US Bonds – helpful for precious metals short-term but medium-term risk

The major fundamental factors in our fair value models for the weekly metal prices were mixed this week. The major role played the outlook for US interest rates and stock markets for the precious metals.

Base metals were mixed but digested well the Chinese trade data, which showed a slower than expected increased of Chinese exports of 7.2% yoy compared with a 10% rise predicted by the consensus. Thus, the export surplus came in lower than expected at $31.6bn. Analysts reported that the import of metal was already affected by the probe of Qindao warehouses as banks are now more cautious with providing letters of credit to metal importers.

As far as US interest rates are concerned, two reports had an impact on markets. The first was a forecast revision by the chief US economist at Goldman Sachs. It took Mr. Hatzius a long time to wake up and to understand the messages, which the FOMC sent out with the quarterly short-term projections and dot charts. The message of the Fed was for quite some time that the first rate hike will take place most likely in mid-2015. But Goldman Sachs predicted against all odds that the first hike would not occur before Q1 2016. Now, also Goldman Sachs forecasts the first increase of the Fed Funds target rate for 2015. As the Fed prepared the markets for quite some time, this forecast revision should not have had any impact on markets. However, traders and analysts argued that the US stock market traded lower after the longer weekend due to the Goldman Sachs forecast revision. Another hint that the Chicago school theory financial markets are not information efficient is not worth a cent, neither an economics noble laureate.

The second report had been the minutes of the recent FOMC meeting, which were released on Wednesday. The interesting news of the minutes is that the majority intends to terminate the bond purchasing program with the October FOMC meeting. This implies that the purchases of US Treasury paper will be reduced not at the current speed of $5bn in October but by $10bn. However, ending QE3 by the end of October 2014 has also implications for the timing of the first rate hike by the Fed. Chair Mrs. Yellen stated several times that the first hike might take place about 6 month after terminating the bond purchase program. Therefore, the FOMC might decide already at the April 28 -29, 2015 FOMC meeting instead at the on at the end of June next year to increase the Fed Funds rate.

If the FOMC decides in April 2015 to hike the Fed Funds rate, then there are five more meetings scheduled were the committee could lift the key interest rate to a more normal level. Thus, also the level for the Fed Funds indicated by the dot charts of 1.25% by the end of 2015 gets more likely. However, the Fed Funds futures only price in a rate of 0.75%. From our point of view, fixed income markets are currently too optimistic for the outlook of Fed Funds by the end of next year. But adjusting expectations for the short-end will usually also have an impact on the long end of the US Treasury curve. Thus, 10yr US Treasury notes appear to be expensive at the current yield of 2.52%.

It might still take some time until the fixed income markets realize that the implied rate for the Fed Funds by the futures traded at the CME are too low compared with the signals send out by the Fed. However, once the market starts to correct its expectations, the potential impact on metal prices will be negative. On the one hand, rising US interest rates and yields increase the opportunity costs of holding metals. On the other hand, this development could reduce the attractiveness of commodity financing trades in China and thus, reduce the Chinese demand for metals used in commodity financing, which is not only limited to aluminum and copper, but also includes precious metals.

But that precious metals rose further during the past week, is the result of the “shoot first and ask later” mentality among traders and investors. On Thursday, Espirito Santo Financial Group (ESFG), which holds a stake of 25% in Portugal’s largest bank Banco Espirito Santo (BES), decided to suspend trading in its shares and bonds due to “material difficulties” at its largest shareholder Espirito Santo International (ESI), which is controlled by the Espirito Santo family. After BES shares fell by 19%, Portugal’s stock market regulator halted also trading in BES shares. Rumors swirled through markets that BES were in financial difficulties. As a result, not only the shares of BES and ESFG plunged, but it dragged also the Portuguese stock market and also other markets in Europe and the US lower. Furthermore, contagion spread also to the market for government bonds of the Eurozone. Yields on peripheral bonds jumped and Greece was only able to sell have the amount intended at an auction. The plunge of stock markets and soaring yields on peripheral Eurozone government bonds triggered a flight into save havens, which included also precious metals beside US Treasuries and German Bunds. During Thursday night, BES declared that its exposure to ESI would not put the bank at risk of running short of capital to assure investors about its financial stability.

This declaration led to a stabilization. However, according to reports published on Thursday, it should have been clear, that the problems of ESI are institution specific and not a general problem of the Portuguese banking sector in total. The flight to safe havens might support these assets for some time as investors might prefer to get more evidence that the Portuguese banking sector is not in troubles. Thus, in the short-run, the precious metals might be well supported by the safe haven status and as a mean to diversify the risk of holding equities. But the outlook for the US bond market in the medium-term indicates that the all-time high is far out of sight for gold and silver.  

Against the Fundamentals, but not the Flows of Funds

Last week, precious metals closed higher than the Friday before. However, all fundamental drivers included in our fair value models were negative. But investors have rediscovered commodities and the rise of some base metals also supports the precious metals.

Among the economic data, the focus was on the purchasing manager indices for many countries. The Markit flash estimates prepared the markets already for weaker PMIs for many countries in the Eurozone. Thus, it was not a surprise for the market that the final index confirmed the trend, especially as also the EU data on business confidence come in lower. In the US, the ISM manufacturing PMI also edged lower while the consensus of Wall Street economists expected a small increase. However, the lower ISM did not harm the recovery of the US stock market as some components of the ISM manufacturing PMI pointed to better index readings next month.

But not each decrease of a purchasing manager index translates into weaker economic activity. The first misunderstanding is the threshold level of 50. The PMIs are so-called diffusion indices based on surveys. The percentage of negative responses is subtracted from the positive ones. If the number of positive and negative replies is the same, the raw index is zero and the value of 50 is added to obtain an index oscillating around a positive number. However, the responses are not weighted by the size of the company. Regression analysis between economic activity and manufacturing PMIs show that the critical value is in most cases below the 50 threshold.

Furthermore, the time series properties of the PMI are different from those of financial assets. The vast majority of assets in financial markets follow a random walk, which could be described by a geometric Brownian motion. However, oscillating indicators like the PMIs are mean-reverting and their behavior could be described by an Ornstein-Uhlenbeck process. Even with a slow speed of adjustment to the mean, declines during the phase of economic expansion occur and are not necessarily already a harbinger of a slowdown.

In China, the official manufacturing PMI remained above the 50 threshold. However, the more widely followed HSBC manufacturing PMI fell below the 50 threshold in January and now rose again above 50 in June. This surprise already provided support for copper after the release of the flash estimate and lifted copper further up this week.

