Still consolidating

Precious metals are still in a consolidation and the outlook does not point to a short-term breakout to the upside. The past week was mixed for precious metals, after moving higher at the start of the week, prices came down again. Gold and palladium manage to end higher than the week before, while silver and platinum closed lower than the preceding Friday.

The positive start into the trading week was caused by the US labor market report released the Friday before. Some buyers of precious metals speculated that the lower than expected number of new jobs would induce the Fed to embark on the third round of quantitative easing. A look at the yield on 10yr US Treasury notes indicates also that bond investors are still convinced that the Fed would implement QE3 as yields declined further this week. However, those buyers overlook an important fact. The unemployment rate has declined further to 8.2%. And comments of some FOMC members indicate that the Fed is currently not considering any additional monetary stimulus. The indication to be ready to act when needed should not be misunderstood as this would be currently the case. Thus, the FOMC is likely to disappoint the expectations of Wall Street at the next FOMC meeting on April 24/25.

In the case that the FOMC does not indicate to prolong “operation twist” beyond the scheduled expiration by the end of June or to take any other measures of QE3 – as we expect - then the markets are likely to react as they did in March. The US dollar might strengthen against the major currencies and stock market indices and bond prices are likely to come down. This would also have a negative impact on the prices of precious metals.

We pointed out several times that it is a typical behavior of economists to become too optimistic after they have underestimated economic data for some month. This is currently the case. US economic data is coming in mixed. The PMI surveys for the manufacturing and service sector point to still robust growth. However, after some data came in lower than expected, the financial markets already fear a significant slow-down of US GDP growth. The risk-aversion of investors has risen and falling stock markets have also a negative impact on precious metals.

The eurozone debt crisis is back in the focus after last week as Spain sold new paper at the lower end of the target range only. Italy could sell sufficient amounts at auctions this week. However, as yields have risen since the preceding auction in March, some fixed income strategists and traders were concerned about the higher yields Italy had to accept according to market comments. Yields and CDS rates on Spanish and Italian debt rose. The situation calmed down after the member of the ECB directorate responsible for the bond purchase program, Mr. Benoit Coeure, indicated that the ECB could buy bonds of the two countries in the secondary market again. However, on Friday, the president of Netherland’s central bank, Mr. Klaas Knot, send jitters again among market participants by stating that renewed bond buying would be a far way off.

Mr. Knot’s comment was rather stupid for several reasons. First, it is the ECB directorate to decide about the timing of any bond buying in the secondary market. ECB president Draghi just recently confirmed that the security market program is not terminated. Second, After Mr, Coeure calmed down the fears in the bond market somewhat without any bond purchase this week, Mr. Knot has done the speculators attacking Spain and Italy a big favor. While he and the German Bundesbank president Weidmann oppose the bond buying program, the comment of Mr. Knot is counterproductive. Further pressure on Spain and Italy could induce the majority of the ECB council to vote for renewed bond purchases. Keeping his mouth shut would have avoided this.

The comments from the head of the Dutch central bank had not only negative consequences on the government bond prices of Spain and Italy. Stock markets turned negative and plunged after his comments. The euro weakened against the US dollar. In this environment, the safe haven had been the German Bunds and the US Treasury notes and bonds, but not the precious metals. Being regarded currently as risky assets, precious metals turned also lower after the comments from Mr. Knot.

As the eurozone debt crisis is back at centre stage and investors fear a slow-down of global growth, especially after China’s GDP growth came in lower than expected, the markets for precious metals are likely to remain in a sideways trading range. Currently, we see the risk more biased towards the downside. However, should the ECB surprise the markets by buying Spanish and Italian bonds again, also precious metals might move higher again.