How will precious metals react to US action in Iran?
Risk aversion is likely to prove supportive of gold, but any correction in silver and/or platinum is likely to prove temporary, providing investors with a buying opportunity.
When financial markets re-open on Monday, we are likely to see a bout of risk aversion in precious metals markets, placing a bid under gold, and potentially, an offer over silver and platinum. How precious metals prices react will depend in part on perceptions of underlying supply and demand as well as investors perceptions of risk and positioning.
In the case of gold, it’s perceived safe-haven status and recent stability amid an unwind of speculative positions in futures, which eases risk of a Value at Risk (VaR) shock, reduced buying of gold-backed ETFs, and a moderation in option volatility, suggests the metal is well placed to benefit.
The case for silver is less clear-cut. The recent run-up in silver has occurred in almost perfect correlation with net open non-commercial futures holdings in the COMEX 5,000oz contract, which is currently at multi-year highs, suggesting vulnerability to a position correction. Silver is likely to find solid support from end-users and investors on any pull-back sub-USD 34/oz.
In the case of platinum, at face value it appears most vulnerable to a correction after soaring recently amid thin liquidity. But platinum faces a significant supply shortage with limited above-ground stocks, mostly tightly held, limited ability to lease physical platinum, and indicators pointing to little extension of speculative positioning. While there is scope for correction, any pull-back is likely to be met by solid-end user and physical investor demand.
Gold to be well supported…
Gold has posted a succession of higher-highs and higher-lows since mid-May, but it has yet to clearly break to the topside, above USD 3,450/oz, with the metal in a narrowing pennant formation. While I expect gold to break higher, it needs to hold support above about USD 3,250/oz to remain in the uptrend. Failure to hold this level would likely lead to a deeper correction towards USD 3,000/oz, with longer-term buyers likely to emerge between that level and the 200-day moving average (USD 2,901/oz).
…with speculative positioning reduced
A key factor supporting gold is the significant reduction in speculative positioning that’s occurred in the COMEX futures market since early February. The Commodity Futures Trading Commission report net open non-commercial futures positions in the 100oz contract has fallen to 591.5t, down 373.2t from its 7th of February peak. Likewise, we’ve seen a significant moderation in gold-backed ETF buying in May and June, with holdings up just 10.9t since end-April. Last week’s attempt of gold to break above USD 3,400/oz was associated with resumed buying, suggesting investors remain keen to add to exposures and will likely buy the metal on a clear signal that it’s breaking higher.
The over-the-counter gold options market is telling us a similar story. One-month at the money forward implied volatility has fallen to 17.1%, but it remains above its twelve-month average (15.6%), while concerns around developments in the Middle East has coincided with a jump in one-month option skew to 1.85% in favor of gold call options. This suggests to me that there is appetite for short-dated out of the money gold call options, consistent with the view that gold may move swiftly higher at some point.
Silver appears vulnerable…
Silver faces the challenge of being both a precious and industrial metal (as does platinum), and when coupled with its lower liquidity, we observe that during periods of risk aversion it tends to under-perform gold. This is especially likely to prove the case if it’s technically extended and/or we’ve seen a build-up in speculative positioning, as appears to be the case.
In the past three trading sessions, we’ve seen significant out-performance of gold relative to silver, sending the Mint Ratio (the ratio of gold-to-silver) up to 93.9:1. This remains well below the 104.7:1 peak observed post-Liberation Day.
Technically, silver appears to be correcting from overbought conditions. However, it is likely that a move sub-USD 34/oz will be met by longer-term buying interest.
…but should be supported by a large supply deficit…
While silver may under-perform gold during periods of risk aversion, the Silver Institute estimates that the metal will remain in hefty supply shortage this year, its seventh straight year of deficit.
…although investor positioning is a risk
Probably the key risk facing silver at present is investor positioning. The CFTC report net open non-commercial futures positions are currently 10,157t, almost double the 5,670t average of the past decade. And unlike gold and platinum, we’ve yet to see any material fall in the volume of silver held in COMEX approved vaults, which surged from 9,910t end-2024 to a peak of 15,698.5t this year and currently stands at 15,410t. At face value one might argue that this hoarding activity reflects investor optimism around silver, but it also represents a risk. And with a weekly correlation between leveraged fund net open futures positions on COMEX and the silver price of 0.88, a fall in the price of silver may prove self-reinforcing.
Positive investor sentiment towards silver is also evident in option skew, which remains above its past decade average and solidly skewed towards a higher price.
While we may see a correction in silver, I anticipate solid investor interest on a pull-back sub-USD 34/oz.
Platinum liquidity a near-term risk but the backdrop is robust
Of all three precious metals, platinum appears the most vulnerable to a technical correction. Since the 18th of May, platinum has surged around 26%, with the metal trading well above its 200-day moving average (USD 989/oz) amid clear signs of technically over-bought conditions.
Solid support from fundamentals…
Based on a price of USD 1,264/oz, I estimate platinum is around 6% below its long-term (1968-2025) fair value (deflated by US CPI in log-levels), with the metal also continuing to trade at a hefty discount to gold (-62.5%). The World Platinum Investment Council (WPIC) estimates the metal will post a supply deficit of around 966koz this year - more if we see strong physical investment demand persist - with deficits forecast to continue for the next five years, sending above-ground stocks to near zero. While we have seen a lift in the price of platinum, it’s impact on miner profitability - which is governed by a basket of Platinum Group of Metals (PGMs) - prices is more muted, with my 6E PGM basket up only 10.8%m/m in South African rand terms. I believe the rise in the 6E PGM basket is insufficient to engender a supply response, nor is it likely to be sufficient to trigger demand destruction.
…and muted speculative positioning
Professional investor demand for platinum has recently picked up, with the Commodity Futures Trading Commission (CFTC) reporting net open non-commercial positions in the 50oz contract amounted to 23.75t last week, above its past decade average (15.4t). However, demand for platinum-backed ETFs appears modest, with holdings 101.6t, down 6.1t from its 9th of June peak and -0.6t month-to-date. Holdings are up just 1.4t year-to-date. While we’ve seen a pick-up in demand for platinum-backed ETFs from the US, Europeans have faded the move.
While speculative positioning paints a mixed picture of demand, we’ve seen reports that leasing costs soared over the past fortnight upwards of 24%, suggesting a scramble to obtain the physical metal. Absent a significant source of leasing such as Central Banks, or a significant potential source of recycling, the surge in leasing costs suggests that any pull-back in platinum towards the USD 1,200/oz level is likely to be met by solid demand from underlying users.
Note: The cover picture for this article is of the Persian Gulf at sunset. It really is quite beautiful.
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