- Precious metals move 5.44% lower in Q1.
- Palladium continues to lead on the upside with a double-digit percentage gain.
- Gold rises 3.96%.
- Platinum plunges 25.43%.
- Silver falls 21.01% over the first three months of 2020.
The precious metals sector of the commodities market posted a loss over the first quarter of 2020 despite gains in palladium and gold. Rhodium moved higher, but silver and platinum both fell sharply.
The composite of the four precious metals that trade on the COMEX and NYMEX divisions of the CME dropped by 8.10% in 2014. The sector fell by 19.46% in 2015, but in 2016, precious metals gained 11.71 %. Precious metals moved 20.19% higher in 2017, posting its second consecutive annual gain. For the year ending on December 31, 2018, the precious metals sector was 3.46% lower. The sector exploded 28.93% higher in 2019. In Q1 2020, the sector declined 5.44%.
The weakness in gold in 2018 was because of a more hawkish Federal reserve in the US. The Fed Funds rate rose four times by 25 basis points last year, boosting the short-term rate to 2.25-2.50%. At the same time, quantitative tightening caused rates to rise further out on the yield curve in the US. However, at the March FOMC meeting, the US central bank reversed course. The Fed had guided that the market should expect another two rate hikes in 2019 and the same in 2020. Projections for slower GDP growth in the US in 2019 on the back of weakening economic data caused the Fed to alter the course of monetary policy. On March 20, 2019, the Fed told markets there would likely be no rate hikes in 2019. They lowered their projection to only one 25 basis point increase in the Fed Funds rate in 2020. At the same time, they said that the program of balance sheet reduction would end in September 2019. On June 18, 2019, the Fed became even more dovish as recent economic data, and the escalation of the trade dispute between the US and China caused the central bank to guide that the Fed Funds rate would lower before the end of 2019. At the July 31 meeting last year, the Fed lowered the rate by 25 basis points and immediately ended the program of quantitative tightening. In September and October 2019, the Fed cut rates twice more for a total of 75 basis points in 2019. Gold had been rallying on the prospects of lower interest rates, and the moves by the Fed lit a bullish fuse under the yellow metal. In Q1, the outbreak of Coronavirus and the upcoming US election caused volatility in markets across all asset classes. During the final week of February, risk-off conditions caused central banks around the world to ease, which continued to support the price of gold. In March, the US central bank lowered the Fed Fund rate to zero percent and launched bazookas of liquidity in the form of quantitative easing into the financial system.
Global interest rates continue to be at very low levels and are still falling. In Europe, the ECB lowered its deposit rate by ten basis points in September. The central bank also began quantitative easing to the tune of 20 billion euros per month in November. Sluggish economic growth in Europe has put the ECB on a dovish path when it comes to monetary policy. The September 2019 meeting was the last for ECB President Mario Draghi as former IMF managing director Christine Lagarde is now the chief of the ECB. Ms. Lagarde has continued to pursue a dovish monetary policy path. The ECB followed the Fed with 750 billion in euros of liquidity to stabilize markets as the virus took a high toll on members of the EU.
US President Trump continued to put lots of pressure on the Fed, which he believes is far behind the curve when it comes to lowering interest rates. The US central bank had little choice but to continue to ease in Q1 as Coronavirus threatened to push the world into a global recession. At the same time, falling oil prices moved the inflation rate further away from the Fed’s 2% target rate, paving the way for rate reductions.
The public standoff between the President and Fed on social media is unprecedented and continued throughout Q1. President Trump believed that the Fed needed to lower the rate, which stood at 1.50%-1.75% until March 3 to zero and reinstitute quantitative easing. Higher rates in the US make US exports less competitive in global markets. Moreover, the President believed that at the level in February, the Fed was making credit tight, which worked against the tax and regulatory reforms that have been at least partially responsible for economic growth in the US. At the same time, a higher dollar makes negotiations with trade partners around the world more difficult. As we head into Q2, the US will negotiate new trade protocols with Europe. A weaker dollar would favor US negotiators. On March 3, the uncertainties over Coronavirus caused the Fed to surprise markets with a 50-basis point rate but sending the short-term benchmark to 1.00%-1.25%. Less than two weeks later, the rate was back at zero.
The gap remains between U.S. rates and other currency yields, which is a supportive factor for the value of the dollar. The gap between the US dollar and short-term euro rates stood at fifty basis points at the end of Q1. A carry trade between the euro and the dollar began to unwind during the risk-off period starting in late February. As market participants closed the trade, it put upward pressure on the euro and pushed the dollar index and euro versus the dollar currency pair lower. A weaker dollar was also supportive of gold. However, the currency market has been highly volatile as the global pandemic caused economic carnage in the US and around the globe.
