|PDAC 2011: Real Interest Rates Remain Subdued For Now, But Rises Will Hurt Metals Prices – Analysts
06 March 2011, 09:24 p.m.
TORONTO (Kitco News) – Real interest rates remain subdued currently, but a rise will have a negative impact on commodities prices, particularly for precious metals, commodities market analysts said.
There has been some concern that the low interest rate environment is changing as countries like China and India raise rates to combat inflation and the European Central Bank President Trichet signaled last week it may consider raising interest rates as soon as April when it meets again.
“It will take the froth out we’ve seen in commodities and that’s particularly true for precious metals. We’d see significant change in investor behavior. But that’s unlikely to occur this year. The trend is low to negative levels in the three major currencies,” said Phil Klapwijk chairman, GFMS.
Klapwijk and other market analysts spoke at a commodities market forum at the Prospectors & Developers Association of Canada conference in Toronto on Sunday.
It’s very unlikely that the U.S. or Japan will raise interest rates because those economies are seeing fragile rebounds in growth and central banks will not want to kill any recovery. The ECB could raise rates as much as 100 basis points by the end of this year, but even a move like that, in the context of an inflation rate of 2% still, keeps real rates in negative territory, Klapwijk said.
Michael Jansen, analyst at JPMorgan Securities, said the gold market might be experiencing some “friction” lately because one measure of inflation – the U.S. Treasury Inflation Protected Securities, an inflation-linked debt security – has crept up to a current yield of 1.2%. That’s double of what it has been and above the current Federal Funds target of zero to 0.25%. That’s one reason why there’s been some movement by the investor class out of exchange-traded funds.
Jansen said so far there is no opportunity cost to hold gold because the real yield on assets, using the TIPS as a benchmark, is low.
The real yield is more important that the inflation expectations as gold has moved out of the category of being a good hedge against inflation expectations because central bankers are now starting to tighten interest rates., he said.
He is not worried about inflation in the U.S. right now, but added that in a few years inflation could be a problem there. The U.S. needs to deal with its debt situation, but how that will be resolved is a question. The bond market, he said, could force the U.S. to deal with it, like it did Greece, or it could allow policy makers to figure it out, like it is allowing the U.K.
Klapwijk said right now countries seem to be in favor of “a bit” of inflation to prevent damage caused by a possible double-dip recession, and with rising food and energy prices there will be more inflation. Certain countries like the U.K. and China have an inflation problem and inflation could become a global concern, which is supportive to precious metals prices.
He said the second round of quantitative easing by the Federal Reserve has lowered the U.S. dollar’s value and increased the price of commodities, and Klapwijk said he does not see the dollar having and significant rebound in 2011. In fact, he said, with the growing government debt in the EU, U.S. and Japan the global situation could get worse.
Portugal will be “the next shoe to drop” in the sovereign debt crisis and the contagion could spread to the U.S. and Japan. He also said if the debt problems in the U.S. continue, there is a concern the U.S. will not retain its triple-A debt rating and he thinks that will come into question by the end of 2011.
The sluggish U.S. economy has some in the markets wondering if the U.S. will attempt a third quantitative easing measure. If it does not, and if the current measure ends in June as the Fed said it would, Jansen said Treasury yields could rise, perhaps as much as 30 to 40 basis points, and that would put pressure on precious metals prices.
The Treasury yield curve is starting to steepen, meaning farther-dated securities are yielding more than short-term debt and that’s a sign of an economic recovery. Jansen said that is one reason why investors are moving out of gold ETFs and moving into markets like equities which are undervalued with compared with gold.
However, the rising yield curve is supportive for a metal like silver, said Jim Steel, senior vice president and metals analyst with HSBC. Silver benefits from its dual purpose as a currency and an industrial metal, he said.
There are also silver ETFs and while there has been some movement out of that product, Steel said it hasn’t been at the same rate as in gold. He said an informal poll HSBC took among buyers of the silver ETFs suggested these buyers are mostly individuals who are holding onto theirs for inheritance reasons and that may be one reason why there’s been less movement out of the silver ETFs. “It could be that silver is off the market for years,” he said.
Jansen said although investors have liquidated some of their gold ETF positions, the impact on the price has been muted because of strong physical buying to replace it, particularly out of China and India. “We’re seeing ounces transfer from the wholesale market to the individual,” he said.
It’s one reason why JPMorgan continues to have a bullish outlook for gold prices. They have an average annual price of $1,465 an ounce, with a year-end price of $1,500. GFMS, in a PDAC presentation posted on their website, estimated the average first half price for gold at $1,402.
Steel did not give any price projections for silver, but said in addition to investment buying, industrial demand is strengthening sharply. The strong demand will be enough to take up the explosion in mine production, which has been spurred by multi-decade price highs. The industrial demand alone in 2010 was 55 million ounces and HSBC forecasts global industrial growth up another 5.8% in 2011.
By Debbie Carlson of Kitco News firstname.lastname@example.org