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Precious Metals: Bottoming Out Before A New Rally?

The ongoing slide in commodity prices is hurting the mining and exploration companies, and everyone else who's business is in some way related to it. Will we see further weakness first or is the worst behind us?

For the past two years, commodity prices have been sliding slowly but constantly to the lows we're seeing at this very moment. Look at the chart below for the ETFS Physical PM Basket Shares (NYSEARCA:GLTR), which tracks the prices of gold, silver, platinum and palladium, compared to the S&P500 (2 years):


Roughly stated, the commodities are lagging the broader stock market by 50%.

Lately we've heard a lot of talk about the decoupling of 'physical' and 'paper' metal prices. The demand for gold and silver coins, for example, is very strong according to the producers while on the other hand the prices keep falling. This sounds odd and it is odd. The coin prices are based on the official gold price. Now the gold price is suffering heavily from strong outflows of ETFs. It is good to realize that a position in a gold ETF is not necessarily a position in "physical' gold. It rather is a claim on the issuer of the ETF to pay you the difference if the gold price goes your way.

Since the stock markets have been stabilizing and then rallying the appetite for gold as a hedge against monetary disasters has abated seriously. The demand for silver and gold as jewelry however should increase in better economic circumstances.

When do we hit the bottom

Of course it is hard to tell when the bottom is insight. The enormous outflow of money in the metal ETFs is putting huge pressure on the commodity prices. But there are certain signs that could herald the end of the commodity sell-off:

  • The market price is nearing the cost price. For gold, a lot of miners work with a total cash cost between $1000 and $1200, leaving little room for another leg down. Further declining prices will push miners out of business. Less mining activity means less supply, and less supply means higher prices.
  • The monthly outflow of metal ETFs is enormous, but the flip side of the coin is that investors in Asia and the Middle-East are sizing up their bullion investments. According to World Gold Council Managing Director Marcus Grubb: "Asian markets will see record quarterly totals of gold demand in the second quarter of 2013. Even if ETF outflows continue in the United States, it is quite likely that the gold previously held in ETFs will find a ready market among Indian, Chinese and Middle Eastern consumers who are taking a long-term view on the prospects for gold."
  • Economic growth worldwide is picking up, albeit slow. However gold is unfavorable in economic prosperity, demand for silver, platinum and palladium is getting stronger once the economy is recovering.
  • Due to delays at many new gold mining projects and little new discoveries, the supply of precious metals will decline in the coming years.
  • For some metals, the demand is already bigger than the supply. Due to the recent sell-off in metal-ETFs supply is temporarily exceeding demand, but this of course can't last forever. The production of gold, silver and other metals can simply not keep up with the basic demand.


It may be too early to call a bottom already for the precious metals, but above mentioned arguments give enough ammunition to at least assume that the bottom is near. Precious metal prices will increase again once the metal (NASDAQ:GOLD) ETFs have been unloaded.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Stocks: GLTR