Monday, 15 April 2013

Precious metals?

Gold prices are down 5% and silver prices are down 9% today as we write this which is an uncharacteristically large move for both these commodities (we view silver as a ‘higher beta’ precious metal compared with gold, given that the market is even smaller and more opaque than the gold market). The FTSE 350 precious metals companies are also down substantially (8-20% as we write this).

First, why the big move today? On the news flow side, there were reports last week that Cyprus is thinking of selling its gold reserve, apparently around €400m worth according to the press. This is not large in the context of the gold market, and our feeling is that the market might have been looking for bad news.

The other data point we would highlight is the relatively large sell off in the industrial metals today (eg copper is down 3% as we write this, which again is a large one day move for this commodity). The reason for this is the slightly worse than expected Chinese GDP growth data for the first quarter (7.7% versus consensus expectations of around 8.0%). We have been highlighting the better supply situation in the important industrial metals (eg copper and iron ore) for the last few months and since December this has gone from being a reasonable theory to the consensus view. The lower Chinese GDP number adds concerns over demand to a weak supply story.

Over the past few years, we have observed that gold has at times been positively correlated with risk assets such as commodities, which is of course not desirable for a commodity which investors might own for exactly the opposite reason.

The gold price is driven purely by investor sentiment and there is really no fundamental way to forecast prices, in our view (this is unlike industrial metals which generally move between the marginal cost of production, and a level which causes demand destruction). Our best guess for the gold (and silver) price is that it continues down in the near term driven by strong negative momentum, before eventually moving back into a constructive environment for all the reasons of the past (for example inflation/deflation worries, negative real interest rates, eurozone worries). This supports our relative preference of companies with better cost control, better production growth prospects and falling capital requirements.

Nik Stanojevic
Divisional Director - Research 

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