This year is turning out to be a great one for platinum group of metals. New sanctions placed on Russia, the world’s largest producer of palladium, may see interruptions in the shipments of the metal, putting further pressure on an already tight supply.
Given the metal is a key component in the auto industry, analysts are concerned that Russia may react to sanctions by restricting supply of palladium putting pressure on the United States' car industry.
Russia controls around 42% of palladium global output. Stockpiles were once high as the Kremlin had amassed huge amounts during the Soviet-era, but these have been gradually sold off. To what extent the stockpiles have been depleted is unknown as their levels have always been kept a state-secret.
Together, South African and Russia, account for 80% of global palladium supply. The market experienced a short-fall in supply last year, and given events in South Africa and those involving Russia, HSBC predicts this year’s shortfall will be double that of last years, around 1.06 million ounces.
Gold extended losses yesterday after the announcement from the U.S. Federal Reserve that stated monthly bond purchases would be further reduced by $10 billion, from $65 billion to $55 billion. Overall the tone of the Fed was seen to be more hawkish than expected.
The reaction of the gold price is not surprising, we warned in the last few weeks that the main, short-term drivers for gold were Ukraine and China. With the simmering of tensions between Russia and the West it was expected that speculators would turn to the FOMC meeting as their focus in regard to what to do with gold.
Further to the additional tapering, the FOMC released new forecasts showing predictions, by officials, that the benchmark rate would rise to at least 1% by the end of 2015 and 2.25% by 2016. It is currently close to zero. Their is a widely held belief that rising interest rates are bad for the price of gold.
The sharp drop seen yesterday may be inconsistent with gold’s price action since the beginning of the year (since which it has climbed +10%). However, it is not inconsistent with its short-term reaction to similar FOMC announcements as seen in the past. Had the FOMC surprised the market, which it did not, then gold’s drop could well have been bigger.
Despite the perception that the Fed had been more hawkish than was perhaps expected, holdings in the SPDR Gold Trust remained unchanged for the second day running. This follows the Trust’s 0.5% contraction on Monday, its biggest single-day drop since mid-February.
More banks weigh in with price forecasts
In contrast to Goldman Sachs who believe gold will touch $1,000/oz. by the end of the year, Commerzbank issued a report yesterday forecasting the yellow metal will rise to $1,400/oz. in 2014.
Chinese buyers are back
In response to the fall in the gold price, those much missed Chinese buyers rushed in to buy gold. Volumes on the Shanghai Gold Exchange, on the benchmark spot contract, rose to a three-week high. Premiums have failed to reappear however, as prices for 99.999% purity gold, for immediate delivery, were $3.95/oz below London, according to Bloomberg.
Silver broke away from gold
Gold and silver, of late, have had a fairly tumultuous relationship. As the Ukrainian situation heated up, silver was slow to react to gold’s rediscovered status as a safe-haven. However, as the gold price fell yesterday, silver for immediate delivery climbed 0.4% following three straight days of losses.
Silver had previously struggled over concerns regarding China’s economic slowdown. The metal is used increasingly in industry, and significantly so in China.
Some fans of chart-analysis may see the metal’s move below the key support/resistance level of $20.50/60, and a move below the 200 day-moving-average, as a particularly bearish sign.
Will India relax gold restrictions?
As a perhaps potential precursory move to easing restrictions on gold imports into India, the Reserve Bank has allowed more banks to import gold under the current scheme. Currently, a rule known as the 80:20 rule means that nominated agencies may import gold but must agree to export 20%.
Restrictions on gold imports, which have been increasing since 2012, have seen an unprecedented rise in illegal gold activities. T.S. Kalyanaraman, the billionaire chairman of Thrissur, India-based Kalyan Jewellers Ltd, told Bloomberg, “smuggling is like cancer…It will spoil the country’s economy. If they continue this arrangement, it will be a heavy loss for the country.”
The best story I have read so far on gold smuggling is a 27-year old from Kerala, who was caught with gold in the lining of his brass flower pot. His poor Mum probably thought he’d bought her a nice gift, to then see it smashed up by customs officials in search of gold.