• Precious metals are the best performing sector in Q3 and over the first nine months of 2019
  • Silver leads the way with an over 11% gain
  • Palladium is a runner-up on the upside with an almost 7.5% percentage gain- Rhodium continues to explode to the upside as the price rises to $5000 per ounce
  • Gold moves close to 4% higher and platinum gains over 5%
  • Digital currencies tank in Q3

The precious metals sector of the commodities market was the best-performing sector in the third quarter of 2019 and so far for the year with gains in all of the metal.

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. In Q3, the sector gained 7.05% and was 17.97% higher for the first nine months of 2019, as the metals added to the gains during the first half of the year over the past three months.

The losses in 2018 were likely the result 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 at 2.1% 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, 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, 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, the Fed lowered the rate by 25 basis points and immediately ended the program of quantitative tightening. 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.

Meanwhile, global interest rates continue to be at very low levels and are falling. In Europe, the ECB lowered its deposit rate by ten basis points in December. The central bank also told markets that quantitative easing to the tune of 20 billion euros per quarter would begin in November. Sluggish economic growth in Europe has put the ECB on a dovish path when it comes to monetary policy. The September meeting was the last for ECB President Mario Draghi as former IMF managing director Christine Lagarde will now take over the position as the dove in chief of the ECB.

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. On September 18, after the Fed moved to lower rates by 25 points, he tweeted:

Source: Twitter

The public standoff between the President and Fed on social media is unprecedented and is likely to continue. President Trump believes that the Fed should lower the rate, which stands at 1.75%-2.00% to zero and reinstitute quantitative easing. Higher rates in the US make US exports less competitive in global markets. Moreover, the President believes that at the current level, the Fed is making credit tight which is working 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 the Chinese on trade more difficult.

The gap remains wide between U.S. rates and other currency yields, which is a supportive factor for the value of the dollar. Even after two rate cuts, the gap between the US dollar and short-term euro rates stood at 2.25%-2.50% at the end of Q3.

The escalation of the trade dispute between the US and China increased fear and uncertainty in markets in Q3. On August 1 the President slapped new tariffs on China, and the Chinese retaliated. At the same time, the temperature increased in the Middle East in Q3 when a drone attack on Saudi Arabian oil fields temporarily knocked 50% of Aramco’s daily production offline. The tensions between Saudi Arabia and Iran continue to rise in the region. U.S. and European relations with Russia remain strained. Saudi sovereign territory via missile attacks from Yemen.

In the US, Democrats in the House of Representatives have begun an impeachment inquiry against President Trump. The 2020 Presidential campaign season is now moving into full swing. While the 2016 campaign was one of the most divisive in history, the upcoming election is likely to be even more contentious.

The spectacular rise in digital currencies throughout 2017 came to a brutal end in 2018 as Bitcoin. The other cryptocurrencies also declined precipitously. The total market cap of the digital currency market dropped from over $800 billion in December 2017 to just over $125 billion at the end of last year. However, the prices and the market cap of the asset class came storming back in Q2. In Q3, prices went the other way as the buying ran out of steam. In Q3, the market cap of the asset class fell to $220.249 billion or 36.6% lower for the three months. Bitcoin moved 32.87% lower in Q3 to the $8.286.18 level but was 122.04% higher over the first nine months of 2019 after suffering a decline of 74.36% in 2018. Litecoin posted a 53.26% loss in Q3 and was 84.64% higher so far in 2019. Ethereum lost 42.67% in Q3 and was 33.97% higher over the first nine months of this year. Ripple fell 39.33% in Q3 and was 27.36% lower over the first nine months of this year. The air went out of the cryptocurrency asset class balloon in Q3.

Precious metals are moving into Q4 with percentage gains in all of the members of the sector that trade on the COMEX and NYMEX futures exchanges over the first nine months of this year. The price of palladium rose to a new record high in Q3. Gold moved to new record levels in almost all world currencies except for Swiss francs and the US dollar during Q3. Palladium continues to rise to record levels.

