Profit taking ahead of gold and silver?

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CORONAVIRUS IMPACT

Here are the major world news headlines from the past week with impact of precious metals markets:

  • US: The release of the Federal Open Market Committee minutes led to expectations that further stimulus activities from the Federal Reserve Bank are being considered, sooner rather than later.
  • US: The US durable goods figures jumped to a plus of 4.2 per cent, but this has been achieved on the back of massive civilian (non-military) aircraft purchases.
  • The Indian rupee finished the week at 55.50 to the US dollar.

Gold: US $1670.00 – up US $ 54.50 from last week.

Gold finished the week very strongly and well above the major resistance level, which stood at US $ 1632 and also above the 200 day-moving-average level, which stood at USD $ 1657. There were several reasons which accounted for this rally and it appears that the quiet summer hole has come to an end. The gold price action took some strength from the price action of platinum and palladium. The whole precious metal complex was under some positive investment influence, which grew significantly stronger once the break of US $ 1632 signalled the end of the several month old trading range (US $ 1550 – US $ 1630). The next big step forward came with the release of the Federal Open Market Committee (FOMC) minutes, which indicated that the Federal Reserve Bank (FED) is considering, sooner rather than later, a renewed stimulus package for the US economy. That was the spark, which pushed gold above the 200 day-moving-average and confirmed the technical breakout.

The danger for the market is that too many short-term longs might have established themselves above the US $ 1632 level in the hope of an immediate announcement of Quantitative Easing 3 during next week`s FED meeting in Jackson Hole. Chairman Bernanke might choose to wait for the August non-farm-payroll numbers to be released at the beginning of September before taking any decisions before the FED`s scheduled September meeting. This could lead to some profit taking but this might not materialise before this FED meeting at the next weekend.

eToro  Gold in Euro is moving closer towards the all-time high of Euro 1359 and important decisions about the Eurozone are scheduled for the first half of September 2012. The Greek Prime inister Samaras visited Germany and France at the end of last week and he also met the President of the Eurogroup Jean-Claude Juncker last week in Athens. The request for more time in order to implement the promised and agreed bail-out conditions have been his major wish.

However, it appears that the aforementioned countries are awaiting the next update from the Troika about progress in Greece, which is scheduled for September 2012. The very important International Indian Gold Convention in Hyderabad took place this weekend. It will be interesting to find out next week from the participants what the highlights and what the important takeaways have been for the physical markets. It seems that the Gold Convention had over 600 registered delegates and that signifies the importance of the Indian market to the global gold industry.

Physical buying in Dubai and the region has been poor and we have seen quite a significant amount of liquidation from our customers, while we have hardly seen any new purchases. This is absolutely and fully understandable as customers used these rising prices to take some profits after a long period of price stagnation. However, ENBD expects, with potentially increased tensions in Europe and the beginning of the hot phase in the presidential election campaign in the US, that gold will be again a very much sought after “insurance policy”.

The Commitment of Traders Report (COTR) shows that there has been a significant increase of new long positions recorded, while a lot of short positions have been covered.

Option volatilities midrates : Gold atm (at the money)

1 month 15.00 % up 1.75 %
3 month 17.25 % up 0.75 %
6 month 19.25 % up 0.25 %
1 year 22.25 % up 0.25 %

Discount 1kg Gold bars loco Dubai (DGD 995 fine) against loco London: US $ 0.50
EFP Spot Gold to December Comex: US $ 2.30
ETF: Holdings are at 2560 tons
Support : 1647 and 1632 Resistance: 1696 and 1712

Silver: US $30.78 – up US $ 2.72 from last week.

Silver gained just under ten per cent during last week`s trading. Some major resistance levels have been broken and the main question arises: if silver can sustain these excellent gains? The holdings in silver ETF`s registered another 105 ton inflow last week and the price gains appear to have been helped through a distinctive lack of selling. The price action of the Platinum Group Metals have also influenced the trading environment and the performance of
gold helped to make this a week of all-round gains for the precious metals and the best week for a long while.

The technical picture has also changed towards potentially more gains in the remaining months of 2012, as the investment community has finally rediscovered silver. However, silver does carry a higher risk profile and this is substantiated through the highest volatilities of all precious metals. These elevated levels of volatility are responsible for potentially larger profits and also for potentially larger losses, compared with the other three precious metals.

The COTR report shows that fresh long positions have been recorded, while a large amount of short positions have been covered.

Option volatilities midrates : Silver atm (at the money)

1 month 27.00 % up 3.00 %
3 month 29.00 % up 1.50 %
6 month 31.00 % up 0.50 %
1 year 33.50 % unchanged

EFP Spot Silver to September Comex: US $ minus 5.00 cents
ETF: Holdings are at 15580 tons
Support : 29.50 and 28.90 Resistance : 31.50 and 32.05

Platinum: US $1545 – up US $ 79 from last week.

The discount to gold has decreased to US $ 125. Platinum has gained approximately ten per cent over the last 1 ½ weeks. The supply uncertainties have led to some sharp short covering and it seems likely that the current issues are going to remain relevant for a while. The South African miners, or especially the rock drillers are looking for potentially 200 to 300 per cent wage increases, and that is a very tough bargaining position. The tensions have already spread to some other platinum mines and the outcome of these potential wage negotiations will be followed with great interest. It is possible that the tensions seen would only really be at the beginning, if a major concession for the platinum miners would be agreed with the mine owners. South Africa is by far the world`s largest platinum producer, but it has to be expected that the miners in the much bigger South African gold industry would like to follow this precedence, if successful.

The expected surplus of platinum for 2012 is getting eroded on a daily basis, but the platinum supply expectation for 2013 is still assuming a significant surplus. This puts into question how long or better how far this rally can last, unless the world economy makes significant strides towards economic growth.

The Commitment of Traders Report (COTR) shows an increase in new long positions and a massive covering of existing short positions.

Option volatilities midrates : Platinum atm (at the money)

1 month 20.00 % unchanged
3 month 22.00 % unchanged
6 month 23.00 % unchanged
1 year 24.00 % unchanged

EFP Spot Platinum loco Zurich to October NYMEX: US $ 0.75
ETF: Holdings are at 48 tons.
Support : 1522 and 1505 Resistance : 1560and 1590

Palladium: US $ 650 – up US $ 47 from last week.

Palladium has also registered gains of more than twelve per cent over the last two weeks. The technical picture has changed towards a potentially bullish scenario with the next big resistance level at US $ 683. Palladium has been the main benefactor from the heightened expectations about more world-wide stimulus packages from Governments and Central Banks. South Africa accounts for over twenty per cent of the world`s palladium production and the work stoppages and tensions in that country have also contributed significantly to the price rises.

The chances that these gains can be sustained are higher than in the case of platinum, as it is
widely accepted that palladium would be the main winner if more stimulus packages would be introduced, in order to boost the world economy.

The Commitment of Traders Report (COTR) shows an increase of net long positions, as a lot of existing short positions have been covered.

Option volatilities midrates: Palladium atm (at the money)

1 month 21.50 % unchanged
3 month 24.50 % unchanged
6 month 26.00 % unchanged
1 year 28.00 % unchanged

EFP Spot Palladium loco Zurich to September NYMEX: US $ minus 0.50
ETF: Holdings are at 62 tons
Support: 612 and 594 Resistance: 660 and 683

*Precious Metals Report dated August 25, 2012 by Gerhard Schubert, Head of Precious Metals, Emirates NBD

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