• Precious metals are the best performing sector in 2019 and all members move higher in Q4
  • Double-digit percentage gains for all precious metals in 2019.
  • Palladium is the leader in Q4 with another double-digit percentage gain for the quarter- Rhodium continues to roar
  • Gold and silver remain strong going into 2020
  • Another ugly quarter for digital currencies as China cracks down

 

The precious metals sector of the commodities market was the best-performing sector in 2019 with double-digit percentage gains in all four of the metals that trade on the COMEX and NYMEX.

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 Q4, the sector moved 8.92% higher after a gain of 7.05% in Q3. The sector was 28.93% higher in 2019.

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, 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. In September and October, 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. The ongoing trade war with China also provided support for the gold market.

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 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 meeting was the last for ECB President Mario Draghi as former IMF managing director Christine Lagarde is now the 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.

The public standoff between the President and Fed on social media is unprecedented and continued throughout Q4. President Trump believes that the Fed should lower the rate, which stands at 1.50%-1.75% 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 trade partners around the world 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 three rate cuts, the gap between the US dollar and short-term euro rates stood at 2.00%-2.25% at the end of Q4.

The “phase one” trade deal between the US and China brought a return of optimism to markets in Q4, which did not weigh much on gold and silver prices. The world remains a volatile place, which promises to continue to provide support for the sector in 2020.

In the US, Democrats in the House of Representatives impeached President Trump on December 18. Not one Republican voted in favor of impeachment, which makes the chances of a conviction in the Senate almost nil. The 2020 Presidential campaign season is now in 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 and the other cryptocurrencies declined precipitously.  The air went out of the cryptocurrency asset class balloon throughout 2018. In 2019, prices of most digital currencies rebounded, but they moved lower in Q4.

Precious metals are moving into 2020 with double-digit percentage gains in all of the members of the sector that trade on the COMEX and NYMEX futures exchanges in 2019. The price of palladium rose to a new record high in Q4 and posted an over 59% gain on the year. Gold moved to new record levels in almost all world currencies except for Swiss francs and the US dollar during 2019. Palladium and rhodium continued to be bullish beasts in Q4.

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 Q4, the yellow metal gained 3.92% after moving 3.97% higher in Q3. Gold was 18.87% higher in 2019. Gold traded in a range between $1266.00 and $1571.70 so far this year and settled on December 31 at $1523.10 per ounce. The dollar index fell by 2.99% in Q4 but was 0.34% higher for 2019. 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 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 Q4 at $29.28 compared to $26.71 at the end of Q3 and $21.09 at the end of Q4 2018. GDX gained 9.62% in Q4 and was 38.83% higher in 2019. The leading gold mining stocks outperformed the yellow metal in 2019, which is a bullish sign for the gold market.

The GDXJ, the ETF that tracks the junior gold mining companies, closed Q4 at $42.26 after settling at $36.26 at the end of Q3 and $30.22 at the end of Q4 2018. GDXJ moved 16.55% higher in Q3 and was 39.84% higher for the year. GDX outperformed the price action in the gold futures market and the GDXJ in Q4 and 2019.

Open interest in COMEX gold futures contracts increased by 155,820 contracts to 786,166 contracts during the three months from the end of Q3 to the end of Q4 2019, a rise of 24.72%. Rising price and increasing open interest throughout 2019 is a technical validation of a bullish trend in a futures market. The open interest metric hit a new record on the final day of 2019.

Meanwhile, the leader of the digital currency asset class continued to move lower over the final quarter of 2019, with Bitcoin falling from $8,286.18 at the end of Q3 to $7,226.77 at the end of Q4. The cryptocurrency fell 12.79% in Q4 but was 93.65% higher in 2019.

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 and continued to move to higher highs in Q3. At the end of Q4, momentum was 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 following the Fed meeting. Technical support now stands at the breakout level just below $1380 per ounce as we head into Q1 2020.

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 $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.

Gold is moving into 2020 after a correction and consolidation period. Price momentum has moved into an oversold condition and crossed higher in late December, and relative strength was above a neutral reading. The stronger dollar, which made a new high in Q3, had not stood in front of recent gains throughout 2019. A less hawkish 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. During Q4, Poland repatriated 100 tons of the metal from the Bank of England within its borders.

