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LAWRIE WILLIAMS: Gold back over $1,300, palladium over $1,000. Can they hold?

Friday trading, and this morning’s, saw gold breach the $1,300 an ounce level again and palladium at over $1,000 an ounce for the first time in 16 years.  The other precious metals have also been dragged up with silver at over $17.40, platinum hitting $945 and rhodium – the other pgm of significance in the autocatalyst sector at over $1,300 pretty well matching the gold price but poised, perhaps, to run even higher.

If we look at performance year to date, gold is up around 13%, silver has risen 7%, platinum by only 2%, but palladium by a massive 42% and rhodium has recorded an even more spectacular rise of over 80% - all in US dollar terms and depending on whose price quotations one takes in, in rhodium’s case a pretty small market.  In contrast the S&P500, which is at new record as the media keeps on telling us, has risen 14% - barely more than gold which, you would think from most media coverage, had had a rather poor year.

While the prices of the platinum group metals are perhaps driven more by supply/demand fundamentals, gold, at the moment, is very much data driven – mostly by U.S. economic patterns, while silver is driven by a mixture of fundamentals and the path of the gold price.  This does mean that price patterns may diverge quite sharply, although the gold price path does have some influence on all the others in the precious metals complex to a greater or lesser extent.

Can gold hold onto its gains. A U.S. Fed interest rate rise in December is largely expected now, although there are observers out there – notably Jim Rickards – who reckon U.S. data is still too weak to justify this.  But regardless one can probably assume that a 25 basis point interest rate rise in December remains on the cards, and that is largely discounted in the current gold price level.  That’s not to say that gold won’t see some price weakness in the run up to the December FOMC meeting date at which the interest rate decision is likely to be taken (December12-13), or even ahead of the October/November FOMC meeting in 2 weeks’ time which will be looked at for further guidance.

With all the uncertain domestic and global economic and geopolitical uncertainties which seem to be prevailing, we had been seeing a return to ‘insurance’ interest in gold, but this seemed to fade away at the end of last month and early this, but that may be returning again.  Sales out of and purchases into the big gold ETF – GLD – are something of a guide here, but signals from these have been mixed over the past few weeks suggesting some uncertainty over gold from the institutional community. Overall though we see likely short term movement in the gold price as positive which should drag silver up along with it.  Fundamentals tend to improve at this time of year with a regeneration in Indian demand in the Festival and wedding seasons and Chinese demand tends to pick up towards the end of the year.  And here the most recent release of Shanghai Gold Exchange withdrawal data suggest higher demand levels than a year ago.  China and India are by far the two largest destinations for gold flows.

Various U.S. data points, though could have a short term positive or negative impact but, of course, if Rickards is correct and it starts to look increasingly unlikely that the FOMC will recommend a rate increase at its December meeting, tyhen gold and silver could take off.

The other key factor here is dollar strength.  The dollar index (DXY) has fallen around 10% this year, and much of gold’s rise – in dollar terms – has been in recognition of greenback weakness against other key currencies.  If this should continue, then gold will carry on being a significant beneficiary.

As for the pgms.  Historically platinum has maintained a much stronger price level than palladium, which has led to the latter being the preferred main component in petrol (gasoline) powered internal combustion engines.  It has largely replaced platinum in this usage, the latter though maintaining an advantage in diesel powered units where it has proved to work better.  While the more efficient diesels were beginning to lead the market – in Europe at least – platinum demand remained strong, but the recent emissions ‘cheating’ by Volkswagen and renewed fears over NOx emissions from diesel engines had reversed the growth in diesel powered automobiles.  A switch back to petrol power had given palladium (which was in short supply) demand a boost, hence the rapid rise in the palladium price, while platinum (where supply and demand were pretty much in balance) began to suffer from a fall in demand.  Hence the price reversal in the two pgms.

The big question now is will the price reversal between platinum and palladium lead to reverse substitution in the emission control catalyst market.  Platinum is a proven efficient catalyst  for petrol systems and certainly catalytic control system manufacturers will be looking at options, particularly as palladium catalysts are usually used in conjunction with rhodium.  The longer any price differential in palladium’s favour continues the more likely is it that substitution will take place, but this would all take time and palladium’s place in the sun will likely continue for the time being.  One caution, though, is that last time the palladium price exceeded that of platinum this kind of substitution took place quite rapidly.

Looking further ahead, as we have pointed out before, the growth in demand for electric vehicles (EVs), or vehicles with other non-polluting drives, is likely to adversely impact the demand for pgm-based catalytic converters, although this is unlikely to happen significantly until well into the next decade.  However it should also be borne in kind that advances in electric vehicle technology are proceeding far faster than anyone had imagined only a year ago, and most of the projections on EV growth are becoming rapidly outdated.

But, to answer the question posed in the title we do think the current gold and palladium price levels are sustainable , at or around current levels at least, in the short to medium term, although there could be some ultra short term variations.  Palladium will perhaps have a shorter period of higher prices, while gold’s advance could be slower, and steadier – the tortoise to palladium’s hare.  We do think that, perhaps within a year, maybe two, platinum’s price ascendancy over palladium will re-assert itself, but in the meantime palladium’s strong supply/demand fundamentals could lead to further sharp gains.

16 Oct 2017 | Categories: Gold, Platinum, Palladium

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