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  • Precious metals move 11.52% higher in Q2.
  • Silver leads the way on the upside with a better than 30% gain for the quarter
  • Gold continues to march higher with an over 13% price increase from Q1
  • Platinum recovers by over 16%
  • Palladium corrects lower, but the price was still just below $2000 per ounce

The precious metals sector of the commodities market posted a gain over the second quarter of 2020 despite a loss in palladium. Rhodium edged a bit lower, but silver, gold, and platinum all posted double-digit percentage gains. The move higher in the sector tuned a loss in Q1 into a gain at the end of the first six months of 2020 in the sector.

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 by 5.44%. In Q2, it gained 11.52% and was 2.81% higher over the first six months of this year.

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 2019 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 Funds rate to zero percent and launched bazookas of liquidity in the form of quantitative easing into the financial system. Throughout Q2, the Fed unleashed an unprecedented quantitative easing program that included both government and corporate debt issues. The US Treasury borrowed $530 billion from June through September 2008 in the aftermath of the global financial crisis. In May 2020, the Treasury borrowed $3 trillion, and more borrowing is likely on the horizon over the coming months. Double-digit unemployment in the US and outbreaks of the virus have taken a toll on the economy as businesses and individuals alike continue to suffer.

Global interest rates are at record low levels. 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. As the virus took a took on Europe, the ECB unleashed an accommodative bazooka on the financial system. Sluggish economic growth in Europe put the ECB on a dovish path when it comes to monetary policy before the outbreak of COVID0-19. ECB President Christine Lagarde has continued to pursue a dovish monetary policy path. The ECB followed the Fed with liquidity injections to stabilize markets as the virus took a high toll on members of the EU.

US President Trump favors negative interest rates for the US, but so far, the Fed has rejected the notion. However, future shutdowns of the economy could force the hand of the central bank now that shot-term rates are at zero percent.

The gap between U.S. rates and other currency yields narrowed in 2020. The gap between the US dollar and short-term euro rates stood at fifty basis points at the end of Q2, far lower than over the past years when it rose to over 2.50%. 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. The currency market became highly volatile in March as the global pandemic caused economic carnage in the US and around the globe. The dollar index rose to the highest level since 2002 when it reached 103.96 on the back of risk-off behavior in markets that caused buying in the US currency. Since late March, the dollar index has been moving lower as the yield differential no long supports a strong greenback versus the euro. The euro is the primary currency in the dollar index, with an almost 60% exposure.

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 Q3 and beyond.

In the US, former Vice President Joe Biden is the nominee for the Democrats. He will challenge President Trump in November. The election comes with a backdrop of the pandemic and social unrest created by the tragic death of an African American man at the hands of a policeman. The event triggered protests, demonstrations, and a level of civil unrest across the US not witnessed since the late 1960s. The 2020 Presidential contest has the potential to be the most contentious in history, given the current environment in the United States. Meanwhile, coronavirus has taken a significant toll on the US as it leads the world in cases and fatalities.

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. In Q2, the digital currency asset class posted gains, which could be a function of dovish central bank policies that weigh on the value of fiat currencies like the dollar, euro, and other legal tenders around the globe. Central banks can print currencies to their heart’s content in the current environment. Digital currencies are an alternative to traditional foreign exchange instruments as they operate independently from central banks, governments, and monetary authorities. As faith in governments and central banks decline, the cryptocurrencies become more attractive.

Precious metals are moving into Q3 after impressive gains in silver, platinum, and gold in Q2. Gold moved to new record levels in almost all world currencies except for the US dollar during 2019 and the first half of 2020. At the $1800 level, the yellow metal is closing in on the 2011 peak at $1920.70 per ounce. 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 Review

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%. In Q2, it moved 13.71% higher and was 18.21% above the price at the end of 2019. Gold traded in a range between $1450.90 and $1804.00 over the first half of 2020 and settled on June 30 near the peak at $1800.50 per ounce. The dollar index fell by 1.76% in Q2 but was 1.35% higher over the first six months of this year. Gold’s rise continues to be a testament to its overall strength considering the rising dollar since the end of last year.

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.

Source: CQG

The weekly chart shows that gold has been moving higher in dollar terms since August 2018.

Source: CQG

The weekly chart of gold in euro currency terms shows price appreciation since late 2018.