The “phase one” trade deal between the US and China brought a return of optimism to markets in Q4, but that quickly ended as Coronavirus was the next issue facing China and the world. The world remains a volatile place, which promises to continue to provide support for some of the members of the precious metals sector in Q2 and beyond.
In the US, Democrats in the House of Representatives impeached President Trump on December 18. Not one Republican voted in favor of impeachment. The Senate acquitted the President on both articles. The 2020 Presidential campaign season is now in full swing, but social distancing will make it a virtual contest. While the 2016 campaign was one of the most divisive in history, the upcoming election is likely to be even more contentious. At the end of Q1, former Vice President Joe Biden appeared to be the nominee with a string of victories in primaries.
The spectacular rise in digital currencies throughout 2017 came to a brutal end in 2018 as Bitcoin and the other cryptocurrencies declined precipitously. The air went out of the cryptocurrency asset class balloon throughout 2018. In 2019, the prices of most digital currencies rebounded. In Q1 2020, many of the cryptocurrencies posted losses, but there were some gains.
Precious metals are moving into Q2 with impressive gains in palladium and rhodium, and a continuation of the bullish price action in gold, which made higher highs in Q1. Silver de-coupled from gold, and platinum posted a double-digit percentage loss in Q1 in a pattern of underperformance that has been in place since 2014. Gold moved to new record levels in almost all world currencies except for Swiss francs and the US dollar during 2019 and early 2020. The Aberdeen Standard Physical Precious Metals Basket Shares ETF product (GLTR) holds a diversified basket of physical positions in gold, silver, platinum, and palladium.
Gold fell 10.46% in 2015, but it rallied by 8.66% in 2016. The yellow metal posted a 13.65% gain in 2017. Gold moved 2.14% lower in 2018. Gold was 18.87% higher in 2019. In Q1, the precious metal continued to march higher as it gained 3.96%. Gold traded in a range between $1519.70 and $1707.80 so far in 2020 and settled on March 31 at $1583.40 per ounce. The dollar index rose by 3.16% in Q1. Gold’s rise continues to be a testament to its overall strength considering the rising dollar.
Gold has not only been moving higher in dollar terms but also in euro and yen currency terms, which is the sign of a bull market in the precious metal.
The weekly chart shows that gold has been moving higher in dollar terms since August 2018.
The weekly chart of gold in euro currency terms shows price appreciation since late 2018.
In yen terms, gold has also been in bullish mode on the weekly chart.
The GDX, which is an ETF that represents the leading gold mining companies, closed Q1 at $23.04 compared to $29.28 at the end of Q4 2019. GDX fell 21.31% in Q1 after gaining 38.83% in 2019. The leading gold mining stocks outperformed the yellow metal in 2019, which was a bullish sign for the gold market. However, the stocks underperformed in Q1 as risk-off conditions weighed on prices of the mining shares.
The GDXJ, the ETF that tracks the junior gold mining companies, closed Q1 at $28.10 after settling at $42.26 at the end of Q4 2019. GDXJ moved 33.51% lower in Q1 but was 39.84% higher in 2019. GDX and GDXJ underperformed the price action in gold in Q1 after significant gains in 2019.
Open interest in COMEX gold futures contracts decreased by 290,514 contracts to 495,652 contracts during the three months from the end of Q4 2019 to the end of Q1 2020, a decline of 36.95%. The open interest metric hit a new record on January 23 at 798,822 contracts.
Meanwhile, the leader of the digital currency asset class moved lower over the first quarter of 2020, with Bitcoin falling from $7,226.77 at the end of Q4 2019 to $6,440.61 at the end of Q1. The cryptocurrency fell by 10.88% in Q1 after moving 93.65% higher in 2019.
As the monthly chart of COMEX gold futures highlights, price momentum in the yellow metal was trending higher as the price broke out to the upside out of a multi-year trading range late in Q2 2019 and continued to move to higher highs through Q1 2020. At the end of Q1, momentum remained in overbought territory.
After two attempts to challenge the 2016 peak at $1377.50, the yellow metal put in a double top at $1365.40 in late January and early April, which led to a lower low for 2018. Nearby gold futures traded to a low of $1161.40 in mid-August 2018. Since then, the price has made higher lows, and higher highs as gold broke through its 2016 high at $1377.50 in June 2019 following the Fed meeting. Long-term technical support stands at the breakout level just below $1380 per ounce as we head into Q2 2020.
