Precious metals consolidate recent gains

According to data from ThomsonReuters, gold and silver ended the trading week around the levels of the previous week, while the PGMs came under some stronger pressure with losses of more than 3%. The performance of gold and silver is remarkable as the major fundamental drivers were all negative. This indicates that among the precious metals complex, gold and silver are likely to perform well during the final quarter of this year while the PGMs might lag behind.

After the implementation of QE3, the increase of risk appetite did not last long. The turnaround towards buying the safe haven government bonds was triggered by Asian investors. After markets were closed in Tokyo on Monday, Japanese investors were buying US Treasuries on bargain hunting. Also the geo-political tensions between China and Japan increased the appeal of US Treasuries as a safe haven. Some commentators argued that the increase of inflation expectations was overdone and thus, US government bonds were an attractive investment. Last week, we wrote that fears of a strong rise of inflation rates were overdone. However, this does not imply that US Treasuries are an attractive investment at current levels. As long as nominal yields are below the inflation rate, investing in conventional US Treasuries destroys wealth in real-terms.

We also regard the recent movement of the spread between yields on conventional and inflation-linked US Treasuries not as overdone. Furthermore, it is also not contradicting our assessment that QE3 is currently not inflationary. Nevertheless, if QE3 will be successful, an increase of GDP growth could have an impact energy prices. A change in relative prices could lead to an increase of head-line CPI inflation above 2% while core CPI inflation remains well behaved. However, for an investment in bonds with fixed nominal coupons and redemption, it is the overall price development that matters. This is again an argument against investing in conventional US Treasury paper, UK Gilts or German Bunds as long as yields are below inflation rates.

However, last week, crude oil prices came under strong pressure after having rallied the weeks before on hopes for QE3. On Monday, Brent and WTI futures at the ICE and NYMEX exchanges plunged more than 3$/bbl within a minute without any obvious reason. During the course of the week, crude oil prices came under further pressure as Saudi-Arabia has been reported to pump around 10 million bpd to bring crude oil prices below 100 dollar. Another negative factor for the price of crude oil had been the weekly EIA report on US oil inventories showing a strong build of 8.5 million barrels while the market consensus expected a draw of 0.2 million barrels. As a result, the front-month light crude oil future at the NYMEX lost more than 6% and fell by more than 6 dollar from 99 to 9s.89$/bbl.

In the eurozone, buying the German bunds as safe haven got also support from traders losing patience with Spain hesitating to apply for a full bail-out, which would pave the way for the ECB to buy Spanish government paper up to maturities of 3 years. We argued that the disadvantages of the ECB’s OMT program are the strings attached. The conditionality of applying for a bail-out by the EFSF/ESM will deter governments to seek for financial help, especially, if the conditions are not known in advance. Thus, the hesitation of the Spanish government is fully understandable. Nevertheless, it is also not very rational to sell now Spanish government bonds and notes as Spain could apply anytime for a bail-out. Fading hopes that Spain would apply for a bail-out did not only lead to a decline of yields on safe haven German bonds at the longer end of the curve, but also the euro pared some of the gains made in the week before. Thus, also a firmer US dollar was a negative factor for the precious metals.

Stock markets were not only affected by the renewed wave of buying safe haven government bonds, but also by some economic data. In China, the PMI compiled by Markit increased from revised 47.6 to 47.8 but the market was disappointed by the fact that this index remained below the 50 threshold level. However, turnarounds do not occur as spikes but are gradual improvements. A change in the direction is the more important indication for the economic outlook. In Germany, the ZEW index came in better that expected. Nevertheless, the stock market was disappointed as the assessment of the current situation did not improve. But usually the expectations increase first and later also the assessment of the current situation increases. The expectations are the leading indicator and should be emphasized more than current business conditions. In the Eurozone, the flash estimates of the PMIs were also weighing on stock markets. In Germany, the PMI for the service and the manufacturing sector increased both surprisingly. However, even a bigger surprise was the plunge of the two PMI indices in France. The overall estimate for the eurozone showed an increase in the manufacturing sector but a drop in the service sector. However, the development of the French indices dominated sentiment. While European stock markets ended mixed, all the major US stock indices ended the week negative, which was another burden for precious metals. Beside the PMIs, also the outlook for the European automobile market given by the CEO of the German car company Daimler weighed on the PGMs.