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. In Q3, the yellow metal gained 3.97% and was 14.39% higher over the first nine months of the year. Gold traded in a range between $1266.00 and $1566.20 so far this year and settled on September 30 at $1465.70 per ounce. The dollar index rose by 3.51% in Q2 and was 3.43% higher over the first nine months of the year. Gold’s rise continues to be a testament to its overall strength in the current environment as it has diverged, considering the stronger 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.

Source: CQG

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

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 bull in bullish mode on the weekly chart.

The GDX, which is an ETF that represents the leading gold mining companies, closed Q3 at $26.71 compared to $25.56 at the end of Q2 and $21.09 at the end of Q4 2018. GDX gained 4.5% in Q3 and is 26.6% higher over the first nine months of 2019. The leading gold mining stocks outperformed the yellow metal so far in 2019.

The GDXJ, the ETF that tracks the junior gold mining companies closed Q3 at $36.26 after settling at $34.96 at the end of Q2 and $30.22 at the end of Q4 2018. GDXJ moved 3.72% higher in Q3 and is 20% higher so far this year. GDX outperformed the price action in the gold futures market and the GDXJ so far in 2019.

Open interest in COMEX gold futures contracts increased by 28,303 contracts to 610,343 contracts during the three-month period from the end of Q2 to the end of Q3 2019 a rise of 4.86%. Rising price and increasing open interest is a technical validation of a bullish trend in a futures market.

Meanwhile, the leader of the digital currency asset class moved lower during the same period with Bitcoin falling from $12,344.05 at the end of Q2 to $8,286.18 at the end of Q3. The cryptocurrency fell 32.87% in Q3 but is 122.04% higher so far in 2019.

Source: CQG

As the monthly chart of COMEX gold futures highlights, price momentum in the yellow metal is trending higher as the price broke out to the upside out of a multi-year trading range late in Q2 and continued to move to higher highs in Q3. At the end of Q3, momentum was threatening to cross lower.

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 following the Fed meeting. Technical support now stands at the breakout level just below $1380 per ounce as we head into Q4.

Source: CQG

The weekly chart illustrates that gold has 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 $1458.30 and was trading at the $1465.70 level at the end of Q3.

Gold is moving into Q4 after a correction. The stronger dollar had not stood in front of recent gains throughout 2019. A less hawkish Fed is a supportive factor for the gold market. In the last quarterly report, I wrote, “I am bullish on gold for 2019 but would reconsider if the price moves below the $1236.50 and $1200 levels over the second quarter.” Gold did not violate those levels on the downside as the price reached a low at $1266 in Q2. 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.

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 and gold mining stocks. 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 also favor the GDX and GDXJ ETF products as gold mining shares typically outperform the yellow metal on the upside. So long as gold remains above the $1350 level, the bullish trend is likely to remain intact.

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 underperformed gold in Q1 and Q2 this year. In Q3, silver outperformed the yellow metal as it moved 11.44% higher and was 9.38% higher for the first nine months of 2019. Silver had still underperformed gold since the end of 2018 as of the end of Q3. Silver traded in a range between $14.245 and $19.75 since the start of 2019. Silver had been consolidating, but it broke higher over the three months that ended on September 30. While gold rallied above its July 2016, silver was not able to challenge that level in Q3.

Silver open interest decreased in Q3. The metric in silver futures traded on COMEX moved from 220,612 contracts at the end of Q2 to 213,288 contracts at the end of Q3 – a decline of 7,324 or 3.32%. Silver tends to magnify moves in the gold market, but that has not been the case in 2019 as gold had taken a leadership role when it comes to price direction. In Q1 and Q2, gold outperformed silver. While that trend reversed in Q3, silver has lagged gold compared to their respective closing prices at the end of 2018.

As we move forward into Q4, 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 after trading to a high at 86.42 during Q4 2018. In Q1, the ratio rose to 85.57, up 3.12 over the first three months of 2019. In Q2, the relationship continued the trend as it was at the 92.42 level, up another 6.85 for the quarter and 9.97 over the first half of 2019. The ratio moved to a peak at 93.39:1 at its high during Q3 on July 5, which was the highest level since 1992. The ratio was at 86.23:1 at the end of Q3, down 6.19 from Q2 but still 3.78 above the level at the end of last year.

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 fell from the highest level in over a quarter of a century in July.