Source: CQG

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 Q2 at $36.68 compared to $23.04 at the end of Q1 2020. GDX rose 59.20% in Q1 after falling 21.31% in Q1. The leading gold mining stocks outperformed the yellow metal in 2019, which was a bullish sign for the gold market. The stocks underperformed in Q1 as risk-off conditions weighed on prices of the mining shares, but the gold mining shares came roaring back in Q2 as they outperformed the percentage gain in gold by more than four-fold.

The GDXJ, the ETF that tracks the junior gold mining companies, closed Q2 at $49.58 after settling at $28.10 at the end of Q1 2020. GDXJ moved 33.51% lower in Q1 but was 76.44% higher in Q2. GDX and GDXJ underperformed the price action in gold in Q1 after significant gains in 2019. In Q2, the gold mining shares did a lot better than the metal, which is a bullish sign for the trend in the precious metal.

Open interest in COMEX gold futures contracts increased by 65,976 contracts to 561,628 contracts during the three months from the end of Q1 to the end of Q2 2020, a rise of 13.31%. 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 higher over the second quarter of 2020, with Bitcoin rising from $6,440.61 at the end of Q1 to $9,135.53 at the end of Q2. The cryptocurrency rose by 41.84% in Q2 and was 26.41% higher over the first six months of 2020.

Source: CQG

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 and Q2 2020. At the end of Q2, momentum and relative strength 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 Q3 2020 with an upside target at the all-time high from 2011.

Source: CQG

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 $1808 level on the continuous contract in late June. The price corrected to a low at $1450.90 during Q1 but turned higher and rose to the highest price since 2011 at the end of Q2.

Gold is moving into Q3, making higher lows and higher highs. Price momentum and relative strength were trending higher towards overbought conditions. The weaker dollar, which fell in Q2, is supportive of the price of gold. A dovish Fed is a supportive factor for the gold market. Central banks continue to be net buyers of gold. Central banks continued to buy gold in Q2, but Russia suspended its purchases.

We witnessed some dislocations in the prices between COMEX gold futures and gold for delivery in London, the international hub for gold trading. Some of the dealers suffered significant losses over the past months on EFP (exchange for physical) positions, where they had positions in COMEX futures and a contrary position in the London market. As some refineries closed down because of the virus, it became a challenge to deliver COMEX 100-ounce bars. The standard of trade in London is the 400-ounce bar. Scotia Bank, a Canadian gold dealer, closed their bullion trading operation in Q2, and other dealers around the world have scaled back some of their activities. The dramatic decline in open interest in the gold from the early 2020 peak at almost 800,000 contracts to below 480,000 in April was partially because of the dealer issues with the gold EFP between gold for delivery on the COMEX exchange and in London. Liquidity in the gold market could suffer if dealers pull back their risk-taking and market-making operations.

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. Bank of America expects gold to rise to $3000 per ounce. Gold has made new record highs in all currencies, except for US dollars. In Q2, the Swiss franc fell to a new record low against gold. The rate cuts by the Fed, a return of quantitative easing, and accommodative central bank policy around the world are 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 in dollar terms.

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 used the GDX and GDXJ ETF products for medium-term long positions on price dips. I have also traded the NUGT and JNUG products, which magnify the price performance on the upside for short-term exposure to the gold market. I continue to prefer the metal for long-term positions.

 

Silver Review

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. In Q2, silver came storming back after the dramatic downside spike in Q1 and was 30.98% higher for the quarter. Over the first half of 2020, silver was 3.,46% higher than the price at the end of 2019. Silver traded in a range between $11.64 and $19.075 over the first six months of 2020. Silver fell to its lowest price since 2009 in highly volatile conditions in Q1 but outperformed gold in Q2. Silver is a highly volatile precious metal that attracts speculative interest when the price trends.

Silver open interest decreased significantly in Q1 as risk-off conditions caused market participants to move to the sidelines. In Q2, speculators came back to the silver market, pushing the total number of open long and short positions higher. The metric in silver futures traded on COMEX moved from 139,256 contracts at the end of Q1 to 169,418 contracts at the end of Q2 – an increase of 30,162 contracts or 21.66% after an over 39% drop in Q1. Silver tends to magnify moves in the gold market, but that had not been the case in 2019 and the first half 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. Silver played catchup in Q2.

