Economic Background
- Europe: The Spanish 10-year bond yield closed the week nearly unchanged at 5.77 per cent, while the Italian 10-year bond yield closed at 5.05 per cent. Germany’s 10year bond yield closed the week at 1.6 per cent.
- South Africa: The strikes in the mining industry are spreading to other gold mines. The Governor of the South African Reserve Bank has warned that the Lonmin deal at Marikana mines has set a precedent for the whole industry. Ultimately, an illegal strike was rewarded with a 22 per cent pay rise and a one-off bonus payment of 2000 Rand to help pay something towards the 6-week wage loss. Several mine workers in other mines have already seen this as encouragement to follow that pattern.
- The Indian Rupee finished the week at 53.44 to the US dollar.
Gold: $1772.00 – up $2.00 from last week.
The gold market consolidated over the course of last week, with prices trading within relatively narrow boundaries. The low trades were noted in the high $1750’s, while a high of $1788 was reached last Friday, before closing for the week nearly unchanged.
The illegal strikes in South Africa’s (SA) mining industry are now spreading across the gold mining community, with supposedly 15.000 workers at Goldfields on strike. Another 5,000 workers in a mine belonging to a different company are also now on strike, demanding a wage increase from 5,000 Rand to 12,500 Rand. That sounds very familiar.
A disturbance of the supply of gold from South Africa however, would not have as far reaching consequences, as, for example, a long-term strike in the platinum industry. SA produces 75 per cent of the world’s platinum, while SA is globally the 4th largest gold producing country.
Physical buying in the region is starting to normalize with redemption and new sales starting to level out more. We do expect the customer base to return to buying gold in a stronger fashion, once the $1800 mark can be broken and sustained.
The premium from Gold over Platinum rose last week to $135. The latest Commitment of Traders (COTR) Report shows that there has been a strong build-up of new long positions, while more short positions have been covered. The COTR report is based on positions at the close of last Tuesday (September 18). The size of the long positions is giving reason for concern as the market can easily be looked at as being in overbought territory, at least in the short term. The gold market might well be trading already with positioning having reached a new high for the year. A confirmation for this is expected with the release of next week’s figures.
Silver: $34.50 – down $0.11 from last week.
Silver has held very well last week, and the market has rallied up to $35.30 level on Friday, before closing the week around $34.50. There seem to be a fresh bout of confidence surrounding silver, with new investment out of China being most visible.
The current performance does gives reason to believe in the sustainability of the uptrend, but the influence from gold cannot be underestimated. It would be difficult for silver to stay and hold above $34 if gold would see a strong, short term orientated, long position liquidation as the situation in the yellow metal is looking well overbought.
The COTR report shows that new long positions have been recorded, while short positions have also seen small increases (end of business Tuesday, September 18).
Platinum: $1639 – down $61 from last week.
The discount to gold has increased to $135. The precedent set through the agreement at Lonmin’s Marikana mine brought these workers back to work with reports stating that over 80 per cent of workers returned to work making the mine fully operational. However, news headlines show that workers at other mines, are only returning to works in drips and drabs and that is not really helpful, as a certain minimum is required to make the shifts in the mines operational and most importantly, also safe. There will be ongoing news coming out of South Africa and they will continue to change the perception of this big issue. Trading could and will most likely be extremely short term orientated.
The $1600 level has been tested twice last week, a minor breach was recorded but the prices rebounded well. The market is currently still trading approx. $230 above the level when the strikes first made major headlines.
The COTR shows a very small increase in new long positions, and a further reduction of existing short positions (end of business Tuesday, September 18).
Palladium: $670 – down $20 from last week.
Palladium gave $20 from the previous week’s gains back to the market, as platinum was sold off very strongly on headline news about the acceptance of the pay-offer from Lonmin. However, going forward, we think that palladium has a much stronger base and better fundamentals than platinum and that will come through eventually. Palladium in general, is expected to be in a deficit situation for the next few years at least, while platinum does have a structural surplus production issue in the near future. The COTR shows a small increase of long positions, as the covering of existing short positions has been continuing (end of business Tuesday, September 18).
*By Gerhard Schubert, Head of Precious Metals, Emirates NBD
