Is it all over for precious metals? Is it all over for precious metals? Is it all over for precious metals?

Is it all over for precious metals?

Commodities 10 minutes to read
Picture of Ole Hansen
Ole Hansen

Head of Commodity Strategy

Summary:  Bullish sentiment in both gold and silver has staggered this week against a backdrop of multiple risk-positive factors. Is this the end of the road for the recent run in precious metals?


Gold, silver and platinum strength have seen a major challenge this past week. Here, we take a look at the reasons behind the reduced appetite for precious metals and ponder whether the recent rally has run out of steam. 

Several events during the past few weeks helped change the sentiment away from safe-haven assets:

Increased speculation about a successful outcome of the US-China trade talks.
Stronger than expected US Q4’18 GDP pushing back, at least temporarily, concerns about the economy sliding into recession.
Rebound in Federal Reserve hike odds following recent testimonies on Capitol Hill from Fed chair Powell.
Reduced risk of a hard Brexit as PM May gives in to pressure from members of her party.
Profit-taking from gold investors worrying that the $1,360-80/oz band would once again offer an impenetrable barrier of resistance.


The table below shows the performance across some of the key markets which help determine the appetite for gold at any given time. While the rally in stocks has provided some headwinds since January, it was renewed strengthening of the dollar and bond yields which help accelerate the sell-off since last Friday’s stronger than expected US data.
Precious metals
Delayed Commitments of Traders reports from the US CFTC found that hedge funds jumped into gold futures in the run-up to the failed attempt at $1,350/oz. The 69% increase in the net-long during the week to February 19 left many recent established longs under water once the price reversed lower. Investors in exchange-traded funds backed by bullion, meanwhile, have been continued sellers since early February.

The reductions culminated last Friday when 11 tons were withdrawn, the biggest one-day reduction in total holdings since March 21 of last year. 
Total holdings
Source: Saxo Bank
The selling pressure increased last week after the uptrend from November was broken. We view the current sell-off as a correction within the current uptrend. While we maintain a bullish outlook above $1,276/oz, we also have to conclude that a deterioration in global stocks, as well as increased geopolitical and/or macroeconomic risks are needed to give gold enough momentum to mount a challenge at the strong band of resistance between $1,360 and $1,380/oz. 

We believe that the stock market, while not yet showing any real warning signs, may be at risk of a correction once the trade deal is announced – not least given how far the belief in a deal has carried the market already. The biggest short-term risk to our constructive outlook remains the dollar, which may put in a final push to the upside before running out of steam, despite having remained rangebound for months. 
XAUUSD
Source: Saxo Bank
Silver has already corrected 50% of its November-February rally as it remains out of favour with investors looking for better opportunities in other metals such as platinum and copper.

Platinum, supported by surging palladium prices, has seen relative value traders return to bring down the discount to gold; the same, however, can not be said about silver. The lack of demand is best reflected in the gold-silver ratio, which has moved back above 85 (silver ounces to one gold ounce), not far from the quarter-century closing high at 86.2 reached last November. 
Silver
Source: Saxo Bank
Platinum, which up until recently enjoyed a tailwind from rising gold and surging palladium prices, also ran into profit-taking after failing to break the November high at $877/oz. Having retraced half of the February run-up in just three days the metal is once again looking for support around $830/oz (as per the chart below).

A near-$700 record discount to palladium is likely to provide the support needed for the metal to further claw back some of its discount to gold, currently at $445/oz and down from a record $525/oz just three weeks ago. 

Platinum’s initial surge and subsequent sell-off shows the price impact on metals, where a lack of liquidity can quickly turn from being an investor's best friend to their worst enemy.
Platinum
Source: Saxo Bank
HG Copper has been in corrective mode the past week after finding resistance ahead of $3/lb. The rally until then was driven by trade talk hopes and a rundown in stocks held at warehouses monitored by the London Metal Exchange, the worlds largest industrial metals exchange, and COMEX in New York.

While overall LME stockpiles have dropped to 118,000 tons, the lowest since 2008, the drop in freely available stocks has fallen close to levels last seen in the 1970s. These developments have led to speculation about a tightening market, as can be seen through the widening backwardation between LME copper cash and the three-month contract.

It is worth noting, however, that deliverable stocks at the Shanghai Futures Exchange in China have continued to rise since early January in tandem with these developments. 
Copper
High-grade copper was a star performer during February on the back of tightening supply and optimism on several Chinese fronts. However, we maintain our view from last week that the current consolidation has further to go for the aforementioned reasons, with the market taking aim at the area of support below $2.86/lb.
Copper
Source: Saxo Bank

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.