The weekly chart illustrates that gold had been in a bullish trend since the mid-August 2018 low at $1161.40 per ounce. Gold hit a peak at just under the $1560 level on the continuous contract in early September and ran out of some steam on the upside. The price corrected to a low at $1446.20 during Q4 but bounced back over the $1520 level by the end of the year. In Q2, gold rose to a higher high of $1613.30 on January 8 as tensions rose to a boiling point between the US and Iran. After the situation calmed, the price fell to a higher low of $1536.40 before moving to another new peak at $1704.30 in March as the fears over Coronavirus mounted. Risk-off conditions caused the price to correct to $1450.90 in mid-March before moving higher.
Gold is moving into Q2, making higher lows and higher highs. Price momentum and relative strength were just above neutral territory. The stronger dollar, which made a new high in Q1, had not stood in front of recent gains throughout 2019 and the first quarter of 2020. A dovish Fed is a supportive factor for the gold market. Central banks continue to be net buyers of gold with China and Russia leading the way as the two nations continue to build their reserves. Central banks continued to buy gold in Q1. However, Russia announced it was suspending gold purchases at the end of Q1 as the nation’s economy suffers under the weight of lower oil and other commodities prices.
Analysts at Citigroup raised their forecast for the price of gold in Q1, saying they expect the price to reach $2000 over the coming 12 to 24 months. Gold has made new record highs in a host of currencies, except for Swiss francs and US dollars. I expect that we will see new peaks in francs and dollars in the coming months and years. The rate cuts by the Fed, a return of quantitative easing, and accommodative central bank policy around the world is bullish rocket fuel for the gold market. While the risk of price corrections will rise with the price, I continue to believe gold is on a path for higher highs and a new all-time peak.
I will be using gold futures on both the long and short sides of the market over the coming weeks to go with short-term trends that develop. As of the end of the quarter, I am long physical gold. For those who do not trade in the volatile futures arena, the triple leveraged UGLD and DGLD ETN products can serve as effective trading instruments for short-term forays into the gold market. I tend to hold these instruments for periods of two weeks or less. I have avoided the GDX and GDXJ ETF products, as gold mining shares could lag gold if production declines. I prefer the metal in the current unprecedented environment.
Silver was the best performing precious metal in 2016. Silver was up 15.63% in 2016 after moving 11.51% lower in 2015. In 2014, silver shed 22.82% of its value. In 2017, the price of silver moved 7.42% higher. Silver lost 9.36% of its value in 2018. Silver was 15.32% higher in 2019. In Q1 2020, the price of silver plunged 21.01% as the precious metal underperformed the price action in gold. Silver traded in a range between $11.64 and $19.005 over the first three months of 2020. Gold continued to make new highs in Q1, but silver remains below the 2019 peak at $19.54 and its critical level of technical resistance at the July 2016 peak of $21.095 per ounce. Silver fell to its lowest price since 2009 in highly volatility conditions.
Silver open interest decreased significantly in Q1 as risk-off conditions caused market participants to move to the sidelines. The metric in silver futures traded on COMEX moved from 229,680 contracts at the end of Q4 2019 to 139,256 contracts at the end of Q1 – a decline of 90,424 contracts or 39.37%. Silver tends to magnify moves in the gold market, but that had not been the case in 2019 and the first quarter of 2020 as gold took a leadership role when it comes to price direction. In Q1 and Q2 2019, gold outperformed silver. While that trend reversed in Q3 and Q4, silver lagged gold during the first quarter of 2020.
As we move forward into Q2, I will continue to watch the silver-gold ratio, which closed 2016 at 72.18 and climbed to 76.37 at the end of 2017. The ratio moved higher to 82.45 at the end of 2018. At the end of 2019, the ratio was at 84.99, 2.54 above the level at the end of the previous year. At the end of Q1, the price relationship between silver and gold was at 111.85, 26.86 higher over the three months, and at record high. The ratio traded to over 124:1 during the quarter when silver fell to the low.
When the ratio moves to the lower, it tends to be a bullish sign for the precious metals sector on a historical basis. The theory is that when silver outperforms gold, it is often the result of speculative capital coming to the silver market, which typically moves more than the yellow metal on a percentage basis. When the ratio moves higher, it tends to be a bearish sign for the prices of gold and silver since both metals depend on investment demand. The ratio moved higher in 2019 and Q1 2020, which continues to be a warning sign for the precious metals. However, gold has taken on a significant role in the global financial system, with central banks continuing to add to reserves. Individual investors have also been buying the yellow metal, but have ignored silver, thus far.