Positive were the flow of funds data. Large speculators increased their net long position further by 9,099 to 191,115 contracts, according to the weekly CFTC report on the ‘Commitment of Traders’. For silver, the net-long position of non-commercials rose by more than 1,000 to 32,555 contracts. The holdings of the biggest gold ETF - the SPDR Gold Trust - increased by more than 16 tons to 1,317.76 tons during the past week. The silver holdings in the iShare Silver ETF increased by almost 200 tons to 9,940.66 tons.

The decisions taken by the ECB and the Fed in September pave the way for an economic recovery in the eurozone and stronger GDP growth in the US. If eurozone politicians do not counteract by imposing more severe fiscal austerity measures, the situation in the eurozone could improve. This would also be positive for other parts of the world. Stronger global economic growth would be positive for precious metals, not by a strong pick-up of inflation, but by increasing the risk appetite of investors. 

Metals rally on growth outlook and not on increasing inflation expectations

In many areas like natural science, you can not be right for the wrong reason. However, financial and commodity markets are an exception. Within one week, two of the main central banks decided on important monetary policy measures. Metals markets rallied and some commentators argued rising metal prices were based on increasing inflation expectations. However, inflation is not looming, neither in the eurozone nor in the US.

The ECB’s decision to buy short-term government bonds in the secondary market if a country asks the EFSF or the ESM for help has been criticized, especially by inflation paranoid German politicians and newspaper commentators, as leading sooner or later towards rising inflation rates. Even repeating this argument in parliament does not provide any sound economic basis. The ECB stated that all purchases under the “outright monetary transaction (OTM)” program will be sterilized. Thus, OTM will not lead to an increase of the ECB balance sheet. Furthermore, the number of eurozone countries being in a recession is increasing. Also core countries like Germany are likely to slow down and get close to recession in 2013. Thus, the risk in the eurozone is more biased towards deflation than inflation. Yes, it is true that food and energy prices are increasing, but this is just a change of relative prices and not inflation.

The Fed has not disappointed the majority of Wall Street economists. A majority of 65% expected the FOMC to implement the third round of quantitative easing, called QE3. However, the FOMC surprised the bond markets by announcing to buy $40bn of mortgage backed securities (MBS) per month for an unlimited period until the target unemployment rate is reached. Treasury notes and bonds will not profit from QE3 but operation twist will be continued. Thus, the Fed will extend its balance sheet.

With QE3, one condition for increasing inflation rates according to the famous Fisher equation will be fulfilled. Thus, it is not surprising that inflation expectations, as measured by the spread of yields on conventional and inflation-linked US Treasury notes, have risen over the last few days and weeks. However, as the past 20 years have shown, increasing money supply does not necessarily lead to rising inflation. Monetarists have made some assumptions to reach their conclusion that extending money supply would lead to inflation. One assumption is the constant velocity of money. But the velocity of money in circulation has declined steadily. The more important assumption is the full employment of resources.

The decision of the FOMC to provide more liquidity by unconventional monetary policy measures is based on the violation of the assumption of full employment. The current unemployment rate of 8.1% is far above the natural level, which is estimated to be between 5 – 6%. Furthermore, the decline of the unemployment rate was to a large degree the result of unemployed persons leaving the work-force. While a certain fraction of leaving the work-force could be explained by retiring baby-boomers, the vast majority has left because they see currently no chance of finding a job. However, it is also well known that the work-force participation increases again in times of stronger economic growth.

But it is not only the work-force, which is not fully employed. Also the second production factor capital is not fully utilized. One day after the FOMC meeting, the Fed released the data for industrial production and capacity utilization in August. Industrial production declined by 1.2% compared to the previous month and capacity utilization fell from 79.2 to 78.2%, which is 2.6% below the long-term average of 80.3%. But even in the case that QE3 would lead to an increase of the capacity utilization above the long-term average, it is not immediately inflationary. Only if capacities were almost fully used, inflationary pressure would build.

The measures taken by the FOMC could lead to an improvement of US GDP growth. This is the main reason, why investors have increased their risk appetite again and buy risky assets and sell safe haven US Treasury notes and bonds. QE3 also has an impact on the US dollar as buying risky assets also includes buying assets denominated in foreign currencies. If markets were not convinced that the Fed policy would lead to stronger growth, base metals would still trade at lower levels. However, also base metals rallied and this surge in prices can not be explained only with fears of higher inflation rates by some gold bugs. It is improved global growth prospects, not inflation, which drive precious and base metals prices. 

