Precious metals showing little movement despite destabilizing election and referendum results

Whoever wins or loses an election, life still goes on.  Some will be disappointed with the result, some will be downright angry, but this is democracy at work.  Often though, little actually changes for the person in the street other than, perhaps, a tendency towards higher blood pressure for those angered by a particular outcome.

Recently we have seen some truly polarizing election and referendum results – notably the Trump victory in the U.S. Presidential election, the rather hollow Conservative victory (which many see as a defeat) in the UK General Election, the Brexit referendum vote, the Scottish independence referendum and, to a lesser extent, in that it was not as contentious, the Macron victory in the French Presidential election.  But, will much change for the person in the street as a result of any of these?

Arguably the only one which may have a lasting impact on the participants in the democratic votes will be Brexit, with the U.K.’s withdrawal from the EU definitely having an impact on the fortunes of the U.K. and EU populations. But whether this will be positive or negative for either party will probably not be truly apparent for several years to come.  One suspects that overall there will be little change in the daily lives of the respective populations over time.  Some will benefit and others may suffer, but probably not significantly either way.

Platinum and Palladium Prospects

Perhaps one should look at the financial markets and the performance of the gold price as an indicator of where things are going. It looks like there are definitely mixed messages here.

Rising Price of Gold

In general, despite the contentious impact of the various elections and referenda, the gold price – supposedly a global economic bellwether – has shown no real significant jump or fall directly from any of these events.  True, gold's overall trend so far this year has been upwards, but it’s a generally uncertain world out there.

With a growing wealth element, particularly in countries where individuals have a propensity to buy and hoard precious metals as long term wealth insurance (notably the world’s two most populous nations – China and India), generally rising gold price shouldn’t be too much of a surprise to anyone. Year to date the spot gold price has risen a little under 9 percent, even after the post-Fed interest rate decision falls in the past week.

Of the other precious metals, silver and platinum have been particularly weak vis-a-vis gold.  The gold/silver ratio temporarily rose above 75 again – a level which we have said before could well offer a silver buying opportunity. This is particularly telling should the gold price rise as  the year goes on, given silver usually performs better than gold in advancing precious metals markets.  Silver is up around 3.2 percent since the beginning of the year.

Platinum has been suffering because of its primary usage as a diesel engine exhaust catalyst and the diesel market is declining because of harmful pollutant worries. Year to date platinum's price is virtually identical to that at which it started 2017.

Palladium has been the star performer in the precious metals complex having risen around 30 percent since the beginning of the year.  It is primarily used as a catalyst in gasoline driven internal combustion engines and is widely seen as being in a supply deficit situation, coupled with continuing doubts about supplies from Russian mines. Russia is the world’s No. 1 palladium producer, a little ahead of South Africa where it is largely produced as a by- , or co- , product of the country’s platinum mines.

Industrial vs. Precious Metals

Silver, platinum and palladium though should largely be considered industrial metals, rather than precious, particularly with the latter two where demand is, in reality, almost wholly industrial.

While the short to medium term price outlook for palladium looks positive, perhaps not for platinum. The longer term (three-four year) outlook for both the platinum group metals looks more uncertain given that the rise in demand for, and use of, non-polluting electric driven vehicles looks to be taking off far faster than previously anticipated.

Battery technology is the key here with substantially improved range, charging times and falling prices, all potentially reducing the need for internal combustion (IC) engine exhaust pollution control catalysts as the proportion of IC driven vehicles falls.

Brexit & Beyond

Then there are equities markets.  Despite both the Brexit referendum result and the dismal Conservative performance in the U.K. general election – both of which might be seen as economically destabilizing for the UK economy – U.K. equities markets have risen. (The FTSE100 index is up 5 percent year-to-date and up over 25 percent since the immediate aftermath of the Brexit referendum.)

In the USA, there may have been a stronger reason for U.S. equities to rise given the Trump campaign promises, although he is finding these far harder to implement than his rhetoric may have suggested.  The S&P 500 is up around 7.7 percent year to date.

Currencies are another indicator, and perhaps the most telling of all.

The dollar index (DXY) peaked at around 103 back in January this year, but has fallen back to around 97 at the time of writing, which is telling a different story from the equities indices.  This perhaps relates to how others see the U.S. economy, whereas equities strength perhaps relates more to how the American investor sees the country’s financial prospects. Although there are still plenty of eminent commentators who see the U.S. equities market as in a bubble, largely supported by the U.S. Fed’s easing programs.

'How Life Goes On'

So, what is the moral of all the above?  In the words of the Beatles Ob-La-Di, Ob La Da, "life goes on."

Little has actually changed for the person in the street despite what could be seen as some particularly destabilizing election and referenda results around the world.  Gold had performed marginally better than equities, but this could well be seen as a reflection on the overall perception of the performance of the U.S. dollar index.  Much of gold’s rise so far this year could be put down to the fall in U.S. dollar parities.  In other words, gold is doing its job in terms of wealth protection.

So, where does gold go from here?

This writer still believes onwards and upwards for some of the reasons noted above.  Several bank analysts are still predicting a year-end gold price of $1,300 to $1,400 and I would concur – tending towards the higher level.  Silver looks to be a possibly even better bet with the gold/silver ratio coming back down below 70 – perhaps even as low as 65 – and with gold at $1,400, that would put silver at just over $21.50 – a 28 percent increase as opposed to a mere 11 percent for gold. 

But beware, silver is a far more volatile metal than gold so the risk increases.