As the new decade begins, precious metals have started the year well ahead of the January 2019 levels, but mostly still showing lower gains than equities until the past few days when external factors caused precious metals prices to spike. Thus it is interesting to look back at some of the drivers that have, or have not, had much of an impact over 2019. Why should people invest in a different asset class when equities had seemed to be moving on what seems to be an inexorable upwards path? We also thus look forward at which drivers may most affect precious metals and equities performances in the year ahead and their likely impacts.

Geopolitical Gold

Geopolitical events have not necessarily been as prevalent as drivers of precious metals prices during 2019 as predicted at the beginning of the year, although have perhaps come to a head in the first week of 2020. Equities markets have not (yet) crashed as many commentators had been forecasting, thus have still been providing positive investment sentiment which may have negatively affected investment interest in precious metals. Gold and silver, in particular, underperformed the principal equities indexes over 2019, although the former did end the year showing a gain just short of the equities advances and has risen sharply in the thin post-Christmas trading period followed by the sharp boost due to Middle Eastern developments.

Platinum group metals, particularly palladium, performed rather better than gold over the year, though, due to some more positive supply/demand fundamentals. These platinum group metals (pgms) should perhaps rather be better classified as industrial metals with price advances more dependent on supply/demand factors than as precious metals-type investment counters. Palladium, in particular, has been in a supply deficit for a few years now and the price took off accordingly last year. We are worried, though, that its big year-end price premium over platinum (around 2x) could lead to a degree of substitution by the latter metal in the principal exhaust control catalyst market for gasoline-powered internal combustion engines looking ahead.

Year-end Precious Metals Pricing

Year–end closing prices in New York for all four major precious metals were as follows: Gold - $1516.80, up 18% on the year; Silver - $17.82, up 15%; Platinum did better than both ending the year at $964 (up 21%) while Palladium – again easily the best performing major precious metal – closed at $1,923, up 52%. On average therefore precious metals investment actually did pretty well over the year, but perhaps not quite as well as equities overall. Equities, thus had a good year, outperforming all the major precious metals bar palladium. To show comparisons with the precious metals over the year, the Dow Jones Industrial Average (DJIA) closed at 28,538 (up 22% on the year), the S&P500 at 3,231 (up 29%) and the NASDAQ, the best U.S. market performer in 2019, closed at 8,973 – up 35% on the year. Thus the equities indexes were percentage increase dominant over gold, silver and platinum, but not palladium. So all these asset classes actually performed quite well, and may continue to do so, but we tend to see equities as having more downside risk than precious metals when looking to the future.

U.S. domestic political and economic factors did affect both the equities markets (of course) and precious metals prices, but perhaps global geopolitics and geo-economics had rather less impact than might have been anticipated, given the number of potential global flashpoints, coupled with a seemingly ‘shoot from the hip’ U.S. Commander in Chief. Whether any of these global flashpoints will erupt in 2020, with a serious effect on precious metals or equities, had seemed doubtful given the world’s leaders’ propensities for pulling back from the brink – that is until the past week when President Trump apparently authorized a drone strike which killed Iran’s top general. Iran has vowed to retaliate, but what form this will take was not yet apparent at the time of writing. Nevertheless the U.S. action is bound to escalate tensions in an already volatile region and one suspects soft U.S. targets, and the U.S.’s principal regional allies, Israel, Saudi Arabia, Kuwait and the United Arab Emirates may bear the brunt of this likely escalation, although fear of an even more severe American response may make the Iranians more circumspect in any revenge attack they may be planning.

Gold and the Latest U.S. Strike

As might have been expected, the immediate aftermath of the latest U.S. strike saw the gold and oil prices advance sharply. Gold tends to rise on global uncertainty and ended the week above $1,550 for the first time in almost seven years and the Brent crude oil price, vulnerable to the upside on possible disruption of Saudi oil production and oil traffic through the Hormuz Strait, both of which could provide Iran with retaliatory targets, climbed to $70 for the first time since May last year. Global equities markets also fell on the news of the U.S. drone attack.

