MetalMiner’s Global Precious Monthly Metals Index (MMI), tracking a basket of platinum, palladium, gold and silver prices in several geographies across the globe, is now officially in a two-month uptrend this November after several months of declines.
The Global Precious MMI came in at a value of 85 for its November 2018 reading, up 2.4% from 83 last month, continuing a steady upswing (the sub-index’s level this past September had not been seen since January 2017).
The U.S. platinum bar price sustained its own bounce-back with another spike this November. As my colleague Fouad Egbaria mentioned earlier this week, the platinum-palladium spread narrowed slightly this past month. U.S. platinum bars rose 2.6% to $835/ounce, while palladium bars fell 0.3% to $1,067/ounce.
Notably, platinum continues to stay above the $1,000 per ounce threshold, which is quite significant.
Palladium Looking Up
A couple weeks ago, palladium hit a record high — so high, in fact, that it nearly achieved parity with the gold price, something for which the platinum price has usually been in the running as the lead candidate … but not lately.
The U.S. gold price, as tracked by our MetalMiner IndX, gained slightly over last month to begin November at $1,214 per ounce.
As we’ve been continued to report in this monthly column, “a combination of factors, from tight supplies and large deficits to resurgent interest from speculative investors, has kept the platinum group metal (PGM) on the boil,” as a recent Reuters piece put it.
However, more specifically it looks as though geopolitics have been in play.
According to Reuters, fears that Russia “could restrict supplies in response to the United States’ plans to withdraw from the Intermediate-Range Nuclear Forces Treaty,” as well as the promise that a recent economic stimulus package in China will inject life into the auto markets, has contributed to spiking palladium prices.
Speaking of the auto markets, when it comes to the U.S. automakers, the platinum-palladium price differential has got analysts using the “S” word: substitution.
But even with the sustained reversal in the price relationship, car companies such as General Motors won’t be rushing to swap the two materials anytime soon.
“It’s not a flick of a switch for us,” Rahul Mital, global technical specialist, diesel aftertreatment at General Motors, said in a panel discussion at a London Bullion Market Association meeting in Boston on Monday, as quoted by Bloomberg.
“Any time you want to make a substitution like that, it is at least 18 months to a two-year cycle if we’re going to switch. We have to be careful that by the time we do all that, price changes don’t negate the benefits,” Mital was quoted as saying.
Platinum’s Tail Already Between Its Legs
According to a different Reuters article citing a poll carried out by the news service, palladium’s price premium over platinum “will widen next year, with palladium set for its best year on record while platinum slumps to its worst performance since 2004.”
Palladium is expected to average at $993/ounce this year, and $1,025/ounce next year, while platinum is expected to be averaging $882/ounce in 2018 and $875/ounce in 2019, according to the experts and analysts polled in the article.
We’ve touched on conflict materials in this space before, typically in reference to cobalt. A majority of the world’s cobalt is mined in the Democratic Republic of the Congo, where conditions at so-called artisanal mines (i.e., small-scale mines) are sub-standard, according to reports by a variety of NGOs.
Among the concerns at these mines includes a lack of regulation, which in some cases leads to extremely unsafe working conditions and the use of child labor.
Amnesty International last year released a report in which a number of big-name companies came in for criticism with respect to their cobalt supply chains.
Meanwhile, over at MetalMiner’s sister site, SpendMatters, you can find a similar report on the supply-chain issues related to gold — that is, conflict gold passing through some big-name companies en route to the U.S. market.
Documents reviewed and interviews carried out by The Sentry, a team of policy experts and financial auditors co-founded by George Clooney, raise concerns that the corporate network controlled by Belgian tycoon Alain Goetz, director at the Belgian gold refinery Tony Goetz N.V., has refined illegally smuggled conflict gold from eastern DRC at the African Gold Refinery (AGR) in Uganda and subsequently exported it through a series of companies to the U.S. and Europe. The study lists companies like Amazon, General Electric and Sony as possibly being ones that conflict gold may have been sold to.
But this festive season, starting from around the beginning of October, gold buying has not picked up at the pace one it used to.
Reports are coming in that Indians are not flocking to jewelry stores as they normally would for a couple of reasons – an increase in the price of domestic gold and the increasing value of the U.S. dollar versus the Indian rupee.
At the first marker of this season, that is Dusshera, when buying the yellow metal is considered auspicious, demand was down between 20-40% in some places, as compared to the same period last year, according to a Reuters report.
Of course, demand was better compared to some of the previous months, but it has not been as high as it was last year, according to Nitin Khandelwal, chairman of the All Indian Gems & Jewellery Domestic Council, as quoted by Reuters.
Much of the demand for “festival” gold comes from rural India. This year, that sector is lagging, partly because of failure of the monsoon in many parts. A good monsoon means a bumper crop, which translates into better buying of the bullion during the festival time. Even discounts of about U.S. $8 an ounce failed to pull in the crowds.
The next milestone is the Indian festival of lights, Diwali.
