Precious metals head higher as risk appetite increases

Most precious metals got two strong impulses to move higher last week, one at the start and one at the end of the trading week. But neither of these two moves was related to quantitative easing or possible changes in the Fed policy as discussed at the recent FOMC meeting (linking current policy stance on certain levels for inflation and unemployment). The triggers were increases of investors risk appetite. However, this reduced risk aversion is related less to economic than more to political factors. If those political factors develop favorably then precious metals could climb further.

The push higher last Monday was based on hopes that US policy makers will avoid that automatic tax hikes and spending cuts kick in, which would lead to the US economy tumbling over a fiscal cliff. Politicians from both parties underlined the willingness to find a compromise. Due to the Thanksgiving holiday, there was not much movement. However, negotiations are likely to resume quickly. This could be positive for precious metals as long as there is progress towards a compromise. Our base line scenario is that a compromise will be found just in time to avoid a fiscal cliff. However, political bargaining is seldom leading to a quick compromise. One should always keep in mind the lack of patience in Wall Street in July 2011. Despite a compromise to lift the debt ceiling was found in the 11^th hour, the stock market declined as investors lost patience. Therefore, it can not be ruled out that sentiment among investors turns sour again and institutional investors withdraw funds from commodity markets.

On Friday, the push higher was also based on hopes that a political solution will be found, but this time the focus was on Greece. The next payment from EU and IMF is already overdue. However, eurzone finance ministers and the IMF could not find an agreement on whether Greece would need another debt restructuring. But now, it seems that a solution could be found next Monday. However, more important for Greece than just receiving funds to avoid bankruptcy, it would be to relax the imposed conditionality of the bailout. As long as requested fiscal austerity leads Greece deeper and deeper into depression, the less likely it will be that the Greek debt/GDP ratio will reach a peak. Nevertheless, a decision to release funds for Greece would be positive for the euro, stock markets and thus also for precious metals.

Positive news came also from various business surveys. The flash estimate of the HSBC manufacturing PMI for China surprised to the upside. The index rose again above the crucial 50 threshold. This manufacturing PMI now confirms what other economic data already indicated, namely, that the Chinese economy is growing again at a faster pace. But also the manufacturing PMI for the eurozone and some member countries showed a stronger rebound. In Germany, also the ifo business climate index posted a surprising increase, thus, paring the drop in the previous month. The recovery of the manufacturing PMIs indicates that also the eurozone economy is likely to stabilize and not to head further into recession. This is another positive factor for risky assets.

After China, the US and the UK, now also the eurozone shows signs of improving economic data. This should be positive for stock markets. It should also lead to a weaker US dollar as investors risk appetite is likely to increase and they invest also more outside the US financial markets. An improved economic outlook should also be a supportive factor for crude oil prices. However, here also the supply side has to be taken into consideration and new technologies (fracking) could lead to an increasing supply. However, the critical factors remain political decisions. If these political decisions will be also favorable for risky assets, then funds are likely to be flowing out of the safe havens of government bonds, the US Treasury notes and the German bunds. This could give precious metals another push higher.