PGMs perform again best amongst precious metals

Gold and silver ended the week lower with a loss of around 1.5% for gold and 2.2% for silver. Both metals gave back the gain of the preceding week and gold even closed lower than 2 weeks ago. On the other hand, platinum gained 1.5% on the week while palladium rose by 2.9%.

After a positive start, gold and silver plunged on the last two trading days of the week. On both days, the three major fundamental factors for the price development of gold and silver according to our fair value models had been positive. Normally, flows into the risky assets and commodities had been favorable for gold and silver last year. However, this is not the case in this year so far. Gold and silver get under selling pressure when investors also move out of the safe haven government bonds, the US Treasury notes and the German Bunds.

On Thursday, the Bund future initially rallied on disappointing flash estimates of the Markit PMI for France, which came in far weaker than expected. Also a surprisingly strong flash estimate for the German PMI did not change the direction. Gold and silver could not profit from this move, but came under stronger selling pressure inline with Bunds and US Treasuries after the release of US economic data. The initial jobless claims number surprised for the second week with a further decline to 330,000. This points to a better labor market report released next Friday, on February 1. In addition, the flash estimate of the Markit PMI for the US manufacturing sector jumped from 54.0 to 56.1, which indicates that the US economy is probably expanding at a faster pace again. The leading indicator compiled by the Conference Board also posted a stronger than expected increase of 0.5%.

On Friday, traders cited the new home sales report as a reason for the continued sell off in gold and silver. While the number of new home sales remained below the consensus estimate, the previous month’ number had been revised considerably higher. In Germany, the ifo business climate index also surprised with a stronger than expected increase, which pulled the Bund and the US T-Note futures lower.

Many market participants believe that the economic recovery might be stronger and that the Fed might stop QE earlier than assumed. They also believe that QE would be a necessary condition for higher gold and silver prices. However, this is not the case as we have pointed out several times. Nevertheless, QE is certainly a supportive factor. But even without QE, gold and silver prices could move higher as stronger GDP growth and a fall of the unemployment rate are necessary conditions for terminating QE. In this case, however, also the output gap narrows and the risk of inflation picking-up is increasing. This would be positive for both metals for two reasons. First, both metals are bought as a hedge against inflation. Thus, it would not be rational to lift the hedge just when the need for the hedge is most urgent. Second, with a stronger economy, at least two of the major fundamental factors will improve further. Stock markets are likely to rise further and also the price of crude oil is probably rising with stronger economic activity, unless new technologies lead to supply increasing stronger than demand.

Even if believes are wrong or not rational, they could nevertheless move the markets. Holdings at the major US gold and silver ETF held quite well, or even increased during the last couple of months, whereas large speculative accounts reduced their net long position in the Comex gold and silver future. But now also the ETF holdings declined. The holding in the SDPR Gold Trust ETF declined by 6 to 1,329.9 tons while the iShare Silver Trust holdings decreased by 266.2 to 10,468.76 tons. This decline reflects a shift in sentiment among the more medium- to long-term oriented investors.

Whether gold and silver remain within the recent sideways trading range will depend on two events in the coming week. First, on the statement of the FOMC, which will be released after the meeting on Wednesday, January 30.  Second on the US labor market report released on Friday, February 1. If any of these two events will increase the fear of an earlier termination of quantitative easing by the Fed, then the selling pressure on gold and silver could increase. In this case, the PGMs will probably continue to perform better than the other two metals in the precious metals segment.