ETC: Precious Metals Weekly

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Quantitative easing not fully priced in, but external trigger needed for further gains.

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      Precious metals waiting for an external trigger. If history is a guide, we should see further price upside for precious metals following last month’s announcement of a third round of quantitative easing (QE3) by the Fed.
      Six months after the initial announcements of previous rounds of quantitative easing, the gold price rose on average by 12% and the silver price by 33% .Since the announcement of QE3, physical gold has risen only 2.3% and physical silver only 2.6%. The likely next trigger for precious metals to move higher is a formal request by Spain for a bailout. This would open the way for the ECB to buy Spanish sovereign bonds in the secondary market on a potentially “unlimited” basis, making investors think twice before shorting Spanish bonds and taking immediate pressure off peripheral European sovereign markets. It also would likely improve depositor confidence in Spanish banks and help reduce capital flight. Such developments would likely benefit the Euro (weaken the US dollar) and boost risk appetite.
      Precious metals, particularly the higher beta “white” metals, will likely perform well under such a scenario. In the meantime, since it is difficult to predict when Spain will ask for a bailout, markets remain on edge – particularly as net speculative futures longs are looking stretched for some of the metals and prone to short-term correction. Therefore, while the latest QE appears not to have been fully priced in, an external trigger, such as a Spain bailout request may be necessary to driven the next leg of the bull market.

      South African gold supply constraints keep prices high. South African gold miners rejected the industry’s latest wage offer last Thursday, prolonging strike action and constraining gold supply from one of the world’s largest producing countries. The strike action is holding back an estimated 32,000 ounces of gold a week of production at Anglo Gold Ashanti and 2,300 ounces a day at Gold Fields. Approximately 41% of South Africa’s gold output is idled. The Chamber of Mines which is leading discussion with unions is set to meet again today. If mining companies are forced to lay off illegally striking employees, supply will be hampered for some time to come. Although gold prices fell during the week, supply concerns are a supporting factor helping to keep gold prices above $1765/oz.

      Key events to watch this week: European heads of state summit. This week the main focus of attention will be the European heads of state summit where a new austerity program for Greece will be considered, indications of Spain’s intention to accept a bailout package and other key European issues will be discussed. China’s 3Q GDP will be scrutinized for signs of resilience (or lack thereof), US and China retail sales, Germany’s ZEW survey and US existing home sales will also be watched closely for indications of relative economic health.