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 over the first half of 2019. Silver always has the potential to surprise. As we move into Q4, a continuation of bull market action in the precious metals sector would likely cause the ratio to decline. The next technical target for silver above the Q3 high is at the peak from July 2016.

Source: CQG

As the weekly chart highlights, price momentum crossed lower in overbought territory.

Source: CQG

As the monthly chart illustrates, long-term support is at $13.635, which was the December 2015 low. Technical resistance is at the recent high at $19.54, which stands as the next level on the upside before the July 2016 peak at $21.095. Silver blew through the early 2019, 2018, 2017 highs in Q3 before correcting to below the $18 level. Silver is a metal that tends to surprise, and its recent price action could lead to a significant move if gold continues to rise. Silver closed Q3 at $16.998 per ounce on the continuous futures contract.

Platinum Review

Platinum recovered in Q3 and probed the $1000 level for the first time since early 2018. Platinum moved 15.18% lower in 2018. In Q1, it posted a 6.66% gain for the quarter, but it gave some of that back in Q2 as the price fell 1.58%. In Q3, platinum gained 5.33% and was up 10.57% after the first nine months of the year.

Platinum traded in a range between $780.90 and $1000.80 over the first nine months of 2019 and closed the third quarter below the midpoint as a selloff at the end of the quarter took the price below the $900 level. 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. Platinum is a metal that offers significant value on a historical basis compared to the prices of all of the other precious metals. Since last summer, platinum probed below $800 per ounce on the nearby futures contract numerous times, but it did not make a lower low. The price action in gold, silver, palladium, and rhodium markets had a magnetic impact on platinum in Q3.

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. For years, platinum traded at a significant premium to palladium, but that changed in Q4 of 2017.

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.”

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 are bound to eventually cause industrial users to turn to platinum as a substitute because of its higher density and higher resistance to heat. While platinum rallied in Q3, it 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 83,751 contracts at the end of Q2 and ended Q3 at 85,543 an increase of 1,792 contracts or 2.14% over the three-month period. The open interest moved to an all-time high during the quarter at 99,311 contracts on September 13, which could be a sign of some investment demand. However, those who bought platinum on the way up and held the long positions were under pressure at the end of the quarter.

Source: CQG

As the weekly chart shows, price momentum rose to overbought territory and crossed lower towards the end of Q3. The quarterly chart was in oversold territory but crossed higher. The monthly chart was in a neutral condition at the end of Q3.

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 Q1, the spread improved a bit to $444.10, which was $41.30 higher than at the end of 2018. However, the spread went the other way in Q2 and closed on June 28 at a $574.20 discount for platinum, which was $103.10 lower than at the end of Q1 and at a new all-time low. In Q3, the spread was at $585.70, $11.50 above the level at the end of Q2 and still close to a record level.

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, 2016, 2017, 2018, and through the first nine months of 2019, 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 Q3 at over an over $685 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. The end of Q3 price of platinum implies a price of $680 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 $1665.70. The divergence is significant and based on the closing level of $880 per ounce platinum would need to rally by $785.70 or 89.3% to revert to the long-term median level for the price relationship with gold at the $1499.50 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 away from the norm at the end of Q3 after making a new record at just shy of a $700 per ounce discount.

Platinum had been cheap against gold for years, and it continued to be inexpensive on a historical basis in Q3. Meanwhile, platinum underperformed palladium over the quarter and remained historically cheap versus its sister metal. Platinum continues to be a metal with a compelling case for a significant price recovery.

Palladium Review

Palladium was the best performing precious metal 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. In Q1, palladium continued to lead the precious metals that trade on the COMEX and NYMEX futures exchanges as it moved 12.08% higher making a series of new all-time highs. Q2 was no different as the price of the metal posted a 14.2% gain for the three months that ended on June 28. In Q3, palladium moved to a new all-time high and posted a 7.46% gain for the quarter. Palladium has increased in value by 37.55% so far in 2019 at the end of the first nine months. Palladium is the second-leading commodity of those that trade in the futures and forward markets so far this year.

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 Q3, the metal peaked at $1693.00 per ounce. Palladium outperformed platinum, its sister metal and remains historically strong against the namesake PGM.