As we move forward into Q3, 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 a record high. The ratio traded to over 124:1 during the first quarter when silver fell to the low. At the end of Q2, the ratio was at the 97.11 level, 14.74 lower than at the end of Q1.

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, but in Q2, it turned lower. 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. Silver made a significant comeback in Q2, which is a bullish sign for both precious metals.

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 but fell below the 100 level at the end of Q2.  Silver always has the potential to surprise. As we move into Q3, 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. The price action in Q1 did damage to the silver market, but the recovery established the move to below $12 per ounce as a blow-off low.

Source: CQG

As the weekly chart highlights, price momentum and relative strength indicators were above neutral territory at the end of Q2. There is a small gap on the weekly chart from $16.975 to $17.015, which could act as a magnet for the price during a correction.

Source: CQG

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 Q2 2020 at $18.541 per ounce on the continuous futures contract. Expect the unexpected in the silver market and you will never be disappointed.

 

Platinum Review

Platinum was the second-best performing precious metal in Q2 after tanking in Q1 2020. Platinum moved 15.18% lower in 2018, but it posted a gain of 22.05% in 2019. In Q1, platinum fell 25.43%, but it recovered by 16.05% in Q2. Platinum moved 13.45% lower over the first six months of 2020, as the metal continues to underperform the precious metals sector. Platinum is the only member of the sector that has moved lower since the end of 2019.

Platinum traded in a range between $556 and $1054.60 over the first half of the year and closed the second quarter above 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. In Q2, the price rallied, but the metal remains a laggard.

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 Q2, platinum moved higher and posted a double-digit percentage gain.

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 over the past years could eventually cause industrial users to turn to platinum as a substitute because of its higher density and higher resistance to heat. Platinum still has lots of catching up to do when it comes to the price action in palladium and rhodium.

Open interest in NYMEX platinum futures was at 54,148 contracts at the end of Q1 and ended Q2 at 47,837, a decline of 6,311 contracts, or 11.66%. The metric declined over 45% in Q1. 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 in Q1. The decline in open interest in Q2 was a further sign of the lack of investment interest in the platinum market.

Source: CQG

As the weekly chart shows, price momentum was trending lower below neutral territory at the end of Q2. Relative strength was also under a neutral reading. The quarterly chart was just below neutral territory. The monthly chart was on either side of a neutral reading at the end of Q2.

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. In Q2, the spread widened with platinum at a $959.80 discount to gold. Platinum fell another $100.80 per ounce against gold on a quarter-by-quarter basis.

Source: CQG

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 Q2 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.

Source: CQG

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 $1000 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 Q2, the price of platinum implies a price of $640.70 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 $2000.50. The divergence is significant and based on the closing level of $840.70 per ounce; platinum would need to rally by $1,159.80 or more than double in price to revert to the long-term median level for the price relationship with gold at the $1800.50 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 further away from the norm at the end of Q2.

Platinum had been cheap against gold for years, and it became more inexpensive on a historical basis in Q2. Meanwhile, platinum also significantly underperformed palladium over the first quarter and remained historically cheap versus its sister metal. While platinum made a comeback against palladium in Q2, the divergence remains substantial. 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 during attempts at a rally. Platinum has not traded above the $1035 level since early 2017.

 

Palladium Review

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%. In Q2, gravity hit the palladium market as the price fell by 14.66%. Palladium was still 3.02% higher than the price at the end of 2019 on June 30.

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 underperformed platinum, its sister metal, in Q2, but the price remains historically high against platinum at the end of the first half of 2020.

Source: CQG

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. In Q2, it fell to $1,126.20 as it narrowed by $454.20 per ounce. The low in platinum versus palladium came in late February at almost $1840 per ounce. Gravity caused the rally in palladium to pause in Q2.

Source: CQG

Meanwhile, the weekly chart shows that open interest in NYMEX palladium futures moved from 7,655 contracts at the end of Q1 to 7,080 contracts at the end of Q2 2020, a decrease of only 575 contracts or 7.51% in Q2 after a dramatic 67.62% decline in Q1. In my Q1 report, I wrote, “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.” Palladium’s correction of 14.66% was not a surprise, but it is impossible to pick a top in a market.