The long-term pivot point for the ratio is around the 55:1 level. Silver underperformed gold in 2017, and the trend continued in 2018 and 2019. The weak performance picked up steam in Q1 2020. Silver always has the potential to surprise. As we move into Q2, a continuation of bull market action in the precious metals sector could cause a sudden and dramatic change in the silver market. The next technical target for silver above the Q3 2019 high is at the peak from July 2016. However, the price action in Q1 did lots of damage to the silver market.
As the weekly chart highlights, price momentum was below neutral territory at the end of Q1 after putting in a bearish reversal on the weekly chart during the final week of February that led to the price carnage in the silver futures market.
As the monthly chart illustrates, long-term support at $13.635 gave way in Q1, which was the December 2015 low. However, the price recovered above the 2015 low by the end of the quarter. Technical resistance is at the September 2019 peak at $19.54, which stands as the next level on the upside before the July 2016 high at $21.095. Silver blew through the early 2019, 2018, 2017 highs in Q3 2019 before it blew through the support levels on the downside. Silver is a metal that tends to surprise as we witnessed in Q1. Silver closed Q1 2020 at $14.156 per ounce on the continuous futures contract.
Platinum tanked in Q1 as it returned to its role as the worst-performing precious metal. Platinum moved 15.18% lower in 2018, but it posted a gain of 22.05% in 2019. In Q1, platinum fell 25.43%,
Platinum traded in a range between $556 and $1052.30 in Q1 and closed the first quarter below the midpoint of the range. In August 2018, platinum fell to its lowest price since the fourth quarter of 2003, a decade and a half low for the precious metal. In Q1, the price fell to $556, the lowest since 2002. Platinum is a metal that offers significant value on a historical basis compared to the prices of all of the other precious metals. However, in Q1, platinum tanked, and fell to the lowest price in almost two decades and underperformed gold, silver, palladium, and rhodium prices.
Platinum is a rare precious metal that is expensive and difficult to mine. The vast majority of platinum production, around eighty percent, comes from South Africa. Most of the balance of output comes from Russia, the largest palladium producer, and the metal is a byproduct of nickel production in the Norilsk region of Siberia. As an industrial precious metal, a large percentage of platinum demand comes from its use in automobile catalytic converters. Industrial demand continued to be weak for the rare precious metal as palladium use in automobiles has grown at the expense of platinum. The global pandemic only exacerbated the demand destruction. For years, platinum traded at a significant premium to palladium, but that changed starting in Q4 of 2017 and has continued.
As I wrote in the past quarterly reports, “Investment demand has been absent in platinum, and its price has remained weak compared with gold. In September 2017, palladium began gaining on platinum and reached a $150 premium in December 2017. Platinum, like many other industrial commodities, posted a new multi-year low in early 2016 before the price corrected. However, platinum is also a precious metal with a history of attracting investor interest. Eventually, the value proposition for platinum will cause a reversion to the mean against both palladium and gold. I believe that price action dating back to 2008 may have soured many investors on the platinum market. In March 2008, platinum traded to its all-time high at $2308.80 per ounce, and by October of the same year, it fell to $761.80. Over a seven-month period, the precious metal fell $1547 or 67%. The price action in 2008 may have scared investors and traders away from long-term structural positions in the platinum market because of its penchant for volatility and lack of liquidity during that period. However, compared with gold and palladium, platinum has a higher production cost, it is rarer, denser, and has a higher boiling and melting point. These characteristics could one day ignite the price of the metal that has been in a funk since 2014 compared with the other precious metals.” In Q1, platinum continued to be the dog of the sector as it posted a double-digit percentage loss.
Meanwhile, the fifteen-year low in platinum in Q3 2018 caused some primary producers in South Africa to close mine shafts where higher-cost production is no longer viable as the market price is below the cost of extraction. However, gains in palladium and rhodium should eventually cause industrial users to turn to platinum as a substitute because of its higher density and higher resistance to heat. Platinum has lots of catching up to do when it comes to the price action in palladium and rhodium. It fell much further behind the curve in Q1.
Open interest in NYMEX platinum futures was at 99,045 contracts at the end of Q4 2019 and ended Q4 at 54,148, a decline of 44,897 contracts, or 45.33% over the three months. The open interest moved to an all-time high during the fourth quarter of 2019 at 100,446 contracts on December 19, which was a sign of investment demand. Disappointed investors headed for the exit from long positions as the price of platinum plunged.
As the weekly chart shows, price momentum was attempting to cross higher from oversold territory at the end of Q4. Relative strength was also under a neutral reading. The quarterly chart was below neutral territory. The monthly chart was below a neutral reading at the end of Q4.
