Working in precious metal markets, as in any market, it is easy to be absorbed by day-by-day or even minute-by-minute changes to spot prices and to be sucked into placing too much emphasis on the significance of such movements.
It is often considerably more instructive to step back and consider the longer-term fundamentals behind these markets and the multi-year tidal movements within certain commodities.
Gold is the largest and most influential market within precious metals. While its price does not always directly correlate to the prices of other precious metals – and at present there appears to be somewhat of a decoupling between the price movements – it certainly exerts significant influence.
Looking at a five-year graph of the gold price, it is clear that the long-term bear market [falling prices] came to an end in December 2015 and a steady long-term rally is continuing.
Prices were wildly volatile in 2016 – driven by specific global events, namely the Brexit vote and the election of Donald Trump – but have since reverted to the long-term trend. Gold has been tightly range-bound in the first quarter of 2018.
Rather than guessing the implications of daily fluctuations, I believe it is by studying this long-term picture that we can best predict what will happen to precious metal prices when gold finally breaks free from this range.
Gold opened 2018 at $1,313/oz and has waxed and waned repeatedly during the first quarter. It is sitting at $1,359/oz at the time of writing, having recorded a high of $1,360/oz and a low of $1,311/oz.
The yellow metal has been tightly range-bound by significant support at $1,300/oz and resistance at the 2016 high of $1,365/oz. It is very hard to predict what will be the catalyst for gold to break out of this range eventually. But once it does, the price movement could be significant.
Several factors make the upside potential of the gold price more attractive to investors than the downside risk. Supply remains tight, with very few significant deposits discovered in recent years, while demand is being driven up by significant exchange-traded fund inflows in Q1 2018.
“Should gold break out of its current range, there is a significant chance that silver will be dragged in the same direction but move more sharply in percentage terms.”
As the Federal Reserve Bank in the US seeks to unwind its programme of quantitative easing with scheduled quantitative tapering – likely to exceed $350bn during 2018 – the risk of a US recession must increase, especially considering the potential deleterious effects of a US-China trade war looming large.
If there were to be a sharp correction in global equity markets, gold would be a likely recipient of capital. If the resistance at $1,365/oz is broken, double-digit percentage gains would not be surprising before the year end.
Silver’s price has seen less correlation with that of gold in Q1 than in recent years, dropping significantly at the end of January and having been fairly tightly range-bound since then.
Silver opened the year at $17.06/oz and rose to a high of $17.52/oz by 25 January before falling sharply. It has since remained range-bound, but recovered from the bottom of its range at $16.25/oz to $16.83/oz at the time of writing.
Unlike gold, the global supply of silver has continued to grow robustly in recent years. Similarly, demand is driven by industrial needs more than investment demand to a far greater extend than gold, which may have had a negative effect on the recent price.
It is a smaller and traditionally far more volatile market than gold. But should gold break out of its current range, there is a significant chance that silver will be dragged in the same direction but move more sharply in percentage terms.
It is also worth noting that, throughout history, the gold/silver ratio has rarely traded higher than its current level of 80 to one.
Platinum has underperformed relative to gold for a significant time now, and at the current price of $929/oz, sits at an historically enormous discount of more than 31% of the price of gold.
Production costs remain high and supply constrained, making this continued underperformance somewhat surprising. However, platinum has no significant weight as an investment metal, and has lost some ground to palladium in terms of demand in both the catalyst and jewellery markets.
Platinum opened the year at $937/oz and rose to $1,020/oz before once more surrendering those gains.
Having generally outperformed the rest of the precious metals market in 2016/17, palladium has reversed this trend in Q1, having declined steadily from an opening price of $1,071/oz.
To some extent this is perhaps a simple unwinding of overperformance in recent years. Within the jewellery market, palladium’s traditional appeal as a cheaper substitute for platinum is clearly negated at the current price of $950/oz.
Charlie Betts is the managing director at Stephen Betts Group