What’s Precious And What’s Not

  • Gold is not far from the 2016 peak
  • Silver is not even in the ballpark
  • Platinum is cold as ice
  • Palladium and rhodium continue to show incredible strength
  • Precious metal deviation- Gold is king

I grew up in the precious metals’ markets. From the time I began delivering telex messages to the traders at Philipp Brothers in the late 1970s, the action in the precious metals trading room mesmerized me. While all of the other traders at the world’s leading raw materials company at the time sat in offices, busy on their phones negotiating deals, the precious metals business was organized bedlam. The gold and silver traders were on their feet for most of the day, with a phone in each ear, in front of price screens with a speaker to the floor of the COMEX exchange broadcasting the second-by-second price changes. Gold and silver trading were in an area away from the other raw material departments as screaming and yelling was the norm, rather than the exception.

During the summer of 1979, the action in the room became even more frantic as the prices of the shiny metals were heading for record highs. Each day, gold and silver prices set a new record, and the traders were making fortunes for the company. In 1979 and 1980, precious metals and crude oil trading carried the company and provided enough capital to purchase Salomon Brothers, the highly profitable private investment banking and financial trading company with particular expertise in the bond market.

At the time I was delivering those messages during vacations from college, I never imagined that ten years later, I would be in charge of the business for the firm. From the late 1980s until 1997, I was in charge of the company’s gold, silver, and platinum group metal trading.

I have watched these markets like a hawk over the past forty years, and in June 2019, it is looking like we are about to see some more action in the sector. Fasten your seatbelts, precious metals could be making a significant comeback, and gold is likely to be the leader of the pack.

Gold is not far from the 2016 peak

Gold has always been my favorite precious metal because the market offers the highest level of liquidity, and it is the most attractive of all. Gold is all about history. The Neolithic period, some 12,000 years ago, marked the first discovery of gold in its natural form in river beds. Gold ornaments, mostly ring-shaped amulets, made of hammered sheet metal have been dated to the Stone Age. Anyone who has even held a bar of gold or a gold coin will understand how ancient civilizations were entranced by the shine and density of the yellow metal. Each time I hold gold in my hands, I realize that the metal represents wealth. As it has done for millennia, it will long outlive me and any other holder

The Bible recounts how the Israelites, at the foot of Mount Sinai more than 3,000 years ago grew weary of waiting for Moses to return “and feasted and danced around the golden calf.” Those anecdotes are just a sliver of gold’s role throughout history, which continues today.

Since the turn of this century, more than 5000 years since the time of Moses, the price of gold has been rising in all of the world’s reserve currencies.

Source: CQG

In US dollar terms, gold has appreciated substantially over the past two decades.

Source: CQG

The same holds for the price of the precious metal in euro currency terms.

Source: CQG

In Japanese yen terms, gold is working its way towards the all-time high from January 2013. The trend in all three of the world’s reserve currency is not so much a commentary on the strength of the price of gold, but the weakness and faltering faith in the governments that issue the legal tender when it comes to dollars, euros, and yen. Along with almost all of the other world’s currency instruments, the oldest means of exchange around the globe has been making a statement that fiat currencies are declining in value. The rise of the digital currency asset class represents the same trend.

I could go on and on when it comes to the reasons why I believe the price of gold is heading much higher, which includes the impact of historically low rates of interest around the world. I was speaking to someone today who told me that a leading financial institution in Europe is currently paying borrowers to take loans. Negative interest rates could be the most compelling signal when it comes to the value of fiat currencies. While central banks do not like to talk about gold, they all hold the metal as a significant percentage of their foreign currency reserves and have been net buyers for years with Russia and China leading the way on purchases. Both nations have absorbed domestic production like vacuums, and China is the world’s leading producer.

From a shorter-term perspective, gold looks like it is ready to bust through a wall of resistance that has developed at the $1380 per ounce level. 

