Greek election and FOMC in the focus

All precious metals posted gains this trading week. The fundamental drivers were positive on balance and weaker than expected US economic data fuelled the speculation on QE3. Whether this will be repeated this week remains quite uncertain.

The poll stations for the general election in Greece were still open when this article had been written. The race between the New Democracy party, supporting the austerity measures implemented by the previous government, and the radical left-wing Syriza, which promised to cancel the treaties with the troika, is too close to call. A preliminary result is expected before markets open on Monday morning. There have been reports that finance ministers, central banks and also eurozone head of states would be holding phone conferences to prevent a panic in markets.

The best outcome would certainly be a victory of the New Democracy party with sufficient seats to form a government, at least with the PASOK party as coalition partner. In this case, Greece would continue the austerity policy agreed with the troika and would stay in the euro. In this case, the euro is expected to strengthen against the US dollar.

A government lead by Syriza would not be received positive by financial markets. A Greek exit might not be imminent as party leader Tsirpas always stated that his party would remain in the euro, but aims of getting rid of the austerity policy imposed. However, if Greece will not meet its obligations, the troika of EU, ECB and IMF will probably no longer provide any funds. Greece would default and would eventually decide to leave the euro.

The precious metals are expected to react with rising prices in the case that the conservative party would form a new government. A new government led by the radical left-wing parties might sent precious metals prices lower. However, in the case that central banks flood the markets with liquidity if Syriza wins the Greek election, a decline of precious metal prices might be short-lived.

Also the two-day FOMC meeting taking place on Tuesday and Wednesday will most likely have an impact on the price of precious metals. Weak economic data released lately had been positive for precious metals as the market speculated on further quantitative easing measures by the FOMC. We also pointed out the likelihood has risen with the recent US labor market report. However, we only expect that the FOMC will continue “operation twist”. This operation is designed to be neutral on the balance sheet of the Fed. Purchases of longer-dated US Treasuries are funded by selling US Treasuries with a rather short remaining life. The risk is that the markets have already priced in a balance sheet extension instead of only a prolongation of “operation twist”. In this case, the precious metals might head lower again.

On Monday, the G20 meeting takes place in Mexico. The crisis of the eurozone and the lousy crisis management by the European politicians, especially by German Chancellor Merkel, is probably still high on the agenda. The G20 meeting has more potential to disappoint financial and commodity markets again than to provide a positive surprise.

The coming trading week in precious metals is most likely dominated by political factors. Volatility might remain high. However, the uncertainty about the political developments makes a sound forecast about the market direction more like predicting the outcome of tossing a coin.