The platinum-gold spread closed 2015 at a $168.50 discount; platinum was cheaper than gold. The long-term median level for this relationship over the past four decades had been around a $100-$200 premium for platinum over the price of gold. The premium reflects the rarity of platinum; there is more than ten times the amount of gold produced each year than platinum, and on a per ounce basis, industrial applications for platinum are much more than for gold. This relationship closed at a $246.20 discount at the end of 2016. In 2017, it closed at a $371.00 discount to the price of gold. In 2018, platinum closed at a $485.40 discount to the price of gold. In 2019, the spread moved $66.30 lower to $551.70 per ounce. In Q1, higher gold and lower platinum prices sent the price relationship to a new all-time low as it closed on March 31 at an $859.00 discount for platinum under gold, $307.30 lower than at the end of 2019.
As the quarterly chart of the price of platinum minus the price of gold reveals before 2015, platinum had never traded to a discount of over $200 to the price of gold. In 2008, it sold at over a $1200 premium. The nickname for platinum is “rich man’s gold” – in recent years, it has been anything but that, platinum has not traded at a premium to gold since 2014. In 2015 through Q1 2020, platinum has been the cheaper alternative when compared to the yellow metal as the trend in the spread has sent it into a bearish abyss and bottomless pit.
The daily chart of the price relationship highlights that the spread moved to a new all-time low in Q1 2020 at over an over $955 discount to gold.
The discount tells us that platinum is either too cheap at its current price or gold is too expensive on a historical basis. At the end of Q1, the price of platinum implies a price of $524.40 for gold, given a reversion to the mean at a $200 premium for platinum on the long-term price relationship. On the other hand, it also could suggest a platinum price of $1783.40. The divergence is significant and based on the closing level of $724.40 per ounce; platinum would need to rally by $1059 or more than double in price to revert to the long-term median level for the price relationship with gold at the $1583.40 level. Divergence often creates the most profitable trading opportunities. However, the divergence since 2014 has created one of the most frustrating and painful mean reversion trades I can remember for those who have been long platinum and short gold on spread. The spread moved far away from the norm at the end of Q1.
Platinum had been cheap against gold for years, and it became more inexpensive on a historical basis in Q1. Meanwhile, platinum also significantly underperformed palladium over the first quarter and remained historically cheap versus its sister metal. Platinum continues to be a metal with a compelling case for a significant price recovery. However, it also continued to hand out pain to anyone dipping a toe into the platinum market on the long side, particularly on rally attempts.
Palladium was the best performing precious metal that trades in the futures market in 2016, posting a gain of 20.96% for the year. Palladium fell 29.61% in 2015, making it the worst-performing precious metal of that year. Palladium fell to lows of $451.50 per ounce in January 2016. Palladium moved an incredible 56.08% higher in 2017, making it the best performing commodity across all sectors for the year. Palladium moved 12.84% higher in 2018. The price of palladium increased in value by 59.48% in 2019. Palladium was the star performer in the commodities market in 2019. In Q1, the bullish party continued as the price of palladium rose by 20.71%.
Palladium, a platinum group metal, is a rare precious metal. Russia, more precisely the Norilsk Nickel mines in Siberia and South Africa, produces the majority of the world’s palladium. Like platinum in Russia, palladium is a byproduct of nickel production. Before the explosive move to the upside, the previous all-time high for palladium came in January 2001 at $1090 per ounce. In Q1, the metal peaked at $2815.50 per ounce. Palladium outperformed platinum, its sister metal, and remains historically strong against the namesake PGM.
As the quarterly chart highlights, the all-time high in palladium over platinum came in 2001 when palladium traded to its record peak at $1090 per ounce. The spread peaked at a $344.20 premium for palladium over platinum. However, from 2003 through 2014, platinum traded at more than a $500 premium to palladium, which encouraged industrial consumers to use palladium for their requirements. The spread between the two platinum group metals closed 2017 at a $122.70 spread where platinum was lower than palladium. In 2018, the spread fell to a new record low and closed the year at $401.30. In 2019, the spread moved to an even wider divergence and closed at $937.90, an incredible $536.60 higher for the year. At the end of Q1 2020, the spread was at $1580.40, $642.50 wider. Palladium continues to be a superstar in the precious metals sector.
Meanwhile, the weekly chart shows that open interest in NYMEX palladium futures moved from 23,638 contracts at the end of Q4 2019 to 7,655 contracts at the end of Q1 2020, a decrease of 15,983 contracts or 67.62% over the quarter. Declining open interest and the rising price is not typically a technical validation of a bullish trend, which could mean palladium had risen to an unsustainable level. However, standing in front of the bullish freight train in palladium since 2016 has been a tragic financial mistake. Risk-off conditions have caused volatility to explode in palladium.
