After multi-year bear markets, characterised by a lack of confidence, the first quarter of 2016 saw a momentous shift in the fortunes of global precious metal markets.
With the price of gold rising by more than 20%, the strongest quarterly performance in the metal for several decades, many feel the tectonic plates of the sector are finally moving towards another major bull cycle. The fact that the other precious metals have now followed gold strongly upwards, and that any corrections in the yellow metal have seen renewed buying, is certainly grist to the mill for gold bugs. But we must question whether the market has come too far too fast, and is likely to see significant consolidation or whether momentum could drive prices much higher still.
The metal’s performance so far in 2016 has been staggeringly strong, putting most other global investment categories to shame. But it is important to bear in mind that this performance is coming on the back of multi-year declines in the gold price and, at the time of writing, gold is valued at only 67% of its peak value of $1,896.50 per oz from 2011.
Gold opened the year at $1,072/oz and rose more than 20% to a record high of just over $1,300/oz. It has retreated slightly to $1,276/oz, but still appears to be well supported above $1,250.
Such strong performance has led some commentators to suggest that it could be the start of a stratospheric rise in the gold price to several times its current value if global powers were to abandon fiat currencies (currency that a government has declared to be legal tender but is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand).
While this line of argument is over-excited, there has clearly been a strong improvement in both investor and central bank sentiment towards gold in 2016.
Investors must weigh the inevitable risk of short-term corrections in a market that has performed so strongly against a macro-economic backdrop which is increasingly positive for gold. Concerns over emerging market growth and stability, a hiatus in the rise of the US dollar and, perhaps most importantly, the implementation of negative interest rates by several central banks, all lend significant weight to the argument for gold.
Above all, the gold price is driven by momentum, and there is no denying that the momentum has shifted.
Like gold, silver underwent a five-year period of decline from its highs in 2011 until the start of 2016. Silver’s decline was even more dramatic than that of gold, losing more than 70% of its value in that period.
The metal opened 2016 at $14/oz and, while it saw strong gains of nearly 10% in Q1, this seemed somewhat muted in comparison with gold, given silver’s usual high volatility. During April, however, the rally of silver was exceptionally strong and, at the time of writing, it stands at $17.51/oz, some 25% above its 2016 opening price.
Silver’s move in April, coupled with good performance in platinum, seems to represent the strength of the gold market affecting sentiment right across the precious metals complex. With silver’s natural propensity for extreme volatility, and the fact that it is still valued at around only 36% of its 2011 high-water mark, significant further gains are certainly possible.
Despite the sharp gains in April, light exchange-traded fund redemptions suggest that investors believe there is further to go.
Platinum’s performance so far in 2016 has also been strong, rising steadily but inexorably for four months from an opening of $878/oz by 19% to $1,043/oz at the time of writing.
Its discount to gold has remained consistent at around 22%, which is historically huge for a metal which has usually traded at a premium to gold.
The generally positive sentiment across the sector, coupled with such an unusually large discount to gold, suggests a possibility for outperformance by platinum in coming months. But this must be weighed against the effect of ongoing global industrial weakness on a metal for which industrial demand plays a significant role, and supply has been relatively robust in recent months.
Palladium has been the precious metal least correlated to gold in the recent rally, actually declining significantly from a January opening of $547/oz to a low of $465/oz at the start of the year.
It was only in March that palladium began to rally, rising sharply to a high of $624/oz (up 34%) before declining again. At the time of writing, palladium stands at $583/oz, some 6.5% up for the year.
While it seems clear that positive investor sentiment across the precious metals sector has had some effect on palladium, the questionable strength of demand from the automotive sector makes the metal’s prospects slightly more questionable. If investors’ newfound ardour for precious metals continues, palladium is unlikely to be the biggest winner in the short term.
Charlie Betts is managing director at The Stephen Betts Group