- Precious metals are showing new signs of strength.
- Palladium made new all-time high.
- I see two main scenarios, both can be positive for precious metals.
Silver exploded yesterday, jumped 5 percent to 18.75 USD, a price not seen for two weeks. Gold and Platinum were also surging. The precious metals rally which began this summer seems to continue.
Nice two-digit gains
Gold began its new journey at the end of May, then silver, in July, and platinum, end of August. Palladium is a little different story but it reached a new all-time high just yesterday, Monday, by 1642.9 USD. After the peaks at the beginning of September, precious metals seemed to take a breath, make a correction.
But now we can discover new signs of life. In the short term, gold and other precious metals began to rally again after a strike against Saudi Arabian oil facilities. This raised the tensions in the Middle East. In the last 12 months, gold rose 26 percent, silver 30, platinum 15, and palladium 57 percent (see chart).
Palladium, silver, gold, platinum, changes in percent, one year (Chart courtesy of Tradingview.com)
Main reasons of the precious metals bull
All right, that was the past, but what do we know about the future? The main reasons why precious metals surged this year can be summarized as follows:
- Main central banks are staying dovish, interest rates remain low and monetary easing is spreading again in the world. The Fed has cut interest rates last week and can make it again soon.
- Most stocks, bonds, and real estate markets are expensive. A lot of money is idle, investors are searching for reasonable investments. A tough task in a world with overpriced assets and zero, or near zero interest rates.
- Volatility is relatively high, many people are waiting for new corrections on stock markets. Secure-thought investments are gaining popularity.
- Industrial demand was increasing in last years and also central banks gold buying jumped.
Safe harbors and doves
Dovish central banks, low interest rates are mostly favorable for precious metals. (Especially negative real interest rates.) In times of stock market fears and high volatility, investors are focusing often on precious metals. They re-discover safe harbors, shelter investments which they have forgotten in good times of stock market bull.
The good news for “gold-bugs” and silver fans is, in my humble opinion, that these conditions mentioned above may stay for other months or even years. The reasons for the surge in precious metals can stay with us even if the year ends with a big stock price rise.
Precious Metals The Story Of The Year
I think there are two main scenarios. If there will be a further economic slowdown, eventually a recession, then central banks will print more money and cut interest rates. And if there is no recession, the demand for precious metals will be boosted by the industry and the growing middle class of emerging countries.
Palladium, silver, gold, platinum, changes in percent, ten years (Chart courtesy of Tradingview.com)
Both scenarios are positive for precious metals, which have a limited supply. Besides, many commodities are far away from their all-time highs and don’t seem to be too expensive. (Like platinum, see the 10 years chart.) I see no signs of bubble on commodities markets, except a few products.
Precious Metals In The Industry
All precious metals have industrial uses but in different extents. Gold less, only in a small part – but gold demand of central banks is very high ultimately. The most of silver, platinum and especially palladium is used in the industry. Platinum and palladium are mostly used in catalyst converters.
“There is a growing demand for palladium, but the existing supply is insufficient to meet demand. The last 7-years have seen a net deficit and deficits are expected to continue.” (Source: Palladium One)
Black swans and the precious metals-story
The last “Black Swans” – totally unexpected, unpredictable events with a strong impact on the world – could have been the Fukushima-disaster, or the 9/11 World Trade Center attacks. (I think the Brexit-referendum or the election of Donald Trump aren’t typical Black Swans.) In any case, if something unexpected happens, a misfortune or a war, it can also raise the exchange rates of precious metals.
Conversely, if economic growth begins, capital markets calm down and central banks raise interest rates again, these events could lead to a collapse in precious metals prices in the short and medium term. Although I think the industry will continue to push prices up in the long run.
I’m long on silver and platinum, short on palladium.
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