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Material Focus: Precious metals

silver

Precious metals seemed to return to favour in December, with the entire sec­tor recording significant gains for the first time in around a year.

Silver, as is often the case, was the sharpest mover, recording gains of around 10%, with gold and palladium rising by around 5%, although palla­dium has since accelerated dramatically, more of which later. Platinum remains the sick man of the complex, but still recorded significant gains in the month.

With gold hovering within range of $1,300/oz, markets in January appear to be taking a breath before we see the next significant move.

As has been the case for some time, market conditions seem set for a contin­ued strong rally in precious metal prices, especially given December’s knocks to the confidence of equity investors. Com­mentators on precious metals markets seem also to be increasingly bullish on the prospects for the year ahead.

Gold

Gold rallied in early 2018 from an open­ing position of $1,312/oz to a January high of $1,360. This new dawn was, however, short-lived, with gold falling steadily until recording lows of $1,176/oz in August. The metal rallied again in the fourth quarter, accelerating in December and currently stands at $1,285/oz.

Gold appears to have been negatively correlated to equity markets in the past 12 months and, with geopolitical ten­sions looming large in both Europe and the US, many commentators are increasingly positive on the metal’s prospects. With gold essentially priced in US dollars, any shock shift in the val­uation of the pound in relation to Brexit outcomes would have a significant effect on gold prices in sterling.

It is worth noting that the Bank of China increased its gold reserves by a relatively modest 20,000lb during December, the first such move since September 2016. Further purchases would be significant for gold’s short-term prospects.

Silver

Silver was the best performing metal in December. But at the time of writing it stands at only $15.49/oz, more than 10% lower than the high it recorded in January 2018. Last year saw steady losses for silver, which hit a low of $13.97 in November before rallying by 10% in December.

The metal’s poor performance in rela­tion to gold can largely be attributed to weakness in the industrial sector, lead­ing to less physical demand. At the year end, however, the silver/gold ratio was 85x, which is the highest level recorded for more than 25 years.

A return to the average multiple in the past 20 years of around 60x would see a silver price of around $20/oz. As a smaller market than gold, silver tends to see significantly more price volatility and a sharp increase in coming months would not be surprising.

Platinum

Platinum’s performance in 2018 was the weakest of all the precious metals, declining from a January high of $1,020/oz to a low of $794/oz in Sep­tember. The rally since this point has been fairly muted, with the current price standing at $813/oz.

“Market conditions seem set for a continued strong rally in precious metal prices, especially given December’s knocks to the confidence of equity investors.”

The metal has lost significant ground to palladium in both industrial markets – with many car manufacturers shifting to palladium catalysts as car demand shifts from diesel to petrol – and the jewellery sector. But, the current price is at an historically low ratio to both gold and palladium.

The enormously inflated palladium price could drive users back to plati­num, while ongoing strike issues in South African mines could see supply constriction, leading to a return to favour of platinum in the medium term.

Palladium

Palladium was the best performing precious metal in 2018, rising from a low of $864/oz in August to close the year at a lofty $1,274/oz. Since year end, the price has accelerated even more rapidly to $1,414/oz at the time of writ­ing – a rise of more than 60% in less than six months.

Lease rates in palladium are currently in the extraordinary region of 40% and palladium is trading at an all-time high, more than seven times higher than its price a decade ago.

The current spike has been caused by somewhat panicked buying in the auto­motive sector, where manufacturers require palladium for catalytic convert­ers in order to meet ever more stringent emissions requirements in petrol cars, combined with a shortage of supply. Given the poor automotive figures being recorded globally, it seems probable that this imbalance between supply and demand is considerably overstated.

The current price is already driving demand away from palladium in the jewellery sector and could soon also see automotive sector users exploring other options. Expect to see significant vola­tility in palladium in Q1 2019.

Charlie Betts is Managing director at Stephen Betts Group

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