Dollar’s Heat Keeping Metals Soft

Gold first became precious as an Egyptian status symbol about 5,000 years ago and was introduced as a form of money about 2,700 years ago in a country that later became a part of Turkey. While Platinum and Palladium have at times retained a higher value, Gold remains a very precious metal. With Gold and other metals priced in Dollars due to the Greenbacks global reserve currency status, there is a strong inverse relationship. As the Dollar rises Gold often falls as it becomes more expensive to almost 95% of the worlds population that resides outside of the US. From the late 1800’s until the early 1970’s we have used versions of a Gold backed monetary system to control the paper currency in circulation and thus limit inflation risk. When Nixon moved the US and the world completely off Gold backed currency to a free floating fiat system, there was a rare period of stagflation unique to the 1970’s when all commodities soared in value creating inflation despite economic stagnation. Without a hard asset backing a currency, the world has been able to print money out of thin air as long as confidence allows and engender explosive growth in economies and accompanying debt for almost 50 years. When the world rebounded from the Great Recession of 2008 to 2009 using a multi trillion money printing infusion, Gold soared to new records near $1,900 on the expectation that massive inflation or currency panics were around the corner. Since that premature speculation wave ended eight years ago, Gold has fallen back to a calmer disinflationary price range.

Since 2011 Gold has been weak while the Dollar has been appreciating in value. Over the past three years both Gold and the Dollar have been congesting sideways in value. While we have no reason to believe that inflation is about to break out, we do anticipate the potential for the $1,600’s in this metal next year. Our premise is that the global economic cycle is bottoming during the first half of 2019, Trump trade deals around the world should be enacted and the US Dollar will fall and boost commodity inflation and precious metals. Additionally, there has been a 4 month surge in Chinese Gold purchases of 1.4 Million ounces since November in what we assume is an ongoing effort to elevate China’s Renimbi as a world reserve currency. Perhaps China has been building their reserves while Gold is in the 1200’s in anticipation of a trade deal that boosts the global economy, inflation and precious metal prices. Technical confirmation of a longer lasting uptrend in Gold will be confirmed when it surpasses major resistance in the upper 1300’s to low 1400’s. We expect a third quarter 2019 peak in the upper 1300’s to be followed by another leg higher in 2020 towards 1600. While the odds seem quite low for a trade war escalation, we will state that a trade deal impasse with China that renews the tariff battle will send Gold well under 1200 and possible under 1,000 during a global economic fallout.

When Gold coins first appeared almost 3,000 years ago it was combined with Silver as has been the case with most gold coins until modern times. Silver is naturally cheaper, being mined at 5 to 10 times the rate of Gold and commands a greater industrial use beyond its attractiveness in jewelry and coinage. Silver has yet to establish an uptrend in almost three years, but may begin a modest continuation move should it clearly break resistance just above 16. A confirmed trend higher would target 17.5 yo 18.5 an ounce for Silver.

While Platinum is far more rare than Gold or Silver it wasn’t until it was heavily used in the medical and automotive sectors that demand brought its price above Gold. Though it less abundant, Platinum currently trades at an unusually large $390/ounce discount to Gold due in part to the strong Dollar, weak global economy and the Chinese and Russian stockpiling of Gold. Another interesting reason for weak Platinum is South Africa and the Palladium shortage: with Palladium prices soaring, South African Platinum miners have been digging up excess Platinum in search of the far more valuable Palladium that is often a byproduct. This would seem to make Platinum an under performer during any new Bull market in precious metals in the year ahead until the Palladium shortage is solved. While the current uptrend is modest,more gains may be coming soon as long as the 880 support area holds.

The only major precious metal more rare than Gold and Platinum is Palladium. For most of its modern history Palladium was far cheaper than Gold or Platinum, but now has become an indispensable element in pollution control and catalytic converters as more countries mandate lower emissions regardless of price. Supply has been unable to catch up in recent months and suitable cheaper replacements are unlikely to dent demand until 2021 or later. Thus a recession or the mainstream adoption of fully electric vehicles seem to be the only way Palladium can fall a healthy 50 percent. As over priced as Palladium may appear, it’s unlikely to collapse and will continue higher when the Global economy accelerates or the US Dollar weakens.  The recent 17 percent panic profit taking drop of over $200 in two days has wiped out many of the speculators bidding up the price beyond what the actual shortage warranted. While prices could dip below 1200, once prices move back above 1450 to 1500, it should confirm that the uptrend is in force.

Copper has been used for over 10,000 years, about 6,000 years before Gold appeared on the scene. Yet 75 percent of all Copper ever consumed over those 10,000 years was produced in the last 70 years. Today Copper is the third most consumed metal behind iron and aluminum. With over 40 percent of supplies coming from Chile and Peru there is labor unrest volatility risk, but with Aluminum as a cheap substitute, Copper is unlikely to have supply shortages and speculation such as Palladium has experienced. Technically, Copper remains in an uptrend from 2016 and after stalling for a year, it has resumed a smaller trend up in 2019 in anticipation of a Global recovery and a trade boosting agreement between China and the US. A break of minor resistance at $3.00 projects to the 3.10 to 3.30 area.

The dynamics of the metals market is a bit unique today. Palladium is the hot metal attracting excessive speculation due to intractable supply shortages. Platinum is being depressed in the search for more Palladium. Gold is being boosted by Central Bank and Sovereign purchases. The more industrial Silver and Copper markets are waiting for signs of a Global economic recovery. We are somewhat optimistic on the metals sector, expecting further gains this year once the US Dollar enters its first downtrend since 2017. As always, Caveat Emptor: a China Trade Deal is a prerequisite for this outlook to become manifest.

 

 

 

 

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