The risk in the palladium market increased 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% in March and April. 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. However, the slowdown in the global economy was a bearish factor for the precious metal. Palladium was at $1966.90 per ounce on June 30. Betting against the rally in palladium had been a losing proposition since early 2016, but in Q2 it was a profitable approach to the illiquid market.

While palladium underperformed all precious metals in Q2, it had been the consistent star of the sector over the past years. Rhodium, another PGM that had been a bullish beast, put in a marginal decline in Q2.

Source: Kitco

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. On June 30, the midpoint price was at $6800, $200 per ounce lower than at the end of Q1. The bid-offer spread was at the $2000 level at the end of Q2 as it narrowed by $1000 from 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, but gravity hit the rhodium market during the risk-off period in March. Throughout most of Q2, the price of rhodium was steady and edged higher despite the loss on the quarter-by-quarter basis.

The price strength in both the rhodium and the palladium markets over the past years 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 was encouraging in Q2, but the price remained at a depressed level compared to gold, palladium, and rhodium.

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 $1126.20 discount to palladium and an almost $5960 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 Q3, 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. In Q2, platinum displayed some signs of life, but the price will need to move above the $1035 per ounce level to encourage investment demand.

 

Looking forward to Q3 2020 in the precious metals and cryptocurrencies

Palladium and rhodium fell in Q2, while silver, platinum, and gold posted gains. At the end of the first six months of 2020, gold is the leader with an over 18.2% price jump. Silver tends to attract the most speculative demand, and it displayed signs of bullish life in Q2. The prospects for Q3and 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. Economic contraction could weigh on the demand for new automobiles and palladium.

Platinum and silver are precious metals with many industrial applications and investment angles. In platinum and silver, both metals still have lots of catching up to do when it comes to their price levels compared to gold and the other platinum group metals. Silver’s blow-off low and recovery in Q2 is a bullish sign for the metal. Platinum needs to trade above the $1035 level to generate investment demand.

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 the 2011 high at $1920.70 per ounce. As I wrote at the end of Q1, “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.” I continue to believe that gold will move a lot higher than many analysts believe possible. The unprecedented level of stimulus is bullish fuel for the gold market.

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 higher. While the situation calmed over the rest of the first half of the year, 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 and then agreed to production cuts to balance the market in Q2. Russia will be a topic of debate during the US Presidential contest over the coming months.

The trade war between the US 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 is exacerbating tensions around the world.

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, and the dollar index has been trending lower since the period of increased price variance. Meanwhile, central banks and government stimulus weigh on the value of all fiat currencies. While they can print legal tender to their heart’s content, the only way to producer more gold is to extract it from the crust of the earth. Central banks hold the yellow metal as an integral part of their foreign exchange reserves, which validates gold’s role in the global financial system. As we head into the second half of 2020, the landscape for gold remains highly supportive of higher prices for the precious metal.

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 was ground zero for coronavirus, which weighed on the Chinese economy even more than the trade war at the start of 2020. The Chinese approach to coronavirus continues to strain relations between China and the US and Europe.

Gold heads into Q3 way above its technical resistance level at $1377.50 while silver remains below its 2016 peak at $21.095 per ounce. The level of the silver-gold ratio moved to a modern-day record peak but retreated in Q2. 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. Double-digit unemployment and outbreaks of civil unrest have created the most significant period since the 1960s. The 2020 election cycle will be in high gear over the coming months, which is likely to be a lot more contentious than the 2016 contest. Biden versus Trump will be an epic battle. While the former vice president has a commanding lead in the polls in early July, Hillary Clinton was in the same position in 2016 before President Trump won a majority in the electoral college to win the election.

Central banks continued to be net buyers of gold in the first half of 2020. Russia stopped 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 trends remain compelling in 2020. Gold rose to an all-time high in almost all currency terms. In Q2, the Swiss franc became the latest victim.  Gold now needs to rise above the $1920.70 level in US dollar terms to complete a clean sweep when it comes to the deterioration of all global currencies.

Source: CQG

As the daily chart of gold in euro-terms highlights, the yellow metal rose to a high of over 1627.50 euros on May 15. The previous long-term record high was at 1376.87 euros in 2012.

