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Kitco Precious Metals and Economic Review - Week Ending March 20, 2008
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Kitco Precious Metals and Economic Review – Week Ending March 20, 2008
Gold
Gold along with the other metals were hit hard last week. Many speculate that the fall in gold and platinum by over 8% as well as the correction in silver and palladium was the result of the U.S. dollar’s appreciation coupled with the Federal Reserve’s announcement to reduce the federal funds target rate by 75 basis points instead of by 100. Some analysts believe that participants in both the foreign exchange and precious metals markets had priced in an interest rate reduction 25 basis points more than what was delivered. The result would be an underestimation of the value of the dollar and an overestimation of the price of precious metals in the days before the interest rate announcement; therefore, an adjustment of both would take place. While this explanation might provide the rationale behind the short-term changes in the value of the U.S. dollar, there are strong doubts that the federal funds target rate reduction by less than 100 basis points led to the magnitude of price changes that we had observed in the metals last week. What is more, a dramatic fall in sentiment for the metals given economic and financial market conditions does not support the price change either.
Therefore, it is currently reasoned that the additional measures to ensure liquidity to financial markets taken by the New York Federal Reserve district this past March 16 lead to the metals’ sell off, as investment banks scrambled to get the funds necessary to put forward the collateral required to take a loan through the district’s discount window. The move would allow the banks to fund more business with their clients and help to stabilize the market. Within the first three days of the New York Federal Reserve’s launch of its lending facility, there was around $31.3 billion lent to primary dealers holding the appropriate collateral.
Most are doubtful that anyone could have predicted the magnitude of the moves taken in the past week, as we are observing the combination of unique financial conditions coupled with innovations in problem solving taken by central banks that introduce new incentives and paths of action for market participants. What we do know is that history had revealed that periods of stagflation have been consistently coupled with enhanced price volatility and dispersion within the precious metals market, something I had presented back in October 2007. We also know that recent history has revealed to us is that the growth in precious metal prices from August 2007 to present day has been substantially greater than the year prior, around 40% versus 5%, as the disappointing overall performance in equities and financial markets have shifted interest to the metals and other commodities.
Amazingly, even with the 8% fall in gold’s London PM Fix from Monday to Thursday of last week, gold would still outperform its average from the week prior, rising by 0.02%. The average London PM Fix from the week ending March 14 was $980.96 per ounce compared to the average for the week ending March 20 at $981.15 per ounce. Furthermore, the strength gold had at the beginning of last week would ensure that its average price would sit above its 10-day (two-week) through 120-day (six-month) moving average. Even in light of this surprisingly positive relative performance, it is currently anticipated that the average performance of gold for this week will not rise above the week ending March 20.
Silver
Silver was also hit hard last week, as its London PM Fix had fallen by 16% from March 17 to March 20. Again, the strength silver had at the onset of the week help to support a less severe percentage change from its average London PM in the week ending March 14 to its average in the week ending March 20. The change here was only a fall by 1.7%. Even with the correction in silver, its average London PM Fix of $19.82 per ounce would sit above its 30-day to 120-day moving averages and its real annual gain had posted a very strong 45%. Again, these marked gains had spun from the onset of the credit crisis. The average nominal price of silver last year for the same week was $13.26 per ounce; while the real (purchasing power adjusted) price was $13.71 per ounce.
Platinum Group Metals
Platinum group metals also suffered from last week’s sell-off. The metals group had been experiencing price softness with the confirmation that Eskom would increase power supplied to the South African mining industry. With a 5% increase in power supplied, the industry would be able to operate with a 95% power capacity; thereby, allowing miners to be better able to meet output projections.
With improved supply projections coupled with actions taken by market makers, platinum’s average price of $1962.60 per ounce would fall short of its 10-day to 30-day moving average as well as fall by 4.6% from the week ending March 14. From March 17 to March 20, platinum’s London PM Fix had fallen by 8.6%, very similar to gold’s 8.5% fall. The downturn would not bring platinum’s average for the week below its 60-day to 120-day moving average. Real annual gains posted 54%. The average nominal and real (purchasing power adjusted) price for platinum for the same week last year was $1229.33 and $1271.02 per ounce, respectively.
