Precious metals: Gold prices increase amid renewed inflation concerns 

After a period of consolidation and profit-taking last week, gold prices resumed their upward trend again this week. In the meantime, prices have risen to above USD 940. Silver prices have been following suit and are currently trading around USD 17.90.

Platinum and palladium prices continued their remarkable rally which started in mid-January. At the moment, platinum is trading at USD 2,160. Palladium prices have soared by more than 13% and are currently standing around USD 500.

The reasons for the renewed increases in the gold price are threefold. First, the US dollar started losing ground versus  the euro again, prompting investors to buy the yellow metal as a hedge against the weakening US currency. The second reason is the oil price. After significant inflows of liquidity into the market and mounting concerns about possible output cuts by OPEC, oil prices have rallied to USD 100 again. As a result of the increase in oil prices, inflation expectations have been increasing again which in turn fueled the gold price rally. Inflation concerns have been exacerbated further by the publication of US inflation numbers. Headline inflation in January rose to 4.3%. The third reason is the further decline in US short-term interest rates, which are now deeply negative in real terms. Negative real interest rates are generally supportive for non-yielding assets such as gold.

We stick to our positive outlook for gold. In our view, the recent consolidation shows that gold prices below USD 900 should be viewed as good buying levels. There appears to be some physical buying support emerging below this mark. Apart from gold, platinum, which is in our view the precious metal with the strongest fundamentals, had a rather weak performance this week. 

Nevertheless, the price is still more than 35% above the levels we saw in mid-January 2008. Following such a spectacular price rally it is not unusual to see some consolidation or even some profit-taking in the short term. Despite these short-term difficulties, we stick to our positive outlook for the market. In our view, the rally is justified by strong fundamentals, with the main reason for the price rally being outages on the supply side. 

The platinum market has been in a supply deficit for several years as supply has been unable to keep pace with rapidly increasing demand from the car industry. At the same time, platinum supply is very concentrated, with South Africa producing roughly 80% of global supply. As a result of this concentration, the market was hit particularly hard by the energy crisis in South Africa. Miners had to shut down production or produce at a reduced rate. At the moment, it looks like the electricity situation in South Africa will remain tight at least for the next 2-3 years. In a market where the supply/demand balance is already tight, supply disruptions are usually the most powerful catalysts for higher prices.

One indicator showing that the rally is most likely justified by fundamentals is the correlation between platinum and other commodities. Since the beginning of the production problems, platinum has been able to decouple from gold. The correlation has declined from almost 0.8 to below 0.4. This indicates that it is not just speculative buying amid the general gold price rally. At the same time, the correlation of platinum and aluminum has increased sharply. Aluminum is very energyintensive in production and therefore also affected by the power shortages in China and South Africa. Given the strong fundamentals, we think that further price increases are possible.

source: CS