Precious metals rally on central bank policy

It were the policy action of the ECB and the expectations of further Fed policy action which drove precious metal prices sharply higher last week. However, whether prices will advance further during the next trading week will depend on the German constitutional court ruling on the EMS and the FOMC decision on another round of quantitative easing.

The ECB presented the details of its new bond purchase program called ‘outright monetary transactions OTM’, which is not the optimal solution. However, it is far better than following the advice of the German Bundesbank to do nothing at all. The ECB has attached some conditions, which make the program less effective. First, the ECB will only purchase bonds in the secondary market after a government has requested a bailout from the EFSF/ESM. In addition, the IMF should be involved in determining the conditions of a bail-out program, even if the IMF will not provide own funds. However, it is just the IMF conditionality, which makes governments hesitant to ask for a help. The doctrine of the IMF is to implement severe austerity measures. Even staff members of the IMF showed in a recent working paper, that austerity measures aggravate a recession and are not a cure to reduce a budget deficit if a country is already in a recession. The two main candidates for ECB bond purchases are Spain and Italy, which are already in a recession. Thus, both governments might not be too eager to ask for help from the EFSF/ESM and from the ECB to bring down borrowing costs.

Second, the ECB is limiting any purchase to bonds with a remaining life to maturity of up to three years.  This limit has to be seen against the background of critics that the ECB would violate its mandate and would finance governments illegally. The limit of three years is regard as being in compliance with the ECB’s legal framework. From the perspective of market impact, of course, no limitation of the maturity range would have been preferable.

Third, there appears to be now concrete target for yields. Thus, markets are probably trying to test the ECB once a country applies for help. By stating a concrete target, the markets might have moved to the target level without any need of the ECB to purchase bonds. But it is positive that the ECB is willing to purchase unlimited amounts of bonds in the selected maturity range.

The ECB’s outright monetary transaction program will not be a measure of quantitative easing. The amount of bonds purchased will be sterilized by withdrawing liquidity by other means, for example at the weekly refinancing operations. Thus, the OTM is not going to extend the ECB balance sheet.

Despite the ECB’s OTM is not quantitative easing, it is positive for precious metals. Those buying gold on fears the ECB policy would lead to higher inflation make the right decision but for the wrong reason. Without having spent even one euro on buying bonds of Spain and Italy, yields on government paper of these two eurozone member states already came down. Yields declined significantly not only at the short end of the yield curve but also for longer maturities. After the ECB announcement of OTM, speculators have to fear that anytime soon, Spain and Italy might apply for a bail-out and the ECB starts buying bonds. Thus, they already began to cover their short-positions in government paper of these two countries. And it is this decline of yields, which mitigates the funding situation. At the same time, also the risk of countries leaving the euro declines considerably. The debt crisis in the eurozone is not yet solved, but the ECB’s OTM is major step towards ending the crisis. Thus, the euro recovered against the US dollar, which is positive for gold. Also investors bought more stocks and the rise of equity indices is another positive factor for gold as investors’ risk appetite is increasing and they also buy not only stocks but also commodities again.

The US labor market report for August had been mixed, but overall it disappointed. It has increased the odds that the FOMC might already decide in the coming week at the meeting on September 12/13 to implement QE3. However, as a fiscal cliff in the US is not yet avoided, we see a slightly higher probability that the FOMC might keep its powder dry. In the case that the FOMC does not embark on QE3 at the next meeting, precious metals might suffer a set-back.

A potential risk for precious metals is also the ruling of the German constitutional court on the ESM. The majority of the German population favors that the highest court in Germany stops the ESM. However, this would be an economic disaster. But one never knows how the judges at a court will decide. Thus, this is an event risk and the result is hard to predict. In the case that the constitutional court paves the way for the ratification of the treaty, precious metals are likely to advance further. However, any blocking would probably be negative for the euro and risky assets, including the precious metals.

No news from Bernanke has been interpreted as good news

Precious metals had consolidated ahead of the speech given by Fed chairman Bernanke at the Kansas City Fed seminar in Jackson Hole, Wyoming. After the release of the text of his speech, precious metals rallied in line with US Treasury notes and bonds. Stock markets were initially disappointed but later pared losses, which was a further support for precious metals. Only the PGMs did not rally strongly enough to end the week with a gain compared to the previous Friday.