The US labor market data came in far stronger than predicted by even many optimistic forecasters. The number of new jobs created rose to 288,000 and also the figure for the preceding month was revised higher by 7K to 224,000. The unemployment rate was expected to remain unchanged at 6.3% but dropped to 6.1%. And average hourly earnings increased again by 0.2% on the month. Thus, the labor market report points to an acceleration of the US recovery after the GDP drop due to the weather in the first quarter. This has lifted the US stock market to new highs for the S&P and Dow Jones indices. Also the US dollar appreciated against the major currencies and the US dollar index rose. Furthermore, the US bond market declined and yields on the 10yr US Treasury note rose by to 2.64%. All these factors are usually negative for precious metals.

Stronger economic data is normally supportive for the price of crude oil as it indicates a rising demand. However, demand is only one side of the equation. It was developments at the supply side, which lead to falling oil prices. In particular the news that the Libyan government reached an agreement with rebels, who handed over ports with oil terminals, send the price of crude oil lower.

In 2013 and also in some parts of this year, a stronger US stock market was negative for precious metals. The rise of the PGMs could be well explained with a stronger economy, translating into higher demand from car makers, and the supply loss due to the strike in South Africa. But why does gold and silver now rise when the major fundamental drivers are negative?

First, correlations are not causations and many factors can have an impact on the relationship between two variables. This explains well, why correlations fluctuate widely if correlation is measured over a shorter time period like 20 or 30 days. There were also periods when the stock markets and gold moved in the same direction before.

Second, the behavior of investors is not constant. Their assessment of future performance perspectives changes. Also the perception of risk is variable. In 2013, investors were convinced that stock markets offer a better return outlook and they shifted funds massively out of commodities into stock markets. The precious and base metal prices declined from the levels prevailing at the start of last year. However, now, two developments have changed the outlook. Many investors get more cautious towards equities. The valuations do not look as attractive compared to last year. Volatility has dropped. This is often regarded as a sign of complacency by investors. However, fund managers are now aware that low volatility spells danger.

Analysts at the end of last year were predicting that supply of many metals would rise and would shift the supply-demand balance towards lower prices on average in 2014. In this blog, we pointed out for copper that the development of warehouse inventories were not compatible with the narrative told by analysts but also official organizations. Indonesia impost export regulations, which had a strong impact on the supply of some metals. Nickel was the first base metal reacting with rising prices. But also lead and zinc prices recovered during the first half. Now also copper recovered and is trading again above the 7,000$/t level.

Therefore, we conclude that an increasing risk-awareness towards equities and the improved outlook for commodities has induced investors to allocate again more funds into commodity markets. Unfortunately, the LME has delayed further the publication of data comparable to the “Commitment of Traders” report compiled for US exchanges by the CFTC. Thus, there is only data for copper traded at the CME available for base metals. At the start of the year, speculative investors were net long 10,363 futures contracts and by the end of the first quarter, this turned into a net short position of 32,975 contracts. But during the second quarter, the net short position was reduced significantly to 1,764 contracts as of July 1^st. In gold, the non-commercials were net long just 766 Comex gold futures at the start of June. Within one month, the net long position rose to 40,299 contracts, the highest level since early December 2012. Also the gold holdings of the SPDR Gold Trust ETF rose by almost 20 tons after hitting a low of 776 tons in late May.

If our conclusion about the behavior of large investors is correct, it has two implications for precious metals. First, firmer equities are not a reason to sell gold as some investors also buy gold as a hedge against the case that equities might reverse direction. Second, the improved economic outlook for the US and China leads to more funds flowing back into commodities. This is the kind of tight that lifts all boats. But as piano player Sam sung in the famous movie Casablanca: “Those fundamental things apply, as time goes by”. Thus, the stronger US recovery should lead to the first Fed rate hike in the middle of 2015 and rising yields will support the US dollar and weaken US Treasury paper. Both should weigh on precious metals and other commodities in the medium-term.

Loans backed by falsified gold transactions

What started in the copper market with the probe of alleged fraud at Qindao warehouses in China now spreads to the gold market. Bloomberg reported on Thursday that China’s chief auditor discovered 94.4 bn yuan ($15.2bn) were collateralized by falsified gold transactions. Although already widely suspected by many people, this was the first official confirmation that also gold is used in Chinese commodity financing deals. Goldman Sachs reports according to the media that up to $80bn false-loans may involve gold. Thus, the question is: how do these false-loans influence the spot gold market?

To answer this question, it is first necessary to analyze how commodity financing deals work. There are two possibilities. In the first kind of commodity financing transactions, the owner of the commodity uses warehouse receipts to get credit from banks. The proceeds from this collateralized loans can be invested in higher yielding assets before redeeming the debt. This transaction is only economical if the return on the investment is higher than the interest rate on the loan. Due to restrictions, this is currently the case for investments in the Chinese shadow banking system.

The second transaction involves the import of the commodity. The Chinese buyer places an order with a foreign company to buy the commodity. Then the buyer applies for a letter of credit from a lender, which is used to import the commodity. With opening the letter of credit, the buyer obtains the consignment, which he can sell in the domestic market. Again, the importer of the commodity can use the proceeds for investing onshore before paying back the original loan. As many commodities are traded internationally in US dollars, this type of financial deal involves cross-currency transactions. Funding costs in US dollars are quite low and the foreign exchange rate risk is limited due to the yuan exchange rate regime, which allows only limited daily fluctuations. In addition, as long as the yuan strengthens against the US dollar, the yuan appreciation even contributes to the return in local currency for the Chinese importer.

In the first type, if the loan is based on a falsified gold transaction, then the warehouse receipt is a fake. This implies that the lender has made a loan but the collateral is worthless. The lender could demand from the borrower to provide the promised collateral. Alternatively, the creditor could cancel the loan agreement and demand the repayment of the credit. For the borrower, it might be probably easier and cheaper to liquidate the domestic higher-yielding investment and to redeem the loan. Buying the gold in the spot market requires to have the funds available to pay the seller. Obtaining a loan in this situation is probably far more expensive. In addition, interest payments on the original loan are still due.

Therefore, the direct impact on the spot price of gold should be rather limited. Those who obtained a loan based on false-gold transaction are more likely to liquidate the investment and redeem the loan than purchase gold to provide the collateral. However, the process of selling the higher yielding investments probably leads to price pressures for those investments, which might induce other investors to purchase gold as a safe haven.   

