2019 precious metals outlook: The return of the bull?

After peaking at about $1,900 and $50 per ounce respectively in 2011, gold and silver spot prices have been in a mostly bearish market since then apart from a couple of temporary bright spots. For example, in April 2018 gold got back to $1,385 before beginning another decline that took it down to $1,174 in August. But in the past few months, especially since early December 2018, gold prices have begun to rebound and are trying to break back through the psychological barrier of $1,300 and move higher from there.

Bullish Sentiment Returns

Sentiment towards gold has become markedly more positive recently, as reflected in surveys of Main Street (i.e., the investing public) and other measures such as continued central bank gold reserve acquisition and a tight physical market because of low mine production and rising physical demand. On Wall Street sentiment has improved too, but views there are more divided about the metal’s prospects than average investors are.

Many times when market sentiment turns strongly bullish, it is often the case that prices will soon correct downward, but for many analysts gold is currently “pushing into a bull market” because of “concerns about the economy and the hard asset of gold is becoming very attractive to investors,” as Todd “Bubba” Horwitz, Bubba Trading’s chief market strategist told Kitco recently.

RJO Futures market strategist Phillip Streible (unlike in many past instances when the buying public got bullish too late) thinks they are on the right track because of factors ranging from heightened stock market volatility (likely to continue in the coming year — LG) to the partial federal government shutdown (also expected to continue with negative consequences for the economy — LG), in addition to a good chart pattern and strong momentum for gold (which is above its 200-day moving average — LG) and the U.S. dollar finally showing weakness after years of pronounced strength.

Another analyst, Alasdair Macleod, sees 2019 as a perfect storm that will push gold prices higher. The key factors that support his bullish view are: The U.S. dollar may decline very substantially once investors realize the world is awash in dollars (and especially if, as he speculates, China decides that rather than get into a “tit for tat” tariff war with the U.S., it is better off disposing of some of its dollar reserves);

shifts away from the dollar and toward gold in Asia, including Russia which has replaced the dollar with gold as its primary reserve currency, and China, which established oil-yuan futures contracts that would enable oil producers like Iran to be paid in gold rather than dollars;

a shift in the credit cycle and a risk of markets facing a crash like that in 1929-32, which he suggested would result in a new round of government liquidity similar to the quantitative easing we saw after the 2008 crisis;

demand for physical gold that continues to exceed the supply from gold mines and changes in banking regulations that allow commercial banks to increase their liquidity with gold, which is especially attractive to banks in countries that use the euro and yen.

Bullish sentiment is reflected in an increase of 18.6 tons of gold into gold ETFs (exchange-traded funds) just since the start of 2019, according to a recent Bloomberg report.

Longtime coin dealer and gold bull Barry Stuppler regularly advises his clients on where he sees the various metal markets going. In his latest pronouncement (“Weekly Precious Metal and Rare Coin Report,” January 7), he noted that while gold was down 2% for 2018, it was the best-performing asset for the year since all equity markets and Bitcoin were down much more (and other precious metals too). He predicts a gold price of $1,480 by the end of 2019 and silver at $17.

His gold price prediction is higher than the price predictions of nine of the largest investment banks from a month ago, in which all but one came in between $1,300-$1,400, the exception being Commerzbank at $1,500.

Economic Analysis

Increased volatility and some of the sharpest one-day declines ever in equity markets in the past two months have undoubtedly sent investors flocking to gold as a hedge and portfolio diversifier, but other economic factors are at play too.

In particular, the overall economic outlook began to shift towards the end of last year, and analysts and investors are still working out the various implications of these changes and adapting to a different interest rate environment following the end of quantitative easing and reduction of the Fed’s balance sheet. The problem for them, as well as for the Federal Reserve, is that it is too soon to know the extent to which economic growth is slowing.

Outside the U.S. it has already slowed down a great deal, especially in China, and that, combined with a potentially unresolved trade war with China over the course of the year, has the potential to result in a considerable economic slowdown in the U.S. too and potentially an increase in inflation if the trade war worsens. There was already evidence of a slowdown in recent data on manufacturing.

