Precious Metals Sector Showing Price Divergence

Gold eased a few dollars after Mario Draghi showed little interest in making any changes to the banks current program. The ECB held rates and policy today as traders expected some excitement from Mr. Draghi’s press conference, but the head of the ECB had little to say to spark market interest except a slight upgrade to growth.  The Bank did show some concern of the effects of the Brexit decision on the Eurozone. Gold dipped closed to $5 to trade at 1344.65 and silver fell 85 points to 19.76.

Shares also fell on disappointment that ECB chief Mario Draghi said the bank had not even discussed an extension of quantitative easing.

“People’s expectations were again too high ahead of this decision and they have been caught offside,” said Craig Erlam, an analyst with online broker Oanda.

The moves in gold were narrow, with bullion still gaining support on the downside from a weaker dollar on views that the U.S. central bank is in no hurry to raise interest rates.

 

Yesterday, the FOMC released their Beige Book, which is their outlook and comments of the state of the US economy.  The report illustrates some of the challenges facing the U.S. economy as it struggles to break out of its uninspired growth trajectory in the third quarter. Hiring has been steady throughout much of the expansion, but has only recently begun to translate into noticeable wage gains. Low energy prices for much of the past two years held inflation in check. In July and August, the beige book reported, a “potential record national harvest” weighed on prices for agricultural products.

Fed officials are looking for signs of inflation as they weigh an increase in interest rates at their next policy meeting Sept. 20-21. Fed Chairwoman Janet Yellen in late August said she believed the case for increasing the benchmark federal-funds rate “has strengthened in recent months,” citing the “solid” performance of the labor market as one factor. An August survey of economists by The Wall Street Journal found more than two-thirds of economists expect the Fed to wait until December to raise interest rates.

Platinum and palladium seemed less effected by the moves in the precious market sector. Platinum is flat at 1092.00 and palladium is holding at 692.00 trading in the green.  In its latest Platinum Quarterly report, the World Platinum Investment Council forecast a 520,000-ounce deficit in the platinum market this year, up from a 455,000-ounce shortfall predicted three months previously.

Strategist at UBS was wary about any gains in platinum based on a possible strike by miners in top producer South Africa. “Unless there are material signs of market tightness, we think any significant upside move in platinum on the back of industry action should ultimately be faded,” said in a note.

The pullback in palladium prices seems to be profit-taking; given the gains since the June low, this is not surprising. The gross long fund position on Nymex climbed to 22,727 contracts on August 9 from a low of 12,824 contracts late in May. It has since started to slip on long liquidation was last at 20,052 contracts. Short-selling picked up in early August – it reached 7,187 contracts on August 2 but it has since fallen to 6,254.

ETF investors have also been taking profits. Holdings stand at 2.09 million ounces, down from a recent high of 2.24 million ounces in mid-July.

Given the extent of the gains, it seems likely that the market expects some industrial action over wage negotiations in South Africa’s PGM industry; some may already be priced in.