In the case of the second type of commodity financing transaction, there should be a discrepancy between the gold import statistics and the volume of consignments. In international trade finance, after a letter of credit was opened, the bank of the exporter sends the documents to the bank of the importer. The importer’s bank examines the documents, makes the payment to the bank of the exporter and hands the documents to the importer. If the consignment is faked, the buyer of the consignment will notice the fraud with a delay of only a few months if the commodity never arrives at the port of destination. Furthermore, ships can be tracked easily nowadays. Thus, the chances of discovering a falsified gold transaction involving gold imports are higher. Therefore, it is more likely that a faked gold transaction occurs with warehouse receipts instead of consignments.  

In the case of a falsified consignment, it is also rather unlikely that it will lead to a higher demand for gold in the spot market. The buyer of the consignment would have to prove who faked the consignment. This could be either the exporter or the importer. Identifying the party who faked the documents is a time consuming process. But even if the buyer succeeds to obtain a legal title against the criminal party, it might be worthless in the case this counterparty went bankrupt in-between.

While the amount of commodity financing based on falsified gold transactions is impressive, the impact on gold prices should be rather limited. Unwinding the financing deals does not involve buying or selling gold as a necessary condition. However, other assets, i.e. those purchased with the proceeds from commodity financing might come under pressure. This is especially the case if lenders demand more and secure collateral or terminate the loan agreement.

Precious Metals rally after FOMC Meeting

While precious metals traded sideways ahead of the FOMC meeting, the four metals rallied as the US dollar weakened against the major currencies after the meeting. Gold jumped above 1,300$/oz. and silver above 20$/oz. However, we regard the reaction in the precious metals and foreign exchange markets as overdone.

The FOMC kept the Fed Funds target rate unchanged at 0.25% or lower and reduced the total volume of bond purchases by another $10bn. This should not come as a surprise. The Fed did not provide any hint that the majority of FOMC voting members would accelerate the speed of tapering. Even with the committee recognizing “that growth in economic activity has rebounded in recent months”, the stronger growth compared with the first quarter is not a convincing argument to change track in monetary policy. Also the improvement in the labor market is not sufficiently strong enough to justify a faster termination of bond purchases. The FOMC still regards the unemployment rate as elevated. Furthermore, the committee states “inflation has been running below the Committee’s longer-run objective, but long-term inflation expectations have remained stable”. Thus, also the second target of the Fed does not provide a justification for reaching the end of bond purchases faster than previously indicated.

The FOMC also presented its economic projections. It lowered the projection for GDP growth in this year from 2.8 – 3.3% to 2.1 -2.3%. At a first glance, this might look like a major revision in expectations for the current quarter and the second half of 2014. However, for the GDP in the final quarter of 2014 to be 3% higher than in the same quarter of the previous year, GDP has to grow at an average quarterly rate of around 0.75%. But due to the negative weather, US GDP declined by 0.25% quarter-on-quarter, which translates into a drop of 1.0% annualized. Taking this decline into account, the revised projection still implies an average quarterly GDP growth of around 0.75% for the other 3 quarters in 2014. Thus the new projection neither reflects a more pessimistic nor more optimistic view of the FOMC members on the underlying expansion of US economic activity. Also the revisions for the unemployment and inflation rate are only minor.

There was criticism that the decision to taper further by $10bn was inconsistent with the revision of GDP projections. However, as shown, the FOMC has not changed the projection for average quarterly growth for the remaining 3 quarters. Furthermore, the revision of the GDP projection has led to accusations that the Fed would always overestimate GDP growth. The FOMC presents a range of GDP growth, nevertheless, there remains an imponderability in any forecast of a random time series. And in the case of the Q1 GDP growth, the weather had a stronger impact on economic activity than on average during the winter months. Even meteorologists did not predict such a long cold period before the start of the winter season. Therefore, the FOMC is not to blame for overestimating the GDP growth in Q1.

But also the expectation of faster end of bond purchases are not rational based on the expectation of a recovering US economy. The projections of the FOMC for the dual mandate variable are only modified slightly. Also the underlying expectation for average quarterly GDP growth remains almost unchanged. However, for terminating bond purchases faster the FOMC would have to expect stronger economic activity than previously assumed. Just forecasting a recovering after the decline of GDP in Q1 is not sufficient.

The dot charts are sometimes misinterpreted. But they give a good indication about the direction of monetary policy and the possible Fed Funds target rate at the end of the corresponding year. There is still no majority expecting a rate increase in 2014. Thus, the middle of 2015 remains currently the most likely date for the first rate hike. However, there appears to be no majority for increasing the Fed Funds target rate beyond 1.25% by the end of 2015. The dot chart from the March FOMC meeting showed that the majority did expect the Fed Funds rate to be only lifted to 1.0%. Thus, the FOMC got a bit more hawkish as far as the outlook for interest rates is concerned. But the Fed Funds December 2015 future just prices in a hike to 0.75%.

From our point of view, the risk is clearly that the FOMC might hike the key interest rate more than the market prices in during the second half of 2015. This should be supportive for the US dollar against the euro and the Japanese yen. However, the Bank of England might increase the base rate earlier. But overall, the indications provided by the FOMC do not support arguments for a weaker US dollar. Thus, the FOMC policy outlook is also not positive for the precious metals.

But there is not only a danger for precious metals of the Fed monetary policy outlook for 2015 via the influence of the US dollar on precious metals. At the current yield of 2.62% on 10yr US Treasury notes, there is hardly any downside potential left unless economic conditions weaken surprisingly and would derail the FOMC policy projections. A rise of the Fed Funds target rate to 1.25% within the next 18 months should also lift yields higher at the medium- to long-term maturity range. Given the outlook provided by the FOMC, 10yr US Treasury yields in the range between 2.75 – 3.0% appear more appropriate and 2.62% looks as expensive. A rise of US Treasury yields also increase the opportunity costs for holding precious metals. Thus, also the medium-term outlook for the US Treasury market is a negative factor for gold and silver. 

Therefore, we come to the conclusion that the outlook for precious metals is not as positive as the market believes after the FOMC meeting. As long as the US economy develops as the FOMC expects, the risk for precious metals remains more biased to the downside. Only negative surprises, which would lead to a change in the outlook for the Fed policy, could make gold more attractive in the medium-term. However, geo-political developments could lead to demand for gold and silver as safe havens. How the situation in Iraq develops is hard to predict.   