The behavior of most markets last Friday contradicts academic theory that markets are information efficient, which means that not only public available but also inside information is already discounted in the prices. Many market commentators expected the Fed chairman to provide a clear signal that the FOMC would implement a third round of quantitative easing at the next meeting, which is scheduled to take place on September 12 and 13, 2012. However, Ben Bernanke only repeated information, which was already provided by statement and minutes of the recent FOMC meeting. Thus, Mr. Bernanke did not provide any news the market had hoped for. As markets had already priced in more details about the implementation of QE3, the normal reaction expected would be a drop of prices for US Treasury paper and precious metals. However, these markets switched to rally mode – a very strange behavior.

Also the part of Mr. Bernanke’s speech, in which he defended quantitative easing, has to be seen more against the criticism, especially from republican lawmakers. Presidential candidate Mitt Rommney even declared as US president, he would sack Fed chairman Bernanke. While we fully agree that QE1 and QE2 as well as “operation twist” have their merits and helped the US economy to recover pretty well after the financial crisis of 2008, we have doubts about the effectiveness of a third round.

After the rally of last Friday, the yields on 10yr US Treasury notes stay at 1.55%. This is very close to the record low of around 1.4% reached just a few weeks ago. If this already historically low yield level on 10yr US Treasuries does not induce corporates to invest more, which difference would QE3 make? Furthermore, the yield on 2yr US Treasury notes is at 0.22%, thus, the steepness of the yield curve, often measured by the spread between 2- and 10yr T-notes, is 133 basis points. In a historical comparison, this is a rather flat yield curve level to have a strong stimulating impact on the economy.

For business fixed investments, the yield level of corporate bonds is more relevant than funding costs of the US government. Therefore, QE3 would have a stronger impact if the Fed would buy corporate bond ETFs or mortgage backed securities instead of US Treasury paper. Furthermore, companies do not just invest because the yield level is low. As James Tobin has shown with his famous q-ratio, funding costs have to be low relative to the expected rate of return on real capital. If business leaders are unsecure about the economic outlook, they hesitate to invest and postpone investment decisions into the future.

In this context, the stock market comes into play as it is often regarded as a leading indicator of future economic growth. So far this year, the US stock market has performed quite well and just about two weeks ago, the S&P 500 reached the highest level since May 2008. However, the US stock market reacts negatively in the case that hopes for QE3 get dampened. But it is well known that economic policy is to a large extent also changing the psychology of market participants. In this respect, QE acts like a drug, once injected it gives traders and investors a high feeling, but the hang-over is not far away. And then a higher dose is requested. Considering QE3 is already an indication that the Fed would not be convinced that the US economy will improve. How could the Fed expect business leaders as well as stock market investors would view the economic outlook more optimistic?

We do not deny that the US economy also faces some head-winds. Growth in China is slowing, which also has an impact on the US economy. The political leaders in the Eurozone are unable to come up with a solution to fix the debt crisis. All they do is buying time. And some necessary measures to stabilize the euro are torpedoed by the German Bundesbank. However, against these headwinds, the Fed can do relatively little. QE3 could even be negative for stabilizing the situation in the eurozone as a rally in US Treasury notes also pushes German Bunds higher. But a rise of Bund prices leads normally to selling of Spanish and Italian government bonds. Nevertheless, QE3 could have an impact to increase the competitiveness of the US economy by weakening the US dollar. However, if this would be the real hidden purpose of QE3, then the FOMC should better declare openly that they aim to weaken the US dollar.

Ben Bernanke’s speech keeps the door open for QE3 at the September FOMC meeting but it is not a pre-commitment that measures will be taken in mid-September. A lot will still depend on further economic data released ahead of the FOMC meeting. The most important is certainly the US labor market report due next Friday. This report will also have a strong impact on precious metals markets. However, a positive surprise in the number of new jobs created or the unemployment rate would dampen QE3 hopes, but as pointed out two weeks ago, no further quantitative easing is not necessarily bad for precious metals as a stronger economy is also supportive for precious metal prices. 

Central banks fuel rally in precious metals

All four precious metals have rallied last week and broke out of consolidation ranges last week. The main forces behind these moves are expectations about further monetary policy measures of the major central banks. Platinum and palladium also profited by the labor unrest in South Africa. Therefore, prices metals prices have further scope to the upside. Nevertheless, one should not overlook the stumbling blocks on the road to further monetary easing.

