Analysts Still Like Precious Metals

July 14th, 2010 by

Despite Thursday’s (June 1st) decline in gold, silver, platinum and palladium, analysts aren’t ready to give up on precious metals just yet. Many are calling gold’s over $50/oz. intraday decline in the last week of June a temporary reaction to the uncertainty of U.S. economic recovery and the confidence of Europe’s.

“We’re not ready to write the epitaph for gold just yet,” said James Cordier at Optionsellers.com “Gold was getting into a very crowded space.”

What Cordier, and many spectators like him are getting at, is the fundamentals behind gold’s dip this week. There were several factors at play, many of which worked together to bring about the observed decline.

Profit-Taking: First and foremost, there was profit-taking. Because precious metals have recently traded higher than ever before, many traders were looking to cash in on their good investments. Quite simply, the large number of investors doing this affected global spot prices.

European Optimism: The European Central Bank announced Wednesday that several European financial institutions did not ask for the full amount of money they will be required to repay, which served as a sign that Europe’s recovery effort may be in full swing. This positivity spurred a renewed interest in Euro-denominated assets which bid Euro value up 2% on Thursday (July 1st) alone.

American Pessimism: Apprehension over Friday’s release of the jobs report spurred American equities downward throughout the week. Realization of these fears on Friday (July 2nd) only added to concerns when private-sector payrolls fell short of expectations by nearly 28%. In response, stocks slid further, adding to investor frustration.

Bond/Equities Yield Differential: Looking to get out of American equities and into something comparatively secure, investors looked at American Treasury markets. The decline in equities revealed the largest yield differential between bonds and equities in nine years, resulting in a renewed interest in treasuries.

While profit-taking affected precious metal prices this week, it also acted in conjunction with American pessimism and the bond/yield differential to encourage investors to seek the comparative security of U.S. Treasuries for the holiday weekend.

What remains to be seen is how long U.S. stocks will stay down, and how long bond yields will stay up. As with most any “correction” in which precious metals are involved, analysts aren’t ready to throw in the towel yet.