Roller-Coaster for the PGMs

It was a roller-coaster week for the PGMs. After a government mediation failed to reach an agreement between the unions and mining companies to end the longest mining strike in South Africa, palladium rose further to 862.5$/oz. Thus palladium traded higher than in late February 2011 and reached the highest level since February 2001. Also platinum rose, but remained below the high of the year, which was reached at 1,493.90$/oz on May 22.

However, after reports emerged that a wage deal might be in reach, both PGMs came under pressure and posted strong losses. It was a bit of buying the rumor and selling the fact, but it is at the time of writing just a hope that the mining strike will be over soon.

According to GFMS, the demand for palladium exceeded supply in 2013 by more than one million ounces. South Africa contributed 2.35 mil ounces to the total mine production of 6.4 mil. Ounces. Scrap recycling added another 1.9 mil ounces to the total palladium supply. With the long lasting strike, the mine production in South Africa is expected to fall significantly short of last year’s level. Thus, overall palladium supply should be lower in 2014 than in 2013. In late April, GFMS estimated that 0.6 mil ounces were lost due to the strike. Thus, when workers return back to work, the total loss could come close to 1 mil ounces. At the same time, the recovery in the European automotive sector points to an increased industrial demand. Therefore, the supply deficit might rise to 2 mil ounces or above.

From the high reached last Wednesday, palladium lost more than 50$/oz. In the short run, the price of palladium might retreat further. However, with the outlook for a higher excess demand, palladium should be well supported.

One question often asked was about the size of the price increase since the start of the year. Many commentators had expected a stronger rally given the duration of the strike. One possible answer is that palladium consumers hedged their demand right in time with options. In this case, the short seller of the option only needs to buy incremental amounts of palladium according to the change in the option delta to remain hedged. Another possibility is that consumers expected that prices would decline again after a wage deal is reached. They can secure physical palladium by lending from holders of palladium inventories, which do not need the metal for immediate consumption. These are mainly financial institutions and investors.

The rise of palladium to a new multi-year high had also a positive impact on gold and silver. All four precious metal have a common usage in the jewelry industry. Thus, they are to some degree substitutes. A rise of the price of one metal relative to the others is increasing the attractiveness to use one of the other metals as a substitute. Thus, the rise of the PGMs increased the attractiveness of gold in the jewelry industry. This explains that the rally of the PGMs at the middle of the week also pulled gold and silver higher. Also quantitative models (VAR) show that there is a stronger link between gold and platinum prices and a stronger link between silver and palladium.

Then the question arises, why did gold and silver prices increased further while platinum and palladium plunged? From our point of view, the answer is the recent geo-political developments in the Middle-East region. With the ISIS terror group gaining control over Mosul and moving towards Bagdad, the markets got surprised. Oil markets fear that the rebels gain control over Iraqi oil exports. Stock markets fear a negative impact on global growth and turned lower, with weaker than expected US economic data being another reason for taking profits. Thus, gold and silver remained in demand as a safe haven, while the PGMs sold off.    

Where Is the Copper Supply Surplus Gone?

Only less than two months ago, the International Copper Study Group forecasted at its semi-annual meeting in Lisbon that after four years of supply deficit, the copper market would swing into a surplus. While the ICSG estimates that the apparent refined copper consumption exceeded supply in 2013 by 282 thousand tons. For this year, the ICSG forecasts a supply surplus of 405 thousand tons. This swing in the supply/demand-balance by 687 thousand tons is due to an increase in mine production, which leads also to a rise of refined copper output. For this year, global mine production is expected to increase by 4.7% to 18,904 thousand tons. Refined copper production is forecast to rise faster than mine production by 6.5% to 22,362 thousand tons. The global copper consumption is predicted to increase by only 3%, which is less than global GDP growth, to 21,957 thousand tons.

A swing in the supply/demand balance of the magnitude predicted by the ICSG should be reflected in the development of copper stocks. According to the recent figures published on May 22, 2014, by the ICSG in the press release for the Monthly Copper Bulletin, global copper stocks increased by a total of 102 thousand tons in the first two months of 2014. Inventories held in the warehouses of the three major exchanges (LME, Shanghai and CME) dropped by 25.2 thousand tons in the same period, which is in a clear contrast to the estimate of the ICSG for the first two month. Since March, the fall of inventories accelerated. Despite some temporary inventory builds at some exchanges, copper stocks are currently down 228 thousand tons YTD. This plunge of copper inventories at exchange warehouses since the beginning of March is in such an obvious contrast to what one would expect given the forecast of a 405 thousand tons supply surplus.

Certainly, copper inventories are not only held in exchange warehouses. Producers and consumers of copper also hold inventories, but one would expect that these holdings are more determined by economic activity and opportunity costs. If we take this into account, it appears rather unlikely that producers and consumers have increased their inventory holding by the amount to explain the difference between the change in the supply/demand-balance and exchange warehouse inventories.

Furthermore, if producers hold more inventories, then one would expect that they also want to hedge the inventories, especially when the majority of forecasters predict a change in the supply/demand balance. This should lead to a considerable increase of open interest and falling copper prices. However, when copper reached its low of the year so far in March, the LME copper futures open interest was up only 7 thousand contracts compared to the end of 2013. In addition, copper at the LME remained in a slight backwardation in mid-March. But copper prices were in contango at the Shanghai Futures Exchange. LME open interest in copper futures rose far stronger since mid-March to more than 340 thousand contracts at the start of this past week. This rise in open interest was accompanied by a recovery of the copper price. This argues that not producers are hedging against further falling prices due to a supply glut but consumers hedge future demand. However, this behavior would be only rational if consumers doubt that forecasts of a supply surplus depressing prices are correct.

The other explanation is that the copper supply surplus is held in bonded warehouses in China and had been used for financing deals. In April, we analyzed the development of the copper price in Shanghai and the inventories held at SHFE warehouses. In 2012 and 2013, a structural break took place and inventories at SHFE warehouses rose stronger as a model based on the development between 2009 and 2011 would have predicted. However, this development had not a major impact on the price of copper. Other factors explained the price development far better. It could not be ruled out, that the higher SHFE warehouse inventories were the result of stocks moved out of bonded warehouses.

