Spark could ignite fresh fundamental buying in gold, while silver technicals remain negative


Economic Background


  • The European Central Bank (ECB) leaves the key interest rate unchanged at 0.75 per cent.
  • The Bank of England (BoE) does not increase Quantitative Easing (QE) and leaves its interest rates unchanged at 0.5 per cent. Standard & Poor’s has reaffirmed the AAA status of the UK, but warned that the rating is under threat, if the economic situation in the UK worsens.
  • Portugal’s Constitutional Court has ruled several key articles of the 2013 state budget unconstitutional. This means that the Government must find EUR 1.5 billion worth of savings somewhere else, or renegotiate with the Troika. So far, EUR 61 billion, out of the total bail-out worth EUR 78 billion, have been paid to Portugal.
  • German Purchasing Managers Index (PMI) declined in March to 50.6, down from 53.3 in February of this year. The same number for France fell to 41.9, which is the lowest number since March 2009. Overall, the PMI figure for the whole Eurozone fell to 46.5 in March, down from 47.9 in February.


  • The US Non-Farm-Payroll (NFP) figure for March was announced as 88,000, which is significantly less than the median analysts forecast of 190,000. However, the NFP figure for February was revised upwards to 268,000.
  • The headline unemployment rate in the US fell to 7.6 per cent, down from 7.7 per cent in February, which is the lowest number since December 2008. However, the reason for the decline is the fall in the number of participants in the Labour force, which declined by just under 500,000 in the month of March, to the lowest number on record, since May 1979.
  • The US Trade deficit narrowed in February to $43 billion, down from a revised figure of $44.5 billion in January 2013. It appears that significantly lower Oil purchases are the main reason for the fall.


  • The Bank of Japan (BoJ) announced a massive increase in Quantitative Easing (QE). BoJ plans to buy JPY 7 trillion worth of bonds each month.


  • The recent outbreak of avian influenza (bird flu), which caused six deaths so far, is expected to have, together with curbs of the property segment in China, a negative effect in the projected recovery of the economy.


  • The Indian Rupee finished the week at 54.805 to the US dollar.

Gold: $1582 – down $15 from last week

The premium to Platinum stands at $46. The proceedings of last week’s trading demonstrated very clearly the strains and difficulties under which the Precious Metals “asset class” currently operates.

It has become very evident that the outflows from investments in ETF’s are very strong and ongoing. It appears that some constituents of the investment community have shifted, or are still looking to execute changes to their asset allocation, away from precious metals and mostly into equities. A lot of these investments into Gold assets over recent years were guided potentially by safe-haven expectations (Eurozone debt crisis, US economy, etc), coupled with an overall extremely low interest yielding environment. These, at the time, very valid reasons are now being questioned and some of the above mentioned reasons have started to dissipate, as the US economy has performed strongly during the early part of this year. The effect of the “sequester cuts” will most likely only begin to be felt in the second half of the year, and that could lead to a renewed slowdown in the US economy. Europe’s problems are being dealt with on a drip-feed solution basis, at least until the German general election in September. These thoughts make, hopefully, the decisions from hedge funds to leave the gold market behind, easier understandable.

Physical buying has been on an elevated level, but the important Chinese physical markets were closed during the latter part of last week. It will be interesting to see how the Chinese consumer will react once the markets reopen on Monday.

The recent strong build-up of professional short positions, together with the very disappointing NFP numbers, have been the saviour for the gold price last Friday and it has to be seen if it was simply a short covering rally or something more meaningful. However, a spark would be needed to ignite fresh fundamental buying in gold and the ongoing continuing buying from the official sector alone, cannot stem the flow of disinvestment.

The latest Commitment of Traders Report (COTR) (end of business day 2 April 2013), shows that the long positions have slightly decreased and short positions have massively increased.

Silver: $27.34 – down $1.04 from last week

Silver has given up a lot of ground last week, with prices falling very quickly, amid a very serious lack of buying towards the $26.25 level. The technical picture for silver looks negative, with a view of testing the important support level at $26.20.

There is not a lot of support visible, from a technical point of view, before $21.50, if the $26.20 level breaks, but the massive build-up of fresh short positions is currently the best hope of support for the silver market. The bears appear to have this market firmly in their clutches for the time being, but this could be turning in a flash.

It is interesting to note that the investments in ETF’s have not yet fallen and that the investment from that aspect of the investment community is still in an, at least “neutral” gear. However, silver is getting punished by the weaker outlook for gold as well, as paying the price for the potentially stuttering global economic recovery, which affects the white “industrial” precious metals.

Silver prices would need to regain convincingly the $28 level, before we expect any fresh meaningful investment into silver.
The latest COTR (end of business day 2 April 2013), shows that the short positions have massively increased, while long positions have also increased, but only marginally.

Platinum: $1536 – down $31 from last week

The discount to gold at the end of last week is $46. Platinum prices gave way in sympathy with gold during the early stage of last week’s trading. Platinum prices fell towards $1510 at one point and prices finished the week on some light short covering before the weekend. The release of the NFP in the US has not really helped the platinum prices, as it starts to question the pace of the economic recovery in the US, and this validates the dovish views from the Federal Reserve Bank concerning the continuous level of Quantitative Easing support.

The very recent data from China have been throughout regarded as positive, but the renewed talk of curbs in the Chinese property sector, coupled with the worry about a new bout of “bird flu”, leads to a more cautious stance towards the economy in general and the automotive industry in particular.

The talks in the market about the potential supply cartel between Russia and South Africa are ongoing, and events are being carefully monitored and analysed. Both countries together are responsible for 90 per cent of the freshly mined new supply, which bodes for approximately 60 per cent of the overall global supply, with the rest coming mainly from recycled catalysts. This could have all the potential of a longer term massive price increase, but the short term outlook is still very challenging.

The latest COTR (end of business day 2 April, 2013), shows that the short positions have slightly increased, and long positions have also increased.

Palladium: $726 – down $44 from last week

Palladium has finally reacted to the very bearish trading environment in precious metals during last week’s proceedings. The NFP in the US brought again more jitters to the investment community, which has been long of palladium for quite a long time. Ultimately, nothing substantial has changed but it will take some time for palladium to regain the heights of $770 and above. Furthermore, a clear-out and some long liquidation from the weaker longs is welcome news for the longer term investor. The fundamental story for palladium is strong and the potential supply cartel between Russia and South Africa can only be positive for the metal in the medium to long term. It would take a long time, if and when meaningful substitution for the properties of palladium can be found and utilised in a mass production environment. The certification of changed compositions of new catalysts based on their “green” effectiveness will take years. It should not be forgotten that the price of palladium in a car catalyst is relatively miniscule, compared with the end price of a new car and that would not change even if the price for palladium would double.

The latest COTR (end of business day 2 April 2013), shows that the short positions have decreased, while the long positions have seen some increase.


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