Where Are Au, Ag, Pt & Pd. Headed?

Bullion analyst Sanjiv Arole does a bit of crystal ball-gazing to predict possible outcomes for precious metals in the near future.

Gold appears to have met its nemesis in the form of the Fed Chief Jerome Powell. After having scaled over $2,067 per ounce on the back of the pandemic in August 2020, gold was back with a bang as it soared to an intra-day high of $2,074.60 per ounce on 6th March, 2022 a few days after the start of Ukraine war.

The yellow metal eyed further highs as there were many factors in its favour. Not only gold, but the entire precious metals basket was on a high immediately after the Ukraine war began – silver scaled its year high of $26.150 per ounce, platinum reached its peak for the year of $1,151 per ounce, and palladium climbed to its all-time high of $3,440.76 per ounce (intra-day) in early March 2022.

The factors favouring gold and other precious metals were record high inflation in the world, particularly in the western world. In fact, in the US inflation was at a 40-year peak. Oil prices were volatile and topped sharply a few times, and gas supplies to Europe were under a cloud. There were several other geo-political tensions across the global, the pandemic too seemed to be going on forever, the stock markets went into a tizzy and have remained volatile ever since.

The picture looked rosy for gold, in particular, as a safety net against inflation, et al. However, Jerome Powell’s single-minded pursuit of taming inflation with interest rate hikes since June this year, with the last two hikes at 0.75% each in July and September, have put a spoke in gold’s wheels. With another hike promised in December 2022, the outlook seems bleak for the precious metals basket.

Powell’s aggressive monetary policy stance has not only strengthened the USD and increased bond yields, but as a result impacted the equity as well as the commodity markets, bruising them badly. Gold fell to its lowest of $1618.20 per ounce on 28th September 2022, silver decreased to $17.77 per ounce on 1st September 2022, then platinum too fell to $831 per ounce on July 14th 2022, while palladium nose-dived to $1,810 per ounce 14th June 2022. Thereafter, it became apparent that US stock markets were in a bear phase and that a recession was just round the corner.

There were many international disruptions that shored up gold prices to cross over the $1,700 per ounce mark briefly late last weekend. These include bankruptcy news about Credit Suisse and Deutsche Bank as well as the real threat of a nuclear fallout over Ukraine, rumours about a coup in China, the flash point over Taiwan, and the North Korean missile over Japan. It was back to normal as the yellow metal slumped to $1,665.30 per ounce on 10th October itself intra-day low with other precious metals in tow. So, what’s in store for the rest of the precious metals basket in the remainder of the year?

The World Trade Organisation WTO recently cut its forecast for global trade growth for 2023 from 3.4% to just 1%. Likewise, the IMF cut its global GDP forecast for 2023 to 2.7%, even while keeping the current year’s forecast at 3.2%. Recession, it seems, is a foregone conclusion with some saying that it has already descended on Europe. Both the IMF and the World Bank have cut their growth estimates for all countries, including India. Let’s look at the impact of the above parameters on the each of the precious metals.

