Platinum shines strongly among precious metals

Platinum develops better than gold in percentage terms. But whether this is going to continue in the coming weeks and months will depend largely on the development of the automotive industry. The sales figures show strong gains in the first quarter and the results were better than expected. However it is questionable, whether the car shares rise more strongly, as they are already clearly overbought. If auto stocks correct in line with the overall market, then this should also have a negative impact on the relative performance of platinum over gold.

We have in this blog several times already criticized the German Federal Government, in particular Chancellor Angela Merkel, for the policy in the Greece-crisis. The always hesitant attitude and vague statements have given Greece no rest and relaxation on the financial markets, but only exacerbated the crisis further. Also, it was not a smart idea from the Chancellor involving the IMF in a rescue operation for Greece. Fueled by statements of some U.S. economists this has only exacerbated the fear of Greece declaring state bankruptcy. This has weighed on Gold as new lows in the EUR/USD exchange rate are negative for gold. Another negative factor in the previous week was the SEC action against Goldman Sachs, which has reduced the risk appetite of investors and also the precious metals suffered under increasing risk aversion.

The platinum group metals are not spared of the negative developments in the foreign exchange markets. But the industrial use of the PGMs for catalysts in the automotive industry plays also a significant role and at present offsets the impact of the EUR/USD exchange rate. With the start of the global economic crisis in the autumn of 2008, which was triggered by the financial crisis and the bankruptcy of Lehman Brothers, some countries have established incentive programs for the purchase of new cars (scrapping premium in Germany, cash for clunkers in the US). Automotive experts, such as Professor Ferdinand Dudenhoeffer (a “leading German expert”), had criticized such programs as ineffective, indeed even as harmful to the automotive industry. After the expiry of the incentive program, there would be a massive slump in demand for automobiles, which would not only delay the crisis but would even make it more severe.

But it came back a different way than the professorial experts had predicted. Although the sales declined slightly after the expiry of the programs, but in most countries car sales in the autumn of 2009 were higher than the year before. In particular, the car sales have risen considerably in China. This shows the success of the Chinese government’s policy to boost domestic consumption. Thus, even automotive brands, which have benefited little from the incentive programs, could increases car sales significantly. Last week, some automobile companies exceeded expectations considerable and reported surprising results for the first quarter of 2010. This argues for a further advantage of platinum compared to gold in the short run. 

The chart shows the ratio of gold to platinum price. A falling ratio means that platinum performed better than gold that is either increases stronger or decreases slower in percentage terms. In the previous week, this line has reached its lowest level since September 2008. At the same time, this represents a correction to the 61.8% increase from June 2008 to peak in December 2008. This Fibonacci correction is seen from a chart-technical point of view as a critical level. If the ratio of the gold and platinum price could continue to decline, then the low of June 2008 might be reached again as a target, suggesting a still significant potential for better performance of platinum. But in the case that the line does hold at that mark, then gold should receive sufficiently strong support and could perform better. At the same time, the chart shows the price of Daimler shares (other European car shares, with the exception of the Volkswagen Group would show a similar development) with an inverted left-hand scale. It is striking that platinum often performed better than gold when the Daimler share price has increased. After an increase of around 30% in two months, the stock is now clearly overbought. The international stock markets are overbought after two months' rise, too. The risk of a correction in equity markets has therefore increased significantly. And the case of Goldman Sachs shows how nervous investors are and how quickly risk aversion can rise. Falling stock markets, especially in automotive stocks would thus also be a negative signal for platinum, which should then perform worse than gold.

Copper could be due for a correction

When a market is no longer increasing on good news, this is usually a sign of a turnaround. This is the case for copper. In addition, the market doubts whether the fundamentals justify a price of about 8,000$/t. On the last Friday, in the course of the afternoon also the chart-technical situation has changed. Furthermore, also other industrial metals could be drawn down in line with copper.

In China, the largest consumer of copper, GDP in the first quarter of 2010 increased by 11.9%. Although the central bank had taken restrictive measures in January, GDP growth accelerated further. We had noted previously in this blog that increases in minimum reserve requirements and the restriction of credit would only slow down the pace of growth, but the increase in the demand for copper should continue. The message of China's GDP growth would actually be positive for the copper market. But copper has not been able to cross above the threshold of 8,000$/t significantly. In the market, the growth rate has once again raised worries that the copper demand could decline.