The risk in the palladium market continues to increase with the price, and palladium has become a lot more volatile over the past months with the daily and weekly historical measures of price variance rising to well over 100%. The palladium market was in deficit as supplies could not keep up with demand as Coronavirus spread. The demand for palladium-based catalytic converters around the world that clean emissions from the air have exploded over the past years. Palladium was at $2304.80 per ounce on March 31. Betting against the rally in palladium has been a losing proposition since early 2016.
While palladium outperformed all precious metals in Q1, another precious metal that does not trade on the futures exchange has been even more explosive.
The price of rhodium, a byproduct of platinum output in South Africa, moved significantly higher in 2018 and the year at $2300 bid at $2450 offered. At the end of 2019, the price jumped to $5580 at $5980 per ounce, $3,280 higher last year. At the end of Q1 2020, rhodium was at the $7,000 level, $1,220 higher since the end of 2019. The bid-offer spread has widened as the price climbed and because of the wild volatility in the metal that reached the $12,000 per ounce level during Q1. The bid-offer spread was at the $3000 level at the end of Q1. Palladium reached a series of new all-time peaks in 2019 and 2020, and the rhodium market achieved the same feat in Q1 2020. In 2008, the price of rhodium rose to just over the $10,000 per ounce level. Since some South African mines are cutting platinum output because of low prices, rhodium supplies have dwindled to levels, which took the price appreciably higher. Rhodium rose to a new record high in 2020.
The price strength in both the rhodium and the palladium markets could eventually impact the price of platinum, which has a higher resistance to heat, is denser, and is the only platinum group metal that has a history of significant investor demand. The price action in platinum did not reflect the gains in its sister metals as platinum lost over 25% of its value in Q1.
The price situation in platinum had become so dire that primary producers in South Africa trimmed output at higher-cost mines, causing the shortage of rhodium, which is a byproduct of platinum production. The silver lining is that platinum can serve as a substitute for palladium in catalytic converters if consumers decide to change their production lines. The bottom line is that car manufacturers became addicted to palladium in the 90s when the Russians were liquidating stockpiles at a fraction of the cost of an ounce of platinum. Now that the tables have turned when it comes to prices, it could be just a matter of time before platinum begins showing up in catalytic converters. At a $1580.40 discount to palladium, and over a $6275 per ounce discount to rhodium, platinum is the wiser economic choice when it comes to most consumer requirements for platinum group metals these days. The value proposition for platinum continues to be compelling as we move into Q2, but that does not mean that the spreads at divergent historical levels cannot move further away from norms, as I wrote throughout 2019. Platinum has been a very frustrating investment, while palladium and rhodium have offered incredible rewards since 2016. It could be only a matter of time before a magnetic parabolic move in the platinum market occurs. Based on the price action in its sister PGMs, platinum has been more than frustrating.
Looking forward to Q2 2020 in the precious metals
Gold and palladium prices moved higher in Q1, while platinum and silver posted over 20% losses over the three months. Silver tends to attract the most speculative demand, but it was a significant laggard in Q1. The prospects for Q2 and beyond are different for the various metals. Palladium and rhodium are industrial metals. The decline in platinum output should continue to provide support for rhodium, but it is at a lofty level at an all-time high. When it comes to palladium, rising demand for catalytic converters across the globe is supportive of the price of rare metal. The decline in open interest is a sign of rising illiquidity, which increases the potential for wild price swings on the up and downsides. Platinum and silver are precious metals with many industrial applications and investment angles. In platinum and silver, both metals have lots of catching up to do when it comes to their price levels compared to gold and the other platinum group metals. The global pandemic that triggered an economic meltdown could cause lots of volatility on all of the precious metals, and could weigh especially on the prices of industrial metals.
When it comes to the gold market, interest rates, the dollar, and fear and uncertainty drove the price higher, and above the 2016 peak and level of critical technical resistance at $1377.50 per ounce in 2019. The break to the upside took on a life of its own as trend-following traders and speculators could continue to pile into the gold market. The bullish technical breakout in gold and a continuation of higher highs could eventually ignite both the silver and the platinum markets. The current target on gold is March high is at just above the $1700 level. I believe gold is heading for a new all-time peak over the coming months and years. The move in gold is a commentary on the value of fiat currencies. In Q1, analysts at Citigroup said they expect gold to reach $2000 per ounce over the next twelve to twenty-four months. However, we should expect lots of two-way volatility in the yellow metal in the current environment.
The political and economic state of the world remains complex and turbulent, which always has the potential to drive investors to safe-haven investment vehicles like precious metals.
