ETF Trends
ETF Trends

Bernanke’s dovish comments sent precious metals higher last week as bond yields and the US dollar fell, and a short covering rally added to the rebound.  Strong loan data from China also helped reduce fears of a broad credit crunch, improving sentiment towards the more industrially-oriented precious metals. The Chairman of the Fed emphasized the need for highly accommodative policy for the foreseeable future, even if the Fed does start to taper its enormous program. The minutes of the Fed’s last meeting also appeared dovish, with emphasis on the downside risks to growth.  Bernanke’s semi-annual testimony to the US Congress on Wednesday will provide more clarity on the Fed’s stance. In our view, the Fed clearly wants to maintain a highly accommodative policy and limit interest rate upside given continued vulnerabilities in the US economy. Continued low real interest rates, combined with a longer but weaker than usual economic recovery should be medium-term bullish most precious metals prices.

Gold and silver price rebound accelerates as Fed highlights dovish position. While the June FOMC meeting minutes showed a clear split within the committee on the timing of the tapering of its quantitative easing policy, the Q&A session at the end of conference was more dovish than expected. Bernanke confirmed the Fed’s intention of maintaining a highly accommodative policy for the foreseeable future as substantial downside risks to the economy persist. The US Dollar fell sharply after the announcement, pushing gold and silver up to almost US$1,300oz and over US$20oz, respectively. [Gold ETFs See Outflows Despite Higher Prices]

Platinum and palladium prices back in focus on South African strikes. Last week, two of Amplats’ mines were hit by unauthorized strikes. Although the conflict was fast resolved and production rapidly returned to normal, fears of a repetition of last year’s events, prompted an upward move in PGM prices. Palladium was the best performer across precious metals last week, as Norilsk Nickel, palladium’s biggest producer, announced that it expects the deficit in the market to grow to 60 tonnes by 2020 due to lack of new projects and declining ore grades. Given the geographical concentration of PGM supply, issues such as government intervention, geopolitical instability, unreliable infrastructure and social tensions in South Africa and Russia have the potential to substantially disrupt production for prolonged periods of time.

Gold Forward Offered Rates (GOFO) rates turn negative for the first time since the Lehman crisis. The cost of borrowing gold rose to the highest level since 2008 last week, as the recent gold sell-off has substantially tightened the leasing market. While gold miners’ hedging might have contributed to the rise in gold lease rates, the lack of liquidity is most likely behind this phenomenon.

Key events to watch this week.  Bernanke’s Congressional testimony on Wednesday will be watched very carefully for further clarity on the Fed’s monetary stance.  US industrial production and housing market data will also potentially drive precious metals sentiment, with strong figures supporting platinum and palladium. EU car sales, after having fallen to a 20 year low, could temper the gains in platinum if they fall further.