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Kitco Precious Metals and Economic Review – Week Ending May 9, 2008
May 10, 2008 – 11 PM ET
Gold
Gold’s London PM Fix edged up over the course of the week. As with the other metals in review, gold’s price path would ride against the U.S. dollar and selected equity indexes such as Standard and Poor’s 500. Renewed concerns about the depth of the credit crisis arose with American International Group’s (AIG) first quarter earnings report that posted a $7.8 billion loss attributed to those financial instruments tied to the mortgage market. AIG is one of the world’s top insurance companies. Gold, along with the other metals in review, would ride with currencies that firmed over the week as well as indicative inflationary statistics such as WTI crude oil.
Gold posted an average of $871 per ounce. Its average would fall 1% lower than the week prior, but still manage to sit above its 120-day (6-month) moving average. Real annual gains remain very strong as gold’s price increased by 25% from the same week last year.
Silver
Silver’s London Fix also edged up over the course of the week, being influenced by the same factors that affected the market for gold. Its average price of $16.63 per ounce fell by less than one-half of a percent from the week ending May 2, 2008. Real annual gains remain solid at 22%.
Platinum Group Metals
Of the precious metals, platinum and rhodium came in the strongest, posting a positive gain from the week ending May 2, 2008 on Lonmin’s announcement to downgrade its expansion targets for 2012 as well as Stillwater’s production results. Lonmin is the world’s third largest platinum miner, accounting for around three-quarters of global output. Lonmin stated that the South African power crisis was the root cause of its decline in its output projection. As for Stillwater Mining Company, its production results that posted a 15,000 ounce fall from the first quarter of 2007 to first quarter of 2008. Stillwater is another leading producer of platinum group metals.
With a reduction in the supply outlook, platinum would reenter the $2,000 per ounce region by the end of the week and post an average London PM of $1,965 per ounce. Its average would sit above its 10-day (2-week) and 120-day moving average. Real annual gains remain among the highest at 46%.
Palladium would also surge over the week. In addition to the factors influencing gold and silver, the metal had been supported by production results from Stillwater, a primary producer of palladium. Its average price would come in at $424 per ounce, just $2.90 under last week’s average and above its 10-day and 120-day moving average. Real annual gains posted 13%.
Finally, rhodium continued a strong rise to $9,475 per ounce last Friday. The metal would gain 1.5% from the week prior as well as rest above its 10-day through 120-day moving averages. Real annual gains remain the highest among the metals at 48%.
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
As we had observed in the data last week, the metals moved closely together, leading to the expected strong positive correlation. Another expected result that came through last week was in equity’s performance relative to the metals. Here, the performance in equities is loosely measured by Standard and Poor’s 500 (S&P 500), which fell over the course of last week while the metals gained. As a result, a negative correlation was posted. A list of the performance of other equities for selected countries can be found at the end of the article. We also observed the expected positive correlation between the metals and crude oil. The performance of the metals relative to the currencies listed below came in mixed. Both the sterling and the Indian rupee fell over the course of the week, yielding the negative correlation with the metals. We typically observe a positive correlation between the currencies and the metals, since the metals are priced in U.S. dollars and an increase in the value of the currency against the U.S. dollar implies that holders of the currency are able to purchase the metals at a better price than if the currency had not increased. The currencies that posted a positive correlation with the metals were the gainers of last week.
Gold and silver’s spot prices moved in the same direction as their corresponding lease rates for all terms being considered, confirming result we had found last week. Both the forward rates and USA BBA LIBOR rates had fallen from their average in the week ending May 2, indicative of reduced sentiment for both metal futures as well as the U.S. dollar.
U.S. Brief Statistical Update
As we had seen last week, the metals had been partly influenced by the value of the dollar and inflationary pressures. The value of the U.S. dollar against a basket of six major trading currencies had posted a marginal weekly gain of one-half of a percent with growing expectations that a further easing in the federal funds rate was unlikely. The European Central Bank and the Bank of England had announced a zero basis point change in their key interest rates on May 8; thereby, maintaining the difference between those rates and the federal funds rate. The federal funds target rate is one of the lowest key rates in the world, coming in second to Japan’s 0.5. In addition to these interest rate announcements, the Bureau of Economic Analysis announced that March’s goods and services trade deficit had fallen by $3.5 billion resulting from a larger fall in imports relative to exports.
On the inflation front, WTI crude oil continued to rise despite a slowing economy. Last week, crude oil came in 96% higher than the same week last year, the highest percentage increase that we have seen so far. The support for crude oil prices is largely prompted by investor interest in commodities. Higher prices presage the need for consumers to switch to alternative methods of transportation as well as to more energy efficient vehicles.
Equities
Overall, equity performance was down for the week, as renewed credit issues weighed down on investor sentiment with AIG’s greater than expected quarterly loss. Poor earnings reports from car makers and banks also added to the downturns. Target interest rate announcements made by the Bank of England and the European Central Bank gave market participants indications that the slowing of their respective economies outweighed inflationary pressures. The Reserve Bank of Australia kept their target interest rate at 7.25% to fight inflation. The bank’s announcement of an expected slowing in economic growth in the coming quarters would negatively impact All Ordinaries, but the index would still be able to post a positive gain for the week.
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