Despite High inflation and the largest ever negative real bond yields in history, both factors that are usually favorable for Precious Metals, the markets have been punishing Palladium, Palladium, Silver and Gold since February 2021 and even since August 2020.
It is quite an anomaly since the relationship between inflation, real interest rates and Gold has been very well established since the abandonment of the Gold Standard exactly 40 years ago.
The logic is that if inflation rises, all assets and income flows are depreciated in real terms, leading investors to privilege Gold to interest bearing instrument such as money market rates or bonds.
When it comes to real interest rates, as Gold and precious metals do not pay any income, the higher rates and the higher real rates, the less attractive instruments bearing no interest rates such as precious metals are.
What is unique in the current environment – but what is not abnormal in a Jeremy Powell liquidity mania ? – is the fact that bond yields are in record negative territory, meaning that investors are actually paying in real terms to lend money to borrowers.
In this environment, investors should bail out of bonds and shift to precious metals, protecting their being power in inflationary times.
Moreover, in an environment where the world economy has recovered form the pandemic and going back to long term growth trends, commodities such as Palladium and Platinum, and even more Silver which benefits from the Clean energy – Solar panels – revolution and the Electric vehicle revolution should be great beneficiaries on the merits of increased demand form industrial use.
There are many explanations brought forward by commentators and analysts to try to explain the breakdown in the relationship :
. The first one is a macro economic one and is aligned on the off cal take of the FED, Inflation is transitory and therefore negative real rates and yields will not last. This is a very valid reason not to speculate on higher prices for precious metals if you expect the economy to slowdown, inflation to fall again and rates to rise.
. The second one, which is more credible in our view is that the precious metals and commodity markets are expecting bond yields to shoot up vey soon, reducing brutally the negative real yields currently present. If that is the case, investors are right to avoid precious metals altogether as they tend t underperform in rising interest rates environments.
. The third one is that Cryptos have replaced gold as the non-interest bearing instrument of hedging against inflation. A similar limited supply / unlimited demand equation and much easier accessibility and ease of holding. We actually doubt that cryptos have been around for long enough to establish a credible relationship with inflation and that their environment is getting more and more difficult by the day from the regulatory standpoint.
Indeed prices have been pushed up sharply by speculators, young traders, Elon Musk and other gurus and finally by banks and financial institutions, but there is still a lot of mileage to be had before a real balance and rationale for holding cryptos can be made.
. The fourth and last argument, which is the one we see as the most credible is that after the spectacular rise of Gold and precious metals from 2014 to 202, the market had become intrinsically bullish with large long investment and speculative positions. On the other side of the equation, Miners are highly profitable at current price levels and they have been selling forward production to guarantee their margin all along the move up.
Since February, as Gold prices peaked in August 2020 at 2075, speculators and investors have actually reduced their buying while miners have continued to sell forward their production, sending prices into a multi-month correction .
Looking at the long term chart, it could also be said that the current correction is a healthy one after Gold prices successfully challenged and broke through their 2011 high at 1900 and that we are currently simply consolidating this advance before a new up-pleg develops towards all-time highs.
This must be put in the context that, 1) we do not see inflation abating, 2) we see bond yields rising sharply, 3) we see a major bear market in risky assets to start in Q1 2022.
Meaning that Gold prices should make a new attempt a new highs but that they probably will not stay there for long
Now looking at the short term charts, what we see is that the 1700 level has now built a very solid support for Gold having been tested once in march 2021 and once in August 2021.
Moreover, Since June, we have built a very significant inverse head and shoulder which has just been completed in the past couple of days with the right shoulder holding the 1750 level.
This is telling us that GOLD and the Precious Metal complex are in a significant bottoming process following the correction that has started in August 2020 and that we should see a new up leg unfolding with a minimum target at 1900 / 1970 unfolding in October.
The Investment case is even stronger when looking at the other precious metals
Buy PALLADIUM @ USD 1995
The downdraft in Palladium has been extremely sharp and the recent travails of Evergrande in China and negative economic news coming from the Middle Kingdom has accelerated the down move extremely sharply in the past three weeks.
One of the main negatives for Palladium has been the shortage in Semi-conductirs that has hampered the ability of car manufacturers to keep up with finals demand. Global auto sales have fallen to a 14-month low as well, sapping palladium demand even as supplies have rebounded from last year’s mine and refinery closures.
Another negative is the perception that vehicle makers will switch form expensive Palladium to cheaper platinum for the electronics in their cars.
Today, the correction in Palladium is actually steepest than the one experienced in March 2020, despite the fact that the world economies are still firing on.
Palladium is extremely oversold and due for a significant trading bounce.
Buy PLATINUM @ USD 980
Global platinum demand was up sharply against Q2’20 increasing 23% (+352 koz) year-on-year to 1,907 koz, with 2021 forecast to increase by 1% (+59 koz) over 2020 to 7,753 koz. With recoveries in economic output surprising even the most optimistic growth expectations, platinum demand is expected to continue for the rest of the year.
But, despite global demand continuing the positive year-on-year growth trend seen in the previous three quarters, with stand-out rises in automotive and industrial segments, the combination of mines operating at 97% of capacity and the faster-than-expected processing of material built up during plant outages in 2020 meant supply outstripped demand, resulting in a surplus for the Q2of 161 koz.
Recycle supply has not yet fully recovered to pre-pandemic levels (-13% on Q2’19), but global mine supply was lifted 65% (+615 koz) over Q2’20, bolstered by the processing of a higher-than-expected portion of the backlog created by plant outages in 2020 and a reduction of 34 koz of refined working inventory. The news that 300 koz of the 500 koz of platinum in semi-finished stock is expected to be processed in 2021, not 200 koz as previously anticipated, means that supply for the year rises by 17% (+1,132 koz) and 2021 is now forecast to be in a surplus of +190 koz.
However, beyond the adjustments of both mining and re-cycling post Pandemic disturbances, the supply-demand equation should come back to a normal imbalance In favour of demand in the coming years.
The sharp downdraft since February 2021 has more than factored in the 2021 supply excesses and Platinum juts hit its long term moving average last week, at levels – 800 / 900 – that have proved to be log term accumulation levels in the past 5 years.
Platinum is deeply oversold, has just bounced sharply and is ready to break its May – September downtrend, something that will take all the shorts out.
Buy SILVER @ 22.70
Buy GOLD MINERS @ 844
Gold Miners have lost 35 % of their value since August 2020. This is an interesting development considering the fact that even if they have pulled back from their 2077 high to 1750, a 16 % drop, Gold Prices are still trading way higher than the average cost of production of Miner, and Miners tend to have high operational leverage.
According to the World Gold council, costs in the gold mining industry increased for the second consecutive quarter in Q1’21, with the global average All-in Sustaining Cost (AISC) up by 5% q-o-q to US$1,048/oz, its highest level since Q2’13.
At around 1050 all-in cost of mining an once that sells at 1750, there is no surprise that Gold miners are selling forward as much as they can, but their profitability is also extremely high by any standards.
Clearly equity investors are fearing the return of inflation, higher interest rates and lower economic growth ahead, but on the other hand Gold Miners have now reached an important accumulation level dating back to 2019 and the gap between current price and analysts Target Price is at the highest it has been in months.
We see Gold Miners due for a significant bounce into October
We privilege buying the Direction Daily Gold Miners NUGT US, a leveraged ETF with significant upside potential
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