Precious Metals: Prices Down, Chances to Buy Up

The prices of many precious metals fell last week after Federal Reserve Chairman Ben Bernanke’s announcements regarding the Fed’s projected end to quantitative easing (QE) by the middle of 2014. And they are continuing their weakening trend this week, bringing ETFs and other metals-themed products down to levels that that some analysts are pointing to as good buying opportunities for investors.

The general outlook of gold and silver prices, says ETF Securities Research, should stay negative while interest-rate expectations keep rising and the U.S. dollar continues to improve. This means there are plenty of “reasons for contrarian investors to look favorably on precious metals,” wrote analysts Nitesh Shah and Nicholas Brooks in their outlook report on Friday for ETF Securities.

“At current levels gold, silver, platinum and palladium are estimated to be trading around or below their respective marginal costs of production,” they said.

“Therefore, while further downside in the short-term is possible, investors with longer-term time horizons may start to look at the recent sell-off as a longer-term accumulation opportunity,” Shan and Brooks emphasized.

Low and Lower

Gold prices dropped 7% last week, 5% for the month, 20% for three months and 18% for the past 12 months, according to Bloomberg data cited by ETF Securities. Meanwhile, silver fell even more — declining 8%, 11%, 31% and 29% during the same period.  

Prices on platinum and palladium also have moved down, but not as dramatically.

Platinum decreased 6% last week, 6% for the past month, 14% for the past three months and 6% over the last 12 months. Palladium dropped 8% last week, 9% in the past 30 days and 12% in last 90 days, but is up 9% for the 12-month period.

“As long as the Fed continues to reaffirm its commitment to reduce QE in the coming months, it seems likely that gold prices will remain weak,” the ETF Securities analysts said in their report.

But there are several factors that could change hurt U.S. growth, they add, and such a shift might prompt the Fed to step back from QE reductions. “With gold positioning so negative, this has the potential to stimulate a strong short-covering gold price move,” the analysts wrote.

Frank Holmes, CEO and chief investment officer of U.S. Global Investors, said before the Fed’s latest announcement that he had expected a 10% drop in gold prices, but he also notes the potential for a 30% move on the upside over the next 18 months.

Platinum, Palladium

The recent price drops of these metals is likely associated with a more general move by investors away from “risky” cyclical assets “in reaction to expected reduced liquidity injections by the U.S. Fed later this year,” Shah and Brooks say.

“In our view, however, to the degree that the Fed ultimately reduces its easing policy because of continued recovery of the U.S. economy," they conclude, "both platinum and palladium should benefit.”

ETF Efforts

As metals prices have moved down in the past 12 months, metal-themed ETFs — of course — have declined as well.

The SPDR Gold Shares ETF (GLD) has seen large outflows. GLD fell roughly 12% in the past 30 days, about 23.5% year to date and 19% in the last 12 months.

The iShares Silver Trust ETF (SLV) has fallen roughly 7.5% for the month, 35% year to date and 28% in the past 12 months.

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