The Middle East remains an area of the world that could cause fear and uncertainty to rise in the blink of an eye. Tensions between the US and Iran reached a boiling point on January 8, which drove gold above the $1600 per ounce level. While the situation calmed over the rest of the quarter, the potential for provocative actions in the Middle East could cause price volatility in all markets, including gold, in the blink of an eye.
The relations between Russia and the West have deteriorated to a post-cold war low. Additionally, Russian meddling in the 2016 U.S. Presidential election continues to be a dark cloud hanging over US-Russian relations. The Russians crushed the oil price in Q1, which could lead to discussions over support for the energy commodity in Q2.
The trade war between the U.S. and China de-escalated in January. The “phase one” deal injected optimism into markets, briefly, but the outbreak of Coronavirus in China caused new waves of fear and uncertainty. Blame on China for the pandemic in the coming months could exacerbate tensions around the world.
Brexit became a reality at the end of January. When it comes to Europe, the risk-off climate caused an unwind of the cash and carry trade between the dollar and the European currency in Q1. Buying euros and selling dollars as the interest rate differential declined after the Fed cut the Fed Funds rate by 50 basis points in an emergency move on March 3 sent the dollar lower and euro currency higher. A weaker dollar is typically bullish for gold and other commodities, but they had rallied even as the dollar moved to higher levels in 2019 and early 2020. Currency markets became highly volatile during the deflationary spiral in markets in March, which is likely to continue into Q2.
In Asia, protests in Hong Kong and renewed missile tests by North Korea threaten stability in the region. Each issue could cause periods of uncertainty in the coming year. Moreover, China is ground zero for Coronavirus, which weighed on the Chinese economy even more than the trade war over the past weeks. Time will tell if China has been forthcoming with data on infections and its mortality rate as both were rising in Europe, the US, and around the world at the end of Q1.
Gold heads into Q2 way above its technical resistance level while silver remains below its 2016 peak at $21.095 per ounce and traded below $12 per ounce for the first time since 2009. The level of the silver-gold ratio has moved to a modern-day record peak. The action in the platinum-gold and platinum-palladium spreads reminds us that there are few rules when it comes to the inter-commodity spreads and divergences can widen further than most analysts believe possible.
On the U.S. domestic front, political divisions between the ruling Republican Party and Democrats are likely to reach epic levels over the coming months. A worsening of the domestic situation in the U.S. could cause bouts of fear and uncertainty, which would provide support for precious metals, particularly gold. The US was facing its worst domestic crisis since the 1918 Spanish flu and economic problems since the Great Depression at the end of Q1. The 2020 election cycle will be in high gear, which is likely to be a lot more contentious than the 2016 contest. Joe Biden appeared to be the nominee at the end of Q1. However, politics took a backseat to fighting the virus at the end of March.
Central banks continued to be net buyers of gold in early 2020 with China and Russia, absorbing domestic production and buying on the international market. Russia said it would stop buying gold in April, but there was no indication if domestic production would be sold into the market. We looked at the short-term pictures for euro and yen gold earlier in the report, but the longer-term pictures were compelling in 2019. Gold rose to an all-time high in almost all currency terms except for US dollar and Swiss francs. In Q1, gold rose to a new record level in euro currency terms.
As the daily chart of gold in euro-terms highlights, the yellow metal rose to a high of almost 1540 euros on March 24. The previous long-term record high was at 1376.87 euros in 2012.
The daily price of gold in yen-terms displays that the price continues to make new record highs. Gold in most other currencies aside from US dollar and Swiss francs hit all-time highs in Q1.
While the dollar is the reserve currency of the world, and the benchmark pricing mechanism for the yellow metal, its value in other currencies could impact the path of least resistance for the price of gold. At the same time, growing global debt after the massive monetary stimulus programs that followed the 2008 global financial crisis continues to present a bullish case for the price of gold and all precious metals that investors purchase as stores of wealth. Moreover, the Fed joined the ECB and BOJ when it comes to a return to dovish monetary policy in 2019. In March, the US Fed took the lead with massive quantitative easing and by lowering short-term rates to zero. Many other central banks around the world lowered interest rates in Q1. At the September ECB meeting, the central bank cut rates by ten basis points to the negative fifty basis point level and reinstituted its QE program starting in November at 20 billion euros per month. Monetary policy accommodation and falling rates are bullish fuel for gold.
Meanwhile, lower interest rates and risk-off conditions provided mixed results for the digital currencies.
