Precious metals remained under pressure last week as a narrowing US deficit helped the US dollar appreciate and sent most precious metals (in dollar terms) lower.

Many investors in gold and silver ETPs continued to rotate into equities despite mixed cyclical signals. Meanwhile the Reserve Bank of India added a further obstacle to gold-hungry Indian consumers by restricting the ability of banks to import gold on consignment (meaning that they will only be able to import gold to fulfil a specific customer order from now on).

The only bright spot in precious metals came from palladium which continued to rally on growing supply deficit expectations. As market participants from around the globe gathered in London for Platinum and Palladium Week, there is a growing consensus that the palladium deficit in 2013 will be meaningful. [Gold, Silver Miner ETFs Fall 10% in Week]

Johnson Matthey confirms the platinum and palladium deficit of 2012 and points to a further deficit in palladium in 2013. Palladium is set to see supplies tighten this year as gasoline autocatalyst demand from the US and China continues to grow and Russian state stocks diminish further. JM’s outlook for platinum is strained by still poor diesel autocatalyst sales in Europe and weaker jewellery demand, while recycling activity could pick up. European auto sales may have reached a bottom however, with April sales showing the first increase in 18 months. Sales are currently hovering near a 17 year low and austerity-fatigued consumers of Europe will probably need to see more balance-sheet restructuring before they quicken their pace of car purchases.

Silver mining margins likely to be squeezed. According to the CPM Group, the cost of mining silver at primary silver mines continued to increase at a double digit pace in 2012. Silver cash costs reached $10 in 2012, up 19.0% from $8.4 in 2011. This strong increase in costs, coupled with the 12% drop in the annual average price of silver resulted in lower margin among primary producers. Falling margins should result in tighter silver supply in the future as miners reassess profitability of their operations.

Key events to watch this week. The Bank of Japan will likely confirm its aggressive policy stance following a tacit green light received from other G7 members and tentative signs that the policy course is working from its latest GDP reading and strong upswing in machine orders. Investors will be firmly focused on any indications of the Fed readying its exit from ultra-easy policy from its meeting minutes. However, many investors have the habit over-interpreting the minutes, which could contribute to asset price volatility. The outgoing governor of the Bank of England appeared more optimistic about the state of the UK economy last week, and we will find out this week if he chose not to vote for more easing when the BoE releases the minutes from its last meeting.

ETFS Physical Palladium Shares ETF (NYSEArca: PALL)