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Precious metals: The US Federal Reserve’s interest-rate decision triggers profit-taking activity |
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28.03.08 21:36 |
| | | Precious metals: The US Federal Reserve’s interest-rate decision triggers profit-taking activity
Precious metal prices suffered last week from a sharp selloff after the US Federal Reserve announced that it was lowering its federal funds rate target by 75 basis points. Since the market had priced in a 100-basis-point cut, this triggered a rebound in the dollar, and investors liquidated some long positions, causing prices to tumble.
As a consequence, technical barriers were broken and a lot of stop-losses were thus triggered, which aggravated the hefty price declines. Gold prices fell below USD 915 where buying support emerged; they are now back at around USD 945.
Platinum prices recovered as well and are now trading just above the USD 2,000 mark. Silver and palladium, the precious metals with the weakest fundamentals in our view, have suffered the most from the selloff and are now trading at around USD 18.40 and USD 455, respectively. This is not very surprising, in our view, since the latest price increases in these two metals were mainly speculative in nature.
From a fundamental point of view, the situation remains unchanged. The financial market environment is still favorable for precious metals and especially gold. The decline in US interest rates that has led to negative real interest rates in the USA is supportive for the gold price. Moreover, our economists expect that the US dollar should continue to weaken, particularly versus Asian currencies, while inflation concerns should bode well for gold prices. Last but not least, with the general financial-market instability, precious metals should continue to be viewed as safe-haven investments.
Consequently, we expect investment demand for gold to remain strong. On the physical market, however, we have seen some weakening as already mentioned in previous issues of Research Weekly Commodities. The recent price rally started to have a negative impact on jewelry demand, which has been hit hard by the price increases. In the fourth quarter of 2007, global gold jewelry demand declined 17% YoY. The latest reports from Reuters as well indicate that gold jewelry demand has fallen. The news agency reported that gold sales dropped 15% YoY in February in Dubai while gold jewelry exports from Turkey slipped 5.5% YoY in the first two months of the year.
However, the latest selloff is a warning signal of the increasing volatility that we have observed over the last few months. Increasing liquidity in the commodity markets coupled with increasing speculative positions make investments in precious metals quite vulnerable to near-term profit taking. This is especially true for those markets that have less constructive fundamentals, like the silver and palladium markets.
Since these two markets exhibit considerable supply surpluses, price developments are mainly driven by speculation. Consequently, volatility in these two markets is much higher than in the gold and platinum markets, and price declines like the ones last week are thus more severe in these markets. This is also the reason why we prefer investments in gold and platinum to investments in silver or palladium.
source: CS
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