as soon as the market expected after the recent FOMC meeting. However, the FOMC remained on track, and neither the remark of Mrs. Yellen at the press conference nor the statement made last Monday are a hint of a policy change. The sentence, which excited traders on Monday, is just underlining what is obvious for those with some understanding of monetary policy. If the FOMC were not thinking that the US economy still need the monetary stimulus, the committee would have terminated QE3 already completely. That the Fed pumps $55bn into the US bond market this month could not be justified if the FOMC were convinced that this stimulus would not be needed!

Furthermore, this statement also does not alter the outlook for the first hike of the Fed Funds target rate. The most likely scenario is still that the first increase will take place in mid-2015. Currently, the FOMC reduces the volume of bond purchases by $5bn for the US Treasuries and the mortgage bonds respectively. Maintaining this pace implies, that the FOMC would decide at the October meeting to end buying mortgage bonds and at the December meeting to terminate purchases of US Treasury paper. Thus, six month after the December 2014 meeting is right in the middle of 2015. And this date had been mentioned by Mr. Bernanke already about one year ago. Thus, the words might be different, but the message remains the same. However, that the Fed Funds target rate will be positive again in real terms could only be expected to take place in 2016 given the FOMC projections for the Fed Funds rate and the inflation rate. Thus, the Fed monetary policy will remain expansionary for two more years.

The turn-around for gold came on Wednesday when the market shifted its focus on the forthcoming US labor market report. The ADP estimate already provided an indication that the non-farm payroll figure would be solid. With an increase of 191,000 jobs created, the actual figure was very close to the consensus among Wall Street economists. However, the figures for the first two months of 2014 had been revised considerably higher. The unemployment rate remained unchanged at 6.7%. The FOMC already takes into account that further improvements of the unemployment rate might be harder to achieve as persons who left the labor force might return with a better outlook for finding a job. The average hourly earnings remained unchanged in March. All in all, this labor market report provides just confirmation that the FOMC is likely to maintain its current policy.

The labor market report triggered the rise of gold above the 1,300$/oz level. However, we don’t regard this move as justified by the fundamentals. The ECB kept rates unchanged. However, ECB president Draghi talked about measures of quantitative easing during the press conference. The ECB council has not yet made a decision. But it looks like that the ECB staff is working on a blue print for QE. Some of the details have to be finalized. Overall, it appears to be only a question of time. According to a report in a German paper, the ECB would simulate the impact of QE in the volume of 1,000bn Euro. If such a package would be implemented, gold might get on the same path as after the announcement of Abenomics in Japan. The Euro would probably weaken against the US dollar, which is likely to send gold lower.