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Market Focus: Precious metals

Precious metals

Negative sentiment towards the precious metal sector continued, as predicted, into the fourth quarter of 2015.

Prices accelerated downwards in what seemed an interminable decline.

But the new year seems to have breathed some fresh hope into the market, with prices markedly up across the precious metals sector (with the exception of palladium) and gold in particular having recorded some notable gains.

As equity markets have struggled in recent weeks, the outlook for precious metals is looking decidedly brighter. But with so many false dawns in the past few years, prudent investors will remain cautious.

Gold

Gold opened the year at $1,072/oz (£747/oz), slightly up from a five-year low of $1,050/oz recorded at the start of December. Since then it has risen steadily and then sharply, reaching a high of $1,254/oz, or a 17% increase, in just over a month before stabilising to a level of $1,207/oz at the time of writing.

Reading too much into graphs is often an error, but it does seem significant that this price rise is the first time that gold has significantly breached its trading range in the past two years. Also, this was the largest 30-day change in the price since 2011, another year that was characterised by significant financial stress.

Gold’s recent return to favour has been inversely correlated to poorly performing equity markets as global macro-economic stresses worsen. The reason for this improvement in fortune seems to be being driven mainly by investor sentiment rather than supply and demand fundamentals, with the two most obvious causes being a sharp increase in stock market volatility (causing safe-haven buying) and a deteriorating outlook for interest rates (or even the threat of negative rates).

While the speed at which gold broke through $1,200 and then $1,250 quickly afterwards meant that some correction was almost inevitable, there does seem to be significant support for gold around the $1,200-mark.

Where next for the yellow metal? If fears of another recession and concerns about global banking systems continue to rumble on, it seems likely that gold will appreciate further, perhaps sharply. If, however, conditions begin to normalise, then gold would be likely to trade sideways from this level, propped up by a slightly weaker dollar and possible inflation.

Silver

Unusually, silver’s volatility has been more muted than that of gold in recent months. It started the year at $14/oz and traded sideways while gold rose.

But from 21 January, as gold’s gains accelerated, silver was swept up in the enthusiasm and rose some 11.8% to $15.65/oz before retreating slightly to $15.30/oz at the time of writing. Unlike gold, however, which came within 4% of its 2015 highs, silver peaked some 16.5% below its 2015 high of $18.23/oz.

The current recovery is certainly being led by the investment market. And while correlating reasonably closely to the price of gold, silver’s industrial shackles seem to be holding it back in a market which is nervous about the global industrial outlook – a theme which is even more apparent in the palladium price.

Platinum

After a dismal 2015, platinum opened 2016 at $878/oz and, unlike gold, continued to decline by more than 7% to a low of $817/oz by 21 January.

At this point, the metal was finally swept up in the sector’s sharp move upwards and currently sits at $940/oz.

This price is still 27% below its 2015 high and at a historically huge discount of 22% to the gold price.

It would appear that platinum is currently gaining little interest as an investment vehicle and is also ‘suffering’ from relatively well-balanced supply and demand. Supply is slightly more consistent than in recent years, and there are some demand-side concerns about general industrial weakness and a move towards cheaper alternatives in catalyst markets.

For the time being, platinum looks set to follow gold’s lead but in more muted fashion.

Palladium

Palladium has once again shown a weaker correlation with gold than the other precious metals in the last quarter. And being the most industrial of the precious metals and least influenced by investor sentiment, it has also been the worst performing.

With continuing concerns about global industrial output, palladium fell sharply from $547/oz at the start of the year to record a low of $465/oz on 12 January. From this point, palladium did follow the other precious metal prices upwards, but less sharply, and currently sits at $512/oz, nearly 7% lower than its opening price for the year.

Palladium is currently looking cheap, sitting some 40% lower than its March 2015 high of $830/oz. But until significant faith is restored in the prospects for the global economy, it seems unlikely to outperform in the short term.

Charlie Betts is managing director at The Stephen Betts Group

www.bettsmetals.co.uk

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