Thus, doubts remain that the excess production of refined copper was absorbed by stocks held in bonded warehouses in China for serving as collateral in financing deals. Furthermore, it could not explain the decline of stock held in exchange warehouse inventories

While total exchange warehouse inventories decayed since the start of this year, stock held in LME warehouses declined by 195 thousand tons and remained almost unchanged in CME warehouses. At SHFE warehouses, inventories rose until the plunge of copper prices, and then also sunk from 213.3 to 92.7 thousand tons, which translates to a fall of 33.2 thousand tons since the end of 2013. It had been reported at the end of April that China’s State Reserve Bureau bought copper. However, according to the sources of the reports, the SRB bought from bonded warehouses. But this does not explain the fall of copper stocks at SHFE warehouses, unless the SRB also bought silently since mid-March copper in huge amounts held in bonded and exchange warehouses.

We have data for cancelled warrants only for LME warehouses. At the LME, the free available copper stocks plunged to a mere 92,650 tons at the end of this week. This is the lowest level since early April 2008. Copper is in a backwardation at the LME and the SHFE, which indicates that copper is tight and not abundantly available as estimates about a supply surplus would suggest. Our quantitative model for global total refined copper supply and consumption indicates that consumption would further exceed supply in this year. Structural changes can have a significant impact, which quantitative models do not incorporate immediately. Thus, we would not rely solely on quantitative forecasting models. However, the development of copper inventories in exchange warehouses, the backwardation and the results of the quantitative model increase our skepticism that the copper market will swing to a supply surplus in the magnitude forecasted by the ICSG. 

The End of the Silver Fixing

The announcement of London Silver Market Fixing Limited that it will terminate to administer the London silver fixing with the close of business on August 14, 2014, should not come really as a surprise. After Deutsche Bank already declared to withdraw from the fixings of gold and silver, only two bullion banks remained in the group conducting the silver fixing. When this decision was made public by Deutsche Bank, FCA board member, Mrs. Tracey McDermott, stated that the UK regulator could intervene if there were too few participants left in the London silver fixing.

In the media reports about the announcement, no reason was stated why London Silver Market Fixing made this decision. However, it is quite easy to guess what the major reason behind this move is. The risk of financial penalties by regulators or pending lawsuits – especially outside the UK - just got too high. In the USA, CFTC commissioner Bart Chilton called for investigations into the London fixings for some time already without having provided any evidence for manipulation of the London fixings or for misconduct by the bullion banks involved. Also the head of the German watchdog BaFin, Mrs. Koenig, accused Deutsche Bank of wrongdoing without presenting facts. The London fixing was discredited by foreign regulators. But now, they made a disfavor to many producers and consumers of silver.

In this blog, we have pointed out a few times, that the fixings of gold and silver are not comparable with the setting of the Libor benchmark rates. The London fixings are a price discovery procedure, which is based on real trading activities and not on estimates of what the market price might be. Furthermore, the bullion banks do not know how their clients might change the quantities they commit to buy or sell if a new price will be called in the fixing process. In addition, the procedure applied in the London fixings had also been used in the past at regulated exchanges.

The LBMA issued the following statement: “As part of our role as the trade association for the London Bullion Market, the LBMA has launched a consultation in order to ensure the best way forward for a London silver daily price mechanism. The LBMA will work with market participants, regulators and potential administrators to ensure the London Silver Market continues to serve efficiently the needs of market users around the world. As part of the consultation process, the LBMA will be actively approaching market participants requesting feedback.” Furthermore, the LBMA conducts a survey in the process of market consultations. Thus, the current system of price fixing in the silver market is coming to an end, but the search for an alternative system is taking place already.

What might be possible alternatives to the current London silver fixing? Silver is also quoted by many financial institutions on quote screens at Bloomberg or ThomsonReuters terminals or electronic foreign exchange trading platforms. One possibility would be to use those quotes sampled at a random time within a specified time span. Thus, traders would only know the time span, but not the exact time stamp. Then the quotes in the lower and the upper 25% percentile could be discarded and from the remaining quotes the average would be published as the new benchmark indication. However, such an approach would have the same weaknesses as the Libor benchmark procedure.

From our point of view, any substitute for the current London fixings should be based on real trades and not on quotes. Liquidity in the market is not the same at every point in time but varies during the day. Thus, a new reference price should be found when the liquidity is usually high in the market and this is the case in the afternoon London time. Furthermore, a new benchmark price should be found by trading taking place at one central location. In addition, the price should be set in an auction style procedure.

Spot trading in precious metals is usually OTC trading, but for the fixings, it is concentrated at one place where the price is discovered in an auction style procedure. If the current system has to be replaced without abandoning the advantages of high market liquidity, supply and demand concentrated at one location and auction for price setting, then moving the fixing to a regulated exchange is probably the best solution. This could be an electronic exchange but also an open outcry system. The LME is already fulfilling the requirements for a fair and transparent price setting for cash and forward transactions in base metals. There are ring sessions with settlement prices for transactions in the morning and afternoon. Moving the London fixings of precious metals to the LME ring trading might be the best alternative. Producers and consumers would be able to obtain the best price for larger quantities in trades at a regulated exchange. The procedure would be transparent and the precious metals market would still have benchmarks satisfying the requirements for reflecting the true market price.     

ECB gets ready for easing, negative for precious metals

All precious metals ended the week lower than the Friday before. Among the major fundamental factors of our fair value model, the slight increase of the US dollar index and the marginally lower S&P 500 index were negative for the precious metals, while the modest increase of the crude oil price should have been supportive. However, the major fall of the precious metals occurred last Wednesday after the speech of Mrs. Yellen at her testimony before the Joint Economic Committee of the Congress had been released.

The initial reaction in the stock market was negative, but also the precious metals headed lower. But as Mrs. Yellen stated that the US economy would need further accommodative monetary policy, the stock market recovered. Also the statement by Russian president Putin that military forces had been ordered to return back to their home bases supported the stock market and weighed on precious metals.

From our point of view, the major risk for gold and silver is biased to the downside. And the recent events and economic data in the Eurozone strengthen our assessment. The EU Commission presented the spring forecasts. The inflation rate in the Eurozone is expected to be only 0.8% this year and 1.2% in 2015, which is a slight downward revision. GDP growth is predicted to be 1.2% in the Eurozone in 2014 and should accelerate to 1.7% next year. The German economy is expected to be the locomotive for the Eurozone with a GDP growth of 1.8% this year. Slovakia and the Baltic member states are expected to post stronger growth, but these countries have only a smaller share at Eurozone GDP.

