Not a good week for gold, silver and platinum group metals
With gold ending last week below $800, silver well below $10 and platinum around $860 this has not been a good week for precious metals investors. And this is despite general markets which soared, plunged and soared again creating all kinds of investment nervousness on which precious metals are expected to thrive.We probably need to consider gold’s case separately from platinum group metals which are, in reality, industrial metals where the price is much more dependent on supply and demand, particularly in the petroleum and auto sectors. Silver falls somewhere between the two tending to move up and down with the gold price, but where industrial demand also has an important part to play.By most logic gold should be rising, rather than falling. The metal theoretically thrives upon financial uncertainty and insecurity and probably not since 1929 has there been so much uncertainty and insecurity in the global financial markets. It also thrives as an inflation hedge and Central Banks pumping paper money into the financial system should be a portent of major inflation ahead. But, prices may not rise when consumers aren’t spending and house prices are falling - the situation in much of the western world. That could be seen as deflationary and gold is being caught in a tug-of-war between inflation and deflation and it still remains to be seen which will predominate.Nevertheless demand for physical gold seems to be at enormous levels, with many investors preferring to hold metal rather than trust stocks or even ’paper’ gold. Some gold ETFs are advancing strongly but the investor might be wise to only go for those which back their paper with physical gold, rather than with promises in the form of gold-related paper which isn’t necessarily directly backed with direct gold holdings.There is a danger for the investor in this though. If gold does fall out of favour as a way of protecting one’s assets against falling stock prices, there could also be an unprecedented liquidation of physical metal which could have devastating consequence for the metal price. The markets are fickle and if gold shows ongoing signs of weakness the price could be decimated as investors offload.At the moment it is difficult to judge if the recent gold price fall is due to forced liquidations of metal and stocks, covert Central Bank activity as put forward by Jeff Nichols - see last week’s Mineweb article Why the fall in the gold price when physical gold remains in huge demand?, or as an adverse reaction to the strength of the US dollar which currently is outperforming most other currencies despite the inherent weaknesses in the U.S. economy as Barry Sergeant would have it - Has gold bullion lost its compass?.Fundamentals for gold remain strong - declining global output likely to be made worse by the general mining stock fallout and global difficulty in securing development capital which are bound to put new projects on the back burner - or kill them altogether. But then gold has never really followed supply/demand fundamentals anyway behaving more like a currency than a commodity.What of silver? Despite silver’s many industrial usages, where the impact on silver as a commodity has perhaps more rationale than it does for gold, the driving force for silver remains the tie between it and gold - perhaps more for historic reasons than for logical ones - and we don’t see this necessarily changing. Silver remains more volatile than gold which means precious metals gains will probably see a bigger percentage rise in the silver price than in that of the yellow metal - but the falls on the downside also will be more severe too as many silver investors will be experiencing at the current time.Platinum on the other hand, and the other platinum group metals - notably palladium and rhodium, but several others fall into this category too - is very much an industrial metal with a huge proportion of demand for platinum and palladium at least taken up by their usages as catalysts in the petroleum refining and auto exhaust cleaning markets. Movements in the gold price do have an effect on sentiment, but it is the supply/demand equation that ultimately calls the pricing tune.We are still of the opinion - admittedly without accurate supporting data to back this up - that the anticipated big falls in new auto sales as a result of the global financial uncertainties may be being overblown by the market and that platinum in particular has stronger supply/demand fundamentals than the current market price would suggest.However, to set against this, the world has seen a huge commodities boom over the past three to four years with the prices of precious and industrial metals still well above where they were only four or five years ago. While China and India in particular, perhaps being more shielded from the global credit crisis than most, will likely continue to expand their economies, albeit at a slower rate than has been seen in the past couple of years, and with their huge populations, and the standard of living aspirations of these populations, will continue to have an enormous impact on global commodities demand. While they cannot be insulated from what is going on in the West, growth will continue. It is politically unacceptable for it not to. Remember China has enormous monetary reserves and these can still be pumped into expanding the domestic economy and maintaining a substantial growth rate.While there may well prove to have been a general rerating of commodity prices as a correction against the enormous growth in prices seen in recent years, the outlook has to remain positive as the East continues to grow and the West gradually pulls out of its recessionary downturn. Most mining sector major company CEO’s have stated their confidence in the future of their businesses and this may not be entirely wishful thinking.