The trigger of the rally had been a report in the online edition of a German weekly magazine, Der Spiegel, that the ECB would intend to implement ceilings for the yields on government bonds for countries asking for a bailout. This report had been denied by a spokeswoman of the ECB pointing out that no decision has been made yet on how to proceed under the new bond purchase program announced at the recent ECB press conference. At the same day, the mighty Deutsche Bundesbank voiced again strong opposition to any secondary market bond purchases in its monthly report. In addition, there was an outcry also from German politicians, normally praising and defending the independence of the ECB as indispensable for price stability.

The Lisbon Treaty allows the ECB to buy government bonds in the secondary market. The preamble states that purchases in the secondary market should not circumvent the prohibition of direct government financing. However, the treaty neither sets any limit to government bond purchases in the secondary market nor provides any guideline when such purchases would be no longer an instrument of monetary policy but would constitute direct government financing. Furthermore, the Bundesbank president, Mr. Weidmann, and the German politicians miss the point for the decision made by the ECB earlier this month. The ECB council rightly came to the conclusion that there is a severe malfunctioning and that exceptionally high risk premia observed in government bond prices in several countries and financial fragmentation hinders the effective working of monetary policy. Therefore, it is not only the task of fiscal policy of those countries with high risk premia to restore confidence, but also the ECB has to take measures to re-establish the effectiveness of the monetary transmission mechanism. Reducing the yield spreads of government bonds over Germans Bunds as benchmark for the eurozone by bond purchases in the secondary market is the most efficient way to achieve the target of bond markets functioning again properly.

During last week, several other plans had been leaked. According to one proposal, the ECB might set a limit for government bond yields but keep it secret. However, if ECB staff members already pass information on draft proposals for the decision in the council to the media, one has to expect that such secret limits would not be kept secret for a long time and would also be leaked to the media. Furthermore, secret limits for bond yields would open doors for rumors flying around. And it is not a secret that many traders are not scrupulous to spread rumors to manipulate the market moving in the direction beneficial for their positions held – and their bonus payments of course. Thus, it would be better to communicate target yields openly to the public.   

A widespread argument against those purchases is the fear of inflation accelerating in the near future. Thus, many advisors recommend buying precious metals as a hedge against rising inflation rates. However, government bond purchases by the ECB do not necessarily lead to higher future inflation rates. As with the first security market program (SMP), the ECB can sterilize the impact of bond buying on the provision of liquidity. From our point of view, the more important aspect for buying precious metals is the impact of the ECB bond purchase program on the risk appetite of investors.

Decisive interventions of the ECB would probably have a positive impact on stock markets, not only in the eurozone but also outside Europe. We pointed out several times, that the development of the S&P 500 index has a significant impact of the price movements of precious metals. Furthermore, ECB interventions would probably also lead to a more positive assessment of future growth rates in the eurozone and other regions. Thus, it would probably also have impacts on the oil price, which is another significant factor in our econometric fair value models for precious metals. Normally, a relatively more expansionary monetary policy is expected to weaken the currency in foreign exchange markets. However, in the case of ECB bond buying, the euro could even strengthen. In FX markets, such steps could be seen as a determined defense of the single currency to prevent a collapse of the currency union. Confidence in the euro could be restored and traders and hedge funds speculating on a failure of the euro might be forced to cover their euro short positions. Thus, ECB interventions in the bond markets could lead to a firmer euro, which would be another positive factor for the development of precious metals prices.

But whether the ECB will intervene in government bond markets by buying bonds with exceptionally high risk premia will not depend on the Bundesbank giving up its opposition. The crucial feature of the decision made at the August rate setting ECB council meeting is the conditionality. Only in the case that a country asks the EFSF/ESM for a bailout, it would open the way for the ECB to decide on bond purchases in the secondary market. Despite some rumors that Spain would already told talks about possible conditions for a bailout, the bailout conditions might lead to some hesitation to apply for help from the EFSM or ESM. Furthermore, the ECB announced that a final decision on the procedure of the bond buying program will be taken only after the German constitutional court has decided on the ESM and fiscal stability pact. This decision should be announced on September 12. Thus, there are still some stumbling blocks on the road for ECB bond purchases in the secondary markets.

