Kitco Precious Metals and Economic Review - Metals Up on Equity and Dollar Performance
Kitco Precious Metals and Economic Review – Week Ending May 23, 2008
Wendy Lynn Ip, May 25, 2008, 3 PM ET
Gold, along with the other precious metals reviewed, strengthened over the course of last week on the continued depreciating value of the U.S. dollar, inflationary pressures arising from crude oil prices that increased projections for future inflation, a weaker economic outlook, and faltering global equities. Gold and platinum metal supply concerns had also entered into the equation, as the output effects from the South African power crisis continues to be revealed by key miners such as Gold Fields, Anglo American Plc., Anglo Gold Ashanti, and Lonmin.
With this said, gold’s average London PM Fix rose 4.2% or $37 per ounce above its average in the week ending May 16, 2008. Its average would post at $915 per ounce, well above its 10-day, 30-day, and 120-day moving averages. Real annual gains rose by 7 percentage points from the last review to 36%.
Silver’s spot price also edged up over the course of the week with a continued strengthening from the week ending May 16, 2008. Its average London Fix would rise 3.6% to post at $17.46 per ounce. As in the case for gold, silver’s average would rise above its 10-day, 30-day, and 120-day moving averages. Real annual gains rose by 6 percentage points from the week prior to 32%.
Platinum Group Metals
The platinum group metals also received a surge in prices. Platinum would find itself back in the $2,000 per ounce range for the second week in a row. Its London PM would post a high of $2,182 per ounce last Friday and its average of $2,160 would sit 4.3% or $89 per ounce higher than the week ending May 16, 2008. Its average would sit well above its 10-day to 120-day moving average and its real annual gains came in the highest out of the metals reviewed at 63%.
Palladium’s London PM Fix posted an average of $447 per ounce, 2.2% higher than the week prior and above its 10-day through 120-day moving averages. Real annual gains held constant at 18%, zero change from last week’s review.
Finally, rhodium continued its upward momentum that was started over a month ago. It would remain steady at $9,850 per ounce from Wednesday through Friday of last week. Its average price of $9,721 per ounce would rise 2.6% or $242 per ounce above its average in the week ending May 16 as well as sit well above its 10-day to 120-day moving average. Real annual gains remain among the highest, increasing by 5 percentage points from the last review to post at 52%.
Additional Details on Metal Performance
As we have seen in Kitco’s spot market charts, the metals’ price paths moved closely together last week, resulting in a strong positive correlation between all the metals reviewed. As a result, we can conclude transference of sentiment from one market to the next – specifically, sentiment for the metals was up over the course of last week with the continued depreciation in the U.S. dollar along with a downturn in global equities as well as the aforementioned factors.
In terms of the currencies, we observed the expected relationship between many of them listed below and the metals, with a slight decoupling only in the Indian rupee, as the value of the rupee continued to fall in a second straight week. The case for the Hong Kong dollar is different. The Hong Kong dollar is pegged to the U.S. dollar, so that any depreciation of the U.S. dollar is met with a corresponding devaluation in the Hong Kong dollar. As a result, we expect a negative correlation between the metals and the Hong Kong dollar instead of a positive one.
The metals also showed the expected relationship with crude oil prices, measured by spot WTI crude oil, and equities, as partly indicated by the S&P 500. The advancement in crude oil prices over the course of last week signalled market participants that an easing of inflationary pressures was not forthcoming. Indeed, inflation expectations have been on the rise. Typically, demand for the metals is supported and even heightened in a high inflationary environment, as the metals are used to hedge against the loss in purchasing power brought on by increasing prices. Investment demand for the metals is also heightened during periods of economic duress, as these periods are naturally met with poorer performance in equities. Investors wishing to mitigate the loss in their portfolios will either increase or begin a new investment in the precious metals. A negative correlation between equities and the precious metals is the result, as is shown in the table below.
The correlation between gold and silver’s London PM Fix to that of their corresponding lease rates came in negative for most terms considered, suggesting that lease rates had fallen over the week as the metals climbed. It also suggests that market sentiment for metal futures was greater than that for the U.S. dollar for 1-month to 6-month terms. Indeed, the forward rate for gold and silver were up for shorter terms, mirroring the enhanced sentiment for the metal on the spot market, while the USD BBA LIBOR had fallen for the week, an indication of an easing of liquidity pressure according to the British Bankers Association. Indeed, an easing of liquidity pressures was also indicated towards the end of last week with the federal funds effective rate rising above its target.
U.S. Brief Statistical Update
The dollar continued to fall against a basket of six major trading currencies through the course of last week, as concerns about the U.S. economic position increased with the release of the Federal Reserve’s Economic Outlook for 2008-2010. Participants expected weaker economic growth in 2008 along with higher unemployment and inflation. Economic conditions would pick up by 2009 and continue to do well through 2010. The unemployment rate, however, was forecasted to remain elevated through 2009, tapering down a touch by 2010. Projections for the 2008 headline personal consumption expenditures (PCE) price index received a full percentage point upgrade from January’s economic outlook. Average annual PCE price index is expected to lie between 3.1% and 3.4% by the year’s end.
Upgrades to the PCE projections were partly the result of rising energy prices. Last week, WTI crude oil posted an average price of $129 per barrel, up 102% from the same week last year. Rising oil prices have already placed an upward pressure on the price indexes tracked in this review. Last week, the producer price index came in at a preliminary 6.4% from 12 months prior, down a touch from the 7.7% preliminary posting in January. The price index still remains elevated and will continue to be so throughout the year.
Equity performance stood in stark contrast to the previous week. The positive sentiment of many global investors took a step back, reverting to the pessimism established from the onset of the year. Equity analysts blame inflation, record crude oil prices, the softening of many global economies, and an increased probability of target interest rate increases in the U.S., U.K., and European Union as the root cause of the downturn. The hardest hit index was the Shanghai Composite, dropping 4.2% on the week with the added response of China’s devastating earthquake in the Sichuan Province.
Well, this wraps up this weekly review. Until next time, take care and I wish you all a very good week.
Hyperlinks - Platinum Group Metals: Platinum market in 480,000 oz deficit 19th May 2008
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