Source: CQG

The long-term quarterly chart of COMEX gold futures provides a view of the market from 30,000 feet. After trading to the all-time peak in 2011 at $1920.70, gold declined to a low at $1046.20 in late 2015. Since then, it has traded in a $331.30 consolidation range. In 2016, the range was from $1061 to $1377.50 or $316.50. In 2017, the high occurred at $1358.50 with a range from that high to a low at $1146.50 or $212. Last year, the high was slightly higher at $1365.40, but the range was from the peak to $1161.40 or $204. So far in 2019, the low was at $1266 with the high last week at $1355.40 or just $89.40 through almost the first half of this year. The narrowing ranges over the past four years and rising price momentum and relative strength could be telling us that gold is preparing to bust through the critical resistance level at $1377.50 like a hot knife through butter. Since the dollar index is not far off its high, a break to the upside in gold in the US dollar would mean similar moves in all currency terms. On the quarterly chart, historical volatility at 9.17% is at its lowest level since early 2011 when the price was on its way to the high at over $1900 per ounce.

Gold may not be the top performer of the five precious metals I follow, but it is the leader and king of its precious domain. I expect gold to break to the upside sooner, rather than later.

Silver is not even in the ballpark

Silver is all about sentiment. Fundamental analysis in the silver market is a waste of time, which is quite a statement from someone who believes that fundamentals drive most prices in the medium to long-term. While I could argue that point with Avi for hours, the truth is that silver has no production cost because it is a byproduct of other metal ores. Gold stockpiles are in the hands of central banks and governments. Silver stockpiles are in drawers and attics around the globe. Silver has a myriad of industrial applications. Silver is a highly speculative metal because when it decides to move, it blows away all of the other members of the precious metals sector on a percentage basis.

Silver has a long and storied history. The 1898 Presidential election in the US was a contest between the victor, William McKinley who favors a gold standard for the dollar, and William Jennings Bryan who advocated for a silver standard. In that contest, silver won the silver medal. The Spanish Empire became the richest on the earth in the 1500s upon discoveries of a mountain of silver at Potosi in Bolivia. The massive supplies of silver caused the price to plunge and the Spanish Empire to quickly fall behind other nations when it comes to wealth. Silver has a habit of making small fortunes from large ones like it did with the notorious Hunt Brothers in the late 1970s and 1980 as the COMEX changed the rules to liquidation only in the silver futures market leading to the erosion of their wealth. Many other stories of silver’s history of incredible wealth and losses are likely the reason that so many conspiracy theorists point to government and banking manipulation of the price of the metal. However, that is a subject for another time. Suffice to say; I do not buy the conspiracy arguments as I had an inside look at the industry for decades and can attest that the big hand is sentiment rather than a coordinated effort by JP Morgan or any other institutions or governments. Yes, there have been short-term manipulation when it comes to spoofing and fixings, but no there is no effort to sell silver on every rally. I believe in my heart, and from a knowledge of the business, that governments and banks do not give a hoot if silver was $10 higher or lower than its current price.

Sentiment will drive silver, which is trailing far behind gold. Today, market participants are taking a wait-and-see approach to the volatile precious metal that has a habit of tarnishing when it comes to both its physical appearance and price action.

Source: CQG

Then quarterly chart of the silver-gold ratio shows that at over 90:1, silver is approaching the cheapest level against gold in modern history. If we go back to ancient history, the value proposition is even worse. The approximate average since 1974 is around 55:1. In 3000 BC, the first Egyptian Pharaoh, Menes, stated that two-and-one-half parts silver equal one-part gold. Therefore, at over 90:1, silver is cheap from both an ancient and a modern perspective.

The most recent high in the silver market came on June 7 at $15.15 per ounce, which was $5.945 or 28.2% below its critical level of technical resistance at the July 2016 peak at $21.095. On the other hand, gold traded to a high at $1355.40 on June 14 which was just $22.10 or 1.6% below its level of critical technical resistance at the July 2016 high at $1377.50 per ounce. I believe that when gold breaks above that level over the coming days, weeks, or months, the herd will return to silver in a stampede that will cause a rally that will be challenging for many to buy given the years of disappointment. In a wild bull market in silver, the potential for lots of price manipulation will rise given the presence of dominant players with lots of capital.