A further increase was prevented also by worries that China is deliberately taking measures to cool the property market and to avoid a bubble. This policy is under medium-term aspects positive for the copper market, as it tries to avoid, other than the monetary policy of the Fed, a collapse in demand and achieve a more even level of construction activity in line with demand. It does not mean that the central bank, the Peoples Bank of China, would bring about a slump in construction. However, the short-term demand for copper should be expected to be lower than it would be the case if construction activity would be unbridled.

With the crisis in financial markets in the year 2008, China has fixed the exchange rate of the yuan against the US dollar and now considers a return to a managed floating. This, too, has had a negative effect on the copper price on Friday. The market fears that a revaluation of the yuan, which is to be expected with a controlled floating, although the prices of copper in yuan would cheapen, but China's exports were likely to suffer from a stronger yuan. We consider this argument is not convincing enough. It would only be negative, if China would export all the copper imports after further processing, ie, exports alone would determine the amount of copper imports. With a yuan appreciation copper is also cheaper for domestic consumption and this may be the overall determining factor.

Only on Friday afternoon, copper came but under strong selling pressure. However, the trigger for this has not the least to do with the fundamentals for copper. The news that the U.S. Securities and Exchange Commission brought a fraud action against Goldman Sachs and an employee in connection with the issuance of a CDO in 2007, led to a sharp rise in risk aversion of investors, from which the metals markets were affected. Even gold, which is often regarded as a safe haven, came under massive selling pressure. This change in mood of investors is unlikely to reverse overnight. After copper has traded sideways in the last two weeks, it came to an downside breakout on Friday. Copper could therefore drop further.

In our forecasts for copper prices, we have assumed that the price in the current and also the following quarter would correct lower. However, this decline would not be due to a slump in demand from copper consumers. Rather, we expect that the leading indicators, as the OECD leading indicator showed earlier last week, were rising still, but losing momentum. Financial investors are likely to use this as an opportunity to take profits in base metals. In the case this coincides with a growing risk aversion, then a more pronounced correction in copper and other nonferrous metals might be looming and this, despite the LME warehouse stocks of copper could fall further.

Gold at new high of the year

After the gold price has risen on last Friday to a new annual high, gold could advance further to the next psychological mark of 1,200$/oz. But investors should be cautious. Because it is not the usual fundamental factors that have led to the rise in prices, but because of panic on Greece national debt. If markets return to a sober analysis, then gold could follow the fundamentals and give back the gains.

As stated earlier, the crisis of the high Greek budget deficit is a burden for the euro and is thus negative for the gold price. But it could become a supportive factor once gold is bought up in panic over a bankruptcy. Exactly this situation has occurred in the past week. And with these movements in the markets, two prevailing assumptions have been refuted. When asked during the recent ECB press conference to comment on the market development, ECB chief Trichet replied that the markets were always right. But this is not the case. Central bankers consider themselves infallible. However this statement of Mr. Trichet is obviously not correct. Second, it is often said that information would be processed rationally by the market, and thus academics in their models assume the hypothesis of rational expectations to be confirmed. They were already proofed wrong in the financial crisis and it is not true also in the panic of investors in the past week.

A panic can then be viewed as a rational behavior when it is triggered by new information that is true and leads to a completely new fundamental assessment of the situation. However, if the new information could be easily identified as false, a panic is an irrational behavior. In the case of Greece the panic was triggered by a message from Market News International that according to an unnamed government source, Greece's would refuse to ask the IMF for a loan because of possible conditions, but would try to negotiate a new assistance pact with the EU Heads of States. Greece's Finance Ministry has denied this report, but this has only strengthened the panic in markets. Obviously, the fear of some investors has switched off their brains.

If the markets really process information rationally, they would have quickly classified this message as a hoax and the denial of Greece must be regarded as accurate. The German Federal Government with its rigid stance pushed through an agreement at the summit of EU heads of government on March 25-26, that Greece take a loan from the IMF, before the other EU countries must determine by a unanimous decision the emergency and could grant loans to Greece on market terms. This is the lowest common denominator the various EU states could agree on, and it is not even guaranteed that Greece actually would obtain aid from the EU. For their stance, Chancellor Merkel has received the name Madame No. The attempt to achieve a better result in new negotiations for Greece would be like the battle of Don Quixote against the windmills. And both the Greek Prime Minister and Minister of Finance acting wise enough not to take up this fight. If the market were truly rational, then it should have realized the message of Market News International quickly as a rumor deliberately scattered and it would not have panicked.

