October 2015 Commentary

Precious Metals – The Year in Review.

It has generally not been a good year to be long of precious metals. Palladium has been the only one that has shown signs of resilience, as the rhetoric about the improving US economy and the strength of the US dollar keeps building. Whether, in fact, the situation in the US is going to keep showing signs of improvement is actually beside the point as traders put positions on to ensure they are “ahead of the curve”, rather than (heaven forbid) just keeping up with it. These positions are classically digital in nature i.e. they are either totally correct or totally wrong and only time will tell how it will turn out this time.

Looking back over what happened during the year, gold has been one of the most interesting markets to watch (if not painful for some). The end of December last year saw gold create a double-bottom in the USD market at around USD1180/ounce before creating a triple bottom early in October. The market then rallied, assisted by good demand for gold during the Diwali festival. This impetus faltered, then faded and finally collapsed on itself leading to a capitulation on Friday 31^st October which took it back to levels not seen since October 2010.

There is no doubt that the Chinese have done an excellent job of picking up the slack in demand left by the continuation of onerous import taxes for gold going into India. Even China, however, has its limits, and signs of continued softness in their economic numbers combined with a less expansive and more rigorous lending market, led to an end to their seemingly ever-increasing demand for gold. At the same time China’s own production continued to pick up to annualised equivalent amounts of over 500 tonnes per year.

Having broken down through this long-time support the technical analysts are now looking at a minor support level of USD1080 and a Fibonacci 61.8% retracement level for the whole gold move since Sept 1999 at USD900.

At this level a large number of gold producers (particularly those in the US) will be looking closely at their margins to see what they are (and whether they can still make them positive).

If gold was viewed to have suffered a sell-off, silver could only be described as getting slammed. Although silver still has some friends in the physical market the overwhelming selling from the paper traders with reports of silver production being at the highest levels ever, saw off any attempts to buy the dips. The attempts to buy followed by another attempt to buy became a “bye-bye” scenario with silver trading back at levels that have to be traced back to February 2010 to find a comparison. Technically silver has already broken through the 61.8% retracement level and is now eyeing off the 76.4% retracement at USD14.90. That is using the lows of around USD4.10 in November 2001 as a baseline! Silver is nothing if not volatile.

The closely-watched gold/silver ratio is up at a level of 73.25:1, a level for which it is again difficult to find a peer, although it did get above this level briefly during the GFC.

Platinum had a difficult year too with strikes and unrest in South Africa giving speculators every reason to go long and look for a blow-out on the topside. It did indeed have a good run for a while but created a massive double-top on the charts at the USD1520 level and when word of the strike getting close to resolution and a three year wage deal getting signed, it drifted off at a measured pace to plumb lows well below its starting-price for the year and hit a low of around USD1186 at the same time as gold was putting the third of its low level supports in place at the beginning of October. From there it made a valiant attempt to recover and almost reached USD1300 again as gold rallied, but finally rolled over again and traded quickly back down to the USD1220 level again where it has found support.

Probably the overwhelming disappointment for the platinum bulls has been its ability to find supply when it was supposed to be seriously squeezed.

Palladium has had a relatively good year, but still not what would be called a “bull run”.

As with all the precious metals, the last month or so has been “testing”.

Palladium has been riding all year on the back of the demand for motor vehicles (particularly out of China) and the inherent requirement for the white metal for catalytic converter components.

It rallied from the low levels around USD700 per ounce at the end of December last year to heady heights at USD910 until the numbers out of China intimated that the economy was coming off the boil and as a result motor vehicle purchases were declining. This did not bode well for the long position holders who assumed China was going to continue to buy cars at an ever-increasing rate month-on-month and year after year. The US car manufacturing numbers, however, have picked up in October suggesting that the underlying implied deficit in palladium may still be an issue going forward.

This scenario seems to have placated any fears from the long position holders that the metal is intrinsically weak and palladium ETF holdings grew further in the last week of October.

Overall, the net long positions in this metal remain at lofty levels both in the ETFs and the futures markets, suggesting no signs of weakness yet from those who are carrying them.