Also the Fed had a positive impact on the development of precious metal prices in the second half of last week. The release of the FOMC minutes of the July31 – August 1, 2012 meeting revived the speculation on QE3 again. However, at least from our point of view, the minutes do not contain any new information. Based on the information available at the time of the meeting, the majority considered that further monetary easing might be needed. However, they obviously did not regard the economy as weak enough that immediate action would be required. The July labor market report released after the FOMC meeting was stronger than expected. Also some other economic data had surprised positively. Until the next FOMC meeting, there will be another labor market report due for release. Also the ISM purchasing manager indices for the manufacturing and service sector will be released. The markit PMI for the US came in a bit stronger than the consensus expected. Also the weekly initial jobless claims do not point to a worsening of the labor market situation being sufficient to tip the balance for embarking on QE3 at the September 12/13 FOMC meeting. At the end of the new trading week, the annual Fed seminar at Jackson Hole, Wyoming, will take place. Financial markets will watch this event closely because in the recent past, it provided some insights in the immediate FOMC actions.

At the current juncture, we can not rule out that FOMC will already decide at the September meeting to implement another round of QE. However, in that case, the focus might be no longer on buying US Treasury paper but on mortgage backed securities. Unless the economic data released before the FOMC meeting comes in weaker, we would not be surprised if the FOMC keeps the powder dry for a bit longer after the presidential elections.

After the break out of the recent trading ranges, the outlook for precious metals prices has improved. We expect that monetary policy will be supportive for investment demand in precious metals. However, further monetary stimulus measures might take a bit longer than the market currently anticipates. Therefore, set-backs and corrections can not be ruled out. But from the current point of view, they present more buying opportunities. 

No QE3 is not necessarily negative for precious metals

The major fundamental drivers for gold and silver had been positive on balance. Nevertheless, gold and silver ended the almost unchanged compared with the close of the preceding Friday. Especially the development in the first half of the week underlines that markets sometimes just react in the opposite way on positive news.

The US economic data came in mostly stronger than the consensus of Wall Street economists had predicted. Normally, positive economic surprises are positive for stock markets and other risky assets. However, during the first half of last week, the US stock market showed hardly any reaction. Currently, stock investors are too fixated on expectations of the Fed announcing soon another round of quantitative easing. What most investors and traders in the US stock market completely ignore is the fact that the monetary policy stance of the Fed is already extremely expansionary. It seems that the market is dominated by the thought that it first would have to get worse before it could get better. They completely deny the possibility that it might already get better after the soft spot in spring and that the worst might already be behind them. As another round of quantitative easing was already priced in, many traders and investors were now disappointed that the FOMC might see no need for further monetary policy measures. Thus, instead of buying stocks on bullish news, they reacted negative on stronger than expected economic data. Later during the trading sessions, losses were pared.

The US bond market, however, reacted in the normal way. As yields on medium- to long-term US Treasury notes and bonds had fallen to historic lows, they backed up and prices fell. Precious metals followed US Treasury paper prices lower as the expectation of QE had been also a supportive factor for gold and silver.

On Thursday, stock markets rallied, but also safe haven government bond markets and precious metals rose. Hopes for monetary stimulus returned into the markets. However, it was not primarily revived hopes for QE3 by the Fed. Instead, the financial and precious metal market got more optimistic on the ECB buying government notes in the secondary market. The trigger for this improved sentiment had been German chancellor Merkel. During her summer vacation, members of her coalition government attacked the ECB and in particular ECB president Draghi for the intention to intervene in the secondary market to bring down yields, and thus, to restore again the functioning of the financial markets, which is essential for the transmission mechanism of monetary policy to the real economy. At a visit in Canada, Mrs. Merkel fully supported the ECB and Mr. Draghi.

The ECB is expected to provide further details of its plan for buying bonds in the secondary market at the next press conference in September. However, the major weakness of the plan presented by Mr. Draghi at the August ECB press conference is its conditionality. Governments are likely to remain hesitant to ask the EFSF for a bailout by buying bonds. Therefore, for the time being, we remain skeptical whether the ECB will intervene anytime soon in the bond markets. However, the ECB might buy peripheral eurozone government bonds in the secondary markets even without a formal request in the case that Greece would decide to leave the eurozone. But in this scenario, bond buying by the ECB is probably not positive for precious metals as they might be dragged down by a sell-off in risky assets.