Gold: The yellow metal’s safe haven status is likely to be at the forefront in the coming months as global growth falters and the Western world sucks the rest of the world into the recession quagmire. For, the rate at which interest rates have been hiked, recession is likely to knock down the growth engines much sooner than anticipated. It would seem that Jerome Powell is hurtling the US economy towards a deep and long recession. But, then the architect Ben Bernanke who guided the Fed, when the sub-prime crises led to the fall of Lehmann Brothers and the subsequent global recession, was announced the Nobel Prize for economics recently. So, one never knows. Now, when the recession last hit US and the world in 2008 the gold price was around $700 per ounce. It then rose in leaps and bounds each year to scale its then all-time high of around $1,922 per ounce in September 2011. If one looked at another interesting statistic, the average annual change in Producer Parity Index for gold ores rose from 2.6 in 2008 to 27.4 in 2010 and 32.8 in in 2011 before declining to 5.4 in 2012 (Source: US Bureau of labour statistics). Then, most of the Central Banks are net buyers of gold in 2022 to-date. As far as gold ETFs were concerned, September saw an outflow of 95 tonnes, mostly from North American and European funds. Overall, ETF holdings stood at 3548 tonnes, a 1% decrease year-to-date. The USD gained parity over the euro and even surpassed it in September, 2022. The rising interest rates and the strong USD dollar continue to be the headwinds for gold. It remains to be seen as to how far Jerome Powell can continue with his interest rate hikes and when recession halts his drive. That could be the signal for gold to turn around. In the Indian context, the weak rupee at over ₹82 to a dollar may have kept the gold price above ₹50,000 per 10 gms. The festival and wedding season could well shore up demand for the yellow metal. However, the CAD crisis could well prompt a further hike in import duty. Some even fear a short term ban on gold imports. But, the government seems keen to promote import of gold through the Gift City by availing the UAE trade agreement. In the global markets, some even see gold above $1950 per ounce by the end of the year. Overall, one can expect a roller-coaster ride for gold in the last three months of the year.Silver: In most parts of the world silver is mainly an industrial metal. It is only in India and parts of Asia that silver is used extensively in jewellery and silverware. Therefore, in a period of recession, overall demand for silver is likely to be subdued even if there is a good demand for silver jewellery and silverware from India. As a result, the silver price could be under pressure in the coming period with the recession looming large over the horizon. In the current year, the silver price has been volatile in a 47.66% range, with a high of $26.150 per ounce on 9th March 2022 and a low of $17.71 per ounce on 1st September 2022. But, there is also a twist in the tale for silver. Silver has a relationship with gold and the gold:silver ratio is said to be not just a ratio. Gold tends to pull silver along in its slipstream and very often the silver price is shored up when gold pulls away. Currently, a shade under 90, the time seems to be ripe for silver to follow gold and should gold price run away as recession deepens and gold’s safe haven status comes to the fore.However, while the gold price reached the then all-time high of around $1,922 per ounce in September 2011 and thereafter crossed $2050 per ounce twice in August 2020 (pandemic-induced) and again in 2022 following the Ukraine war, silver managed to near its all-time high of $50 per ounce in 1980 of around $49 per ounce only once in April 2011. The pandemic as well as the Ukraine war have both failed to lift the silver price even though the gold:silver ratio crossed $120 in 2020 and is currently hovering around $90. In rupee terms, though the silver price has crossed the Rs.70,000 per kg mark a couple of times in the past. Whether silver latches on to the gold price or languishes is still a matter of conjecture. Silver is headed for choppy waters.Platinum: Once the most expensive precious metal scaled its all-time high of over $2,200 per ounce mark way back in 2008. The major portion of its demand, around 78% comes from the automotive sector (as auto-catalysts) and the industrial sector. Jewellery accounts for around 20-23% of the demand and the balance is in investments. The demand for platinum jewellery has declined over the last few years from around 40% in 2016-17. Investment demand too has declined significantly. Therefore, the impending recession could adversely affect the platinum price as demand for industrial usage as well demand for automobiles could be hit.However, the Ukraine war has disrupted supplies of platinum from Russia and the rapid trend of substituting platinum in place of palladium in catalytic convertors and in the hydrogen economy could well bail out the white metal. With a price range of 38.51% with a high of $1,151 per ounce and a low of $831 per ounce in the current year, it still less volatile than either silver or palladium, but after gold’s range of 26%. It could well be the dark horse that bucks the trend in times of recession and hold its chin above water.Palladium: As jewellery forms less than 1% of the total demand for palladium it is potentially most vulnerable to recession. For, most of its usage is in the automotive sector as auto-catalysts as well in the industrial sector. A recession is most likely to impact the demand for palladium in normal circumstances. However, palladium has been in short supply for several years now due to its increased demand in catalytic convertors in the automobile sector amid tighter emissions norms.However, this metal seems to be in a league of its own. It was the most volatile of all the precious metals in the current year to date, with a range of over 84% at a high of $3,440.70 per ounce (intra-day) on 7th March 2022 and a low of $1,810 per ounce on 14th June 2022. It seems to be immune to the high interest rates regime unleashed by the Fed chief. Efforts are underway to substitute palladium with platinum in catalytic convertors for the auto industry, however, that cannot be achieved overnight. Moreover, supply disruption of palladium from Russia is likely to keep the price much higher. At the moment, it would seem that the palladium price could outperform all the others in the precious metals basket this year. But, is the high palladium price a mirage? Can it sustain itself at such high levels? Do fundamentals back the palladium price? It would be a while before the picture becomes clear for palladium. In the interim, palladium will continue to fly high,Finally, the bottom-line is that US inflation, though down from a 40-year high of 9.1%, was still at 8.3% by the end of August 2022, way off the Fed target of 2%. So, still a long way to go. In such a scenario, can the Fed continue with its aggressive rate hikes beyond December? How far can Jerome Powell leap before recession engulfs the US and the rest of the world? Moreover, when interest rates rise, prices of existing bonds tends to fall, even though the coupon rates remain constant. Yields go up! The converse also holds good. Currently, we are in the high interest rates and high bond yield regime. Bond yields were at their highest in 1981 at over 15%. Is that the Fed’s point of return? The rest of the parameters, like, high inflation, Ukraine war, impending recession, lowering of growth forecasts, supply shortages, etc., all point towards a rush to the safe havens in the not-too-distant future. Jerome Powell’s pursuit of taming inflation could lead the world to the brink of a rapid recession. One can only hope that the remedy is not worse than the disease.

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