Panic on financial markets weighs on metals

The international financial markets are in a state of panic, and this weighs on the metals markets. Even the precious metals can not take advantage of their status as a safe haven but are under considerable pressure too. As long as there is fear among investors, the metals markets should also struggle to recover.

"We have nothing to fear but fear by itself" This quote a former U.S. President, which was taken up by the former Fed chairman Greenspan during the crisis after the bursting of the dot.com bubble is also true in the current situation again. Markets are dominated by fear, initially that Greece would go bankrupt. After the yield spreads over the Bunds as benchmark for the eurozone had widened and the CDS had risen strongly, the rating agencies fanned the fear further with the downgrading of Greece, Spain, and Portugal or with the threat of deteriorating ratings. A rescue package for Greece missed the expected effects on the markets due to the reluctance of the German government, particularly of Chancellor Merkel and Foreign Minister Westerwelle. Although Greece was hereby able to meet the payment obligations in 2010 and 2011, the markets fell further into trouble. The EU had to agree on a second bailout package totalling 750 billion euros and the ECB has taken the decision to buy government bonds from the countries concerned in the secondary market. But even this could not calm the situation sustainably and the euro fell to 1.21 versus the US dollar.

The widening of the yield spreads for the countries of the euro zone periphery, which went so far that Greece could not finance on the capital market, naturally has an impact on the budget policies of the countries concerned. They have taken additional measures to reduce the budget deficit and avoid a further downgrading by the rating agencies. Actually, this would have to be welcomed by financial markets, as it reduces the likelihood of bankruptcy. But in the financial markets, it has only reinforced the fear. Now the major fear is that these savings will reduce the growth in Europe. But this overlooks that the weak euro makes a positive contribution to the euro zone economy as exports get more competitive.

The culmination of the panic in financial markets was recorded in the past week and starting point was once again Germany. The Finance Ministry has informed a long time that it is working on a bill, among other things, also the general prohibition of naked short selling is scheduled. Thus, in fact, the decision of last Tuesday to ban from Wednesday on naked short sales in shares of financial institutions, government bonds in the euro zone and the purchase of CDS without actual risk positions should not come as a surprise. Nevertheless, the financial markets panicked. Markets have overlooked that covered short sales are still allowed. This is actually the normal procedures to the financial markets. Especially pronounced was the panic on the U.S. markets, although here naked short selling is not allowed for some time. Furthermore, in Germany the settlement in the spot market takes place after two or three days, thus, there is little scope for naked short selling anyway. Thus, the financial markets have made a mountain out of a molehill and fell panic. The comments in the media have intensified the panic. In this situation, it seems almost paradoxical that investors did not flight into the safe haven of gold, but in U.S. Treasuries, whereas the debt of the United States is significantly higher than that of the eurozone as a whole. Even Bunds continued to rally, even though they are no longer needed as an instrument for spread trades against bonds of the periphery in the case the ban by Germany should be as effective as markets fear.

On the metal markets  it is argued that investors needed to sell gold to cover losses elsewhere. This argument is unconvincing. The stock markets have fallen in the first week of May already under pressure and it came to the so-called "flash crash" in the US. This should have been even then a reason for investors to sell gold to cover losses in stocks. But gold continued to rise up to a new record high. The latest data from the CFTC on the "commitment of traders' does not provide evidence that the large speculators have liquidated their gold positions to a considerable extent. Furthermore, the gold holdings in the largest gold ETF, the SPDR gold trust, increased in the previous week yet.

The precious metals are regarded among investors as a risky investment. It often appears that the prices of precious metals also come under pressure if the risk aversion of investors rises dramatically. Then not only stock prices are dropping, but also metal prices are falling. The volatility indices like the VIX in the US or the VDAX are regarded as a measure of risk aversion. Both indices have increased significantly in the last week and have more than doubled since the lows of April. In the previous week, they reached the highest levels since early 2009. It often appears that gold gives way to a sharp rise in VIX index. It is a negative factor for the metals of the platinum-group that the car's shares also fell strongly in the previous week, which is considered in the markets as a sign of lower demand for platinum and palladium from this industry for the production of catalysts.

The other fundamentals have not developed positively for the precious and industrial metals. The US economic data were somewhat weaker than expected. The oil price has fallen temporarily under the mark of 70$/bbl. Although the US dollar traded weaker versus the euro in a week-over-weeks, comparison, the euro traded very weak at the beginning of the week and EUR/USD fell to 1.21. But the U.S. dollar traded firm against other major currencies. Thus, the US dollar was probably on balance more a burden for precious metals.

On Friday, the US stock recovered in the last hour of trading after the indices had pared previously made profits. In the case this was merely short covering before the weekend, the market could remain under pressure in the coming week, which would be negative for the metals markets. However, if the stock markets continue to stabilize, then this would be positive for the metals markets. But given the panic in the previous week, continued caution is appropriate.