These Five Metals Could Be Calling Your Name

Resource expert Rick Rule likes to say that when it comes to investing in natural resources, “you’re either a contrarian or a victim.” Because of the cyclical nature of the sector, you have to be a contrarian and speculate if you want to make money. You have to buy when things look really ugly. That’s one way to think about what we have today.

We had a huge bull market in commodities through the first decade of the 2000s. On the precious metals side, money printing and low interest rates helped drive prices higher. On the industrial metals side, the increasing consumer demand in China and emerging markets led to a huge boom.

But, since 2011, metals have moved mostly in one direction: down. For that reason, contrarian investors should watch this sector very closely. Although continued declines are certainly possible, a recovery from current levels could lead to significant gains. So, let’s take a closer look at five metals: gold, silver, copper, platinum and palladium.

Gold Has Stabilized Around $1,200
(USD Spot Price Per Ounce; 6/22/2010-6/22/2015)

http://www.dailypfennig.com/wp-content/uploads/2015/06/15ACQ0002-25-figure1-lg.jpg

 

Source:EverBank Research Team, based on analysis of publicly available data from Bloomberg. Metal value trends are based on institutional or spot pricing, are illustrative only, and do not reflect retail transaction costs or prices.

After the sharp drop in 2013, gold hasn’t moved much. It has been trapped in a trading range between $1,200 and $1,350 an ounce. The strengthening U.S. economy, the possibility of a rate hike from the Fed, and the resulting rally in the U.S. dollar have all played a key role in keeping gold in a relatively narrow trading range.

But the U.S. economy has disappointed recently. According to data from the Commerce Department, the economy shrank 0.7% from January to March.1 Industrial production also dropped unexpectedly in May and hasn’t increased since November. This means the manufacturing sector is technically in recession.2

That’s not the kind of growth that could trigger an aggressive tightening of monetary policy from the Fed. For that reason, some investors are no longer expecting a sharp rise in interest rates. And after our researchers reviewed the U.S. Dollar Index, we found that it has dropped about 6% since peaking in March, helping to provide some support to gold.3

There’s also some concern that bonds and stocks are overvalued, and vulnerable to a correction. Since gold has tended to retain its value in times of turmoil, some investors have been buying gold around $1,200 an ounce as a way to diversify their assets. For other buyers, market expectations are not so grim, but the value proposition is there anyway.

Silver Has Stabilized Around $16
(USD Spot Price Per Ounce; 6/22/2010-6/22/2015)

http://www.dailypfennig.com/wp-content/uploads/2015/06/15ACQ0002-25-figure2-lg.jpg

Source: EverBank Research Team, based on analysis of publicly available data from Bloomberg. Metal value trends are based on institutional or spot pricing, are illustrative only, and do not reflect retail transaction costs or prices.

All the factors that are driving the price of gold are also affecting silver. Notice the chart for silver looks very similar to the chart for gold. That’s because these two precious metals tend to move together. Just like gold has found some price support around $1,200, silver has found price support around $16 over the past few quarters.

If the U.S. economy continues to disappoint and the Fed is forced to delay its rate hike, we could see a significant rebound in both gold and silver. Not all metals are holding up as well though. Industrial metals, which depend more on the state of the global economy, continue to be weak across the board. Let’s take a closer look at copper, platinum and palladium.

Weak Chinese Demand Is Putting A “Hurting” On Copper
(USD Spot Price Per Ounce; 6/22/2010-6/22/2015)

http://www.dailypfennig.com/wp-content/uploads/2015/06/15ACQ0002-25-figure3-lg.jpg

Source: EverBank Research Team, based on analysis of publicly available data from Bloomberg. Metal value trends are based on institutional or spot pricing, are illustrative only, and do not reflect retail transaction costs or prices.

Unlike gold and silver, copper has not stabilized yet. While gold and silver are flat this year, the red metal is down about 9%. That’s because copper is a pure industrial metal used in everything from homes and cars to electronics and factories. As a result, it’s very sensitive to global economic growth, and things are not looking so good around the globe.

Because of the economic slowdown in China, the biggest consumer of the metal, demand for copper has been way down. But, it’s not just China and the U.S. that are slowing down. Much of the rest of the world looks shaky.

According to the latest forecast from the Organisation for Economic Co-operation and Development (OECD), the world economy will grow less this year than last year.4 China is still trying to deflate its real estate bubble without causing a major crash.5 And Greece is once again grabbing the headlines, as the country’s debt crisis makes a comeback.

Platinum Remains In Free Fall
(USD Spot Price Per Ounce; 6/22/2010-6/22/2015)

http://www.dailypfennig.com/wp-content/uploads/2015/06/15ACQ0002-25-figure4-lg.jpg

Source: EverBank Research Team, based on analysis of publicly available data from Bloomberg. Metal value trends are based on institutional or spot pricing, are illustrative only, and do not reflect retail transaction costs or prices.

Platinum is the worst performing precious metal so far this year. After a 10% drop, it’s now trading at the lowest level in nearly six-and-a-half years. The metal is primarily used in catalytic converters to reduce emissions, specifically for diesel vehicles. Since diesel engines represent 50% of the market in Europe, the region’s automakers are the top consumers of the metal.

So, the weakness in the European economy and the recent return of the Greek debt crisis have clearly played a role in this decline. These short-term factors have also hurt platinum’s sister metal, palladium, which has been the best performing precious metal over the past five years.

And The Winner Is…Palladium
(USD Spot Price Per Ounce; 6/22/2010-6/22/2015)

http://www.dailypfennig.com/wp-content/uploads/2015/06/15ACQ0002-25-figure5-lg.jpg

Source: EverBank Research Team, based on analysis of publicly available data from Bloomberg. Metal value trends are based on institutional or spot pricing, are illustrative only, and do not reflect retail transaction costs or prices.

Despite palladium’s impressive performance over the past five years, the metal is not immune to the recent weakness in the global economy. Palladium finds more application in gasoline engines and, therefore, is more exposed to the changes in the Chinese and U.S. markets. That could help to explain the recent weakness in the metal.

The good news for both platinum and palladium is that those markets should see a deficit this year. The World Platinum Investment Council estimates a platinum undersupply of 160,000 ounces. Other analysts estimate an even bigger gap. For example, UBS and Standard Bank estimate an undersupply of more than a million ounces.6

The palladium market is also expected to be in deficit this year for the fourth year in a row. This could provide some price support in the near future, especially if we see a recovery in demand.

The bottom line is the global economy is not looking good and this has impacted pricing in a variety of physical asset classes. If central banks decide to respond with their typical modus operandi of more easy money policies, we could see a sharp rebound in certain metals. Keep a close eye on them.

Until the next Daily Pfennig® edition…

Sincerely,
Tim Smith
Vice President, World Markets Sales and Servicing Trader
EverBank World Markets, a division of EverBank
1.800.926.4922
www.everbank.com