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Precious Positions

August 2016

Precious metals surge after Brexit with silver leading the pack. Gold, however, hits a soft patch as global cues turn weak

Continuing to feed on uncertainty around the globe, precious metal prices have continued an upwards trajectory over the last few months. Interest rates which have moved to very low levels and even negative in many cases, the result of the UK referendum and the related uncertainty, the elections scheduled in the US for the latter part of the year, are expected to ensure investor interest into this category over the coming months. The pack has of course been led by silver, which has played catch-up game and moved into a new found favor amongst investors.

Gold
The past couple of years has seen gold prices stage impressive gains during the initial months of the year; and see a reversal of trend towards the latter part. This trend seems to have reversed with the latest move – the yellow metal has risen at a healthy rate and also sustained these gains, which seem to have been built on a steady foundation, as is visible from the chart. There is little to suggest this has been a runaway rally; instead fundamentals have supported the same. The low interest rates regime visible across the world is a positive for gold prices. The expectation of cheap money policies triggering an inflationary scenario has been outlined as ‘an ugly legacy of recent monetary policy’.

On the charts, the metal now faces resistance at the highs seen over 2 years ago in March 2014 (USD 1391 an ounce). As long as the level of USD 1300 an ounce is respected, it would seem the current headwinds across the world are fodder enough for it to trend towards and even beyond those levels.

precious-metal-chart-Aug16-1

Silver
At the current levels, silver has returned nearly 45% for the year-to-date, continuing to outperform not just gold but the entire commodity pack. The rally has been particularly sharp over the last month with the metal going past the USD 20 an ounce level. With this move, the gold/silver price ratio has moved to 67. The current global landscape is increasingly drawing silver back into its traditional role as a safe-haven asset away from its classification as an industrial asset. This repositioning is evident given the metals rally in the last month post the Brexit event.

As expectations begin to soar, it would be an ideal time to use the metal as a trading play over the near term. It would be prudent to see the range the metal settles in and play it accordingly. Its inherent higher degree of volatility vis-à-vis Gold would present opportunities to be nimble footed in trades.

Platinum
A recent report by Citigroup Inc. highlights the deficit the metal is expected to see for full-year 2016. The deficit is expected at 172,000 oz. The main reasons for this is South African supply growth remaining constrained near term and slowing growth in auto catalyst recycling combined with robust auto catalyst demand from Western Europe.

Platinum is a rare precious metal that is expensive and difficult to mine. The vast majority of platinum production, ~80%, comes from South Africa. As an industrial precious metal, a significant usage of the same is within the automobile catalytic converters segment. Coupled with the predicted slower growth in Europe, economic woes in China are expected to weigh on the commodity. In the immediate term, it would interesting to see the price trend around the current levels of USD 1100, which also happens to be a strong resistance zone.

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