MINE TO MARKET - October 2015 Precious Metals Price Commentary

A string of data out of the US, which showed the economy there still seems to be struggling for lift-off, weakened the US Dollar and strengthened gold throughout the month. The Non-Farm Payrolls number early in October missed the expectations badly and then comments from the Fed members seemed to confirm that (once again) the interest rate hikes are getting kicked further down the road. This time it appears that it has not only sparked some short-covering but also some taking on of new long positions that drove the market up through USD1180/oz. It did, however, appear to be a largely speculatively driven move, with the Chinese physical traders still not joining the fray and the Indian gold market trading at a discount to Loco London gold as it heads into Diwali.  Government concessions for refiners bringing metal into the country seem to be the catalyst for this phenomenon as the amount of gold being funnelled into the country for processing increases at a dramatic rate.

The USD gold has now pushed up through its 200 day Moving Average which for some chartists and technicians is a buy signal indicating it has potential to move higher. It did rally quickly to USD1188.00 once the 200 dma was cracked, but now seems to be running into some profit-taking from stale long position holders. The problem for USD gold here is that it is running over old ground now and there are still considerable long position holders (particularly in the ETFs and futures markets) who will see this rally as a chance to get square.

Added to this North American producers are seeing the margins between costs and achievable prices opening up again as are the Australian producers who, with the benefit of a weaker AUD, are seeing prices above AUD1600.00 per ounce (which is only 10 % off the all-time high). As a result, projects that were struggling to get into production are back on the fund-raising trail albeit with the major “Condition Precedent” being that a fair amount of hedging or price protection must be undertaken, which in turn puts pressure on the gold price again.

So although there has been some optimism in gold in the last month, the question of how much higher it can go from these (relatively) lofty levels is the one that must be answered in the next month or so.

Silver has again had a torrid spell in the last month but has generally improved its showing and it seems that the consistent physical buying that was evident last month has finally won out against the paper liquidation. The gold silver ratio has come back down to a more respectable 73:1 and the volumes going into India are well up on the previous year. If demand continues at this pace, total imports into the country could hit an all-time high of over 7,000 tonnes.

This elasticity of demand for silver in India in response to the price drop has not translated across all global centres, but from our parochial perspective in Australia, demand has also picked up considerably and supplies in some areas have been difficult to access or have even completely dried up for short periods of time.

With the rally in the price, the silver now seems to be closer to equilibrium between demand and supply and the dearth of available physical seems to be resolving itself with added supply coming from previously dormant stocks of recyclable and scrap material.

Platinum and palladium were both caught up in the VW diesel scandal to a certain extent and the effect was to make them both rally. The view that there would be more of the metals required in future to upgrade/reconfigure the emission systems on the vehicles gained some traction and the prices of the PGMs were caught in the updraft.

Platinum had its own problems early in the month, however, when it was sold down to the USD900 level putting it at a discount of over USD200 to the gold price. The worse-than-expected US data helped it climb (in a much more orderly manner than gold or silver) back up to the USD1,000 level where it now seems to be range trading between USD980 and just over USD1,000 an ounce. The net speculative short position has been significantly reduced now and there are even some signs of long positions being taken on in the futures markets. Some of the holdings in the ETF’s continue to leak out but volumes are still relatively light and have, to date, been more than covered by the futures inflows.

Palladium was dominated by short covering this month, which is no surprise in light of the record large shorts that have been built up over the last few months. The bad US data and the diesel scandal all aided the recovery of the palladium price pushing it back up above USD700 again in relatively quick time.

Once this level was breached it jogged around between USD680 and USD720 which, overall, seems to be a much more comfortable level for this metal in the current environment.

The ETF’s in palladium are suffering from the same syndrome as the other metals, seeing some light liquidation in October after some buying interest at the end of September.

For all of these metals any turnaround in the US economic statistics and an improvement in the USD could create an interesting downside scenario after the flurry of buying activity in the form of both short-covering and new speculative buying that has been witnessed this month. 

Written by Mike Ward. First appeared in Jewellery World Magazine September Edition 2015.