However, also the growth engine in Germany sputters. The volume of new orders in March was expected to increase by 0.3%, however, it dropped by 2.8% on the month according to the preliminary figures. Industrial production figures also disappointed with a decline of 0.5% on the month, whereas the consensus among economists predicted an increase of 0.2%. One could rightly argue that the monthly data is volatile and that a 3mth moving average would provide a better picture. However, looking at the chart below, there is a worrying development. The German manufacturing production reached the highest level since the start of the financial crisis in 2007 in July 2011. Since then, the index of manufacturing production hovered sideways. The industrial production including the construction sector exceeded the high from 2011 marginally in February, but this was mainly due to construction activity, which was up as the winter season was unusually warm. The volume of total new orders (excluding construction orders) did not even come close to the pre-crisis level when it peaked in early 2011. 

But two others points are striking analyzing the chart. First, Germany pushed through that other Eurozone member states suffering under the fall-out of the financial crisis had to impose austerity measures when the debt crisis hit the Eurozone. But the austerity measures did not only lead to a fall of economic activity in the Southern European countries, they also fired back on Germany, which is depending heavily. Second, the flow of new orders and industrial production only recovered after ECB president Draghi gave the pledge that the ECB would do whatever is needed to keep the single currency intact in July 2012. Also the decision to introduce the OMT program was helpful to restore confidence. But it was again Germany, which opposed this policy of the ECB.

However, restoring investors’ confidence that the euro would not fall apart and mitigating the financial stress of Southern Europe came at a cost. The euro recovered against the US dollar and some other major currencies. While this was initially welcome and also attracted foreign investors buying government bonds of the crisis countries again, the euro has now reached a level, which is negative for two reasons.

First, the strong euro hurts the competitiveness of many countries, especially of those countries, which compete with Chinese exporters. Many German exporters will be hurt less by the current level of the euro as their goods are not easily substituted by products of Chinese manufacturers, like luxury cars for example. But in Southern Europe, the benefit of lower wages could easily be lost by the foreign exchange rate movements. 

The second reason is the impact of a stronger euro on the inflation rate. About 10 years ago, the ECB welcomed a stronger euro as it helped to keep the inflation rate close to the target rate. However, now, the situation is completely different. In many countries, the austerity policy and a negative output gap weigh on the development of consumer prices. In some Eurozone member states, the inflation rate is already negative. A stronger euro exercises further pressure on import prices, which will feed through to consumer prices. Thus, a further strengthening of the euro would increase the risk of outright deflation in the whole Eurozone and not only in some parts of the currency area.

The finance minister of France called for measures to weaken the euro. In a typical Pavlov reflex, a spokesperson of German chancellor Merkel already rebuffed this call. However, ECB president Draghi shared the concerns of the French finance minister. While the council did not take any measures at the rate setting meeting this month, Mr. Draghi prepared the market for some policy measures at the next meeting. Another reduction of the repo rate might not be enough to weaken the euro sufficiently. We are still convinced that only some measures of quantitative easing could lead to a desired depreciation of the euro.

But it is again Germany, which voices criticism about further rate cuts or QE. The main argument against further monetary measures is that it would lead to rising real estate prices and thus causing a bubble. However, the situation in Germany is currently not comparable with the US or Eurozone member countries at the start of this millennium. For a bubble in the real estate market, two developments have to coincide: the house prices have to rise and this rise must be accompanied by a surge in construction activity. As the chart shows, the index of house prices in Germany meandered along a slightly declining trend for the first ten years of this century. But with the debt crisis, the flight of many investors into tangible assets led to a rise of house prices. However, this price increase was concentrated on a few urban regions. Nevertheless, more important is that higher house prices did not lead to a strong rise of housing permits. The rise of house prices reflects the scarcity of housing units in the favored cities, which cannot be easily increased by construction activity. Furthermore, for a bubble, house prices would have to exceed the discounted net rent income. This is not everywhere the case even in suburbs of major cities. As long as the rise of house prices is mainly driven by demand from tenants wanting to become the owner of their home, there is hardly a bubble to build.

Therefore, we come to the conclusion that the ECB will act to prevent the euro form firmer further. Just a rate cut would not be sufficient to achieve this target. Thus, even if the council decides not to embark on QE at the June meeting, the foreign exchange market will force the council to take QE measures rather sooner than later. But with the ECB easing and the Fed on hold, the economic outlook remains positive for risky assets like equities. Funds are therefore expected to prefer stocks over precious metals. This outlook would not be positive for gold and silver. However, the best friends for gold investors might be politicians taking the wrong measures endangering the still fragile economic recovery in the Eurozone.

Risk for gold and silver remains biased to the downside

Gold and silver ended the week again slightly lower. However, the PGMs rose once more as hopes for an end of the strike in South Africa were disappointed and the labor unrest continues. The two major economic events for the precious metals were the FOMC meeting and the US labor market report. But also the geo-political development in Eastern Europe played a role.

The decision of the FOMC to reduce the volume of monthly purchases of US Treasury notes and bonds as well of mortgage bonds by $5bn each should not come as a surprise. However, some market participants had feared the committee might express a less optimistic view about the US economy. This was not a rational assumption as the FOMC always stressed that the weaker economic data earlier this year was caused by the severe winter conditions in many parts of the country. According to the first estimate, the US real GDP grew at an annualized rate of 0.1% in Q1. This is still a remarkable achievement. The ISM manufacturing PMI increased further and came in at 54.9 after 53.7 the month before. Thus, the PMI rose stronger than the consensus of Wall Street economists predicted. It also indicates that the US economy expands again at a solid pace in the current quarter.

The FOMC decision and the economic data was well received in the stock market. Thus, it was not surprising that gold and silver headed lower for most of the week. But both metals pared most of the loss on Friday. One reason for the rebound was surprisingly the US labor market report. The number of new jobs created in April was far higher as expected. Instead of 215K additions to the payrolls in the non-farm sector, 288K persons found a new job. Also the figures of the two preceding months had been revised higher. Therefore, the pay-roll was about 100K higher than the consensus expected.

In addition, the unemployment rate dropped to 6.3% while the market expected only a decline by 0.1 percentage points to 6.6%. This decline was due to a lower labor force participation rate. However, we have pointed out several times that the baby boomers start to leave the work force as they retire. The negative part of the labor market report was the unchanged average hourly earnings. Some economists argued that this would limit the increase of private consumption. But the recent figures on personal spending released earlier in the week showed a strong increase of 0.9% on the month. The average hourly earnings of production workers increased by 0.2% on the month, which indicates that a broad part of the total workforce earned more and thus, could increase consumption accordingly.