Platinum is cold as ice

Platinum is a dog when it comes to its price performance, but one of these days, the dog will have its day in the golden sun again. Platinum has a shorter history as an investment metal, but many market participants were left with a sour taste in their mouths after the events of 2008.

Source: CQG

The monthly chart shows that platinum rose to an all-time high in 2008 at $2308.80 per ounce in March, but the thinly traded metal that often has wide bid/offer spreads fell by an incredible 67% in just seven months. Platinum fell so fast that investors did not know what hit them, and most likely swore off any future investment in the metal. Platinum has been in a bear market since 2011 when it recovered to just over the $1900 when gold was on the highs and has done little but make lower highs and lower lows.

When it comes to platinum’s role in jewelry and industry, palladium and rhodium demand has increased over the years because they were often less expensive metals when compared to platinum. At Philipp Brothers in the early 1990s, we sold lots of Russian palladium to the automobile industry who required the metal to make catalytic converters. The growth of environmental regulations around the world has increased the demand for palladium, which is better suited for gasoline-powered engines while platinum demand for diesel engines has declined. However, platinum is denser and has a higher resistance to heat than palladium and rhodium, which could be the eventual reason for a recovery as industry makes a switch for economic reasons. Meanwhile, platinum remains a dog, but I believe that makes its value proposition compelling when it comes to a physical investment rather than a trade. As a trade, platinum remains in the Ice Age of its pricing cycle.

Palladium and rhodium continue to show incredible strength

What can I say about the price action in the palladium and rhodium markets other than, wow? In early 2016, the price of platinum traded to a low at $812.20 per ounce. At $804.70 on June 14, the price was $7.50 lower, bow-wow.

Palladium fell to a low at $451.50 in January 2016, but it has exploded to the upside.  

Source: CQG

The monthly chart shows that at $1440.10 on the nearby NYMEX futures contract on June 14, palladium was over triple the value at the start of 2016. Platinum and palladium are both Platinum Group Metals with similar properties and characteristics. However, palladium is strictly an industrial metal while platinum had an investment allure. Time will tell if platinum can eventually experience a recovery that leads to a palladium-like run. While I believe the current level in the palladium market could be unsustainable, I have learned the hard way that standing in front of bullish freight trains is a great way to be crushed.

Rhodium is a rarer Platinum Group Metal that does not trade on any futures market and is only available in the physical market. Rhodium is a byproduct of primary production of platinum in South Africa. It turns out that the low price of platinum has caused mines to cut back on higher cost production, which created a deficit in the rhodium market with demand outstripping supplies.

Source: Kitco

After trading at below $600 per ounce in early 2016, the price of rhodium was at $3250 bid at $3450 offered on June 14. At the midpoint of the spread, the price of the metal had appreciated by over five and one-half times from the 2016 low. While palladium made a new all-time high at just shy of $1600 per ounce in March of this year, the all-time peak in rhodium was at over the $10,000 per ounce level, so the metal could have more upside room.

The platinum group metals have vast deviance between the price of platinum and its two cousins. Eventually platinum will have its day as it offers a compelling value proposition with producers cutting output and its sister metals, which are industrial substitutes, at incredible premiums.  

Precious metal deviation- Gold is king

For the short-term, the path of the sector is in the hands of gold, the king of the metals. Gold is close to its breakout level, but it has failed around here since 2016. However, each failure came in an environment where the US Fed was increasing short-term rates and balance sheet normalization continued to support higher rates at the longer-end of the yield curve. No matter what the Fed does at their meeting next week, a continuation of dovish statements that lead to an eventual rate cut is highly bullish for the yellow metal.

I would use any price weakness in the aftermath of the meeting to buy gold, gold stocks, and other gold-related products on a scale-down basis. As Paul Tudor Jones said last week, rates are going lower, which is highly bullish for the yellow metal. When it comes to silver, I suggest call options as volatility is at a low level, and the options limit risk while providing full upside exposure minus the premium. I will stay away from palladium and rhodium but continue to add to my physical platinum horde as a value play.

Gold is what is precious these days, and a break to a new high could cause a technical move that makes the yellow metal even more lustrous soon. After three and one-half years of declining price ranges, we could see one whopper of a move starting this year.