Head of Commodity Strategy, Saxo Bank Group
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?
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.
The reductions culminated last Friday when 11 tons were withdrawn, the biggest one-day reduction in total holdings since March 21 of last year.
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.
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.
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.
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.
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