Precious Metals Report: Fed QE programme to come under the spotlight

Published June 16th, 2013 - 11:59 GMT
The weekly jobless claims number fell last week by 12,000.
The weekly jobless claims number fell last week by 12,000.

There will be a renewed focus next week on the Federal Open Market Committee (FOMC) meeting next week, and I am sure that every word will be dissected and analysed comprehensively, in the search for a conclusive answer about the tapering and/or ending of the Quantitative Easing programme.

Personally, i do not expect any clue and any realistic chance for any of the above, before the FED meeting in September, at the earliest.

Economic Background

US

The weekly jobless claims number fell last week by 12,000.

Retail Sales were up by 0.6 per cent in May, compared with only 0.1 per cent rise in April.

Car sale numbers for the automotive industry recorded sales of more than 15 million units for the third month in a row.

Factory output rose in May by 0.1 per cent, compared with a drop of 0.4 per cent in April.

The University of Michigan Consumer sentiment index fell to a reading of 82.7 for June, compared with a reading of 84.5 in May.

Producer Price Index (PPI) rose 0.5 per cent in May, compared with a fall of 0.7 per cent in April.

China

The World Bank cut its 2013 growth forecast for China to 7.7 per cent, which is down from the earlier prediction of 8.4 per cent.

Japan

The Nikkei 225 finished a rather volatile week with small gains on the day at 12686 points. The Nikkei 225 has entered technically a bear-market, after falling by more than 20 per cent from its recent high above 15900, which was recorded on 23 May 2013.

India

The Indian Rupee finished the week at 57.62 to the US dollar, after recording a new all-time low against the US dollar at 58.985.

India’s Finance Minister appealed directly to the Indian nation not to buy any more gold.

Gold: $1392 – up $7 from last week.

The gold market lived through a relatively quiet week, given that the Chinese market was closed for the first three days of the week (Dragon Boat Festival). Couple this with the all-out public offensive by the Indian Government to curb physical gold imports, and you could have rightly expected an attempt to push the gold price towards the downside. However, the resilience shown is probably less a sign of strength, than a bit of fatigue creeping in with the arrival of summer.

The net long positions in the futures market (explicitly Comex) have been reduced to a very low level. This means that pressure on the gold price could come mainly from disgruntled and frustrated longs, rather than through new fresh short positions.

The pressure on Gold production cost in Rand terms, has weakened significantly in recent weeks mainly through the depreciation of the Rand, as the on-going tensions in the mining sector have diminished investor confidence. The small benefit to the mining industry is however, quite damaging for the much bigger rest of the South African economy.

There is an interesting and lively debate about the next trend for the gold price, and it is good to see how many people have a view on this matter, even if they have absolutely nothing to do with the industry and are purely repeating old and well known platitudes.

The gold price is mere reflection and mirror of uncertainties in a global society, economic imbalances, geo-political issues and mistrust towards some Governments of the world.

The latest COTR (end of business day 11 June 2013), shows that the long positions have increased, and short positions have increased even more, so the net long position has been cut further.

Silver: $22.07 – up $0.37 from last week.

Silver held reasonably well over the course of last week. Silver did manage to hold steady, even as the gold price came under a little bit of pressure, before recovering. The does not mean that silver is out of the woods yet, but it was at least a week without more rollercoaster performances. Does this indicate a potential bottom base building: No, not at all, it simply means just a quiet and less spectacular week.

Silver has the unique and not always helpful attribute of escaping normal analytic supply and demand investigations. Production prices have to be monitored and taken into account, when analysing the effect of falling prices on the global supply. This important measure to indicate the bottom lines are missing, as silver is found mostly as a by-product. And this means that silver could easily fall to, for example, $15, and this might not have any effect whatsoever on the global production schedule for silver.

One look towards the volatility displayed in the silver market gives everybody a glimpse of why silver trading is so dangerous, if it is used for speculative reasons and not for hedging purposes.

The latest COTR (end of business day 11 June 2013) shows that the long positions have increased, and short positions have increased even more, so the net long position has been cut even further.

Platinum: $1446 – down $54 from last week. The price for platinum is now at a premium of $54 to the price of gold.

The platinum market, together with palladium, has displayed a role reversal compared to the previous week’s events. It appears to have been a week of long liquidation from frustrated long positions holders, within a less liquid market. Last week did not see any new strike action from South Africa and that seemed to be good enough reason to shed some of the excess positions.

The platinum market can display some good core basic fundamentals for a stable and effective market at current levels, but it seems that the market has been hi-jacked by short term speculators. This does not bode well for the market as these short term opportunists are very fickle investors and adding unwanted volatility to the market. The platinum price in Rand terms has risen strongly, due to the depreciation of the Rand, but long term producing price reductions got to be achieved in the medium to long run. The relief on the production costs gives mining companies a bit more flexibility to address the most important cost issues, without ever being able to ignore social implications in South Africa.

The data from the automotive industry are throughout positive and that should help to stabilise prices. The catalytic converter industry has not been seen purchasing good amounts in the Over-The-Counter (OTC) market, as these companies have long term supply contracts directly with the mines, and only additionally needed material will be bought on the OTC market. The car companies, who buy the platinum themselves and deliver it to their catalytic converter manufacturer, have still been very much in ‘wait and see’ mode before committing to further outright purchases.

The latest COTR (end of business day 11 June 2013) shows that the long positions have increased, and short positions have decreased.

Palladium: $731 – down $25 from last week.

Palladium prices appear to have finally given in to some kind of reality. The COTR numbers are reflecting the position at the end of business from last Tuesday, and I would expect the numbers to look a little bit different next week. Palladium prices rallied early in the week toward $770, but again, could not hold on to these gains. The sell-off seen on Thursday and Friday of last week was a direct reaction to the failed rally and the market is still very very long.

Palladium has, and I keep saying this for the last 18 months, the best fundamental story of all precious metals, but the market has got to get rid of some of the froth. I am still bullish, but I would like to see and I expect I will, see price levels to re-enter the market space of between  $680 and $710.

The data from the automotive industry is positive, as written already in the platinum section, but the market is simply too long and we need some neutrals and more short positions to achieve that. I guess it is going to come natural, when prices would drift lower and opinions start to diverge.

The latest COTR (end of business day 11 June 2013) show that the long positions have increased further, and that the short positions have decreased.


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