Quo vadis precious metals market?

ThomsonReuters reported recently that Analysts are bullish for gold. However, this poll is conducted quarterly, and thus, the assessment of precious metals analysts reflects more a medium-term view. The usual argument for the final four month of the year is physical demand for the festival season, especially in India. However, the high price of gold in Indian rupee as well as the import tax have led to a drop of gold imports into India. Therefore, on of the factors behind the seasonal pattern might fail to give gold a lift higher. Also the US dollar shows a seasonal behavior, which might be overshadowed by the ongoing debt crisis in the eurozone. Thus, there is considerable risk that analysts will have to adjust their forecast of rising precious metals prices by some month into the future. Therefore, a gold rally is probably more driven by investor demand than by physical buying from consumers.

Bloomberg polls analysts about their view on the move of gold over the coming week. This survey data is published on a weekly basis and analysts have to reply whether they are bullish, bearish of neutral.

For the coming week, the bullish reading has increased again to 50 and the bearish reading declined further. However, since the introduction of this survey, 50 per cent of the analysts polled being bullish is a quite low level. Only one third of the time, 50% or less of the precious metals analysts were bullish on gold for the coming week. Furthermore, our quantitative analysis shows that analysts’ responses reflect more the move of the gold price over the preceding week but have no significance for predicting the direction of gold over the next week. Thus, also that analysts got more bullish over the short-term is not a reliable indication that gold would head higher.

CTA’s and hedge funds usually go with the trend. The weekly report of the CFTC on the “Commitment of Traders” provides data on how these large speculators are positioned. After Mr. Draghi gave is speech in London and promised that the ECB would do whatever it takes to preserve the euro, financial markets interpreted this remark as indication the ECB would reactivate the dormant security markets program and would buy Spanish and Italian government bonds in the secondary market. This induced the large speculators to increase their long positions in gold futures. The net long position rose in the week ending July 31, by 13,087 to 126,064 contracts. However, after Mr. Draghi disappointed financial markets, the non-commercials reduced their long position in gold by 8,249 to 163,082 contracts in the week ending August 7. This is even below the level proceeding the Tuesday before the Speech of Mr. Draghi in London. The net long position also declined to 115,500 contracts but due to closing also short positions remained above the level of two weeks before. Thus, we have to conclude that even the trend following CTA’s and hedge funds currently do not see a clear trend in the gold market and expect further range trading.

Last week, most precious metals closed higher than the week before with only platinum ending the week lower. The US dollar strengthened again versus the euro as uncertainty about the ECB buying government bonds in the secondary market weighed on the single currency. The US labor market report did not lead to further selling in the safe haven government bond markets. The S&P 500 index as well as crude oil prices gained on the week and supported gold and other precious metals. The gain of the US stock market, which opened several days lower but managed to pare the gains, is remarkable, given the Chinese economic data. Usually, fears of global recession had been negative for stock markets. However, the decline of the Chinese CPI inflation and the almost stagnating Chinese exports, leading to a considerably smaller export surplus compared to consensus forecasts, give the PBoB and the administration enough leeway for more stimulus measures.

Thus, from our point of view, the major central banks are the key players for a rally in precious metal prices. However, it will not be by increasing reserve holdings in gold, but by monetary policy measures to stimulate the economies. The Chinese PBoP has already shifted to expansionary measures and we expect more cuts of key interest rates and minimum reserve requirements over the next weeks and months. The ECB has indicated to be ready to buy short-term government paper in the secondary market, but plays a game of chicken. Also the Fed stated again and again to stay ready to act when needed. However, the better than expected labor market report released earlier this month and also better than forecasted weekly initial jobless claims indicate that the FOMC might hesitate further with implementing QE3. Also the approaching US presidential election makes the timing of more stimulus measures for the Fed trickier. However, maybe the Fed conference in Jackson Hole later this month provides new indications. Thus, range trading might continue, but the chances for an upside break-out have improved.