I have written before about palladium’s rapid rise in 2018. I said I was skeptical it would last. Given that palladium prices just spiked above gold prices, albeit briefly, I’m sure glad I didn’t say that could never happen.
I’ve included platinum in the chart for reference. Gold, platinum, and palladium were roughly trending down together until August, when all three turned upward. But palladium outperformed the others by far.
What’s particularly interesting about this is that the narrative that’s driving palladium prices is increased demand, primarily for use in making gasoline engines in China. But we now know that the Chinese economy was decelerating that quarter. This suggests to me that the “storyum” here is more important than the palladium itself is to Mr. Market at present.
I’m even more skeptical than I was before that this will last.
To explain why, let’s pull back to look at the bigger picture…
Several things stand out in this chart. First is that 20 years ago, platinum and palladium both spiked. An ounce of palladium sold for more than gold for almost four years. That didn’t make palladium a safe-haven asset, however—and certainly not a monetary metal. The price inversion didn’t last, and palladium underperformed both gold and platinum for the next dozen years or so.
Fast forward to today, and we have the Dieselgate scandal dragging platinum lower than gold. And now, the “China likes gas-powered cars” story has driven palladium nuts.
But I stand by my analysis. I don’t think palladium is more precious than gold. Any spikes further above gold in the near term will likely be short-lived. Then the narrative will move on and palladium will go back to being just another silvery industrial metal. The fact that palladium is expensive today doesn’t make it a safe-haven asset or a monetary metal.
Key point: the trade war is very bad for the palladium narrative.
Unless Trump and Xi make a deal soon, I think the odds favor palladium pulling back—sharply.
If the trade war ends and freer, better trade ensues, we might see palladium prices remain elevated for some time. That could last until the next time industrial metals like this get whacked, which could happen with the next round of global economic figures. Longer term, it won’t last beyond the point when all those new Chinese electric cars steal the market from gas engines. Given how quickly things happen (or are made to happen) in China, I stand by my assertion that most Western market analysts are vastly underestimating the speed at which China will go electric.
But even if I were wrong about that, I wouldn’t even consider putting savings into palladium. Neither would anyone else I know—or have even heard of. When the fear trade drives markets en masse back into gold, I don’t expect palladium to even be a contender.
Gold futures hit their highest level in more than five months Wednesday on continued safe-haven buying after the recent freefall in equities and speculation that the Federal Reserve will slow its pace of monetary tightening.
Around 9:50 a.m. EST, Comex February gold was up $5.40 to $1,277.20 an ounce and peaked at $1,280.70, the contract’s most muscular level since July 9. March Silver rose 25.5 cents to $15.075 and got as high as $15.15, its strongest level since Aug. 28.
The metals were up even though the U.S. dollar index likewise climbed, trading up 0.278 point to 96.285.
“With the overall concern about the economy, we’ve seen the safe-haven play come back into vogue,” said Phil Flynn, senior market analyst with at Price Futures Group.
Further, he cited concerns about the recent declines in the U.S. stock market.
“The criticism of the Federal Reserve makes some traders speculate the Fed won’t raise rates any time soon,” Flynn added. He was referring to harsh criticism of Fed policymakers by U.S. President Donald Trump, who has broken with protocol by lambasting the Fed repeatedly.
Lower interest rates help gold several ways. First, they undercut the U.S. dollar, and precious metals tend to move inversely to the greenback. Lower rates also reduce gold’s so-called “opportunity cost,” which is the lost income from buying a non-yielding asset like gold, which does not pay interest income.
Daniel Pavilonis, senior commodities broker with RJO Futures, cited yet another reason why Fed policymakers may become less aggressive with monetary tightening.
“We saw such a stock-market correction that maybe the Fed will hold off raising rates for a while,” he said.
And that, he continued, could mean more inflation than would otherwise occur. Gold is often bought by investors as an inflation hedge.
Pavilonis listed the area from $1,300 to $1,307 as the next key upside chart resistance for gold, commenting that the metal could accelerate to the upside if it breaks though here.
Unlike its big brother, gold, physical silver is coveted for both investment purposes and industrial usage.
Right now, silver prices are in a bit of a slump—in other words, it’s the perfect time to load up on this precious metal while it’s down.
#1:
Silver is being used up in China’s solar boom
By far the largest application of industrial silver today is in solar panels—and Chinese demand for solar energy is skyrocketing. In its 13th Five-Year Plan, Beijing aims to triple its solar capacity by 2020 in order to combat air pollution and to comply with the Paris Climate Accord.
Amazingly, China is already investing more in clean-energy developments than the European Union.
Last month, China revealed a newly built 250-acre solar farm shaped like a panda—the first of 100 such solar plants planned for the Asian region in the coming years. Displaying typical Chinese efficiency, the solar farm in Datong was proposed in May 2016 and became operational only 14 months later. Over the next 25 years, it will provide the same power as burning one million tons of coal.
No wonder last year was the strongest so far for solar-related silver demand. Leading analysts believe that this trend will continue a while longer—even though Tesla’s Solar City is getting ready to replace silver with the much cheaper copper in its PV panels.
Specialist consultancy Metals Focus said it expected 2017 silver demand from the solar sector to ease only slightly compared to last year, remaining the second highest on record.
And the supply is finite. The chart below shows official global silver reserves, that is, the amount of silver that is considered to be recoverable from mines—which is only 571,000 tonnes.
