Silver

MetalMiner’s Global Precious Metals MMI dropped two points this month to 79, from 81 in November; a 2.5% decrease. But that’s less the story than what happened within this precious metals sub-index.

The PGM Story

As we said last month, longer-term structural concerns remain for the platinum-group metals (PGMs), especially platinum and palladium. However, in the short term, one of those two precious metals that are instrumental in automotive catalytic converters kept the Global Precious MMI from falling even further for December.

Global-Precious-Metals_Chart_December-2016_FNL

Indeed, with gold and silver falling across all four geographic markets (see below), our U.S palladium bar price jumped to an 18-month high, rising a whopping 24% month-over-month. Japanese palladium also rose appreciably.

The platinum bar price, however, did the reverse. Our U.S. platinum bar price hit a 10-month low, dropping 7% since Nov. 1.

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Crossing like ships in the night, one heading north, one heading south, what should buyers make of the platinum/palladium divergence?

According to HSBC senior analyst James Steel, talking to Platts, “the platinum-palladium spread has narrowed substantially, from $375/ounce before the U.S. election. This reflects clearly tighter underlying fundamentals for palladium.”

With car sales in the U.S. and China continuing to be robust, and with Johnson Matthey predicting another supply deficit in 2017, palladium could continue its buoyancy for the near future.

The Dollar –> Infrastructure –> Gold

Raul de Frutos gave MetalMiner readers this helpful rundown in late November:

A rising dollar depresses commodity prices, especially precious metals. It does have less of an effect on more economically-sensitive groups like energy and industrial metals. Indeed, industrial metals are on the rise despite a strong dollar. This is because the dollar is rising on expectations of higher rates down the road but, at the same time, metal prices are getting an additional boost because of Trump’s plans to spend big on the nation’s infrastructure. However, gold’s demand won’t be affected by infrastructure spending. As a result, investors are left without reasons to buy gold at this moment.

That still appears to be the case here in early December, as the US gold price on our MetalMiner IndX hit its lowest point in 10 months, falling to $1,173/oz on Dec. 1 — just over an 8% drop from Nov. 1.

(Silver prices followed suit across 4 markets globally, all dropping from November to December.)

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MetalMiner’s Global Precious MMI dropped 5.8% to a value of 81 for November, the sub-index’s lowest level since June.

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In the midst of worries over the U.S. presidential election and the Federal Reserve‘s interest rate moves, precious metal prices have been on the rise over the past week.

Global-Precious-Metals_Chart_November-2016_FNL

Many investors are girding for a Brexit-like jump if Republican contender Donald Trump wins; the U.S. palladium price, for example, coming off $700/ounce-level highs from early October to just around $600/oz at the start of November, jumped back up to $630 mid-last week.

Focus on Palladium Prices

While some more short-term spikes are undoubtedly coming, longer-term structural concerns continue to swirl around the PGM markets in particular.

In just last month’s analysis of another MetalMiner monthly sub-index (the Automotive MMI), my colleague Jeff Yoders brought up excellent points about the state of the platinum group metals:

“The increasing cost of PGMs was keeping the Automotive MMI in positive territory for most of the first three quarters of 2015. The pullback in precious metals prices could pull the rug out from under automotive, too. The catalyst metals never took off for investors the way that gold did and that’s bad news for their prices as supply was never really in much doubt without more investor interest.”

Now, it looks as though that’s coming true.

Bloomberg reports that palladium futures “tumbled to the lowest in more than three months amid signs of weakening investment and physical demand for the metal used in auto pollution control devices.”

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Phil Streible, a senior market strategist at RJO Futures in Chicago, told Bloomberg that “demand is really starting to fall.”

“You’re going to see that as interest rates go up in the U.S., auto loan rates will rise and you’re probably going to see automobile sales decline,” according to Streible.

The Rest of the Precious Metals

Platinum, silver and gold prices fell across the board from October to November, across geographies including the U.S., China and India.