While some retail jewelers are optimistic of an increase in pickup, others are keeping their fingers crossed. The price of gold continues to soar, touching Rs 32, 350 (about U.S. $442) per 10 grams as of Oct. 23.
Gold plays a major role in the Indian economy. Previous studies have pegged India’s gold stock at around 24,000 tons, mostly held by the average Indian. Its value, at today’s rates, reaches about U.S. $800 billion.
The last quarter of the year is the season of peak demand, with Indians buying almost 240 metric tons on average in the past four years, according to the World Gold Council.
This year, Dhanteras — one of the most auspicious days for Indians to buy gold — falls on Nov. 5 and will be followed by Diwali.
Both retailers and bullion analysts say that if things on the ground do no improve by then, the trend seen during Dusshera will follow into Diwali.
The Global Precious Monthly Metals Index (MMI) registered a value of 83 for its October 2018 reading, up 2.5% from 81 last month, stanching the bleeding — last month’s level had not been seen since January 2017.
The U.S. platinum bar price had its own bounceback after having dropped last month. Platinum rose to $814 per ounce, up from $777 per ounce in September. However, U.S. palladium bar built up a two-month upward price trend by breaking the $1,000 per ounce level for the first time in eight months, rising to $1,070 per ounce.
This extends palladium’s historic premium to platinum for yet another month.
“The best investment bubble propositions incorporate the familiar and the incomprehensible,” he writes.
The largest single application for palladium, as MetalMiner readers well know by now, is to help convert toxic gases within catalytic converters. “Therefore, we have something familiar to investors (cars) and something incomprehensible (the physical chemistry of catalytic converters) — perfect conditions for a bubble,” Dizard concludes.
Much of the bubble conditions can be explained by “Dieselgate” — read about it in the full article (paywall) — but speaking of palladium bar prices, as we were just a bit ago, those aren’t what auto buyers should really be tracking: sponge is where it’s at.
“Could it be that the automakers will run into a supply squeeze and be forced to buy palladium bars of the sort represented by Nymex futures? Not exactly,” Dizard writes. “The automakers actually buy a semi-manufactured product called ‘sponge’, which is palladium (or platinum) particles used to coat a ceramic matrix inside the emissions system. There is a separate, over-the-counter market for palladium sponge.”
Ultimately, “if you follow the quotes for palladium sponge, you can see whether the ‘sponge premium’ over the price of bar metal indicates a real shortage of the industrial product,” according to Dizard.
Evidently, the promise of huge profits based on higher gold prices – and fueled by rampant corruption — have created a continentwide supply chain problem. According to the authors, the issue plagues Colombia, Peru, Bolivia, Brazil, Ecuador and Venezuela.
The core of the problem is a major risk for gold-buying organizations — the ongoing threat of murky supply chain traceability.
From the looks of it, the short answer to that is … yes.
Here’s What Happened
Going by the August 2018 reading of MetalMiner’s Global Precious MMI, which tracks a basket of precious metals from across the globe, the subindex suffered a loss of 2.4%, falling to a value of 82.
The last time we saw the Global Precious MMI at that level was February 2017.
Platinum and palladium seemed to drive the loss this month, yet all major forms of precious metals across geographies ended up lower this month.
For example, the U.S. platinum bar price dropped 1.8% to $837 per ounce. Palladium is still transacting at a premium to platinum in the U.S. market, but not in the China or Japan markets (although exchange rates may ultimately be affecting that relationship). The U.S. palladium bar price dropped for August as well, down 2.1% to $928 per ounce.
Yet the U.S. silver price ended up lower than $16 per ounce to begin the month for the first time since January 2017, clocking in at $15.50 on Aug. 1. The gold price dropped as well, with U.S. gold bullion taking a 2.3% hit to end up at $1,223.40 per ounce.
All of these metals appear to be in a long-term downtrend since the tail end of 2017 and first couple months of 2018.
What Buyers Should Consider
A strong dollar still keeping the platinum price low. Along with supply surplus and the ever-looming threat of a global trade war, the dollar’s strength is a strong indicator of platinum’s fortunes for the rest of 2018. A recent Reuters poll of 29 analysts and traders showed that the platinum price looks to remain historically depressed for the balance of the year, with a slight rebound in 2019. “The diesel scandal remains a drag on demand … Meanwhile, currency weakness provides a lifeline to the South African platinum industry, cutting dollar-denominated costs and reducing the risk of mine closures,” said Carsten Menke, analyst for Julius Baer, as quoted by Reuters.
Palladium to remain at a premium? “We expect a rebound in palladium prices [in 2019] amid a growing market share of gasoline vehicles and healthy demand growth in emerging markets. Fundamentals are tight amid a widening deficit,” Intesa Sanpaolo analyst Daniela Corsini told Reuters.
Your latest preferred supplier — Sears? In the current economic climate that retailer finds itself in, it’s strange to hear that the company has added several brand lines sold by third-party sellers to “bolster its online marketplace,” according to a press release. Additions include “gold, silver, platinum and palladium bars, rounds and coins, as well as premium bullion products,” the release stated. So if you’re looking outside the box to source your precious metal volumes for industrial applications, take note: “Sears.com and Shop Your Way® are currently offering a $20 CASHBACK in Points when members spend $100 or more on APMEX [the online retailer of the metals] products until August 11.”
