Increasing risk aversion hits precious metals

As pointed out over the last few weeks, the risk on and risk off trades of investors not only move stock and the safe haven government bond, but also the metals markets. Given the movements of the major fundamental drivers over the last week, gold and silver held quite well, while the PGMs and other industrial metals have been hit hard. However, is the pessimism among investors and traders really justified?

Economic data released during the course the week in the two major economies came in stronger than expected. In China, the flash estimate of the HSBC manufacturing PMI increased from 47.9 to 49.1. While this reading is still below the threshold of 50, it is the turn-around that matters. Also the recent Chinese data on Q3 GDP growth showed a strong 9% annualized quarter-on-quarter growth, which also points to a rebound. These figures are good indications that the slow-down of the Chinese economy has come to an end. Also US economic data surprised positively. The GDP growth increased from 1.3% in the second quarter to 2.0% in Q3 according to the first estimate. Durable goods orders rose 9.9% on the month, while the consensus was looking for a smaller rebound. Also the core durable goods orders rose stronger than predicted by 2.0% while the consensus expected only an increase of 0.8%. Nevertheless, the US stock market ended the week lower.

We pointed out over the last two weeks, that many corporate companies give a very cautious outlook for their business going forward. To some extent, this is part of a strategy to dampen expectations of analysts, which then makes it easier to beat earnings estimates in the next quarter. However, to some extent, it also reflects the uncertainty by business leaders. Again, the Fed did not provide a positive guidance. The assumption that business leaders base their decisions on rational expectations had been falsified by reality again and again. Akerlof and Shiller were right in pointing out that animal spirits, a term coined by Keynes, have a strong influence on decisions. Thus, part of any economic policy should be to influence the psychology of decision makers. The FOMC statements of the latest two meetings appear more as a self-defense for the implementation of QE3 instead of providing an encouraging outlook now that QE3 has started. Therefore, it appears that investors’ sentiment is worse than justified by the economic data and outlook of the two major economies.

In Europe, the United Kingdom surprised with reporting GDP growth in the third quarter. However, the major problem is still the eurozone. It gets more and more obvious that the German narrative that fiscal austerity would lead the eurozone out of the crisis is absolutely wrong. The mercantilistic German economic system is now feeling the result of describing the wrong medicine. Germany’s economy relies on exports and car sales. But with pushing Southern Europe into a recession, the demand for German export goods declines. Also car sales in Europe plunged. Business leaders postpone or even cancel big ticket orders, which have a negative impact on new orders of the German manufacturing industry. Therefore, it is not surprising that the German manufacturing PMI flash estimate showed another drop and the ifo-index was dragged down by a fall of the current situation assessment.

The automotive sector had been hit hard. Car sales in the eurozone plunge. France intends to provide financial support for its car companies. Ford considers closing three plants in Europe. The German manufacturer Daimler had to revise down the earnings forecast. All these factors had negative impacts on stock prices of European automotive companies. Therefore, platinum and palladium were under stronger pressure this week. But also the easing of the strike situation in South Africa contributed to the decline of PGM prices.

“Those fundamental things apply as time goes by”. This line from the lyrics of the famous song of the movie Casablanca also describes quite well the behavior at financial and commodity markets. At the end, the fundamentals are the major factors driving prices. As some major economies like the US, China and the UK show signs of an economic improvement, the outlook for gold and silver remain positive. However, the PGMs might continue to underperform as long as political leaders in the eurozone do not find a solution to solve the crisis quickly.