Monday, October 22, 2012

With speculative money exiting, central bank actions should provide support for precious metals

Precious metals have been under pressure recently as investors took profits from the recent QE3-driven rally. Some of the sell-off has also been on the back of industrial commodities such as copper, which have been impacted by weak global demand.
FT: - The selling in the metals came as Caterpillar, the manufacturer of earthmoving, construction and mining equipment seen as a barometer of economic activity, cut its full-year forecast, raising uncertainty about global economic growth. Weaker than expected third-quarter profits at US copper miner Freeport-McMoRan, also worried traders.

$/oz, source: Barchart

But as discussed earlier (see this post) investors should have remained cautious on precious metals due to an increase in speculative activity back in August/September. However we are now seeing some of the speculative money fleeing the market with ETP inflows reversing for the first time in months.

Source: JPMorgan

This may be a bullish sign for precious metals, particularly gold. With the start of an unprecedented open-ended monetary expansion by the Fed last week (see post), the accumulation of excess reserves by the banking system will increase inflation expectations. And as a number of other central banks (BOE, BOJ, ECB, etc.) pursue similar policies, precious metals prices are likely to see some support. Certainly the heavily negative real dollar rates (see post) across the curve make any rate product and cash far less attractive on a relative basis.

We are also seeing some support for gold coming from Asia - something we haven't seen recently. Much of it of course is also driven by the expectations of central bank stimulus measures.
Businessweek: - India’s imports are set to climb for the first time in six quarters as a decline in domestic prices stokes jewelry and investment purchases before major festivals, according to Bachhraj Bamalwa, the chairman of the All India Gems & Jewellery Trade Federation. Prices also gained as a report showed Japan’s exports fell the most since the aftermath of last year’s earthquake, increasing speculation that the nation will enact more stimulus measures.

“Physical demand is providing some support,” Phil Streible, a senior commodity broker at R.J. O’Brien & Associates, said in a telephone interview. “The pressure is clearly on the Bank of Japan to introduce fresh easing measures.”
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