Thursday was also a turning point for the PGMs. Platinum and palladium rallied on a labor dispute at o mining company Lonmin - one of the world’s top platinum producer - which turned into deadly violence. South Africa accounts for about three quarters of global platinum production. This labor dispute is likely to have a lasting impact on the supply and demand balance. Thus, the PGMs are expected to perform better than gold and silver. This should especially be the case, if the global economic outlook improves again on monetary stimulus measures in Europe and Asia, in particular in China. But both PGMs are still clearly below their highs made in June. Only a break through those resistance levels would open the scope for considerably higher gains.

Gold and silver are expected to stay in recent trading ranges for the time being. However, even if the Fed waits longer with further monetary stimulus measures, the bias is still more towards a break-out to the upside.  

Quo vadis precious metals market?

ThomsonReuters reported recently that Analysts are bullish for gold. However, this poll is conducted quarterly, and thus, the assessment of precious metals analysts reflects more a medium-term view. The usual argument for the final four month of the year is physical demand for the festival season, especially in India. However, the high price of gold in Indian rupee as well as the import tax have led to a drop of gold imports into India. Therefore, on of the factors behind the seasonal pattern might fail to give gold a lift higher. Also the US dollar shows a seasonal behavior, which might be overshadowed by the ongoing debt crisis in the eurozone. Thus, there is considerable risk that analysts will have to adjust their forecast of rising precious metals prices by some month into the future. Therefore, a gold rally is probably more driven by investor demand than by physical buying from consumers.

Bloomberg polls analysts about their view on the move of gold over the coming week. This survey data is published on a weekly basis and analysts have to reply whether they are bullish, bearish of neutral.

For the coming week, the bullish reading has increased again to 50 and the bearish reading declined further. However, since the introduction of this survey, 50 per cent of the analysts polled being bullish is a quite low level. Only one third of the time, 50% or less of the precious metals analysts were bullish on gold for the coming week. Furthermore, our quantitative analysis shows that analysts’ responses reflect more the move of the gold price over the preceding week but have no significance for predicting the direction of gold over the next week. Thus, also that analysts got more bullish over the short-term is not a reliable indication that gold would head higher.

CTA’s and hedge funds usually go with the trend. The weekly report of the CFTC on the “Commitment of Traders” provides data on how these large speculators are positioned. After Mr. Draghi gave is speech in London and promised that the ECB would do whatever it takes to preserve the euro, financial markets interpreted this remark as indication the ECB would reactivate the dormant security markets program and would buy Spanish and Italian government bonds in the secondary market. This induced the large speculators to increase their long positions in gold futures. The net long position rose in the week ending July 31, by 13,087 to 126,064 contracts. However, after Mr. Draghi disappointed financial markets, the non-commercials reduced their long position in gold by 8,249 to 163,082 contracts in the week ending August 7. This is even below the level proceeding the Tuesday before the Speech of Mr. Draghi in London. The net long position also declined to 115,500 contracts but due to closing also short positions remained above the level of two weeks before. Thus, we have to conclude that even the trend following CTA’s and hedge funds currently do not see a clear trend in the gold market and expect further range trading.

Last week, most precious metals closed higher than the week before with only platinum ending the week lower. The US dollar strengthened again versus the euro as uncertainty about the ECB buying government bonds in the secondary market weighed on the single currency. The US labor market report did not lead to further selling in the safe haven government bond markets. The S&P 500 index as well as crude oil prices gained on the week and supported gold and other precious metals. The gain of the US stock market, which opened several days lower but managed to pare the gains, is remarkable, given the Chinese economic data. Usually, fears of global recession had been negative for stock markets. However, the decline of the Chinese CPI inflation and the almost stagnating Chinese exports, leading to a considerably smaller export surplus compared to consensus forecasts, give the PBoB and the administration enough leeway for more stimulus measures.

Thus, from our point of view, the major central banks are the key players for a rally in precious metal prices. However, it will not be by increasing reserve holdings in gold, but by monetary policy measures to stimulate the economies. The Chinese PBoP has already shifted to expansionary measures and we expect more cuts of key interest rates and minimum reserve requirements over the next weeks and months. The ECB has indicated to be ready to buy short-term government paper in the secondary market, but plays a game of chicken. Also the Fed stated again and again to stay ready to act when needed. However, the better than expected labor market report released earlier this month and also better than forecasted weekly initial jobless claims indicate that the FOMC might hesitate further with implementing QE3. Also the approaching US presidential election makes the timing of more stimulus measures for the Fed trickier. However, maybe the Fed conference in Jackson Hole later this month provides new indications. Thus, range trading might continue, but the chances for an upside break-out have improved.