Source: CQG

The daily price of gold in yen-terms displays that the price continues to make new record highs. Gold in yen rose to another new high of 193,875 on June 30.

Source: CQG

Gold in Swiss franc rose to a high of 1708.44 on May 15. The previous record high was at 1662.51 in 2012. Gold in almost all other currencies aside from the US dollar hit new all-time highs in Q2.

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 2020. The US Treasury borrowed an unprecedented $3 trillion in May to fund the stimulus. Monetary policy accommodation and falling rates are bullish fuel for gold.

Meanwhile, lower interest rates and falling currency values worldwide provided support for the level of digital currencies in Q2.

In Q2, Bitcoin rose 41.84% and was 26.41% higher since the end of 2019. Ethereum moved 68.67% higher in Q2 and was 77.85% higher over the first six months of this year. Litecoin’s value moved 6.16% to the upside in Q1 and was only 0.91% lower in 2020. Ripple was 0.12% lower during the first quarter and fell 9.24% since the end of December 2019. Bitcoin Cash rose 0.72% in Q1 and was 7.48% higher so far this year. Bitcoin Gold gained 40.47% in Q1 for a total gain of 88.79% in 2020. The market cap of the entire digital currency market, which comprises 5,688 tokens, up 403 from the end of Q1 20202, increased from $181.094 billion at the end of Q1 to $259.705 billion at the end of Q2 2020 or 43.41%. The market cap moved 35.31% higher since the end of last year. The market cap peaked at over $800 billion in December 2017. Bitcoin underperformed the sector in Q2 and throughout the first six months of 2020.

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 crack down on digital currencies. In those countries, the need for cryptocurrencies is compelling for individuals. The US remains concerned about the rise of the popularity of the instruments. Congress was uniformly opposed to Facebook’s attempt to put together a consortium for the Libra token.

Meanwhile, I am bullish on the digital currency asset class as it is a rejection of central bank and government management of the money supply in individual countries and from a global perspective. The rise of the asset class is a freight train that could be impossible to stop. However, I expect lots of wild volatility. I would only buy Bitcoin or the other tokens during periods of price weakness.

I am going into Q3 with the same bullish orientation to the precious metals sector at the end of Q1 and 2019. 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 near the most recent high at the $1800 level at the end of Q2. With gold making progress towards its all-time peak in dollar terms, the price action could become more volatile in Q3 and beyond. I will be using futures and the GLD and IAU ETFs for medium to long-term risk positions. UGL and DGLD magnify price performance for short-term positions. I and also using the gold mining ETFs including, GDX and GDXJ and the NUGT and JNUG, that magnify results in gold mining shares for short-term risk positions from the long side. I will only position on the long side of the mining shares with very tight stops. 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, but a decline I production could lift the price of the metal.

In silver, the metal continues to be a tightly coiled spring that could eventually break much higher. The move to below $12 in Q1 was a head-fake blow-off low that gave way to a significant rally to over $18.50 at the end of Q2. 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. I will also be using the SIL and SILJ silver mining ETF products from the long side in Q3 with tight stops.

In palladium, the price corrected to just below the $2000 level at the end of Q2. 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 Q2, a platinum contract has a value of around $42,035 at a price of $840.70 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 Q3 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 the second half of 2020. Lower interest rates and a flood of liquidity are bullish fuel for this sector of the commodities market. Precious metals and cryptocurrencies are alternatives to foreign exchange instruments. Central banks continue to destroy the value of legal tender with unprecedented accommodative policies.

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 $548.09 million in net assets, and an average of 35,142 shares trading each day. Both the net assets and average daily volume decreased from the end of Q1 2020. The top holdings of GLTR include:

Source: Yahoo Finance

Precious metals may continue to be one of the most exciting sectors during the second half of 2020, given their long history as monetary instruments and stores of value. GLTR moved from $75.10 at the end of Q1 to $83.53 per share at the end of Q2 2020, an increase of 11.22% for the quarter that ended on June 30. GLTR kept pace with the composite given GLTR’s holdings, which were 60.29% invested in gold and 22.49% in silver. Gold and silver were 13.71% and 30.98% higher for the quarter, respectively. The next leg of the bull market in gold began in the early 2000s. It continued in 2019 and the first half of 2020. The prospects for Q3 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.

 

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