Mitsubishi: Inflation Cross-Currents For Gold; Palladium Premium Shrinking
(Kitco News) - Gold would face somecross-currents from rising inflation expectations, benefitting as an inflationhedge but also facing potential selling as Treasury yields rise, saysMitsubishi in a weekly report on precious metals.
Meanwhile, strategist JonathanButler points out that palladium’s premium over platinum is slowlydisappearing.
Global equities sold off sharplyat the start of the week and the so-called VIX “fear index” reached its highestlevel since 2015. Against this backdrop, Butler commented that it was“surprising” that gold drew only “limited” support on safe-haven buying, butalso pointing out that the metal ran into headwinds from a stronger U.S. dollar at the same time.
“This correction in stock marketsmay turn out to be short-lived since the economic fundamentals remain strong,with U.S. and euro-zone GDP [gross-domestic-product] growth rising, while thefull benefits of U.S. tax reform have yet to be felt,” the strategist said.
He pointed out that new FederalReserve Chair Jerome Powell is expected to maintain predecessor Janet Yellen’spolicy of raising interest rates gradually. The Fed funds futures are factoringin a 90% probability of a 25-basis-point rate hike in March, which Butler saysthe gold market has largely priced in already. The Fed’s projections are forthree hikes this year.
“If broad measures of inflationsignificantly pick up, matching the uptick in the hourly earnings reading onFriday, then the Fed will be justified in raising rates more quickly, whichwould weigh on gold as a non-yielding asset, though it would benefit to anextent as an inflation hedge,” Butler said.
“If, however, the recent jump inone measure of inflation turns out to be a transitory or seasonal effect, theFed will be disinclined to get ahead of the curve and raise rates too quickly,keeping the macro environment reasonably favorable to bullion.”
Meanwhile, Butler pointed outthat palladium - the strongest commodity in 2017 -- dropped for a thirdstraight week last week and has continued its decline since, falling back belowthe $1,000-an-ounce level. As of 9:20 a.m. EST, spot palladium was down $22 to$989.80 an ounce, while platinum was down $8.10 to $978.90.
“While part of this is explainedby the rise in the dollar and consequent downward pressure across theprecious-metal complex, a sizeable short palladium/long platinum trade appearsto have been at play after an unwinding of the opposite trade that prevailed in2017,” Mitsubishi said. “Palladium’s premium against platinum is now down toless than 2%, having been over 15% back in mid-December, and we forecastplatinum will move back into a premium this year.”
The decline in palladium priceshas been accompanied by a significant decline in speculative length in Nymexfutures, the firm points out. Meanwhile, Mitsubishi describes a recent declinein platinum prices as “limited,” with investors remaining “generally bullish.”
By Allen SykoraFor Kitco News
Follow @AllenSykora
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