Palladium pulled similar results. Its average of $474 per ounce would also fall short of its10-day to 60-day moving average as well as fall by 4.1% from the week prior. From March 17 to March 20, palladium’s London PM Fix had fallen by 11%, coming in second to silver for the largest percentage fall. Even with the correction, it would still post an annual gain of 30%. The average nominal price for palladium for the same week last year came in at $351.17 per ounce; in real terms the price posted $364.10.
Finally, rhodium finished the week 1% lower than it started. Its price change from March 17 to March 20 was equivalent to its week on week average change of -1.4%. The downturn in its price would place it below its 10-day moving average; however, it would continue to rest above its 30-day to 120-day average. Real annual gains are still significant at 48%, as the average real price for rhodium last year, same week, was $6,281 per ounce.
Well, this wraps up this weekly review. Until next time, take care and I wish you all a very good week.
Wendy
Additional Details on Metal Performance
The metals had moved in very much the same direction last week, resulting in a strong positive correlation. Most of the currencies in the review had moved together with the metals, yielding the expected positive correlation. The Chinese Renminbi had edged up against the U.S. dollar through the week, resulting in a strong negative relationship with the metals. The correlation with the rupee was also negative; however, the postings were not significant. The rupee had edged up against the U.S. dollar on Tuesday, but moved down for the rest of the week. Lastly, the expected negative relationship was observed with Standard and Poor’s 500 index and the metals. A brief overview of equity performance for selected countries is presented below.
U.S. Brief Statistical Update
Continued liquidity pressures prompted firm action by the Federal Reserve to reduce the federal funds rate by 75 basis points and the discount rate by 100 basis points last week, bring the rates to 2.25% and 2.5%, respectively. In addition to reductions in the target rates, liquidity was enhanced with the creation of a lending facility within the New York Federal Reserve that would extend credit to primary dealers (a collection of 20 commercial and investment banks) via the district’s discount window. Dealers would then be able to help participants in securitization markets who are in need of cash. As we know, Lehman Brothers Holdings and Morgan Stanley have already tested the program last week; while Goldman Sachs Group (Wall Street’s largest investment bank by market value) had announced their desire to do so. From March 17 through March 19, around $31.3 billion was lent by the Federal Reserve to investment banks.
The Federal Reserve’s announcements had overshadowed all other updates for week; although, much of the data released was just a confirmation of what many had already anticipated. Poor results in manufactures made it clear that the economy can no longer be propped up by the sector. Industrial production, the Empire State and Philadelphia Surveys all posted a negative for February and March. In addition, input price pressures have not been easing with economic slowdown nor have they been completely transferred to increased output prices, causing more strain on producers. Moreover, the producer price index for February came in at an annual 6.8% (preliminary), a further signal that inflation is not easing.
The U.S. dollar did make some small gains last week in spite of the interest rate reductions; however, the weekly change from its average against a basket of major currencies revealed further downturns. Gains in the U.S. dollar was attributed to market participants pricing in a 100 basis point cut in the federal funds rate in the days leading up to the Federal Open Market Committee announcement on March 18.
Equities
Equities came in mixed on the week. The purchase of Bear Stearns by JP Morgan at $2 per share plus enhanced liquidity measures taken by the Federal Reserve beyond those that were introduced on August 17, 2007, led many global market participants to assume that the worst from the credit crisis has yet to be revealed; however, U.S. market participants, while initially disappointed in not getting the full 100 basis point cut in target interest rates, came to be satisfied with the collective measures taken by the Federal Reserve last week. Much of the week’s losses in equities came from poor bank performance.
Previous Articles: http://www.kitco.com/ind/index.html#ip
Enhanced Liquidity:Federal Reserve announces two initiatives designed to bolster market liquidity and promote orderly market functioning; Federal Reserve and other central banks announce specific measures designed to address liquidity pressures in funding markets; The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets (Aug. 17, 07).
South African Power Crisis: Mines to get 95% Power Back, Urgent Meeting with South African President, Gold Fields Affected, Mines to get priority in S.Africa power plans
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Copyright © 2007 Kitco Inc.
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