The U.S. action has also been strongly condemned by the Iraqi government, on whose soil the drone strikes took place, and could lead to a request to the U.S. to withdraw its military presence from the country. Whether the U.S. would comply with such a request is, perhaps, dubious, but this will likely further inflame tensions in the region and perhaps positively drive alliances by Iraq’s and Iran’s respective governments with Iran as one of the region’s military powerhouses. Iran’s forces and logistical support had, at one time, been useful allies in the fight against ISIL but such alliances can be shortlived in the Middle East. The U.S. also seems to have left its other one-time allies – the Kurds – who were also hugely important in the fight against ISIL, to their fate at Turkish hands, too. In the Far East, North Korea’s President Kim seems to have withdrawn from his suggestion of initiating a ‘Christmas present’ for President Trump, which many assumed would be the test launch of a missile with the capability of reaching North America, although Kim is threatening anew to resume nuclear and ICBM testing. North Korea wants the U.S. to water down, or totally withdraw, its sanctions program against the country, but President Trump is demanding North Korea’s de-nuclearization as a quid pro quo for even a partial easing of sanctions – something President Kim does not seem to be prepared to concede, at least for now.

U.S. relations with China seem to blow hot and cold. A Phase One agreement on trade differences seems to be imminent and due for signature in the middle of the current month. However this initial accord will probably not bring to an end the continuing disagreements over the long term future of U.S./China trade. The latter nation runs a significant trade surplus with the U.S. which President Trump is anxious to see substantially diminished. China, however, has the long term goal of making the nation self-sufficient with its own domestic population soaking up most of its industrial output. It has the population base to be able to do this and a recent track record of converting huge swathes of its populace into the middle classes with the buying power to achieve this kind of goal. But a program of this kind takes time to come about and China is probably only about halfway there at the moment. The U.S.-imposed tariffs may just have the effect of accelerating this process with China digging in its heels on the more contentious trade-related concessions.

Gold in the EU

The world’s other big economic area – the EU – is faced with uncertainties over the effects of Brexit, due to be initiated at the end of this month, although negotiations on the full implementation are likely to continue for the rest of the year at least. UK Prime Minister Johnson’s insistence that these negotiations not go on beyond the calendar year end could yet lead to fears of a ‘no-deal’ Brexit which could be de-stabilizing for the UK and EU economies – but probably positive for gold.

So far, contrary to many ‘expert’ predictions, the pound sterling and the U.K stock market have not collapsed as the UK’s withdrawal from the EU becomes inevitable. Indeed the reverse has happened with the pound and U.K equities rising as the official withdrawal date approaches. The UK remains one of the world’s biggest economies in its own right and is a key destination for exports from most EU nations. Thus, in our view economic pragmatism is likely to take over and any trade disruptions as a result of Brexit will, in most cases, be relatively, although perhaps grudgingly, quickly resolved. There may need to be some compromises from both sides, but here again European leaders will likely pull back from the brink. There have already been some conciliatory noises from Angela Merkel in Germany (still listened to despite her relinquishment of the leadership of Germany’s Christian Democratic Union) and Emanuel Macron in France – the EU’s ‘big beasts’, and where they go likely the other EU leaders will follow, The effects on precious metals prices is hard, if not impossible, to quantify. Indeed Brexit has been a bit of a non-event as far as gold and equities markets are concerned up until now with any serious moves seeming to have been confined to Europe, where gold has at times reached new highs in the Euro and the Pound. But the effect on the global dollar price so far has been limited to say the least. However, should the possibility of a ‘no-deal’ Brexit resurface, we could see a brief positive impact on the global gold price.

Elsewhere in Europe the Russia/Ukraine contretemps appears to be cooling down, which could remove another potential flashpoint from the 2020 equation. There is also anecdotal evidence that gold demand in hard money nations like Germany and Austria increased towards the 2019 year end, in part because of the Brexit uncertainties, but this has been insufficient to counter significant gold demand downturns by top consumers, China and India. Probably more significant for precious metals prices has been continuing central bank buying of gold, and positive flows over the past year into global gold ETFs. Whether both these carry on in 2020 remains to be seen, but we think that they will as likely – particularly if the gold price continues to grow.

Middle Eastern concerns following the killing of General Soleimani and possible repercussions therefrom would seem to be dominating the gold price for now. Any lethal response may well cause precious metals to spike, although perhaps only briefly. However, unless a full scale military conflict develops the most likely longer term gold price drivers remain the perceived policies of the U.S. Fed, developments in U.S./China trade talks, the path of the U.S. dollar and that of the U.S. equities markets. U.S. developments do seem to be the principal gold price drivers for now! For the moment the Fed is flagging maintenance of the status quo with interest rates on pause, and predicted to remain so throughout 2020, but this could change rapidly dependent on U.S. economic data, while the dollar could continue to drift downwards. Equities remain vulnerable to very sharp falls – perhaps inevitable over time – but this still may not happen in 2020. If it does it could well be something of a game changer.

There is a perhaps fictional ancient Chinese curse – ‘May you live in interesting times.’ As far as markets are concerned we are definitely in ‘interesting times’ and may well remain so for the whole of 2020 if not beyond.