Gold fails to break above $1,150

Precious metals are encountering resistance. After rallying this week, the risk of adding longs outstrips the upside. However, we doubt the market would want to get to short. We expect precious metals support to remain in place. For a while, especially in October, the market has increasingly priced in a hike in the Fed funds rate by June 2010.

But these expectations have retreated in recent days. A month ago, the futures market assigned only a 30% probability to the Fed keeping rates at 0-25% until June next year (and an equal probability of a rate hike to 0.5% in Jun 2010). As of yesterday, the futures market assigns a 65% probability to flat rates between 0 - 25% until Jun 2010 (and a 27% probability to a hike). The market right now is clearly convinces that rates will stay low for longer.

We still see no rate hike in 2010 (unless it’s in Q4). Low rates should continue to support precious metals. Gold failed to break above $1,150 yesterday. The dollar is also not falling below $1.50 against the euro, and therefore gold’s momentum is fading. We advise buying into dips. A decline in the gold price below $1,137 may open the door to $1,128. We still see strong resistance at $1,150.

PGMs are finding resistance. The metals have rallied strongly, and a correction is expected. However, our target for platinum at ZAR11,200 remains (or $1,500 with a ZAR/USD exchange rate at $7.50). Platinum support is at $1,400. Palladium is likely to struggle to break above the $375 — $380 level, and we view this as the ceiling for now. Rhodium continues its march north, and our price target is $3,000.

Courtesy: Commodities Research, Standard Bank