For the first time, a state-owned miner will take up gold mining in India. Earlier this month, India’s National Mineral Development Corporation (NMDC) won the rights to it at an e-auction. In the process, it beat several biggies, such as Vedanta and Adani. NMDC will dig up a gold mine located in the southern Indian state of Andhra Pradesh.
NMDC is not a newcomer to gold mining. It is developing a gold mine in Tanzania, while its Australian subsidiary, Legacy Iron Ore, is currently in the process of testing as many as 17 gold tenements in the Western Australian region.
The Chigargunta-Bisanatham mine will be an underground operation. First-phase production is expected to begin two years after the permitting process.
According to a report by the Press Trust of India (PTI), the initial investment is estimated to be about U.S. $4.5 billion. The Indian government stands to earn 38.25% revenue on sale value. It has estimated reserves of 1.83 million tons containing 5.15 grams of gold per ton.
Incidentally, India is on the way to formulating a new gold policy, which will promote domestic gold mining.
Industry experts believe that at least 100 tons of gold can be mined annually in India, from the present level of about 1.5 tons (as compared to China’s 450 tons a year). Geologists believe that India sits on vast deposits of gold, as the terrain from Australia to China is very similar, so they see no reason why India cannot step up its gold mining.
Experts want the Indian government to factor in the complete journey of gold, from mines to market, under the new policy.
Very slowly, after a court-imposed e-auction for mining, gold mining has picked up.
One of the first in this business was Vedanta. In February 2016, Vedanta Resources became the first private company to successfully bid for a gold mine in India, in the central Indian state of Chhattisgarh. The mine has gold reserves of 2.7 tons.
Other Indian private miners, in collaboration with international players, have started to move in. More and more are expected to follow in the footsteps of Vedanta and NMDC.
Gold mining will also save the country foreign exchange, since it imports most of its gold at the moment.
A previous government report identified the unrefined gold resource base in the country at 658 tons of metallic gold. The report also stated that this tonnage is spread over 13 different states.
India needs to get its act together on the gold mining front, especially since China is already well on its way. Since 2013, when gold prices plunged 30% in a year, China has been ramping up overseas gold-mining investments.
There is no doubt that developing gold mines is a long-term, risky process requiring years of planning, research and infrastructure development. Miners also need to conduct analyses on how much gold a ton of ore actually contains.
The World Gold Council’s first-half outlook report details the market forces at work behind the gold price’s recent drop, but also argues an array of factors could see the price rise in the second half of the year.
According to the report, after a 4% rise in Q1, gold came back down by the same amount in June, and argues the price is being driven by a triumvirate of factors: the strengthening U.S. dollar, higher investor threshold for headline risk and soft physical gold demand.
“At the same time, gold’s price momentum and investor positioning in derivatives markets has accelerated its descent,” the report states. “We believe, however, that there may be reasons to be more optimistic during the second half of the year.”
Regarding the first, like other metals, gold exhibits an inverse relationship with the U.S. dollar. The dollar has leveled off somewhat in recent weeks, but in the year to date has posted strong gains. In the year to date (i.e., through July 31), the U.S. Dollar Index has jumped 2.61%, as of Wednesday afternoon.
The dollar dropped in January but steadily increased since then, with the spot index hitting a high of 95.39 as of June 28.
However, the World Gold Council argues the trend of strength might not continue, despite the most recent quarter showing the largest appreciation in the value of the dollar since Q4 2016.
“In addition, in the face of ongoing rhetoric over trade agreements, the market seems to have taken the view that the US will likely benefit from renegotiations,” the report states. “Even if this turns out to be the case, many economists believe that an increase in tariffs will eventually have a negative impact on economic growth. And while this could decelerate gold consumer demand somewhat, its effect may be lessened by a weakening in the US dollar.”
In addition, the rise in trade protectionism around the world “has significantly increased the risk that inflation will accelerate further,” the report argues, also noting the price of gold historically rallies when inflation moves above 3%.
For now, however, inflation levels in the U.S. has leveled off in June, according to PCE Index data released Tuesday. Whether factors like trade conflicts will lead to a surge in inflation remains to be seen in the coming months.
In another optimistic outlook, the report notes that the summer months typically see lower gold demand, while September typically sees demand rise.
“Finally, while the summer period tends to be a quiet period for gold buying and trading – as seen by softer seasonal demand, lower trading volumes and sideways price movement – the gold price has tended to increase in September as consumers prepare for a traditional buying period and investors rebalance their portfolios before the end of the year,” the report states.
Gold has lost a bit of its sheen in recent months, but that could change throughout the remainder of the calendar year if the report’s assumptions hold true. Like many current events in the metals markets, we’ll just have to wait and see what happens vis-a-vis a number of political and economic buckets, from trade barriers to the strength of the dollar to rates of inflation.