Gold and other precious metals rallied earlier this week as expectations of the release of disappointing U.S. payroll data discouraged hopeful investors of a stronger economic recovery. The trend reversed on Thursday, however, when gold plummeted nearly $50/oz. A shift in the general attitude toward the European recovery effort and relative strength in U.S. Treasury markets spurred the decline.
The European Central Bank announced Wednesday that some European financial institutions asked for less money than they are due to repay. This defied the predictions of many market analysts, and signaled to spectators worldwide that the European debt situation is perhaps not as dire as originally thought. As a result, the Euro climbed 2% Thursday amidst declining dollar and precious metals markets.
Perhaps not surprisingly, U.S. Treasury markets – the long-standing “benchmark” of security – experienced an upswing in attention this week as U.S. equities took a turn for the worse Tuesday. Renewed concerns about global growth fueled the 2.6%, 3.1%, and 3.8% declines in the Dow Jones, S&P 500, and Nasdaq indices respectively. The yield differential between the two markets now averages its widest margin in nine years.
In expectation of future Euro gains and renewed interest in U.S. Treasury markets, precious metals took a bit of a hit this week.
• Gold: After maintaining relatively high price levels earlier in the week, a combination of profit-taking and capital reallocation caused a marked decline on Thursday of over $50/oz. Gold closed below $1,200 after floor trading ended Thursday. Analysts are not abandoning hope for a $1,300 ounce this year, however, as this setback is considered by most to be temporary, and a function of short-term, ancillary interest in other markets.
• Silver: Silver dropped nearly $2/oz. Thursday when compared to last week’s high of $19.50, marking the biggest intraday decline since May 4. The decline was due mainly to the capital reallocation which plagued gold. Investors not as confident in precious metals as others pulled funds out of silver bullion, valuing gold over silver as a precious metals position.
• Palladium & Platinum: Palladium and Platinum took respective 3.5% and 2% hits Thursday. The metals, when not buoyed by industrial or jewelry demand, traditionally have much lower elasticities of demand when compared to silver and gold. This was apparent late this week when both hit lows not seen in nearly a month.
The short-term future of precious metals depends largely on the direction of European recovery efforts and U.S. indices. As long as there is uncertainty as to the safety of fiat currency-denominated assets, there will be demand for a relatively safer investment. Whether that investment is precious metals depends on how competing investments are performing.