Commodities | Mar 26 2010
By Rudi Filapek-Vandyck
It's difficult to have a positive view about the immediate direction of precious metals prices when one also has a dim view on what's going to happen with the euro.
Standard Chartered analysts find themselves between a rock and a hard place these days. They have been, and remain, firm supporters of precious metals exposure but now that the direction of the euro has changed dramatically, they note the latter is likely to put more weight into the market than anything else.
Yesterday, I noted there are quite a few chartists and FX experts around who see the euro trending towards 1.30 against the US dollar. Standard Chartered's inhouse view is that EUR/USD is on its way to 1.25.
No wonder thus, the analysts at the precious metals desk are a bit miffed these days – at least, that's what I expect them to be. Because as far as underlying market dynamics are concerned, things have only improved recently for both palladium and platinum, with the analysts discovering more and more signals that markets have further tightened.
This should normally lead to higher prices, if it weren't for the weakening euro to spoil the party.
The analysts seem relatively philosophical about it all, noting precious metals prices have relatively stood their ground in the face of another euro onslaught in FX markets this week. But then again, there's simply no escaping the “higher power” principle. Expect precious metals to trend lower, the analysts say.
Longer term, the desk remains positive on both PGM exposures, with a preference for palladium over platinum.
As far as gold goes, the team expects to see solid support at the 200-day moving average, which is at around US$1049/oz.
The same view is broadly applied to the base metals with the difference that there's a potentially higher value in play for the sector. The analysts believe market participants in the base metals spectrum are anxiously looking forward to the timing of the revaluation of the Chinese currency. Because that is widely seen as the provider of a positive boost to Chinese buying of commodities in general (all priced in USD).
For the short term, however, the arbitrage window in copper between London and Shanghai has remained closed since February. So no additional support from Chinese traders is apparent in the present-day market.
Market commentators at MFGlobal hold a similar view. They too expect the US dollar to gain as long as uncertainty rules in terms of euro-zone stability and "PIIGS" debt problems. And similar to Standard Chartered, MFG believes this should keep a lid on everything commodities while moving into the final week of the first quarter.
MFG's uncomfortableness extends to the state of the US equity market, with the commentators noting it has been a long rally this month for US equities. This, they believe, suggests that a pull back might be the way of least resistance.
They are quick to add any such pull back should remain “modest” in nature.
MFG labels itself “fairly bullish” on the US dollar. This translates into an expectation for lower commodity prices in the short term.
Base metals analysts at JP Morgan believe copper needs the return of Chinese buying interest for the metal's price to rise above earlier highs seen in January. Unfortunately, note the analysts, if anything it would seem Chinese traders are becoming less active at the moment, not more.
JP Morgan also notes gold has gradually lost price support from declining global inflation expectations over the past weeks.
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