Precious
metals performed well during the last week. All metals posted strong gains, but
while silver rose 7.4% within one week, the focus of many commentators was on
gold. The widely followed metal increased 4.1%, but what was more important for
gold was the break of the psychological resistance at 1,300$/oz. In order to
assess whether gold is now in an upward trend, one has to analyze which factors
drove precious metal prices higher.
During the
final quarter of 2013 and also in January, gold and other precious metals
performed well, when the major stock markets consolidated or traded lower.
However, last week, stocks and precious metals moved both higher. In both
markets, the statements of Fed chairwoman Yellen at the testimony at the House had
been welcomed. The January labor market report and weaker than expected PMIs in
the US led to speculation that the Fed might slow the pace of reducing the
monthly bond purchases. However, Mrs. Yellen confirmed the FOMC statement made
only two weeks before. In the stock market, traders and investors interpreted
the statement as an indication the FOMC would still expect a strong US economy.
With this respect, the rise of US equity prices is understandable.
However, if
the FOMC continues tapering as indicated and the weaker economic data was only
due to the severe winter weather in the US, then there would be no reason for
the precious metal to be excited about the Fed. Quantitative easing would come
to an end rather sooner than later. Even if the Fed keeps the Fed Funds target
rate at the extremely low level during this year, the outlook for rate hikes in
2015 remains intact. Thus, it has to be expected that short-term interest rates
and yields on US Treasuries would edge up, which implies that the opportunity
costs of holding precious metals would increase too.
The outlook
for higher interest rates should be supportive for the US dollar. Also the
forward guidance of major other central banks points to a continuation of the
expansionary monetary policy. However, this appears not as sufficient to
strengthen the US dollar against the major currencies. In the case of the Bank
of England, the market is skeptical and fears the MPC might raise the base rate
sooner than currently indicated. The ECB has been expected to ease monetary
policy further already at the February meeting. However, the governing council
kept rates unchanged. After declining in January, the 3mth GBP Libor rate edged
up again. In the Eurozone, the 3mth Euribor rate also increased slightly after
the ECB meeting and is still far above the level prevailing in November. Thus,
the development of money market rates contributed to weaker US dollar against
the major currencies. Furthermore, the emerging market currencies, which had
been under pressure in January, managed to recover slightly as the rate hikes
by the central banks in India and Turkey showed some impact. From our point of
view, it was the weaker US dollar, which contributed to the rise of precious
metals.
However,
for the medium-term outlook, it remains questionable whether the US dollar will
remain a supportive factor for gold and other precious metals. The GDP growth
in the final quarter of 2013 was a bit stronger in the Eurozone than the
consensus of economists predicted. The ECB also underlined the outlook towards
an economic recovery. Nevertheless, the inflation rate headed lower again and
fell to 0.7%, which is far below the ECB’s target rate of close, but below 2%. Of
course, the ECB cannot state that the council would expect the Eurozone economy
were heading towards deflation. Such a statement could become a self-fulfilling
prophecy, which would be counter-productive. But this does not rule out, that
the council would have to take further measures to ease monetary policy.
Especially, the rise of the money market rates since early December could not
be welcomed. Therefore, we still attribute a higher probability to the scenario
of further easing. This would be negative for the euro. But higher import
prices could be favorable in the present inflation environment. Furthermore, it
would be positive in particular for the current accounts of Southern Eurozone
member states. Therefore, the positive impact of the US dollar on gold might be
short-lived.
Another
factor contributing to the recovery of gold and silver has been the behavior of
institutional investors. As they reduced their exposure last year, it seems that
the pictures is changing. According to the CFTC report on the “Commitment of
Traders”, large speculators have changed their attitude towards gold since last
Christmas. They have increased on balance their long positions by almost 24K
contracts and reduced short positions by around 22K contracts in the Comex gold
futures. Thus, the net-long position rose from 25,904 contracts on December 17,
2013 to 71,201 contracts in the week ending Tuesday, February 11. Furthermore,
gold holdings at the biggest ETF, the SPDR Gold Trust fell for more than one
year from 1,350.82 tons at year-end 2012 to 790.46 tons at the end of January
this year. It is well known that institutional investors were massive sellers
in this ETF. But know, it appears that also PIMCO is now done with reducing its
gold holdings. The gold holdings at SPDR Gold Trust increased over the last two
weeks to 801.25 tons. This might be just the one swallow, which does not make a
summer. However, it is already sufficient for prices of precious metals to
recover that large institutional investors are no longer selling gold.
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