#2: The US stock bubble is getting ready to burst
How many screaming superlative scan a market take before it collapses? We will probably find out soon.
It seems that US equities are hitting new record highs every day, but the writing is most certainly on the wall. By mid-July, the Case-Shiller P/E Ratio hovered above 30(the 100-year median is around 16). That is reminiscent of the height of the dot-com bubble and the weeks leading up to the 1929 stock market crash.
One yardstick of the growing insanity is the money-burning tech companies whose shares keep going up no matter what.
Take Netflix (NFLX), for example,which casually announced in an April letter to shareholders that it expects a negative free cash flow (FCF) of $2 billion this year, up from “only” $1.7 billion in 2016.
Last
October, the company said it would have to raise another $800 million
in debt (adding to the over $2.2 billion it already had), all in the
name of adding quality content, aka movies and TV shows, to the site.
It’s no secret in investment circles that Netflix doesn’t really make money, a negligible fact that hasn’t kept the stock from skyrocketing.
In its mid-July Q2 earnings report, the company proudly reported that it had added 5.2 million new subscribers in the last quarter,crushing Wall Street estimates and propelling the stock upward by more than 10%.
Never mind that Q2 free cash flow was minus $608 million, a year-over-year increase in losses of$354 million. Investors gobbled up the “good news” and sent shares soaring to new heights of over $188 in July.
We see a similar picture with social-media giants like Twitter and Snapchat, which are virtual money pits.
Of course, there is no way that this can go on. And as stocks are being caught out in the rain, gold and silver will get their day in the sun, as has historically been the case.
#3: European banks are still in big trouble
The ongoing debt crisis in the EU has recently been dwarfed by the global outcry revolving around the much-despised Trump administration and its draconic trade policies.However, while Europe’s woes may be forgotten for the moment, they have been anything but resolved.
In June, the UK Telegraphcommented that “Italy’s long-simmering banking crisis has erupted again. The emergency plan to wind down two Venetian lenders at a cost of up to €17bn is a fiasco of the first order.” This, the article continues, could push Italian debt to 133% of GDP.
Research by Italian
investment bank Mediobanca found that 114 of Italy’s 500 banks have
“Texas Ratios” of over 100% (non-performing loans divided by tangible
book value plus reserves; a TR of over 100% is considered perilous).
24 of the endangered banks reportedly have ratios of over 200%, among them some of Italy’s biggest banks, like Monte dei Paschi di Siena with a TR of 269%, and Veneto Bancawith a TR of 239%.
But the problem extends to the entire European Union. According to a Reuters article, “the total stock of non-performing loans (NPL) in the EU is estimated at over €1 trillion, or 5.4% of total loans, a ratio three times higher than in other major regions of the world.”
Clearly, this is a level that is unsustainable in the long run. And if you don’t believe that Italy’s problems could have a major impact on US investors, remember how the US subprime mortgage crash and subsequent financial crisis affected the entire world.
In today’s interconnected global economy, any severe financial crisis in one part of the world can cause tidal waves in another. And when that happens, gold and silver are the ultimate safe-haven assets.
#4: The risk of military conflict continues to
escalate
Tensions between the US and North Korea continue to escalate as Kim Jong-Un has now threatened a nuclear strike against the United States.
This direct threat came after CIA Director Mike Pompeo said that the US needs to find a way to separate North Korea from the system: “The North Korean people I’m sure are lovely people and would love to see [Kim Jong-Un] go.”
In response, the North Korean Foreign Ministry stated, “Should the US dare to show us even the slightest sign of attempt to remove our supreme leadership, we will strike a merciless blow at the heart of the US with our powerful nuclear hammer, honed and hardened over time.”
By some estimates, Pyongyang could have a nuclear-capable ICBM as early as next year.
And North Korea is not the US government’s only worry. President Trump vehemently opposes the Joint Comprehensive Plan of Action (JCPOA), a treaty signed by the US, Iran, and five other countries in 2015. However, to renege on that agreement and to stop Iran from pursuing nuclear weapons, says retired Army General Paul Eaton, “would require regime change, which requires full-scale invasion, which is not tenable.”
Iran, Eaton warns, would be a much more dangerous enemy than Saddam Hussein’s Iraq. A large-scale attack on Iran would likely involve the US’s NATO allies as well as Israel… and if Russia were to come to Iran’s aid, we might have World War III on our hands.
It doesn’t have to come to war,though, for precious metals prices to rise. The threats and growing tensions are enough to drive more investors to the safety of gold and silver—yet another reason to get some bullion now.
#5: Silver is again becoming real money
Gold and silver are making are turn as sound money.
Article 1, Section 10, of the US Constitution demands that “No State shall… make any Thing but gold and silver Coin a Tender in Payment of Debts.” And more and more states are putting precious metals back on the books.
Six US states have put precious metals back onto their radar, and the seventh just followed suit: as of August 9, Arizona will acknowledge gold and silver as legal tender. Four other states are on the road to accepting bullion as currency—also, Utah and Texas plan to set up bullion depositories to help private investors keep their gold investments secure.
Here’s a map of US states with current or pending legislation to accept precious metals as legal tender:
As a consequence of this legal change, if you live in one of the participating states and your gold and silver appreciates in price, there will be no state capital gains taxes since currency isn’t subject to taxation.
