Gold ETFs are under pressure as Syria military attack has been averted and investors focus on possible Fed tapering.

Precious metals declined last week as concerns about an imminent attack on Syria by the US abated and investors continued to focus on the possible announcement of a reduction in Fed bond buying this week. Palladium was the only precious metal to hold up, as improving global economic conditions and continued strong auto sales lend support. In our view, once the market has put FOMC tapering clarification in the rear view mirror, the focus will likely focus on other issues.

Some of these issues include the need to raise the US debt ceiling in the next month or so or face government shut-down, continued upheaval in the Middle East and the Fed’s need to keep bond yield increases in check given its large debt servicing burden.  All of these factors should be gold price supportive.  On top of these factors, China and central bank physical gold demand remains robust and gold jewellery recycling has dropped sharply, tightening the physical supply-demand balance (as reflected in low to negative gold forward rates).

These factors should help to keep a floor on the gold price. And any sign of slower growth in the US or of Fed dovishness in the coming months has the potential to push the gold price higher.  A key potential beneficiary of a stable gold price and rising industrial growth is silver.

Platinum and palladium back in focus as industrial cycle turn up.  Palladium bucked the bearish precious metals trend, showing a modest gain last week.  The fundamentals of palladium remain positive in our view with rising vehicle sales in the US and China combined with constrained supply expected to keep the metal in supply deficit this year and next. Among the precious metals, palladium has the highest industrial demand exposure at nearly 80%, and thus stands in a particularly strong position to benefit as the global economy improves.

Catalytic converters are the primary source of demand, notably for gasoline engines.  Emerging market demand, coupled with tightening emission regulations are expected to help sustain an excess of demand over supply through 2014. Platinum has also gained some favor recently due to the recovery in Europe.  Platinum tends to be used more in diesel vehicles and Europe is the world’s largest market for diesel passenger cars.  Platinum and palladium are among the few commodities in supply deficit.  Palladium is the same price as November 2010, yet cumulative 12-month vehicle sales have increased about 17% since then.  Platinum is the same price as November 2007, despite the fact that cumulative vehicle sales have increased about 30%. Absent a shift lower in global vehicle sales, the outlook for platinum and palladium appears quite favourable in our view.

Key events to watch this week.  The FOMC statement on the 18th and potential reduction in the bond buying program will likely be the focus this week. Renewed tensions in Syria would raise attention as may the approaching US budget debate.  Data will likely take a back seat, with industrial production and CPI in the US prominent. In the EU, CPI and vehicle registrations should be highlights.

ETFS Physical Swiss Gold Shares (NYSEArca: SGOL)

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