Precious Metals Fourth Quarter 2017 Review And The Outlook For Q1 2018


Date: 28.02.2018

Gold and silver gains come at the very end of Q4.

Platinum posts a small gain in the final quarter of 2017.

Palladium continues to soar.

The December curse in gold and silver takes them lower during the first two weeks of the final month of 2017.

2017 was a bullish year for the sector. A repeat of the pattern of the past two years could mean higher prices ahead early in 2018.

The composite of the four precious metals that trade on the COMEX and NYMEX divisions of the CME posted a gain in the fourth quarter of 2017 which came to an end on Friday, December 29. The precious metals sector moved higher by an average of 5.23% in Q4. The shiny metals that are ornamental, industrial and investment assets dropped by 8.10% in 2014. The sector fell by 19.46% in 2015, but in 2016, precious metals gained 11.71 %. Precious metals moved 20.19% higher in 2017 posting its second consecutive annual gain. The US dollar moved steadily lower throughout the year that ended last week after trading to the highest level since 2002 at 103.815 on the dollar index during the first trading sessions of the year last January. However, the dollar index turned south, and in 2017, the dollar index dropped by 10.23%. The U.S. Federal Reserve hiked the Fed Funds rate three times in 2017 with the latest increase coming in December. The short-term rate in the U.S. is at 1.25% which is still historically low. Meanwhile, global interest rates continue to be at very low levels in Europe, and Japan rates are negative.

2017 elections in France and Germany have cemented the future of the European Union and euro currency, and economic conditions have improved. Tightening of credit tends to be a bearish factor for commodities prices, but the continued weakness in the U.S. dollar typically has the reverse effect on raw material values. Therefore, there are bullish and bearish factors at play for precious metals when it comes to the dollar and interest rates.

Meanwhile, political instability in Asia as a result of North Korea’s nuclear ambitions and in the Middle East continue to be bullish factors for precious metals. Issues in the two areas of the world have the potential to come to a head in 2018 which could foster fear and uncertainty in markets across all asset classes. At the same time, the spectacular rise in digital currencies over the course of 2017 is a sign that alternative means of exchange, like precious metals, continue to attract investment demand as a safe harbor against the devaluation of fiat currencies around the world.

Gold Review
Gold fell 10.46% in 2015, but it rallied by 8.66% in 2016. In Q4 the yellow metal posted a 2.12% gain and moved a total of 13.65% higher for 2017. Gold settled on December 29, 2017, at $1309.30 per ounce basis on the active month COMEX February futures contract, $27.30 higher for the quarter. The gains in gold came during the final two weeks of the year. Gold traded in a range between $1146.50 and $1362.40 over the course of 2017 with the highs coming on September 8. The lows for the year came on the first trading day in 2016, and the same thing happened in 2017. Volatility seekers likely exited precious metals markets as the price variance of cryptos became intoxicating.

As the monthly chart of COMEX gold futures highlights, the yellow metal is in neutral territory, but it has been making higher lows since December 2015, which is a constructive sign for the yellow metal.

While the dollar remains close to recent lows, it seems that the prospect of higher interest rates and balance sheet normalization by the U.S. Fed caused a correction to the downside in the yellow metal at the start of December. The weekly pictorial shows that momentum recently shifted to the upside in oversold territory as gold rejected lows below the $1,240 per ounce level. Gold put in a bullish key reversal pattern on the monthly chart in December 2017 which could mean more gains are on the way in 2018.

Silver Review
Silver was the best performing precious metal in 2016. Silver was up 15.63% in 2016 after moving 11.51% lower in 2015. In 2014, silver shed 22.82% of its value. During Q1 silver gained 14.51% and in Q2 silver lost 9.34% of its value. In Q3, the precious metal moved just 0.62% higher as silver underperformed the price action in the gold market. In Q4, the volatile silver market posted a 2.85% gain, as it slightly outperformed gold. Silver settled on December 29 at $17.145 per ounce on the active month March COMEX futures contract and was 7.42% higher in 2017, which is a little more than one-half the amount that gold appreciated on the year on a percentage basis. Like gold, silver rallied in late December. Silver has traded in a range between $15.15 and $18.875 during 2017 with the high coming in Q2 on April 17 and the low on July 10. The drop to the lowest level since April 2016 was the result of a flash crash in early July that occurred early during Asian trading hours on the electronic COMEX futures market. The price of silver then spent the months of July, August and early September recovering eventually reaching a high of over $18.00 on September 8. Silver usually displays a higher degree of volatility than gold, and it tends to attract more speculative activity.