Moreover, central banks have provided clues about the significance of gold in their planning. In a white paper from the central bank of the Netherlands, it wrote that gold is a backstop in case of a currency crisis. All world currencies trended lower against gold in 2019, which is a sign of the devaluation of fiat foreign exchange instruments.

At the same time, the final months of the year have been periods where gold has experienced selling pressure creating a seasonal pattern in the market. Gold has rallied early in the year, which could ignite the price of the metal in the early weeks of 2020 if the pattern holds.

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. In Q4, silver outperformed gold again as it moved 5.43% higher and was 15.32% higher in 2019. Silver had still underperformed gold since the end of 2018 as of the end of the year. Silver traded in a range between $14.245 and $19.87 since the start of 2019. Silver had been consolidating, but it broke higher over the three months that ended on September 30. In Q4, silver made lower highs and lower lows until the second half of December when the price recovered. While gold rallied above its July 2016 high in 2019, silver was not able to challenge that level in the year that ended on December 31.

Silver open interest increased in Q4. The metric in silver futures traded on COMEX moved from 213,288 contracts at the end of Q3 to 229,680 contracts at the end of Q4 – a rise of 16,392 contracts or 7.69%. Silver tends to magnify moves in the gold market, but that has not been the case in 2019 as gold took a leadership role when it comes to price direction. In Q1 and Q2, gold outperformed silver. While that trend reversed in Q3 and Q4, as silver lagged gold compared to their respective closing prices at the end of 2018.

As we move forward into 2020, 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. In Q4, the ratio was at 84.99 down 1.24, but 2.54 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 moved higher in 2019, which continues to be a warning sign for the precious metals. However, the final quarter of the year has typically been a weak period for gold and silver prices.

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 2020, 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 was rising neutral territory at the end of Q4.

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 $16.50 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 Q4 at $17.921 per ounce on the continuous futures contract.

Platinum Review

Platinum moved higher in Q4 after spending most of the time trading around the $900 per ounce level. 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%. In Q4, platinum was 10.39% higher and was up 22.05% in 2019.

Platinum traded in a range between $780.90 and $1009.30 in 2019 and closed the fourth quarter just above the midpoint of the year. 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. In Q4, platinum outperformed gold and silver but underperformed 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. 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 posted gains in Q3 and Q4, 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 85,543 contracts at the end of Q3 and ended Q4 at 99,045, an increase of 13,502 contracts, or 15.78% over the three months. The open interest moved to an all-time high during the fourth quarter at 100,446 contracts on December 19, which was a sign of investment demand.

Source: CQG

As the weekly chart shows, price momentum was in the lower region of overbought territory at the end of Q4. Relative strength was rising towards an overbought condition. The quarterly chart was in neutral territory after crossing higher. The monthly chart was rising towards an overbought condition 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 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. In Q4, the spread finished the year at $551.70, $34.00 below the level at the end of Q3.

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 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 $690 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 Q4, price of platinum implies a price of $771.40 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 $1723.10. The divergence is significant and based on the closing level of $971.4 per ounce, platinum would need to rally by $751.70 or 77.4% to revert to the long-term median level for the price relationship with gold at the $1523.10 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 slightly towards the norm at the end of Q4.

Platinum had been cheap against gold for years, and it continued to be inexpensive on a historical basis in Q4. 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 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. 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. Q4 was more of the same as the price rose by 15.95%. Palladium has increased in value by 59.48% in 2019. Palladium was the star performer in the commodities market in 2019.

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 Q4, the metal peaked at $1974.60 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. In Q4, the spread moved to an even wider divergence and closed at $937.90, $171.20 higher for the quarter, and an incredible $536.60 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 23,854 contracts at the end of Q3 to 23,638 contracts at the end of Q4 2019, a decrease of only 216 contracts or 0.91% over the quarter.

The risk in the palladium market continues to increase 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. Palladium was at $1909.30 per ounce on December 31 and could be setting the stage for higher highs in 2020. Betting against the rally in palladium has been a losing proposition since early 2016.

