Sumit Roy:  Precious metals continued to rally last week, suggesting that last month’s correction may have been just that—a correction in the larger bull market. Indeed, gold recovered a huge chunk of May’s decline and is now just 2 to 3 percent from the record $1,575/oz level reached at the end of April. 

Even silver is perking up, with prices now nearing the $39.50/oz resistance level, which was the initial high put in immediately after the big spike lower earlier this month. 

The fact that investors continue to liquidate their silver holdings is concerning, however, and may indicate that the metal is due for a period of underperformance relative to gold—at least in the short term (discussed below). 

While gold and silver put in respectable gains of 0.5 percent and 3.8 percent, respectively, over the past five trading sessions, the big winners were platinum and palladium, with returns of 3.3 percent and 5.7 percent, respectively. 

Renewed optimism about global growth—particularly the potential for recovery in Japan—is likely the culprit for this outperformance. 

Autocatalyst demand for platinum and palladium represents 40 percent and 58 percent, respectively, of each metal’s total demand. Thus, the fortunes of the duo are tied closely to the performance of the automotive sector. 

Moreover, for platinum in particular, there is the potential for incremental demand due to substitution at the expense of gold in the jewelry market as the price differential between the two metals continues to narrow. 

Gold Daily Chart YTD:  

Silver Daily Chart YTD:

Platinum Daily Chart 1-Year:

 Palladium Daily Chart 1-Year: 

Gold ETF holdings rose by about 0.4 million troy ounces, or 0.6 percent, but those for silver, platinum and palladium all declined. Silver holdings fell 8.4 million troy ounces, or 1.9 percent; platinum holdings fell 14K, or 1 percent; and palladium holdings sank 7K, or 0.4 percent.

At 443 million troy ounces, silver ETF holdings are now 55 million troy ounces below their April peak and at the lowest levels since October, when silver was trading in the low-$20/oz area. 

Investment demand is most important for gold, silver, palladium and platinum—in that order—as it represents 38 percent, 26 percent, 8 percent and 6 percent of each respective metal’s total demand. 

Key Ratios 

The gold/silver ratio moved down to 40.3 from last week’s high near 43.1, but it still remains substantially above recent lows just above 30. 

Meanwhile, the gold/platinum ratio finally fell back from two-year highs thanks to platinum outperformance. The ratio now stands at 0.84, down from 0.853 last week. 

Similarly, the gold/palladium ratio moved to 1.97 from 2.05. The platinum/palladium ratio fell to 2.35 from 2.41. 

Also helping fuel the greenback’s decline was a 3 percent advance in the Swiss franc against the buck. In fact, the franc is now at an all-time high against its U.S. counterpart. 

Sovereign Debt 

But while the U.S. dollar worked in favor of precious metals, sovereign debt fears cooled a bit, despite the ever-more-obvious need for a Greek bailout. 

Yield spreads on much larger EU members—Italy and Spain—remain elevated; nevertheless, we saw those spreads decline week-over-week. 

The benchmark German 10-year yield fell to 3.02 percent from 3.07 percent after having dipped under 3 percent for much of last week. 

Against that baseline, yield spreads for Portugal, Italy, Ireland, Greece and Spain fell to 6.59 percent, 1.76 percent, 8.02 percent, 13.02 percent and 2.34 percent, respectively, from 6.64 percent, 1.79 percent, 7.84 percent, 14.02 percent and 2.5 percent a week ago. 

Inflation 

The only notable inflation figure over the past week was the preliminary Consumer Price Index for the eurozone for May. It was a fairly benign release, with the gauge rising 2.7 percent year-over-year, down from 2.8 percent in the prior month and the 2.8 percent consensus expectation. Nevertheless, CPI in the region remains near the highest levels since October 2008. 

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