Precious Metals

Precious Metals: Is the Shine Fading?

Significant gains in precious metals prices over the last five years have been fuelled by several key factors, such as the depreciation of the US dollar and geopolitical tensions including the Iraq war.

However, with many analysts now questioning how long this bull run can continue, and when, if ever, the steam will run out for precious metals, IG Index analyst Anthony Grech has taken a look at the factors behind the rise in demand for metals, and their outlook in the coming months.

Below is a summary of the latest free report from IG Index. You can access the full version in the TradeSense Databank found in the PureDeal platform.

Why are metals in demand?

There are several major drivers which, when combined, have helped the price of precious metals more than double since 2003. These include:

• Worldwide increase in wealth, particularly in China and India
• Credit crunch
• Increasing oil prices
• Deterioration of housing market
• Falling value of US dollar and fears of a US recession
• Exchange Traded Funds (ETFs)

And while much of the media focus has been on gold, the best performing precious metal over the last five years has been silver. From February 2003 to 29 February 2008, silver rocketed 330% in price, while gold rose 178.4%. Platinum also outstripped the yellow metal, rising some 215.7% since 2003.

Of the main drivers, it is arguably the use of gold as a long-term hedge against inflation and the depreciating US dollar that have had the greatest affect on prices, and the report seeks to explore these two factors.

While short-term uncertainties and geopolitical tensions have caused sharp upturns in the price of precious metals, in the long term the report suggests that inverse relationships between the price of precious metals – gold in particular – and the US dollar have propelled the surges seen in the pre-recessionary period.

The future for precious metals

Can this upward trend continue? After hitting an all-time high of $1,033 in March, gold has dropped slightly, although some analysts expect a new record to be set later this year.

Nevertheless, forecasts are suggesting a downturn as precious metals' ability to underpin economic uncertainty seems to be becoming less important. Silver in particular could see losses as impressive as its gains over the coming months. 'History shows that when you get a substantial correction in precious metals, silver falls more than gold ... It's a more volatile market and smaller in value terms,' said Stephen Briggs, analyst at Societe Generale. [1]

Meanwhile the US dollar, which traditionally acts as a counterpoint to the price of gold and other precious metals, hit new record lows against the euro recently at $1.60 causing many analysts to suggest that the market may have bottomed and further losses may not be sustained. According to empirical evidence from the World Gold Council of an inverse relationship between the price of gold and the US dollar, this could mean the value of gold may fall should the dollar begin to recover.

Trading on precious metals

So what is the market likely to look like in the coming months? Whatever your views on the outlook for silver, gold, palladium, platinum and many other metals, there are opportunities available to take advantage of the situation with IG Index.

For example, if you think the dollar will continue to struggle and hit new lows, and that gold will continue to hedge the financial markets, you could back your theory by going long on precious metals.

Or if you believe precious metals have hit their peak and no longer hold the same sway as a long-term hedge, you may wish to go short on certain metals.

Take a more in-depth view on precious metals with our specialist report from IG Index analyst Anthony Grech, available to all clients. Apply for an account and get set up in minutes.

[1] Source: Guardian (28 April) 'Spotlight falls on silver's poor fundamentals'

The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.

Updated: 30 April 2008