HardAssetsInvestor

Written by Sumit Roy  |

March 06, 2012

Precious Metals Monitor: Major Reversals In Gold & Silver Reset Technical Expectations

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We offer our latest analysis on the precious metals market after a tumultuous week.

It’s been a dismal week for precious metals, as gold, silver, platinum and palladium all dropped precipitously. The correction began on Wednesday of last week after Ben Bernanke’s testimony to Congress. But it wasn’t what the Fed Chairman said that spooked precious metals traders, but rather, what he didn’t say.

“When Bernanke didn’t mention the possibility of another round of [quantitative easing], that was enough to take the fizz out of everything,” said Dennis Gartman. “Before [the testimony], gold was looking quite strong, but [afterward] it just gave up the ghost.”

The implication is of course, that gold had been pricing in more stimulus — such as a third round of quantitative easing (QE3) from the U.S. central bank. Yet that may not have been the case.

“Negative real interest rates and accommodative monetary policy were and remain the key drivers of investment demand,” said Morgan Stanley. “Bernanke’s testimony [last week] did nothing to remove this benefit.”

“Under these circumstances, QE3 would have been icing on the cake for the monetary easing trade, but not the fundamental driver of bullish investor positioning,” the bank concluded.

Indeed, as of the close of Monday, exchange-traded fund holdings of gold totaled a record 77.4 million troy ounces, indicating that at least one segment of investor demand for the yellow metal remains strong.

Instead, technical factors seem to be the culprit for the volatility in precious metals. Gold’s inability to break above the key $1800 level may have spurred traders to sell. The yellow metal is now trading just above the $1650 level, where prices stood before spiking on the Federal Reserve’s announcement that it would keep interest rates near zero through late 2014.

GOLD

Meanwhile, silver also failed at a key technical level. The white metal looked as if it had made a key breakout near the juncture of two technical lines, but there was no follow-through. Our breakout call last week was clearly premature.

SILVER

Finally, platinum and palladium plunged after output at the world’s largest platinum mine in South Africa resumed this week after a six-week strike.

PLATINUM

PALLADIUM

Looking ahead to the next few weeks, we would maintain a cautious stance on the precious metals sector. While fundamentals remain supportive on the surface, the technical outlook has weakened after gold and silver failed at some key levels. We would wait for stabilization before tiptoeing back in.