Fra AB Amro:
How low can it go?
In January, precious metal prices peaked. Since then they have fallen substantially by 9%
(gold prices) to 20% (platinum prices). Precious metal prices are down between 4.5%
(gold) to 11% (platinum) during this year so far. In recent weeks, the sell-off has
accelerated.
There are several reasons for this price weakness. First, a looming trade war
between the US and China has weighed on prices, especially cyclical precious metals
such as platinum and palladium.
Second, the recovery of the US dollar is negative for all
precious metal prices. Third, a downshift in expectations about the eurozone economy has
been a negative for platinum prices.
Fourth, weakness in emerging markets has lowered all precious metal prices as well.
More recently the substantial fall in the yuan has accelerated the decline in precious metal
prices (see graphs above). Yuan weakness reflects the heightened trade tensions
Precious metal prices peaked in January…
…and have fallen substantially since then
Higher US dollar, looming trade war between the US and China,…
… downward adjustment in eurozone outlook …
…and the slide in the Chinese yuan have contributed to price weakness
Weakness in precious metal prices is not over yet, but prices are close to
the bottom between the US and China and nervousness about Chinese corporate bond defaults. China is a crucial consumer of precious metals. So fears of lower Chinese demand are negative for prices.
Weakness in precious metal prices is not over yet…
In the near-term, weakness in precious metal prices may not be over yet. For a start, we
expect the US dollar to rally a bit further on strong economic data and ongoing Fed rate
hikes. We also expect 10y US Treasury yields to rise a bit further.
This is negative for gold, silver and platinum prices as they have a high sensitivity towards these factors. Moreover, the technical pictures of the different precious metal prices look negative. All precious metal prices are below their 200-day moving averages. Today, gold prices have tested the December 2017 low of just below USD 1,237 per ounce.
It is likely that there will be another test. If prices break below this level, a revisit of the crucial support level at USD 1,200 per ounce is on the cards. Meanwhile, silver prices may revisit the December low close to USD 15.6 per ounce before stabilising. Today, platinum prices have tested the 2016 low. If this level is taken out, the low set around USD 744 per ounce during the Global Financial Crisis is in focus.
Palladium prices could easily revisit USD 900 per ounce in our view. In addition, trade tensions between the US and China will probably linger on and there may be more volatility in the Chinese yuan in the near term. These are also negatives for precious metal prices.
Finally, it is likely that concerns about Italy will return if Italy’s fiscal balance will get into
focus again later in the summer. This will weigh on the euro but also on platinum prices as
the eurozone is an important market for platinum …but prices are close to the bottom
Later in the year, we expect the US dollar and 10y US Treasury yields to peak. This
should support precious metal prices. We also expect US growth to peak in the fourth
quarter of this year. This will support gold and silver prices but weigh on palladium prices.
The US is a crucial market for palladium and palladium prices often move in tandem with
US equity markets. Lower US growth could result in a downward adjustment in demand
for palladium from the US.
Moreover, we expect the fall in the Chinese yuan to come to an end as Chinese
authorities will probably intervene to calm sentiment. We find it hard to imagine the
Chinese authorities letting the yuan drop in an uncontrolled manner. However, in the
near-term, yuan weakness may yet continue. In addition, our base case scenario is that
a significant escalation of the trade conflict is averted. This should support all precious
metal prices.
In addition, net-long speculative positioning in precious metals is not excessive. The
long positions in gold have been reduced substantially and short positions have risen
somewhat resulting in a reduction in net-long gold positions. Net-long silver positions
have risen considerably (up to last Tuesday close), but they are not excessive. In
palladium, long positions have been cut back, but short positions have barely moved.
This signals that investors are not willing to become negative on the palladium price
outlook yet. Surprisingly, the net-positioning in platinum has dropped into negative
territory meaning that the speculative community is net-short platinum. This is the
largest net-short positioning since inception of the data.
We expect gold prices to bottom out between USD 1,200 and 1,250 per ounce and silver
prices between USD 15.2 and 15.6 per ounce. We see these levels as an opportunity to
position for higher gold and silver prices next year. We think that platinum prices have
overreacted and prices should bottom out close to USD 800 per ounce. We remain the
most negative on palladium prices. We think that investors are still too positive on the
outlook for palladium prices. We expect prices will revisit the April low of USD 898 per
ounce.