Nevertheless, the labor market report was not well received in the stock market. However, it was not only the labor market report weighing on stocks and thus, helping gold and silver to recover. Also the developments in the Ukraine, especially in the City of Odessa, played a role. Safe haven government bonds pared the loss following after the release of the labor market report. German Bunds even returned back into the black. Also the precious metals profited from the flow into safe havens.

As long as economic data plays the major role, it seems that the risk for gold and silver are biased to the downside. This is also reflected by the development of gold holdings at the biggest ETF, the SPDR Gold Trust, which fell again in this past week by more than 9 tons to 782.85 tons. The release of the OSCE observers over the weekend might reduce fears of an escalating conflict in the Ukraine. This could be positive for stock markets and thus, weigh on gold and silver. However, as long as no peaceful solution is found, the geo-political developments could also lead to a (brief) rally in both precious metals.   

Gold’s support at 1270$/oz fundamentally not sustainable

Gold managed to close around 10$/oz higher this week compared with the close on Thursday before the major trading centers closed for the Easter Holiday weekend. Also other precious metals posted gains in the weekly comparison. However, we have some doubts that these gains are sustainable.

On Thursday, gold fell to a low of 1268$/oz shortly after noon GMT. From this level, gold slightly recovered and rocketed to 1291.5$/oz at the London PM fixing. There were no complaints that gold had been manipulated higher from the usual conspiracy theorists this time. Technical analysts argue that gold had found support and this triggered a short-covering rally. In-deed, there are several reaction highs and lows located around the 1270$/oz level. And according to the chart theory, those previous highs or lows often serve as support or resistance and lead to market reversals.

However, we are not convinced that it was a technical reaction, which led to the strong rebound, and that gold has a solid basis at around 1270$/oz. Often, when those support or resistance levels are approached, one sees attempts by professional traders to fish stop orders and causing false break-outs with a strong and rapid countermove. This was not the case in the gold market. After hitting the low, gold remained in a consolidation mode for an hour. The strong rise later seems to have taken the market by surprise.

Furthermore, the US durable goods orders data had just been released and it came in much better than Wall Street economists had predicted. Core durable goods orders in March rose 2.0% on the month, while the consensus predicted an increase of only 0.6%. Stronger US economic data is currently not positive for the gold market. Also the reaction in stock markets was positive, which also argues against a technical driven short-covering rally only because gold hit a support level.

The recovery of gold only gained momentum and the price rocketed after stock markets pared gains and turned negative. The reason for this reversal in equity markets had been the recent developments in the geo-political tensions about the Ukraine. Russia’s defense minister announced that he ordered a military drill of forces near the border to Ukraine. Furthermore, the compromise reached before the Easter Holiday did not lead to the agreed results. Ukraine’s acting interim president ordered again troops to move to the eastern parts of the country and to disarm the separatists as well as to regain control over occupied government buildings.

Thus, it is the currently negative correlation between the price of gold and US or other major stock indices, which helped gold to rebound from a technical support level. Our quantitative model for the S&P 500 index, based on macroeconomic indicators, is still long positioned. Furthermore, the recovery of gold was not accompanied by an inflow of fresh capital to gold ETFs. While the holdings of the biggest ETF, the SPDR Gold Trust remained unchanged at 792.14 tons on Thursday and Friday (after falling by 3 tons at the start of the week), gold holdings of all ETFs declined on Thursday according to data compiled by Thomson Reuters.

Therefore, the fundamental factors still indicate that the risks for gold are biased to the downside. The support at 1270$/oz might not be as strong as expected by some technical analysts. However, in the short-run, the geo-political tensions about the Ukraine could remain a dominating factor.    

On the ECB Plans for QE

The development of the US dollar against the major currencies remains one of the crucial factors for the price trends of precious and also base metals. Of course, the policy of the Fed is one decisive determinants of exchange rate fluctuations. However, the monetary policy of other major central banks is also an important component in the price discovery process in foreign exchange rate markets. In this past week, ECB president Draghi stepped up verbal interventions which failed to drive the euro weaker against the US dollar. However, the ECB prepares the blueprint for implementing quantitative easing. Once the ECB embarks on QE, the US dollar could strengthen, which would have a negative impact on metal prices.

As the ECB is the central bank of 18 independent countries, implementing a common quantitative easing policy is not as easy as it was for the Fed or the Bank of England. The ECB has to decide, how to split the amount of quantitative easing among its member countries. According to the online edition of a German weekly magazine, the ECB staff considers currently two proposals. The first one is to allocate the funds for asset purchases based on the share, which each national central banks hold of the ECB capital. This would imply that the ECB would purchase for 26% of the QE volume German bonds, for 20% French and for 18% Italian bonds. When the ECB introduced the outright monetary transaction (OMT) program, which was not used so far, the Deutsche Bundesbank complaint that this program would be a transfer program. This argument also played a role in the decision of the German constitutional court. However, the argument of transfers could now also be applied to this proposal. As the ECB earns interest on the bonds purchased, the profit resulting from QE will be distributed to the national central banks. But German bonds bear the lowest yields. Thus, countries with higher yields could rightly complain that they would subsidize Germany, which would profit from interest earned by the ECB on buying bonds of countries with a higher yield level.

Furthermore, allocating the highest share of QE funds for buying German assets does not make much economic sense. One should keep in mind, what the reason for QE is: namely to prevent deflation. Germany profited from the financial crisis in the Eurozone already by having the lowest yields in the Eurozone and by growing relatively strong compared to the rest of the Eurozone. The deflation risk in the Eurozone is the result of the wrong economic policy, which Germany pushed through at EU summits. If the ECB will decide to allocate funds for QE according to the share on its capital, then Germany would be the biggest winner again. Another argument against the highest share for Germany is that German companies already have lower funding costs compared with companies located in other Eurozone member states. They need less support from the ECB than others.

The second proposal is to allocate the funds according to the size of national government bond markets. In this case, the ECB would allocate 25% for buying Italian bonds and about 22% for French and German bonds respectively. This would make more sense because some countries with higher borrowing costs for companies compared with German entities would receive a bigger slice of the cake. However, from our point of view, this is still not an optimal solution.

