Fundamental Overview Of Recent Macroeconomic Trends And Precious Metals Market

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Includes: GLD, PPLT, SLV
by: Aquarium Investments

Summary

Commodities have appreciated by as much as 20% since January 2016.

Implied probabilities of further rate hikes by the Fed have declined substantially.

A possible exit of the United Kingdom from the EU has further lowered probabilities of another rate hike by the Fed.

Fundamental "absolutes":

  • 1. US dollar is the world's reserve currency and Federal Reserve is the central bank of central banks.
  • 2. US dollar's dominating position implies that the Fed's monetary policy decisions have direct and immediate consequences for the rest of the world.
  • 3. Appreciating US dollar has a weakening effect on American economy and a limiting impact on monetary policy capabilities of the central bank.
  • 4. Expectations of a rate-hiking cycle are premature and it is likely that even increases of 0.25-0.50% will not be the starting point of a new tightening cycle.
  • 5. Global money supply will keep rising due to a low rate environment and various monetary stimulus programs.
  • 6. Commodity markets are at their multi-year bottoms and offer diversification opportunities at ultra-low prices.
  • 7. Gold, silver and platinum are essentially currencies and their supply is limited in comparison to paper currencies.

Market reaction to a 0,25% rate increase by the Fed in December was extremely negative. In January and February most asset classes, including global stock markets have seen sharp, dramatic declines. WTI Crude has declined below $30 per barrel, precious metals have tested their multi-year lows, HY fixed income segment saw corrections across the globe.

Two key developments unfolded since then. Firstly, we saw continued deterioration of US macro data. Secondly, the Fed has lowered its own projections of future rate hikes, effectively admitting a global slowdown.

Consequences of the so-called "Brexit" are local in their nature and will not have a major impact on global macro trends. Nevertheless, negative economic effects and increased market uncertainty are likely to limit the Fed's monetary options even further. Uncertainty and additional market volatility continue to support elevated prices of precious metals and may prove to be a catalyst for a spike higher.

Technicals

Silver against the dollar has stabilized above $19 per troy ounce and there is every possibility of a continued rise in prices in the second half of the year. A wider consolidation in the $16-19 price range cannot be ruled out, however, this probability is directly related to future economic data from the US. Our tactical positioning is based on the assumption of further deterioration of US economy and we expect corrections to be limited to a significant support level at $18.5. Our medium-term price target remains at $25 per troy ounce.

Gold against the dollar shares a similar technical picture. After testing 5-year lows at the end of 2015, gold has gone up to current levels of around $1300 and has been consolidating in a $1200-1330 range since March 2016. A test lower to $1150-70 per ounce is possible from a technical standpoint, however, it is fairly unlikely given the current macro environment and prices could easily stay elevated.

We believe platinum against the dollar to remain as the more attractive investment right now. Platinum has risen only 21% year to date (in comparison with gold appreciating by 28.5% and silver by 44%). Platinum-gold spread is still negative at around $290 and there is a high chance of the spread narrowing in the future.

Base case scenario

There has been no change in the long-term bull trend in precious metals against the US dollar - a stable tendency since early 2000s. Fundamental base for further price gains remains unchallenged while current price levels are attractive for long-term bullish positioning.

Our base case scenario for the coming months is as follows: gold to trade at $1400-1450, silver at $21-23 and platinum at $1200-1250. Also, gold in euro terms could test an important level at €1200-1250 per troy ounce.

Disclosure: I/we 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. I have no business relationship with any company whose stock is mentioned in this article.