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 Q1 2019, as palladium picked up steam on the upside, the spread moved to $492.90 after trading at over $700 before the end of March. In Q2, palladium closed at a $696.90 premium to the price of platinum as the spread moved $204 over the second quarter. In Q3, the spread closed Q3 at a new low at $766.70, up $69.80 for the quarter and $365.40 higher for the year. Palladium continues to be a superstar in the precious metals sector.

Source: CQG

Meanwhile, the weekly chart shows that open interest in NYMEX palladium futures moved from 23,561 contracts at the end of Q2 to 23,854 contracts at the end of Q3 2019, an increase of 293 contracts or 1.24% over the quarter.

The risk in the palladium market increased with the price, and palladium has become a lot more volatile over the past months. The palladium market is in deficit as supplies cannot keep up with demand. The demand for palladium-based catalytic converters around the world that clean emissions from the air has exploded. By the end of Q3, palladium was at $1646.70 per ounce on September 30 and could be setting the stage for a higher high in Q4. Betting against the rally in palladium has been a losing proposition since early 2016.

While palladium outperformed all precious metals in Q3, another precious metal that does not trade on the futures exchange has been explosive.

Source: Kitco

The price of rhodium, a byproduct of platinum output in South Africa moved significantly higher in 2018 and closed last year at $2300 bid at $2450 offered. At the end of Q1 2019, rhodium was trading at $2795 bid at $2945 offered, $495 or 21.5% higher over the first three months of this year. On June 28, the price was at $2865 bid at $3065 offered, $95 per ounce higher or 3.3%. In Q3, the price really took off on the upside with rhodium closing on September 30 at $4850 bid at $5250 offered, $1985 or 69.3% higher. The price of rhodium more than doubled so far in 2019. The bid-offer spread widened by $200 at the higher price at the end of Q2. While palladium it a new all-time peak in 2019, the record level in the rhodium market is above the price at the end of Q2. In 2008, the price of rhodium rose to 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. 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. Some analysts are calling for rhodium to rise to its record level, which is double the price as of the end of Q3.

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 over a $766 discount to palladium, and an almost $4170 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 Q4 2019, but that does not mean that the spreads at divergent historical levels cannot move further away from norms, as I wrote at the end of Q2. 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. Meanwhile, a prolonged strike at General Motors could weigh on demand for the platinum group metals. The higher they move, the more vulnerable the metals become to substantial price corrections.

Looking forward to Q4 2019 in the precious metals

All of the members of the precious metals sector posted gains in Q3 with silver leading the way. Silver tends to attract the most speculative demand, which is a sign of the bullish trend in the sector. The prospects for Q4 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 which could drive the price of the rare physical metal to much higher levels before it even threatens to challenge the 2007 peak at $10,000 per ounce. When it comes to palladium, rising demand for catalytic converters across the globe is supportive of the price of rare metal. Platinum and silver are precious metals with many industrial applications and investment angles. In platinum and silver, both metals have catching up to do when it comes to their price levels compared to gold and the other platinum group 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. 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 should eventually ignite both the silver and the platinum markets. The next target on gold above the recent high is at the $1600 level. However, I believe gold is heading for a new all-time peak over the coming months and years.

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. Iran’s fingerprints were all over a drone attack that took out 50% of Saudi oil production on September 14, 2019. Provocative actions from Iran are likely to continue in Q4.

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 trade war between the U.S. and China escalated in August. Time will tell if the two sides can make progress on an agreement that would end the wave of protectionism.

The new deadline for Brexit is on October 29. Boris Johnson is the new Prime Minister of the UK.  At the end of Q3, he was in the fight of his life with the Parliament and the EU to deliver a Brexit by the deadline. Gold reached a peak in the aftermath of the Brexit referendum in June 2016, and any surprises could cause buying to return to the gold market as a safe-haven asset.

Gold heads into Q4 way above its technical resistance level while silver remains below its 2016 peak at $21.095 per ounce. The level of the silver-gold ratio has moved lower but has a long way to go to return to the long-term average. However, 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 have reached epic levels. 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 2020 election cycle is kicking into high gear which is likely to be a lot more contentious than the 2016 contest. Joe Biden, Elizabeth Warren, and Bernie Sanders have emerged as the most likely candidates to challenge President Trump next year at this time.