While palladium outperformed all precious metals in Q4, 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. At the end of Q4, rhodium was at $5580 at $5980 per ounce, $730 higher for the quarter. The price of rhodium more than doubled in 2019. The bid-offer spread has widened as the price climbed over the year. While palladium reached a series of new all-time peaks in 2019, the record level in the rhodium market is appreciably above the price at the end of Q4. In 2008, the price of rhodium rose to 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. 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 almost double the price as of the end of Q4.

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 $937 discount to palladium, and over a $4800 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 2020, 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.

Looking forward to Q1 2020 in the precious metals

All of the members of the precious metals sector posted gains in 2019 with rhodium and palladium leading the way. Silver tends to attract the most speculative demand, but it was the worst-performing precious metal in 2019. The prospects for 2020 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 lots of 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 could eventually ignite both the silver and the platinum markets. The next target on gold above the September 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 move in gold is a commentary on the value of fiat currencies.

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 2020. A siege at the US embassy in Baghdad at the end of the year had Iranian fingerprints.

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. In December, the “phase one” deal injected optimism into markets. The signing ceremony will take place in Washington on January 15. President Trump plans to travel to Beijing to negotiate “phase two” with President Xi in 2020.

The new deadline for Brexit is at the end of January. Boris Johnson remained the Prime Minister of the UK following the December 12 election. At the end of Q4, his victory could finally result in Brexit by the January 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. A return of some certainty on Brexit did not prevent gold from closing 2019 at over the $1520 per ounce level.

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.

Gold heads into 2020 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 from its recent high 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 will be in high gear, which is likely to be a lot more contentious than the 2016 contest. Joe Biden, Elizabeth Warren, Bernie Sanders, and Pete Buttigieg were the leading candidates vying to challenge President Trump in November 2020. Meanwhile, billionaire Michael Bloomberg announced his candidacy for the Presidency in Q4.

Central banks continued to be net buyers of gold in 2019 with China and Russia, absorbing domestic production and buying on the international market. In Q4, Poland repatriated 100 tons of the yellow metal from London to within its borders. 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 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 of over 1400 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 continues to make new record highs. 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 December, the Fed left rates unchanged after cutting rates by a total of 75 basis points 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 and Q4. 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 objected to the company’s involvement in the cryptocurrency sector in 2019. At the same time, a crackdown by China on digital currencies weighed on their prices and caused a bearish close to the year.

In Q4, Bitcoin dropped 12.79%. Ethereum moved 26.79% lower in Q4. Litecoin’s value moved 25.30% lower in Q4, while Ripple was 24.25% lower during the fourth quarter. Bitcoin Cash fell 9.55% in Q4, and Bitcoin Gold lost 30.97% in Q4 2019. While the losses were substantial, most of the tokens were at higher levels compared to the end of 2018. Ethereum, Ripple, and Bitcoin Gold posted losses on the year. Bitcoin was still 93.65% higher at the end of Q4 compared to its closing price on December 31, 2018. The market cap of the entire digital currency market, which comprises 4986 tokens, up 2,080 from the end of Q3, decreased from $220.249 billion at the end of Q3 to $191.935 billion at the end of Q4 2019. The market cap peaked at over $800 billion in December 2017.

Moreover, the significant increase in new tokens diluted the asset class in 2019. A spike in the number of tokens in Q4 did not lead to a move higher in the market cap of all of the cryptocurrencies. On the year, the market cap was 53.33% higher, while Bitcoin gained 93.65%. The Chinese crackdown was a significant event for the asset class.

I am going into 2020 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 2019. Gold has a history of price weakness during the late months of the year. With gold moving above the top end of its trading range in June, the price action could become more volatile in 2020. 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 Q4, a platinum contract has a value of around $48,570 at a price of $971.40 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 Q1 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 see no reason to alter that opinion as we head into 2020.

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 $463.08 million in net assets, and an average of 24,053 shares trading each day. Both the net assets and average daily volume increased from the end of Q3 because of increased interest and investment demand 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 $72.58 at the end of Q3 to $76.40 per share at the end of Q4, an increase of 5.26% for the quarter that ended on December 31. GLTR underperformed the composite given GLTR’s holdings, which were almost 58% invested in gold, which was 3.92% higher for the quarter. The next leg of the bull market in precious metals that began in the early 2000s continued in 2019, and the prospects for 2020 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.