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Our Global Precious MMI was up a point this month, climbing to 86 from 85 last month, an increase of 1.2%, but this may be the last increase we see for awhile as gold experienced its biggest single-day post-Brexit drop yesterday. It closed at $1,268.40 an ounce, a slide of 3%, down from $1,311.20 on Monday. It’s around $1,275 as of this writing.

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The yellow metal was dragged to its lowest point since the Brexit vote in June which was driven mainly by a bounce in the U.S. dollar after upbeat data triggered a break of key support at $1,300 an ounce. As speculation grows that the Federal Reserve may finally raise interest rates in December, the dollar has been given a boost and a selloff in gold has ensued. Losses in silver and platinum group metals have followed, although none fell as dramatically as gold this week.

Global-Precious-Metals_Chart_Ocotber-2016_FNL

We warned, earlier this month, that the first half investment appeal of precious metals was waning. The relatively tepid increase in September was a sign that the metals, as a group, simply could not keep the momentum of the first half. Most are blaming this pullback on the dollar, and that certainly has a lot to do with it, but the fact that economic fears about the U.S. economy have been quelled might be the real culprit.

U.S. manufacturing rebounded in September after contracting in August. New orders and production at factories increased, although employment fell. The Institute for Supply Management said Monday that its manufacturing index rose to 51.5 in September from 49.4 in August. Any score above 50 is a net expansion in manufacturing activity.

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While gold is the most for-investment metal of the group, the others are experiencing similar effects as gold and their supply/demand fundamentals aren’t much better. Silver is more industrial, but acts as a safe haven, too, a veritable poor man’s gold. Platinum and palladium are more tied to the automotive and other catalyst markets. Still, they are moving largely in lock-step right now and have been doing so since the dollar bottomed out in May. Platinum is receiving a particularly cold shoulder from investors. The metal is well-supplied even if investment demand increases.

What Does This Mean for Precious Buyers?

A stronger dollar and better economic data about the U.S. economy is bad for the investment appeal of precious metals. More data will come out in the days leading up to the presidential election but precious metals’ gains of the first half are likely a thing of the past.

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A couple of developments made precious metals soar in the first half of the year.

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A falling dollar was the first development that helped gold, silver and platinum group metals soar. Second, the U.K.’s Brexit referendum. Since their January’s lows, gold, silver, platinum, and palladium rose 30%, 50%, 44%, and 50% respectively.

Yes, supply/demand fundamentals differ from one metal to another. Gold has a big role in jewelry and investments. Silver has more of an industrial role, while automotive catalyst demand makes up about 40% and 75% of platinum and palladium demand. These distinct elements can cause these metals to behave differently from time to time but, overall, there are more two more critical drivers to pay attention to. The dollar and economic fears:

Gold (in yellow) vs Platinum (in Blue). Source: MetalMiner analysis of stockcharts.com data

Gold (in yellow) vs platinum (in Blue). Source: MetalMiner analysis of stockcharts.com data.

  • Back in December the U.S. dollar peaked. Weakness in the currency lasted until May and boosted the price of precious metals.
  • In May, the dollar bottomed out and started to climb, having a depressing effect on precious metals. But the effect didn’t last too long as toward the end of June, the U.K.’s Brexit referendum took place. The economic uncertainty pushed safe haven assets higher.
  • Finally, during the third quarter, the U.S. Dollar has been pretty neutral as investors wait for the Federal Reserve to take steps on raising rates at the same time as economic fears ease. The result? Investors lack reasons to push prices higher and consequently prices are retracting.

What This Mean For Metal Buyers

Unless the upcoming monetary policies cause the dollar to weaken, or new economic fears bring back the appeal for these safe haven assets, it might take a little while until we see precious metals rising like we saw in the first half.

Our Global Precious Metals MMI took a slight step backward this September, coming in at a value of 85 — a 4.5% drop from the previous month’s 89.

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However, the latter half of the summer has been kind to the gold, silver, platinum and palladium prices we track, with the past three months representing the highest MMI values of the entire calendar year.

Global-Precious-Metals_Chart_September-2016_FNL

All four precious categories tracked by the MetalMiner IndX softened over the month of August for our September 1 reading, contributing to the overall 4-point decline.

