“Gold touches two-month high as Trump uncertainty hits dollar.” ¹

“Gold ends near 10-week high in Trump era as dollar wobbles.” ²

“Gold Hits 2-Mo. High On Safe-Haven Demand, Weak U.S. Dollar” ³

These are just some of the recent headlines on gold. As you can see, the precious yellow metal’s recent recovery is grabbing everyone’s attention. After a weak performance in the second half of 2016, gold is up about 2.9%, year-to-date.⁴ But, while gold has been in the spotlight, there are other metals that are performing much better.

The Hottest Metals Of The Year
I’m talking about platinum, palladium and copper. Year-to-date, as of January 27, platinum is up 7.4%, while palladium and copper are both up about 6.5% respectively.⁵ In order to understand what’s driving the performance of these metals, we need to look at China and its growing environmental problems.

There’s a joke in Beijing that if you want to have free cigarettes, you just need to open the window. This refers to China’s critical air pollution problem. If you do an Internet search for “air pollution in China,” you can see plenty of pictures of buildings that become invisible behind the thick smog.

The U.S. Environmental Protection Agency (EPA) has developed the air quality index (AQI) to measure air pollution. When this index is showing readings between 300 and 500, the EPA advises everyone to “avoid all physical activity outdoors” because the air is hazardous.

According to the EPA, a rating of 300 is considered “extremely rare” in the United States and happens mainly during forest fires.⁶ Well, earlier this year, the AQI registered more than 500 in Beijing. And, according to research from Nanjing University’s School of the Environment, smog has been linked to nearly one-third of deaths on the Chinese mainland.⁷

So, how in the world is this related to palladium and platinum? Well, these metals’ most important industrial usage is in the manufacture of catalytic converters for automobiles. They help reduce pollutants produced by gasoline and diesel engines, lowering the air pollution produced by automobiles. For example, these devices account for about 75% of palladium demand. And, with the Chinese government implementing tougher environmental policies⁸, demand for palladium is expected to remain strong.

Meanwhile, palladium has ongoing supply issues. Russia is the world’s largest producer of palladium, accounting for about 40% of the world’s annual mined supply.⁹ And, most analysts believe that the stockpile is nearly exhausted.¹⁰ The bottom line is that the overall supply of palladium is falling, while demand remains strong. It’s that imbalance that’s driving the price of this metal higher. Can that kind of performance continue?

The Trend Is Your Friend
With a supply crunch and solid demand, the fundamentals for palladium appear strong. From a technical point of view, the chart is also healthy. As you can see in Figure 1, the metal is in a clear uptrend. And, you know what they say: “The trend is your friend.” In other words, this is a bullish sign. As long as this trendline remains intact, traders could expect palladium to continue to move higher.

Fig. #1
Palladium Continuous Contract (EOD Spot)
01/2014 – 01/2017

 

Source: Chart courtesy of StockCharts.com

(View a larger image here)

But, it’s not just palladium and platinum. While silver and gold have not performed as well as these metals, they’ve both outperformed the U.S. stock market in recent weeks. And as noted earlier, copper is already up more than 6% this year. It seems industrial metals may have finally snapped out of the bear market that started back in 2011.

There are three main factors that could be seen as driving this rally in industrial metals. First, economic conditions in China have been improving. Manufacturing activity in China during December of 2016, for example, expanded at the quickest pace in four years.¹¹ Besides that, Trump’s plan to increase infrastructure spending is also helping industrial metals. And, finally, let’s not forget the recent weakness in the U.S. dollar. The dollar has dropped about 2.5% so far this year.¹² As long as these three forces are in place, industrial metals may continue to outperform.

Would you consider precious metals as a way to diversify your portfolio? Are they already playing a role in your portfolio? Let us know by visiting our blog and posting your comments.

Until the next Daily Pfennig^® edition…

Sincerely,
Tim Smith
Vice President
EverBank World Markets, a division of EverBank
1.855.813.8484
everbank.com

January 29, 2017