Certainly more serious, however, are reports that Greek citizens reduce their deposits with the banks. They have already reduced their deposits within the first two months of 2010 by over EUR 8 billion and this trend has intensified in recent weeks. Part of these funds should have landed on accounts with foreign banks, or held as cash. One part could have flowed also in gold, although there is no hard evidence for this. If you look but to the intraday movements of the gold price, it is noted that physical gold demand in Europe has not had a big influence. The significant movements have occurred with the start of trading in the US. Recent data from the CFTC on the "Commitment of Traders" covers only the positions to Tuesday April 6, the day the panic broke out. But already at that time, the net long position of major speculative addresses increased by almost 30 thousand to 203,446 contracts. It should therefore once again be the hedge funds that have speculated on an escalation of the Greek crisis and a run on gold. With a calming of the situation, they could also reduce their positions again rather quickly.

Better perspectives for base metals

The compromise in aid to Greece, the EU leaders have made at their summit in Brussels last Thursday, might lead to a short-term recovery in the euro exchange rate against the US dollar only and thus also the precious metals might profit merely in the short run. However, a permanent shift towards a stronger euro will appear as doubtful in the light of the compromise found. Since the precious metals react more strongly to the US dollar as the industrial metals, this indicates a better performance of non-ferrous metals over the medium-term. In addition, the recent economic data are a further indication of better prospects for industrial metals.

The German press, especially the mass tabloids, celebrated the relentless attitude of Chancellor Merkel in the question of EU assistance to Greece. But the refusing stance of the federal government, determined by internal politics, has proved as a disservice the euro. In particular, it is negative that Greece has to ask for an IMF-loan first. This means that the EU is not able to resolve its own problems without help from the outside (ie, primarily by the US and China). This does not create confidence in a currency some EU politicians have believed that it could replace the US dollar as a global investment and reserve currency. Not unduly, the ECB is concerned that an intervention of the IMF might interfere with its independence, which is also a negative factor for the confidence in the euro. It also appears doubtful whether the IMF under its statutes is allowed to grant Greece a loan as the problem in Greece is not one of balance of payments, but one of financing of the budget deficit. The third point to add is that the States of the euro area have to establish unanimously that Greece receives no credit in the financial markets any more before bilateral loans can be granted. Given the position of Chancellor Merkel, the stance of "no money from German taxpayers for Greece" could again become a stumbling block for a unanimous decision. The recovery of the euro from 1.327 up to 1.341 against the US dollar is likely to be primarily based on short-term profit-taking and replacement purchases of euro short positions and no medium-term trend reversal signal.

The industrial metals react less strongly to the development of the US dollar than the precious metals. In particular, gold is seen as a protection against a weak US dollar. Although base metals benefit from a weak US dollar, the fundamental factors of supply and demand play a greater role. The economic data, released during the preceding week, were better in the US than expected. It is true that GDP growth for the 4th Quarter of 2009 was revised down slightly, but the data for the current quarter indicate a further recovery of the US economy, which is after all the second-largest consumer of industrial metals. The Richmond Fed index rose from 2 to 6 points, while the consensus expected only a rise to 5 points. The orders for durable goods increased by +0.9% in the core rate, more than the consensus of economists had forecasted. In the euro zone purchasing managers' indices could also increase strongly from 54.1 to 56.3. In Germany, the Ifo index rose from 95.2 to 98.1 and thus has not only recouped the slight decline of the previous month again, but still achieved the highest level since June 2008. Overall, therefore, the economic data point to a further recovery in the economy and thus increasing demand for more raw materials. Therefore, even a less expansionary monetary policy in China would change little of this perspective.

Another important indicator of the economic outlook is the trend in the equity markets. In Europe, key indices reached a new annual high in the previous week and the US indices continued to rise. This suggests all in all that the economic outlook will be judged positively on the stock markets. This should also positively impact on the base metals. They should therefore perform better than the precious metals in the coming weeks.