In Q1, Bitcoin fell 10.88%. Ethereum moved 2.48% higher in Q1. Litecoin’s value moved 6.66% to the downside in Q1, while Ripple was 9.13% lower during the first quarter. Bitcoin Cash rose 6.72% in Q1, and Bitcoin Gold gained 34.39% in Q1 2020. The market cap of the entire digital currency market, which comprises 5,285 tokens, up 299 from the end of Q4 2019, decreased from $191.935 billion at the end of Q4 to $181.094 billion at the end of Q1 2020 or 5.65%. The market cap peaked at over $800 billion in December 2017.
The significant increase in new tokens diluted the asset class. An ETF product that trades on the stock exchange and solves the custody issues could turbocharge gains in the world of cryptocurrencies. However, governments continue to express concerns as they will not relinquish their control of the money supply to the new breed of currency instruments. China and Russia have currencies that are not fully convertible, so those governments are likely to crackdown on the digital currencies. The US remains concerned about the rise of the instruments. In Congressional hearings, members of Congress and the Senate were not supportive of Facebook’s leadership in the Libra token, which would be run by a consortium of parties.
I am going into Q2 with the same bullish orientation to the precious metals sector as at the end of last year. I like the price action in gold and will continue to trade and invest from the long side in the yellow metal with tight stops. The critical levels in the gold market are the breakout level at $1377.50 on the downside and the 2011 high at $1920.70 on the upside. Gold was below the recent high at the end of Q1. With gold making progress towards its all-time peak in dollar terms, the price action could become more volatile in Q2 and beyond. I will be using futures and the GLD and IAU ETFs, UGLD, and DGLD on short-term positions. I am avoiding the mining ETFs, GDX, and GDXJ and the NUGT and JNUG that magnify results in gold mining shares at the start of Q2. I will only dip a toe on the long side of the mining shares with very tight stops. With turbulence in the stock market, the metal looks to be a preferable investment than the shares of mining companies in the current environment. The gold mining companies that extract the metal from the crust of the earth could suffer if mining activity slows because of the global pandemic.
In silver, the metal continues to be a tightly coiled spring that could eventually break higher. I move to below $12 in Q1 was a head-fake that could give way to a significant rally if gold continues to appreciate. I will be quick to stop out of long positions but will only trade from the long side of the market in the falling interest rate environment. I will be using futures, SLV, and the USLV product for long positions and the DSLV for shorts.
In palladium, the trend is your friend, and it continues to be higher, but risk rises with the price of the metal that suffers from bouts of illiquidity. The PALL does a good job replicating price action in the NYMEX palladium futures market. Finally, in platinum, I will continue to buy physical metal on a scale-down basis, which has been a very frustrating exercise. Rather than paying the high premium charged by dealers, I will purchase nearby NYMEX futures and stand for delivery on price weakness. Each platinum contract represents 50 ounces of metal, so at the closing price at the end of Q1, a platinum contract has a value of around $36,220 at a price of $724.40 per ounce. I will also be using the PPLT and PLTM ETF products in the platinum market for short-term trades.
I will be watching the price action and the news cycle, which will give me clues about the path of least resistance for prices over the coming three months. Falling global interest rates are bullish for the prices of gold and silver. Each quarter is always a new adventure in markets. As we head into Q2 2020, gold could continue to offer the most attractive value proposition, given its long history as a safe haven for capital. When it comes to absolute value, while platinum has been a dog, every dog has its day, and the metal is long-overdue for a massive price recovery. I was bullish for precious metals prices at the end of 2018 and 2019 and see no reason to alter that opinion as we head into Q2. Lower interest rates and a flood of liquidity are bullish fuel for this sector of the commodities market.
The GLTR is an ETF that represents a basket of the four precious metals that trade on the COMEX and NYMEX divisions of the CME for those who want exposure to the sector without trading the individual metals. GLTR is a liquid instrument with $575.64 million in net assets, and an average of 55,947 shares trading each day. Both the net assets and average daily volume increased from the end of Q4 2019. The top holdings of GLTR include:
Source: Yahoo Finance
Precious metals may continue to be one of the most exciting sectors during the second quarter of 2020, given their long history as monetary instruments and stores of value. GLTR moved from $76.40 at the end of Q4 to $75.10 per share at the end of Q1 2020, a decrease of 1.70% for the quarter that ended on March 31. GLTR outperformed the composite given GLTR’s holdings, which were 55.52% invested in gold and 18.75% in palladium. Gold and palladium were 3.96% and 20.71% higher for the quarter, respectively. The next leg of the bull market in gold that began in the early 2000s continued in 2019 and early 2020, and the prospects for Q2 continue to look golden. Expect lots of volatility in all members of the sector over the coming months.
Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.