Central banks continue to be net buyers of gold with China and Russia, absorbing domestic production and buying on the international 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 Q3. Gold rose to an all-time high in almost all currency terms except for US dollar and Swiss francs. In Q3, gold rose to a record level in euro currency terms.

Source: CQG

As the daily chart of gold in euro-terms highlights, the yellow metal rose to a high at 1407.40 euros on September 3. The previous record high was at 1376.87 euros in 2012.

Source: CQG

The daily price of gold in yen-terms displays that the price rose to a high at 165,039 on September 4. The precious high in gold in yen terms was at 152,457 in early 2013. Gold in most other currencies aside from US dollar and Swiss francs hit all-time highs in Q3.

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, and at their most recent meeting in September, the Fed cut rates by 25 basis points for the second time since July 31, 2019. 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.

Meanwhile, the bullish move in the digital currency asset class in Q2 faded in Q3. I continue to believe that an ETF product that has a robust custodial backbone for Bitcoin and many of the other digital currencies would bring a lot more interest and liquidity to the asset class, which would lift prices. The introduction of a digital token, Libra, by Facebook in June could add validation and lots of interest to the sector. Members of the US Congress object to the company’s involvement in the cryptocurrency sector at the end of Q3.

In Q3, Bitcoin dropped 32.87%. Ethereum moved 42.67% lower in Q3. Litecoin’s value moved 53.26% lower in Q3, while Ripple was 39.33% lower during the third quarter. Bitcoin Cash fell 47.41% in Q3, and Bitcoin Gold lost 72.38% in Q3 2019.  While the losses were substantial, most of the tokens were at higher levels at the end of Q3 than at the end of last year. Only Ripple and Bitcoin Gold posted losses through the first nine months. Bitcoin was still over 100% higher at the end of Q3 compared to its closing price on December 31, 2018. The market cap of the entire digital currency market which comprises 2906 tokens, up 610 from the end of Q2, decreased from $347.407 billion at the end of Q2 to $220.249 billion at the end of Q3 2019. The market cap peaked at over $800 billion in December 2017. Moreover, the significant increase in new tokens diluted the asset class over the past three months. Over the past nine months, the market cap was 75.95% higher while Bitcoin gained 122.04%. The recent price action could attract bargain hunting in the digital currency asset class.

I am going into Q4 with a bullish orientation to the precious metals sector. 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 $1600 level on the upside. Gold was correcting and consolidating at the end of Q3, which was a healthy sign. With gold moving above the top end of its trading range, the price action could become more volatile over the coming three months. I will be using futures and the GLD and IAU ETFs, UGLD and DGLD on short-term positions as well as the mining ETFs, GDX, and GDXJ. On short-term trades, NUGT and JNUG can magnify results on the long side of the market.

In silver, I believe the metal continues to be a tightly coiled spring that will eventually break out above the $21.095 level. I will be quick to stop out of long positions if the price begins to sink to re-establish at a lower level. I will only trade from the long side of the market in the falling interest rate environment in both gold and silver. 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 Q3, a platinum contract has a value of around $44,000 at a price of $880 per ounce. I will also be using the PPLT and PLTM ETF products in the platinum market.

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. Each quarter is always a new adventure in markets. As we head into Q4, 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 during the first three quarters and see no reason to alter that opinion as we head into Q4.

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 $438.62 million in net assets and an average of 27,028 shares trading each day. Both the net assets and average daily volume increased from the end of Q2 because of the bull market in the precious metals sector. The top holdings of GLTR include:

Source: Yahoo Finance

Precious metals may continue to be one of the most exciting sectors during the final quarter of 2019, given their long history as monetary instruments and stores of value. GLTR moved from $68.07 at the end of Q2 to $72.58 per share at the end of Q3, an increase of 6.63% for the quarter that ended on September 30. GLTR marginally underperformed the composite given GLTR’s holdings which were almost 58% invested in gold which was up 3.97% for the quarter. The next leg of the bull market in precious metals that began in the early 2000s continued through Q3, and the prospects for Q4 continue to look golden.

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.