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LAWRIE WILLIAMS: What now for precious metals?

In my last article here I posed the question - Gold back over $1,300, palladium over $1,000. Can they hold? – and the answer was rapidly provided by the New York markets which pegged all the precious metals prices back, with the exception of rhodium which remained the high flyer.   The lower New York prices held elsewhere, but could be seeing another tilt at the higher levels today, if the American mega-players allow.  Still COMEX prices remain the market drivers despite Shanghai trying to bid precious metals prices up with the Shanghai gold price fixes staying consistently above $1,300

The key factor here appears to have been the dollar index which has shown a minor degree of strength after a prolonged period of weakness, but we’re not convinced this ‘strength’ will last.  Strength in the dollar tends to mean weakness in the gold price in dollar terms at least.  There have been no net sales or purchases in or out of the big GLD gold ETF over the past few days either – and these tend to be a pointer to institutional investment interest in gold – suggesting that the players in this sector are sitting on the fence awaiting some indication of significant price movement in one direction or the other.

If we look at the year to date the Dollar Index – DXY - is down around 9% almost matching the 11% dollar rise in the gold price.  Apart from the high flying palladium – up 41% - and the more thinly traded rhodium, which has effectively doubled in price year to date, the other principally-traded precious metals have performed disappointingly vis-à-vis gold with silver up only 4.5% while platinum has done even worse having fallen marginally since the beginning of the year (-0.5%).  As a comparison the Dow Jones Industrial Average index has risen 16% and the S&P500 13%.  The strength of these equity indexes has been, at least in part, one of the reasons that most of the precious metals have not performed better, apart from palladium and rhodium where there are big supply deficits.  The outperformance of the equity markets has dominated the investment sector.

On the precious metals per se, we do think there is scope for palladium to retest the $1,000 level in the near term.  The metal remains that of choice in gasoline (petrol) powered internal combustion engines for the time being, but there is the prospect of platinum coming back into favour in this usage if palladium continues to see prices above those of its sister pgm.  But such re-substitution takes time so palladium, being in such a strong supply deficit (estimated at around 1 million ounces by some analysts when total annual global production is only around 9 million ounces), may maintain its place in the sun for the next year or so.  But, the longer it continues to remain more expensive than platinum, the greater the chance that the auto-catalyst manufacturers will return to platinum as the preferred catalyst which could see a price reversal ahead with platinum the principal beneficiary.

As for gold and silver, the latter’s price progress will largely depend on the performance of the US dollar and its effect on the former despite silver being perhaps more of an industrial, rather than a monetary, metal nowadays.  Should gold advance back over $1,300 and upwards as we think it will then the silver price should accelerate.  The gold:silver ratio is currently at around 75 and on past performance this should fall as the gold price rises, giving something of a boost to the silver price. 

But with the precious metals markets who knows?  There are too many factors in play.  It’s not a simple case of supply and demand and needs a return of investor demand, perhaps as a safe haven play in an increasingly fragile global economy that is so reliant on huge debt, to advance significantly.  Over time gold has to be the place to be, but over what timescale remains, as ever, completely uncertain.

19 Oct 2017 | Categories: Gold, Silver, Dollar, Palladium

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