Main Index Drivers: Platinum and Palladium Prices

In a forthcoming MetalMiner analysis, my colleague Stuart Burns will share his findings from interviewing Trevor Raymond, director of research at the World Platinum Investment Council. The main takeaway? That the platinum market is like a “ticking time bomb.”

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Essentially, the global platinum market has been in deficit for five years running, with mine strikes and shortfalls leading the way into a supply-side headache for the industry. Demand, meanwhile, appears robust, according to WPIC’s data and quarterly reports, led by developments on the heels of Volkswagen‘s diesel scandal, China and India’s jewelry desires, and a potentially interesting knock-on effect from rising oil prices.

However, the investment community will likely be the prime driver of PGM price movements in the future; but whether it’s a chicken-and-egg situation — rising prices spurring investment activity, or vice versa — remains to be seen.

Secondary Driver: Gold Prices

According to a recent release by Sprott Asset Management, “August marked the fourth successive month that gold prices rose in contrast to the dollar — something that has not occurred since metal peaked five years ago amidst the global financial crisis.

Demand is now at a four-year high with metal displaying one of its best yearly performances since the 1970s. Due to the rise of negative interest rates and a more volatile market, gold is looking like a safe bet for many investors,” right alongside platinum, it would seem; with a secondary positive aspect of the latter being its industrial element.

“As a result of sluggish global economic growth, central banks are pushing interest rates into negative territory, which is positive for gold,” according to Senior Portfolio Manager Paul Wong, along with the Sprott Asset Management precious metals team. “We are likely in the early stages of the current gold bull market, driven by a global push to a negative interest rate policy, currency volatility and a high level of cross-asset class correlation.”

My colleague and our in-house metals procurement specialist and analyst, Raul de Frutos, agrees — see his most recent report on the gold market.

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Apart from lithium consumption and aluminum for light-weighting, it is unusual for the hybrid car market to cross paths with metals consumption stories but a recent article in the Economist details a technological development in the automotive industry that will be of interest to both.

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To anyone of even a mildly geeky nature, the Economist makes interesting reading drawing on history, new developments and the future path of electrical automotive technology. In brief, the issue is car voltage.

AdobeStock_ joel_420_electric_car_550_042016

Electric cars and hybrids are touted for their fuel capabilities, but the ability to optimize energy use in operation might be their real killer app. Source: AdobeStock_/joel 420.

Historically, cars started with six-volt systems but in the ’50’s — as vehicle’ electrical systems increased in complexity — the voltage was increased to 12-volt to cope with more onboard appliances, electric starters and so on. Well few things stand still in the automotive market and in spite of acute cost pressures, designers are starting to introduce 48-volt systems and are hoping, as adoption picks up, costs will come down.

What Are Those Extra Volts For?

First, what is driving it? Well, as the Economist explains, one reason is that cars are packed with more and more components, demanding more and more electrical power. A modern vehicle may have as many as 150 electric motors and new features like stop-start technology. These are putting strain on car systems, particularly those with high-compression diesel engines. Read more

This week, a comprehensive analysis of Dodd-Frank conflict minerals compliance filings showed that while some companies are going the extra mile to insure tantalum, tin, tungsten and gold are NOT influenced by the war in the Democratic Republic of the Congo, some still have a long way to go.

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Sadly, no Party City filing this year attesting to how conflict-free mylar party balloons are.

MetalMiner Olympic Construction Beat

The rushed and low-bid Olympic venues of Rio struck again this week as we all had to make sure to nut adjust the contrast on our sets when the games treated us to green water in indoor pools. Apparently they just ran out of pool-cleaning chemicals, not a high-up line-item in the Olympic punchlist, I’d imagine.

Just pretend it’s St. Patrick’s Day in Chicago. Rio visitors and athletes also got a visit from some ROUS’ (rodents of unusual size). Yes, they very much exist.

Metal Bulls

Our Metal Markets kept gaining this week as the Federal Reserve is still showing no stomach for interest rate increases and China’s stimulus keeps on stimulating. The London Metal Exchange is even breaking 30 years of tradition and introducing gold and silver contracts to get in on all of the precious fun.