The two proposals do not take into account the reason for QE. To prevent deflation, countries where the deflation risk is high should receive relatively more funds than countries with less deflation risk. Thus, one criteria could be the difference between the ECB target inflation rate and the actual inflation rate. As the ECB’s target is an inflation rate close, but below 2%, a good starting point might be the difference to 1.9% inflation rate. According the Eurostat, the statistical office of the EU, the harmonized CPI inflation in Germany is 0.9% in March 2014. Thus, Germany is 1.0% below target. However, in Greece, the inflation rate is the lowest with -1.9%, which implies that Greece is 2.8 percentage points below the target. In Cyprus, harmonized consumer prices dropped 0.9% from the same month one year earlier and in Spain the inflation rate was -0.2%. At the other end of the spectrum are Finland with +1.3% and Austria with 1.4%, which would need less monetary stimulus.

Another indicator of deflation risk would be the output gap. The risk of deflation is increasing, the more the actual output is below the potential output. Thus, countries with a bigger negative output gap should receive relatively more monetary stimulus than countries with a small negative output gap. Given the GDP development over the last few years, it is also not difficult to guess that the Southern European countries would need a relatively higher monetary stimulus than Germany.

It should be clear, that neither the difference between actual and target inflation rate nor the size of the output gap alone are a good weighting factor for the allocation of QE funds by the ECB. The size of the bond markets should also play a role because the financial markets have to absorb the volume of QE measures. What we would propose is a two-step process to calculate the allocation weights. In a first step, weighting factors would be calculated based on the inflation gap. In the second step, the size of bond markets would be multiplied with this inflation based weighting factor. The volume of QE would then be allocated according to the share of the weighted bond market size in relation to the sum of weighted bond market size over all member countries.

Precious metals rise, but less than fundamentals sugges

This week, all four precious metals posted gains compared with the close of the Friday before. However, given the development of the major fundamental drivers, the performance was a bit disappointing.  The only exception was palladium, which rose 1.75%. Gold came in second with an increase of 1.2% over the week. However, after rising again above the psychological resistance of 1,300$/oz, a stronger rebound had to be expected against the backdrop of the fundamentals. Silver and platinum did not even manage to increase by 0.5%.

Not only the fundamentals, but also geo-political factors would have argued for a stronger increase of gold as the metal is usually regarded as a safe haven. Russians are a strong part of the population in the eastern parts of the Ukraine. The occupation of government buildings in some cities in the eastern Ukraine increased the tensions instead of deescalating it. NATO warns that Russian forces might invade the Ukraine and US President Obama already announced there would be further sanctions against Russia. In such a situation, there is usually a stronger demand for safe haven assets.

Some members of the FOMC feared, according to the minutes of the recent meeting, that financial markets might not understand the dot charts with the forecasts for the Fed Funds target rate. Obviously, they were right as the reactions after the FOMC meeting, Mrs. Yellen’s speech on March 31, and now after the release of the minutes showed. The messages is again that the first rate hike has to be expected only as early as mid-2015. We have pointed out several times that the FOMC has not changed its course. Even under the chairmanship of Mr. Bernanke, the Fed always indicated during 2013 that until mid-2015 the Fed Funds target rate would remain at the exceptional low level of less that 0.25%.

After the release of the FOMC minutes, the US stock market rallied. However, this rally was very short lived. Already the next day, the market gave the gains back. Profit-taking and the earnings season had a stronger impact. Especially technology stocks suffered most. But also the broader S&P 500 index lost 2.6% in the week over week comparison.

Over the recent couple of months, there was a negative correlation between the US stock market and gold. Given the decline of the US stock market, one would have expected a stronger flow into gold. However, investors have reduced their exposure to gold. The large speculators have reduced their net-long position in gold futures from 100,145 to 88,599 contracts in the week ending April 8, according to the recent CFTC report on the “Commitment of Traders”. Compared to the high, the non-commercials have reduced their net-long position by more than one third. Also the holdings of the biggest gold ETF, the SPDR Gold Trust, fell by almost 5 tons during last week.

But not only should the stock market have contributed to a stronger flow into gold. Also other fundamentals were positive for gold. The US dollar rebounded as markets have now understood that the first rate hike by the Fed will not take place earlier as some economists and market strategists suggested. The US dollar index fell by almost one full point to 79.45 and the euro rose to 1.3905, a gain of 2ct compared to the close of the Friday before. The head of the Deutsche Bundesbank, Mr. Weidmann, played down the risk of deflation in the Eurozone earlier this past week. However, one should not make the mistake to interpret this statement as an indication that the ECB would not embark on QE. A central bank cannot warn of deflation risks for psychological reasons. Such a warning could just increase the risk of deflation, which is clearly unwelcome as the experience of Japan demonstrates. However, as the Eurozone is just a currency union of independent states, implementing QE is far more complicated than it had been for the Fed or the Bank of England. Thus, we still expect that the ECB staff is working on the technical details of QE. From our point of view, the most likely scenario is still that the ECB will vote for QE before the summer recess. This should have a weakening impact on the euro against major currencies, which would be negative for gold and other precious metals.

Also the US Treasury market reacted positively on the FOMC minutes. The yield on the 10yr US T-Note fell by 11bp to 2.62%. This reduction of opportunity costs of holding precious metals should have a positive impact on the demand for all four metals. However, the crucial question is how far the yields on the 10yr benchmark Treasury note could fall. As long as the expansion of the US economy keeps on track, we regard US T-Notes at a yield below 2.5% as expensive. Thus, the most likely scenario remains that the US bond market will not provide much more support for gold. In the medium-term, rising yields are likely, which would be negative for gold.

Another fundamental driver of gold is the price of crude oil, which rose by 2.6$/bbl to 103.74$/bbl for the front-month WTI future at Nymex. Brent increased by only 0.6$/bbl for the front month future. However, also for this factor, the medium-term outlook remains not favorable for gold and other precious metals. In the short-run, the re-opening of ports in eastern parts of Libya remains a crucial factor. OPEC released its monthly report recently and also has reduced the forecast for crude oil demand. Thus, the risk for crude oil appears currently to be more on the downside.

Despite all fundamental drivers were positive, gold rose just 1.2% over the week. A stronger reaction had to be expected. Furthermore, it seems that major investors have reduced their exposure in gold by selling into the rallies. The outlook for the fundamental drivers of precious metals over the medium-term horizon remains negative for precious metals. At best they remain neutral but will not provide much support for a further rally. Only the supply situation for the PGMs remains supportive and should lead to an outperformance, especially of palladium. But for gold and silver, the risks are more biased to the downside in the medium-term. But this does not rule out that the markets edge up further in the short-run.