– All four precious metals outperform markets in August
– Gold posts best month since January, up nearly 4%
– Gold reaches highest price since US election, climbs due to
uncertainty and safe haven demand
– S&P 500 marginally higher; Euro Stoxx, Nikkei lower for month
– Platinum is best performing metal climbing over 5%
– Palladium climbs over 4% thanks to seven year supply squeeze
– Fear, uncertainty and political sanctions are amongst biggest
drivers for precious metals
– Never been a better time to diversify and rebalance portfolios with
stocks and bonds near record highs and looking vulnerable
Editor: Mark O’Byrne
Market Performance in August (Finviz.com)
All four precious metals have made gains in the month of August.
Whilst platinum and palladium’s leading performances can largely be
attributed to industrial factors they have also benefited from the safe haven
demand which is driving gold and silver prices.
Safe haven demand really came into its own this last month. Issues with
North Korea have stepped up a level whilst markets have finally begun to
question the complacency they have been feeling in regard to the US
political and financial situation, geopolitical risk and the increasingly
uncertain outlook for the global economy.
Ultimately very little is known about what will happen with the US debt
ceiling, increasingly overvalued stocks (both the NASDAQ and the
S&P500), Trump’s plans for corporate tax, dealings with North Korea and
(not forgetting) Venezuela.
We are living in very uncertain times indeed and investors decided to
allocate funds to the ultimate safe havens – the precious metals.
Gold shines as investors rush into safe havens
This week gold rose to its highest point so far in 2017 as tensions
between North Korea (but really, the rest of the world) and the US
ramped up. For the month of August the price is up 3.59%.
Silver was also up thanks to safe haven demand, but its 5% climb was also
in part due to manufacturing demand. Currently, about 55% of all silver
consumed is for industrial use.
Gold has so far risen in every month, bar June.
Gold’s climb has in part been due to ongoing demand from countries such as
China and India, but it has primarily been driven by the desire in the West
to own a safe haven. This is not surprising given the ongoing concerns
regarding North Korea, Venezuela, the Middle East and a lack of cohesion in
the Trump administration.
One of the dampeners on gold and silver has been the Federal Reserve’s
plans to raise interest rates. However, when they did so it had little
effect. Expectations for further hikes are falling. Going forward Yellen and
team are expected to slow down on further interest-rate increases
which has provided an additional boost for the gold price.
In the very short-term storm Harvey in Houston, Texas has also impacted
the price of gold and silver. As a result of lost income and recovery
operations, US GDP is expected to be lower in the third-quarter than was
initially expected.
In the long-term investors will look to gold and silver as they begin to
price risk into the market. Yesterday we expressed our concerns over market
complacency whilst other financial organisations have begun to warn
clients about the overpriced equity markets and lack of perceived risk.
It is also worth noting an expected climb in demand from China. Mark
Tinker, Head of AXA Framlington wrote in a note that China’s pricing of
assets in yuan (together with the plan by the Hong Kong Stock Exchange
to sell yuan-priced physical gold contracts) could allow them to
trade out of the banking system in the US
“Having accepted payment for oil or gas in RMB, the seller, be it
Russia or Saudi Arabia or anyone else for that matter, does not have to worry
about having excess RMB, they can simply trade it back into gold,” Tinker
said. “We are moving to a multi-polar world.”
Platinum gains as Russia feels the pain
Platinum has performed very well so far in the second half of the year.
This most recent surge has likely come about thanks to further sanctions
being placed on Russia by the US. Russia is the world’s second biggest
producer of the metal.
The World
Platinum Investment Council outlined the following arguments for
platinum’s role as a safe haven investment asset:
– Supply demand fundamentals are strong and ETF holdings are stable,
despite price volatility
– Risks of supply declines are underestimated – cost pressure and falling
mining investment continue – Downside risks to platinum automotive demand are
overestimated
– Futures positioning follows poor sentiment with high correlation to price
– Platinum is undervalued against its past, its production cost and against
gold
Palladium climbs on Vauxhall’s woes
Palladium is currently at a 16 year high. There is a major tightening in
the supply of palladium because of increased demand for it in engines. 67% of
palladium supply is used in car engines to clean exhaust gases from
gasoline engines. There is obviously a major push for ‘clean’ transport and
the Vauxhall emissions scandal and obviously helped boost demand.
Inventories of palladium supply are down by abut 45% this year, whilst
supply trails demand by the most in the seven years.
Despite the increase in supply, there has been a significant number of
redemptions in the the two main U.S. and European palladium ETFs – the ETFS
Physical Palladium Shares and the ZKB Palladium. By the 22nd August $49
million had been traded in. Supply in the spot market is reportedly so tight
that companies are being forced to trade in multiple ETF shares in order
to redeem them with the issuer in exchange for physical palladium.
ETFs are now being treated like palladium warehouses.
It is also important to note that, like platinum, palladium is also hugely
affected by the sanctions on Russia.
It is also important to note that ETFs
are a risky way to invest in precious metals and most investors
would be better served owning actual precious metals rather than paper or
digital proxies.
Conclusion: Stars aligning? Outlook good for rest of 2017
Earlier this week we explained how investors shouldn’t always be focused
on price. Whilst it is nice to look at the metrics for August and see that
all precious metals are up, we should instead focus on why they are up and
most importantly the diversification benefits for our portfolios.
Precious metals are largely climbing because the perceived risk in the
political and financial system is also climbing. Interestingly many
commentators do not feel some risky issues have been wholly appreciated by
the markets.
Problems such as North Korea are such serious risks that even someone
who pays no attention to markets could spot it. The issue is that you have an
overvalued stock market and a US President who cannot get his people
together. This means that the US debt ceiling issue might ground the U.S.
government to a halt.
These issues are ones which have not yet been fully priced into the
markets. They likely will be in the coming months and then the safe haven
role of the precious metals and gold in particular will come into its own.
News and Commentary
Source: Marketwatch
Gold Prices (LBMA AM)
01 Sep: USD 1,318.40, GBP 1,020.18 & EUR 1,107.98 per ounce
31 Aug: USD 1,305.80, GBP 1,013.17 & EUR 1,098.31 per ounce
30 Aug: USD 1,310.60, GBP 1,014.93 & EUR 1,096.71 per ounce
29 Aug: USD 1,323.40, GBP 1,020.34 & EUR 1,097.36 per ounce
25 Aug: USD 1,287.05, GBP 1,003.90 & EUR 1,090.90 per ounce
24 Aug: USD 1,285.90, GBP 1,003.26 & EUR 1,090.44 per ounce
23 Aug: USD 1,286.45, GBP 1,004.33 & EUR 1,091.68 per ounce
Silver Prices (LBMA)
01 Sep: USD 17.50, GBP 13.53 & EUR 14.69 per ounce
31 Aug: USD 17.34, GBP 13.47 & EUR 14.62 per ounce
30 Aug: USD 17.44, GBP 13.49 & EUR 14.60 per ounce
29 Aug: USD 17.60, GBP 13.59 & EUR 14.62 per ounce
25 Aug: USD 17.02, GBP 13.26 & EUR 14.40 per ounce
24 Aug: USD 16.93, GBP 13.20 & EUR 14.36 per ounce
23 Aug: USD 17.06, GBP 13.32 & EUR 14.48 per ounce