Greece's problems continue to weigh on Precious Metals

As already stated in this blog, problems of Greece and the fear of state bankruptcy remain a burden on the metals markets for the foreseeable future, particularly for precious metals. The connecting link in this chain is the exchange rate of the euro on foreign exchange markets against the US dollar. But it was less the Greeks or even the infamous hedge fund that put the credit default swaps (CDS) markets under pressure, but politicians in Berlin. Most German officials can not cope with the requirements of solid government and are unable to solve problems adequately. The failure of the Berlin policy has put the euro and therefore the metals markets under pressure again. Also, this problem should not be resolved so quickly.

At the start of last week it looked as if the EU put together a package of measures to assist Greece after Greece took the additional savings measures, which were demanded by the EU and the ECB. At the recent press conference, ECB president Trichet praised Greece for the new budget explicitly. But the markets were disappointed by the EU finance ministers, after the chairman of the Eco-Fin Juncker told the press that there had been agreement on the technical aspects of assistance to Greece. It had been leaked, however, hereafter by EU sources that Germany had blocked more concrete statements on which the markets had been waiting. But then by mid-week, Chancellor Merkel shocked the markets with a u-turn of the German policy. She turned to stubborn and recommends Greece to take a loan assistance of the IMF. Germany would not agree to EU package of measures for Greece at the forthcoming summit of EU heads of state under any circumstances.

What are the reasons for the sea change in German politics? Ultimately, it is likely that the state election in North Rhine-Westphalia and the lack of political leadership by Chancellor Merkel as well as the crash of the FDP in the polls, after Foreign Minister Westerwelle rapidly losing popularity, which resulted in the Berlin chancellery to this u-turn. The CDU/FDP coalition in Berlin has in the few months since taking office lost so rapidly in approval that the Merkel-led CDU is threatened with the loss of power in North Rhine-Westphalia. This would also mean that the majority would be lost for the Berlin government coalition in the Bundesrat, the upper house. Aid for Greece is not popular in Germany and the mass media stir up negative sentiment strongly. For the party strategists it is the easiest way to float on this wave of sentiment, and thus, to alienate the voters, even if the unpopular support for Greece is the overall better alternative. While Greece's government under Prime Minister Papandreou explains to its own population the necessity of saving and convince them, so the government can count on broad support, Chancellor Merkel as so often lacks political leadership.

A support package for Greece does not necessarily imply or require that the money of foreign taxpayers, including the German citizens, has to flow to Greece. After all, the Papandreou government has not asked for any financial support from EU. For the financial markets, it is however important to know that Greece still has funding alternatives and is not facing bankruptcy. Requested from the EU are measures, which illustrate that EU countries support Greece, after the Government would implement the required fiscal restraint. Greece would certainly get an IMF loan, without additional restrictive fiscal measures being required. But the German Finance Minister Schaeuble has far quicker worked into the matter of his new resort than the physicist Merkel understands the laws of financial markets. As Schaeuble pointed out, the course of Greece to Washington for the IMF would send the wrong signal. It would show the world that Europe were not in a position to solve its own problems without the cooperation of the USA and China. Confidence in Europe and the euro could take longer-term damage. It would also signal to hedge funds that they had a free hand to attack the next victim. Once the sharks have tasted blood, they attacked the victims. The Asian crisis in 1997, originated in one country, but other countries were infected by the Asian contagion. Even Hong Kong, which operated a sound policy and its currency was firmly tied to the U.S. dollar in a "currency board" system, came under attack. If the EU can not agree on an aid for Greece and the country must take an IMF loan then Portugal and Spain could be the next victims. The euro is likely to remain under pressure against the U.S. dollar, and the speculation about an end to the monetary union could mount again. For the precious metals that would be first a negative scenario. Only once a flight of investors from the euro zone into gold sets-in, the price of gold in dollars might rise again despite continued euro weakness.

Precious metals might face a correction

The markets for precious metals could face a more significant correction. Although the fundamental factors influencing precious metals were positive in the weekly comparison, the precious metal prices, with the exception of platinum, traded lower. Experience teaches that when a market is not rising on positive news any more, but even declines, a severe correction is usually looming around the corner. In this case, even platinum can not escape the downward pressure.

Striking in the development of the gold price in the previous week was that the price came under strong pressure from the futures markets, when pit trading was opened in the U.S. In the econometric models of QCR Commodity Research Quantitative for gold and silver, the respective net positions of large speculators are one of the explanatory variables. But in the case of gold, the net long position increased by 822 to 208,194 contracts, according to the latest report from the CFTC. In silver, the net-long position even rose sharply by 4107 to 35,165 contracts. Overall, this is seen as positive. However, the CFTC data refer to the preceding Tuesday, thus, a reduction in net long position during the previous week is possible. In the largest gold ETF, the SPDR Gold Trust, a slight decline in the gold holdings took place on Wednesday of last week, but they remained constant in the following days.