In 2018 the Fed raised interest rates four times because it saw a very strong U.S. economy and remained concerned that such growth might push inflation above its 2% target. When it raised rates a fourth time in December, many observers were surprised since there was already evidence of an economic slowdown. Since then the Fed has taken a more dovish line, suggesting that for the moment it will pause and not raise rates again until it has a better sense of where the economy is headed. There are even suggestions it could lower rates this year, but that remains to be seen..

Overall, compared to the interest rate outlook just a month ago, it does now appear that rates will at least hold steady for several months. Combined with growing uncertainty for growth and the potential for more equity market volatility, as well as supply and demand fundaments that also look good, it is hard not to find the bullish consensus on gold persuasive.

But, of course, the situation could soon change, especially if those who are bullish about stocks are correct. Stocks often do well in the aftermath of a correction as long as most company earnings are strong, which would reduce the safe haven demand for gold.

The other key factor is the U.S. dollar. It is notable that gold has been up in recent weeks in all major global currencies, not just in dollars. The dollar has softened recently, and, as suggested above, many analysts expect that to continue, especially if interest rates remain stable or even decline since investors flock to the currencies whose interest rates are increasing (and thus one reason gold did not have a good year as rates were rising in the U.S. in 2018).

Other Metals: Silver, Platinum, and Palladium

As far as other metals, many analysts are also bullish about silver for 2019. Many see silver in the $17 range in 2019, or even reaching $18, as physical demand from investors picks up again after hitting a nine-year low in 2018. This was reflected in sales of U.S. Mint American Silver Eagles, which were only 15.4 million in 2018, slightly lower than 2017’s 18 million, and a whopping 67% lower than the record in 2016 of 47 million coins.

It is often noted that silver looks very favorable at current levels (just under $16) when one considers the historic silver-gold ratio, which has averaged about 50 to 1, compared to a current ratio of 82 to 1 that makes silver look very undervalued. Those who are bullish on gold are in many cases also bullish on silver and for many of the same reasons (interest rate normalization, equity turbulence).

However, not all analysts are bullish on silver, and some point to oversupply of the metal as a reason why it will not do much this year or could even go lower to $14, according to BNP Paribas in France (cited in same article on silver from Kitco).

Finally, there are the other two white metals: Platinum and palladium, which have diverged strongly in the recent past with platinum priced well below gold in the low $800’s, while palladium continues to set new heights and even surpassed gold recently.

Platinum is widely viewed as currently undervalued, especially compared to gold. For example, the platinum-gold ratio is at a 40-year low.  In addition, the World Platinum Investment Council recently noted that demand for platinum is expected to increase by 2.4% in 2019 due to “chemical and petroleum demand reflecting economic growth, and a doubling in investment demand as a rebound in exchange traded-funds adds to robust bar and coin demand.”

Palladium, the least used metal in coins, was the best-performing precious metal of 2018, ending the year at $1,234 per ounce, and going even higher this January. There is a shortage of available palladium that is expected to continue supporting high spot values in 2019. Its main uses are in the auto and truck industry, where it serves as a catalyst for controlling emissions.  As electric cars continue to become more prevalent, especially in Europe and China, demand should remain high for the metal.

Many analysts believe that shortages of the metal due to reduced mining in Russia and South Africa, the largest palladium producers in the world which account for about 80% of production, will support continue high prices at least in the first quarter of 2019. However, others point out that speculative buying played an important role in pushing palladium prices in 2018, which they believe makes the metal vulnerable to price reductions in the coming year.

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Louis Golino is an award-winning numismatic journalist and writer specializing primarily in modern U.S. and world coins. His work has appeared in Coin World, CoinWeek, The Greysheet and CPG Market Review, The Numismatist, Numismatic News, FUN Topics, The Clarion and COINage, among other publications. His first coin-writing position was with Coin Update.

In 2015, his CoinWeek.com column, “The Coin Analyst,” received an award from the Numismatic Literary Guild for best website column. By 2017, he received an NLG award for best article in a non-numismatic publication with his “Liberty Centennial Designs,” which was published in Elemetal Direct.

In October 2018 he received a literary award from the Pennsylvania Association of Numismatists (PAN) for his article, “Lady Liberty: America’s Enduring Numismatic Motif,” that appeared in The Clarion in 2017.

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