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In our last commentary, we did outline the US Presidential election core to the sentiment around precious metals. While the election results, with the election of Donald Trump were expected to have favoured a ‘risk-off’ scenario which would repose faith in precious metals, the events over the last few weeks have proven otherwise. Precious metals have had a fairly volatile ride. Weighed down by a strengthening US Dollar, they have breached critical technical support levels. The US Dollar is finding favor driven by expectations of rising inflation if the President-elect delivers on promises to boost public spending and putting barriers on cheap imports.
While the metals have seen a sharp correction, as markets globally come to terms with the events in the recent past, it is essential to note, the level of uncertainty has increased with the current event. How the geopolitical scenario rolls out in the coming months is anybody’s guess. Traditionally, a period of uncertainty is a hotbed for a rally in precious metals and it may not be far from the truth to expect the same once the dust settles. While the near term looks weak for the metals, particularly on the charts, and calling a bottom maybe difficult, the coming months may well test the adage ‘fortune favors the brave’.
Gold moved from a level of over USD 1300 to below USD 1220 per troy ounce post the US elections. It’s move has perplexed many as the expected risk-off rally turned to a risk-on one. The strength in the US Dollar has pressured the yellow metal. The US Dollar has got a new lease of life as seen from the chart above. The sudden expectation of higher inflation as a result of Trump’s spending policy and planned stimulus is driving the dollar index higher. This coupled with expectations that interest rates would climb, which would likely attract inflows into the US dollar would in turn likely push up bond yields, helping drive further flows into the dollar.
As per the latest report released by the World Gold Council (November 2016), elevated Gold prices have kept demand weak. ETPs (Exchange Traded Products) were the only bright spot for gold demand in Q3. Investors continued to build up their strategic allocations to gold via ETPs: Q3 was the third successive quarter of hefty growth, albeit that the pace of inflows slowed slightly from the stellar first-half. The net addition of 145.6t took total AUM in these products to 2,335.6t, the highest since April 2013.
Further analysis reveals that negative interest rate policies (NIRP) and the general environment of historically low nominal and real interest rates – remains a primary factor driving the institutional investment flows. Political uncertainty is also a key influence – in the wake of the Brexit referendum decision – 2017 brings the prospect of elections in France, Germany, the Netherlands and, possibly, Italy.
Silver prices have seen continued volatility as is the case with Gold. The metal breached the earlier indicated range of USD 18 – USD 20 an ounce. After touching a level of USD 19.005 per troy ounce in the wake of the US election results, the metal has moved below the USD 17 an ounce level, reasons being the same plaguing gold. The US dollar has approached a one-year high against a basket of other major currencies.
The current correction may well be an ideal entry point for investors who missed the earlier rally. Aside from its safe-haven status, it is also a widely utilized industrial metal (usage as an industrial metal accounts for roughly three-quarters of global silver production) which may well be a reason for investors to take a look at this commodity.
Platinum prices have weakened to levels below USD 950 an ounce. Fundamentally factors remain supportive of prices. The global platinum market is to record a 520,000 ounce deficit in 2016 according to the Platinum Investment Council forecast, deeper than the 455,000 ounce deficit it forecast in May. Total supply is seen falling 2% to 7.73 million ounce – the WPIC lowered its expectations for recycling levels due to subdued autocatalyst and jewellery scrap sales.