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LAWRIE WILLIAMS: Interesting times! U.S. equities plunge 3-4%. Palladium trumping gold!

Probably fictitious but there is a supposed ancient ironic Chinese proverb or curse – ‘May you live in interesting times’.  In factit is probably not a Chinese saying at all and why living in interesting times should be dangerous to one’s health or wealth is, perhaps, obscure.  But we are definitely living in interesting economic times at the moment, and these interesting times could well be the precursor to some dramatic global economic changes – mostly for the worse for the Western World as we know it.  For the Chinese, though, the likely global economic fallout over the next few decades could well be positive with the current world order likely to change.

So what is happening which makes the current times so ‘interesting’.  The world appears to be embroiled in a fiat currency-inspired debt binge which runs contrary to most rational economic advice.  In the U.S. – the biggest debtor of all – the Federal Reserve seems to be compounding the potential economic problem by raising interest rates.  This makes servicing the U.S. debt mountain ever more costly, although the Fed’s rationale is that by so doing it may enable the debt to be mitigated.  But it may be too little too late with the U.S. trade deficit seemingly ever-rising.  The Trump tariffs may be another attempt to turn this around, but they also look doomed to failure.

Meanwhile U.S. equity markets may be going through something of a correction.  They had been soaring due to the Fed’s quantitative easing and low interest rate policies of the past several years, but now they are acting very nervously in the light of Fed tightening, albeit at a slow and gradual rate as it tries to ‘normalize’ interest rates.  Indeed recent statements have suggested that the Fed may cut back on its tightening programme, although probably not with its planned rate rise that is due in a couple of weeks’ time.  If it does display a more ‘dovish’ attitude and cuts back or delays its proposed tightening options in 2019 and beyond, this could give a good boost to precious metals prices, and perhaps bring the dollar index down a little – which should please President Trump.

Reuters notes that global equities markets are also being spooked by a flattening in the U.S Treasury yield curve — when longer-dated debt yields fall faster than their shorter-dated counterparts.  This inversion of two-year and 10-year yields, Reuters reports, has preceded every U.S. recession in the past 50 years.  If the U.S. is seen to be moving into recession this would likely have an adverse effect on the whole global economy and could regenerate gold in particular as the traditional safe haven investment – even more so should the U.S. dollar, which has been attracting current insurance investment, be seen to be weakening too.

Today U.S. markets are closed in recognition of the death of the seemingly now much-loved, or admired, former President George Bush senior.  When they re-open tomorrow we will likely see a bit of an initial bounce back from yesterday’s 3-4% fall in U.S. equities, but we doubt that will be maintained as America’s overhanging debt problems are at long last beginning to be recognised by the institutions and investing public.  The dismal performance of bitcoin, which has brought bubble-bursting shock into general attention, will be weighing on investors’ minds.  Could something similar happen to equities?  We fear it could – if not now, perhaps sooner rather than later.  Rises in the equities markets are mostly unjustified by earnings advances.  Like bitcoin last year, markets have been talked up because of the seeming belief that markets will rise regardless.  But like bitcoin they could well come crashing back down as hype gives way to reality.  When it does happen markets will probably fall too far too fast leaving those who call the bottom with massive potential profits in the years ahead when the markets recover, but this will be little consolation to those who may lose everything in what could be an epic equities crash.  Interesting times indeed!

But, also on the interesting times theme, palladium – historically the third most valuable of the principal precious metals after platinum and gold – has been soaring in value due to its seemingly strong fundamentals.  Today it moved up in price beyond gold, albet briefly before profit taking took it back down – it had already left platinum in its wake.  Can it maintain any advantage?

Short term we think it could do, but longer term no – we don’t think it likely that it will stay at a premium to gold.  The price has been soaring as an industrial metal with annual demand exceeding annual supply, but if we are heading for a global recession, which is definitely possible, the demand will fall back in line with reducing automobile demand.  And looking even longer term, as electric vehicles replace internal combustion engine driven units in people’s driveways, demand will suffer even more.

Historically the pricing order in the principally-traded precious metals has been platinum, gold, palladium, silver, but today it became palladium, gold, platinum, silver.  We don’t see platinum re-exerting its dominance in the short to medium term without some huge mine production cutbacks in South Africa and Zimbabwe, and those countries rely so much on the vast labour needs of the platinum mines that massive cutbacks are being resisted strongly by politicians and unions alike.  So we suspect that once things settle down gold will again become the price-dominant precious metal in the medium to long term.  Platinum fundamentals are not particularly good for the time being and palladium has to be vulnerable to profit taking and a sell-off if some of the speculative interest falls away.

05 Dec 2018 | Categories: Gold, Platinum, Palladium

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