Silver had been trading around the $17 per ounce pivot point in October and most of November, which gave way to lower prices as December COMEX futures rolled to March. Silver plunged to a low of $15.555 on the continuous contract on December 12 as it led gold to the downside in the lead up to the December Fed meeting. However, silver turned around in the wake of the interest rate hike and gold followed obediently as both precious metals made strides on the upside during the final weeks of 2017.

As we move forward into 2018, I will continue to watch the silver-gold ratio, which closed 2016 at 72.18 and moved to 76.37 at the end of 2017. The ratio was 4.19 higher on the year which is a reflection of silver’s price weakness compared to gold. When the ratio moves to the upside, it tends to be a bearish sign for the precious metals sector on a historical basis. The long-term pivot point for the ratio is around the 55:1 level. Silver underperformed gold in 2017.

Platinum Review
Platinum was the worst performing precious metal in Q1 and the second-worst performer in Q2. Once again, in Q3 platinum turned the weakest performance of the four precious metals that trade on the U.S. futures markets. In Q4, platinum posted a gain, but it was the worst performing precious metal for 2017. Platinum has been a laggard in the sector for years. Nearby platinum futures closed on December 29, at $938.30 per ounce. Platinum lost 26.24% of its value in 2015 after being down 14.35% in 2014. In 2016, platinum only gained 1.58%. Platinum moved just 2.48% higher in Q4. Platinum was 3.59% higher in 2017. Platinum traded in a range between $872.40 and $1050.40 in 2017 and fell to the new low in Q4, which was the lowest level since back in February 2016.

Investment demand has been absent in platinum, and it has remained weak compared with gold. Over recent months, palladium has been gaining on platinum which could change the fundamentals over coming months. Platinum, like many other industrial commodities, posted a new multi-year low in early 2016 before the price corrected. However, platinum also is a precious metal with a history of attracting investor interest. It may only be a matter of time until fundamentals kick in for platinum. However, there are a few signs that speculative or investor interest are returning to the platinum market.

I believe that price action dating back to 2008 may have soured many investors on the platinum market. In March 2008, platinum traded to its all-time high at $2308.80 per ounce, and by October of the same year, it fell to 761.80. Over a seven-month period, the precious metal fell $1547 or 67%. The price action in 2008 may have scared investors and traders away from long-term structural positions in the platinum market because of its penchant for volatility and lack of liquidity during that period. However, compared with gold and palladium, platinum has a higher production cost. It is rarer, denser, and has a higher boiling and melting point. These characteristics could one day ignite the price of the metal that has been in a funk since 2014 compared with the other precious metals.

The platinum-gold spread closed 2015 at a $168.50 discount - platinum was cheaper than gold. The long-term median level for this relationship over the past four decades had been around a $100-$200 premium for platinum over the price of gold. The premium reflects the rarity of platinum - there is more than ten times the amount of gold produced each year than platinum, and on a per ounce basis, industrial applications for platinum are much more than for gold. During Q2-2016, the discount increased to just under $360 – which was a new, modern-day, all-time low. This relationship closed at a $246.20 discount at the end of 2016 and moved to a discount of $298.50 on March 31, 2016. As of September 29, platinum was trading at a $366.40 discount to the yellow metal. In Q3, strength in gold and weakness in platinum sent the spread to a new low at over $370 during the final days of the quarter. In Q4 platinum remained at all-time lows against the yellow metal for most of the quarter and closed on the final day of trading in December at $371.00. Platinum’s discount under gold increased by $4.60 from the end of Q3 as the price relationship moved marginally away from its historical norm.

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