In the weekly comparison, the U.S. dollar has depreciated against both the euro and also the trade-weighted index of the 5 most important currencies. The S & P 500 Index has improved slightly. The yield on 10yr U.S. Treasury notes rose as a result of positive U.S. economic data to 3.75%, but that overall, should be favorable for the metal. Only oil prices suffered a slight loss during the week. Overall, however, the fundamental factors were positive for precious metals.

The reason given by dealers for the decline of gold prices was technical factors. In fact, the spot price of gold has found resistance at the upper Bollinger Band already in the preceding week. At the beginning of the previous week, gold then dropped below support at 1130 $/oz and the short-term uptrend line has also been broken to the downside. An attempt to get back above this uptrend line has failed on Friday. Therefore, it seems very doubtful whether the support at the lower Bollinger band and the recent pivot low at 1088$/oz will hold.

Metal markets suffer from economic uncertainty

The metals markets have had to withstand considerable stress by economic data leased around the middle of last week. But these are likely to be distorted vigorously through the hard and long winter in the northern hemisphere. In the coming months, there should be a correction, which would positive for the metals markets. The example of Greece has shown in the previous week, how little the information-efficient markets are, contrary to the theory of rational expectations. It would take some considerable time before the crisis has endured. Hence the fear of a Greek state bankruptcy remains in the spotlight and contagion to other countries in the euro zone stays on the agenda. For the metals markets, this means that a weaker euro could further weigh on prices.

The metals markets have already turned into the red at the beginning of the trading week. But they came under huge pressure with the publication of two economic figures before they could recover towards the weekend. In Germany, the ifo index of business climate fell surprisingly from 95.8 to 95.2, while the consensus among economists was looking for a slight increase to 96.2. This decrease was caused by a marked deterioration in current business conditions from 91.2 to 89.8. The key here was the retail sector, which suffered strongly due to weather conditions. However, for the further development of business activities, the business expectations are more likely to be of importance. These have continued to improve and have increased from 100.6 to 100.9. With the start of the spring, thus, the situation should improve in the retail sector and should also improve further in other sectors of the economy. In addition, the weaker euro is helping the German export industry, which also does not argue for an economic downturn, even if the GDP growth in 1st Quarter could well again stagnate.

The second negative factor for the metals markets came just hours after the publication of the Ifo index with the release of U.S. consumer confidence. Although even the consensus had expected a slight decrease, but did not calculate with a massive drop from 56.5 to 46.0. Consumer confidence suffered from the development of the labor market in particular. But even here, the weather plays a role, as was also acknowledged by Fed Chairman Bernanke in testimony before the U.S. Congress. With the end of the winter season, the situation could improve again. In addition, it must be remembered that the plunge of consumer confidence needs not necessarily lead to a massive drop in consumer spending. Even for the significantly lower than expected sales figures of the housing market, the weather played a role. But it remains to be seen, whether the situation improves again. For the copper demand, however, building permits and housing starts should be the more significant factors.

These economic data have not only led to falling prices in the stock markets, but also to declining prices for crude oil and declining yields 10yr. U.S. Treasury Notes. These figures were negative for the metals markets. In the gold market, it is often argued that lower yields reduce the opportunity cost. However, they also reflect a worsening of economic assessment, and thus diminishing inflation risks. Therefore, this is negative for gold. Thus also the precious metals could not escape the influence of the worse-than-expected economic data.

Greece came under renewed pressure and the CDS rates and the yield spreads on government bonds have once again widened. This was triggered by the rating agencies. But have only affirmed old positions and thus repeated long familiar-looking statements. The markets are not information-efficient, but behave like somebody watching repeatedly a scary move and gets again shocked every time. The market initially waits for Greece to launch a 10yr. government bond. But even with a successful placement, Greece remains on the agenda. Only when the government shows highly visible successes, reducing the budget deficit to GDP ratio in line with promises made, the situation might ease. Until then, however, the euro versus the U.S. dollar stays vulnerable. Therefore, the euro could remain a burden on the metals markets.