LMEring_550

“Hey guys, let’s do this for silver and gold, too! Then, eventually, PGMs, too?” Source: London Metal Exchange.

Fresh off of slapping member-warehouse operator Metro International on the wrist, the LME is looking to expand its product mix and bring a greater return back to owner Hong Kong Exchanges and Clearing, Ltd.

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HKEX could use the help after this week.

After a gap of 30 years, the London Metal Exchange is, in collaboration with the World Gold Council, getting back into precious metals. Not just because it sees an opportunity, but because the industry is in desperate need of an efficient and professional marketplace following the departure of principal banks from London’s Gold Fix in the wake of the Libor scandal and suggestions the Gold Fix could be manipulated.

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The LME announced this week it will launch centrally cleared gold and silver contracts on a platform called LMEprecious in the first half of next year, followed by platinum and palladium.

Gold bars

Gold will trade on the basis of London good-delivery 99.5% bars in 100 ounce lots. Source: Adobe Stock/misunseo.

According to Bloomberg, the new contracts are designed to complement London’s $5 trillion over-the-counter gold and silver market and will include contracts for spot, daily and monthly futures, options and calendar spread contracts, according to the statement.

Who’s Got the LME’s Back?

Trading house OSTC and banks Goldman Sachs Group Inc., ICBC Standard Bank Plc, Morgan Stanley, Natixis SA and Societe Generale SA will co-own the LMEprecious platform and will act as liquidity providers and some 30 firms have expressed a desire to be engaged from the initial offering. Read more

MetalMiner’s index of global precious metals prices notched the second-largest move for August in our Monthly MMI series, behind only the Stainless MMI.

Global-Precious-Metals_Chart_August-2016_FNL

The Global Precious MMI rose 7.2%, from 83 to 89, between July and August. Gold prices again drove the move, with U.S. bullion logging its second straight month above the $1,300 per ounce threshold; however, the U.S. palladium price experienced a significant jump, rising 18.4% over the month.

Palladium on a Bullish Rebound

After hitting multiyear lows at the beginning of 2016, palladium has begun a slow down but its long-term ascent is still acting rather bullish.

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The PGM has been making higher highs and lower lows since January, and hit above $700 per ounce at the beginning of August.

palladium historical price chart 2016

Why?

Looks like investors have been giving palladium and its cousin platinum some more love.

Analysts at INTL FC Stone and Citi Research have said recently that they think investors have taken some of the money they’ve been putting behind gold and spreading it to the PGMs, according to the WSJ.

Back to Gold

While U.S. gold prices have hovered recently, they are still far ahead of their pre-Brexit levels. The Federal Reserve‘s dovishness has not given investors any reason to abandon their investments in gold, or silver for that matter.

Core Consultants Group opined recently that gold broke through a psychologically important barrier of when it crossed $1,300/ounce and is still finding overall bidding interest despite the slight declines in the price during the last few weeks.

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We, too, can’t see gold’s recent increases being pushed back, or even tempered, by anything other than significant interest rate increases by the Fed. The type of radical action that the central bank has shown no stomach for, lately, despite recent comments that it won’t rule out increasing rates this year.

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Gold and silver will return to the London Metal Exchange soon and China’s pollution crackdown may affect tin prices as many smelters have shut down.

Gold and Silver Return to the LME

The London Metal Exchange said today it is planning to launch spot and futures contracts for gold and silver in the first half of 2017, adding to its list of products which includes copper and aluminum.

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The 139-year old exchange is working in collaboration with the World Gold Council, an industry body backed by gold mining companies such as Barrick Gold and Goldcorp, and is supported by five banks and proprietary trader OSTC, which have committed to provide liquidity.

China Cracks Down on Pollution

China could ramp up imports of refined tin as a string of environmental inspections at smelters in the world’s top producer of the metal curbs local output.

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Officials in eight provinces last month began inspecting metals producers including tin smelters, forcing some to shutter production while they look to comply with environmental standards, according to industry officials and analysts.