Precious metals came under pressure last week as the Syria premium receded and stock markets recovered on the back of generally better than expected economic data.  However, following weaker than expected US unemployment data on Friday precious metals prices rebounded.

August US unemployment was consistent with the July figure, indicating stagnating employment growth. Despite a decline in the unemployment rate to 7.3%, the labor participation rate declined to 63.2%, the lowest since 1978 and non-farm payrolls remain disappointing.  In addition, with the US expected to hit its budget ceiling by mid-October, concern surrounding policy relating to US debt may also help support the gold price.  In the background, China’s demand for physical gold continues unabated, with demand well ahead of 2012 levels and well on track to hit a record amount in 2013 (see chart below).

Modest tapering likely to be precious metals supportive.  While Fed bond buying is likely to begin to be “tapered” this month, the continued sluggishness of the improvement in the underlying US employment situation is likely to make any reductions in Fed bond buying extremely modest initially. Precious metals should remain well-bid, with the Fed’s policy stance remaining extremely accommodative and geopolitical uncertainty lingering. With no evidence of inflationary pressure yet, the gold price has wilted in 2013 in the face of higher real interest rates, as expectations of Fed tapering have escalated. However, any dovishness on the Fed’s part next week could see a sharp unwinding of expectations, reversing the rise in yields and in turn giving a boost to gold (and silver by association). In addition, inflation expectations also need to be watched, with the decline of recent months likely to reverse if the US economic and credit recovery continues. Any declines in real rates would add impetus to a gold price rally.

Palladium price falls despite strongest US auto sales since 2007. Palladium was the worst performing precious metal last week, declining 3.9% despite the strongest US auto sales since November of 2007.  New restrictions in China on the number of cars on the road and some thawing of labor issues in South Africa can be attributed to last week’s decline, but the underlying fundamentals of declining production, improving economic data, particularly in Europe and increasing emissions regulations remain supportive factors for PGM prices in our view (see chart on page 2).  Platinum and palladium are among the few commodities in supply/demand deficit.

Key events to watch this week.   Choppy trading is likely to pervade financial markets this week, with relatively little on the economic calendar front compared to last week. All eyes will be watching the Syrian crisis, while comments from US central bankers are likely to be closely scrutinised ahead of next week’s FOMC meeting. On the data front, PPI and retail sales in the US on Friday are likely to be the highlights. Industrial production in the EC, China and Japan are likely to be a focus in addition to GDP in Japan and retail sales in China.