Investors and the global economy are facing an environment with flat to inverted yield curves which is often a signal of a looming global recession.
The global stock of negative-yielding debt is now in excess of US$ 17 trillion. Stock valuations are at extreme levels especially when compared to the level of interest rates.
At the same time, there are increasing geopolitical concerns; trade wars, Brexit and Middle East turmoil.
It is an unusual period of global economic policy, in search for yield, and the need for capital preservation to return ever so drastically. Within this context, there is a clear consensus for higher levels of safe-haven assets like gold and other precious metals to constitute one’s investment portfolio.
The gold market has depth. With a global market size of 73 million ounces, it is still smaller than US treasuries, though larger than Eurobonds, which is substantial. It should no longer be seen as just a small illiquid backwater of the financial services industry. In fact, the central bank of the Netherlands claims gold as the “trust anchor for the global financial system”.
Investors are adding gold to their portfolios, the most significant of course being the central banks that bought the most gold in history in 2018, with continued robust purchases y-t-d in 2019 (bringing their holdings to 34,000 tonnes) led by Russia, China, Turkey and Kazakhstan. Gold is an important element of global monetary reserves for them and is the third largest reserved asset in the world, constituting about 11% of the world’s international reserves after USD and EUR.
The central banks are leading the way, and gold allocations in an investment portfolio should be higher when yields are low. According to the World Gold Council, “based on historical returns for major asset classes, 2-10% gold allocation is the optimal for portfolios with various asset compositions and increasing as riskier assets are added.
But when we include lower expected returns for bonds based on the results from our model, we find that across most portfolios the optimal gold allocation increases by an additional 1-1.5%.”
Gold prices climbed over 1% again on October 30, supported by an interest rate cut by the U.S. Federal Reserve and uncertainty surrounding a US-China trade war that bolstered the metal’s safe-haven appeal.
Spot gold was 1.2% higher at $1,512.81 an ounce as at the end of Thursday, having earlier risen to a near one-week high of $1514.20. Prices were set for a monthly gain of more than 2%.
Whilst gold should be elemental in an investment portfolio, a diverse precious metals portfolio is recommended also containing especially silver and also platinum and palladium.
Whilst silver is still lagging behind gold and seems a little sleepy, despite trading over US$18 for the last few days, like gold it is a safe-haven asset. A negatively-correlated asset that one will run to when everything else fails.
Demand has been slightly down due to less industrial demand as a result of the global economic growth slowing down. Industrial application accounts for 56% of total silver demand.
Silver is much more volatile than gold and it can be anyone’s guess how the silver prices will move forward. The unofficial average price prediction for the year ahead, 2020, following an LBMA/LLPM meeting in Shenzhen ending October 13, is US$ 23 which is a significant increase of over 30% from the current US$ 18 an ounce.
The World Platinum Investment Council (WPIC) forecasts a substantial 9% increase in total platinum demand in 2019. Increased and solid investment demand has led and will continue to lead this higher demand as opposed to an expected decrease in the automotive and jewellery segments of 4% and 5%, respectively.
Currently trading at US$ 931 an ounce, industry experts see the price of platinum reaching US$ 1,128 in 2020. Again, denoting a greater than 30% price elevation.
Historically, platinum has traded at a premium to gold for over 80% of the time as its supply/demand fundamentals added to its ‘precious’ value. In recent years, negative sentiment, based on concerns over the decline in demand for platinum in jewellery and auto catalysts, has seen this premium eroded.
The reasons for past price weakness are better understood and supply/demand fundamentals are showing signs of strengthening (Chart 3), with demand growth signalling future deficits.
On this basis, platinum looks undervalued relative to gold and silver, with its price still close to an all-time low, presenting a low-risk entry point for investors.
Palladium is by far the best performing precious metal year-to-date with a sharp increase of 40% since beginning of the year to over US$ 1,800.00 an ounce. Acute shortages are currently driving this metal which is a key component in catalytic converters to reduce emissions in cars.
The use of palladium is increasing while supply has not been able to meet this increased demand especially from the Chinese government in tightening its regulations to reduce emissions.
It’s true that palladium’s rise relative to platinum might prompt some carmakers to work on a substitution.
Interestingly, carmakers are now looking into the use of fiberglass which will increase the demand for Rhodium in the future. However, it remains highly uncertain when a switch will or could actually happen.
Research shows that technological advances are needed before it can match the performance of existing palladium-based catalytic converters. With the current and near-term lack of substitution-ability we are seeing a continued growth story for this metal that should almost certainly have a part-allocation in an investment portfolio.
Industry analysts believe that prices will test the US$ 2,000 level in the coming weeks as strong demand, coupled with tight supplies continue to push prices higher. Others are giving it until next year.
Palladium is currently trading in the US$ 1,790 – 1,810 range. Price prediction, following the LBMA/LLPM meeting in Shenzhen, for 2020 is US$ 1,924.