2018 - A Year Of Volatility For Precious Metals

|
Includes: AAAU, AGQ, BAR, CEF, DBP, DBS, DGL, DGLD, DGP, DGZ, DSLV, DZZ, GLD, GLDI, GLDM, GLDW, GLL, GLTR, IAU, IAUF, OUNZ, PALL, PHYS, PLTM, PPLT, PSLV, PTM, QGLDX, SGOL, SHNY, SIVR, SLV, SLVO, SPPP, UBG, UGL, UGLD, USLV, USV, ZSL
by: Bullion Exchanges
Summary

Volatility of the top 48 asset classes which comprise the majority of future contracts.

The analysis on the performance of different industries in 2018.

Precious metals performance in 2018.

2018 is within a few hours of the record books as this article is being written, so let us take the opportunity to review the year in the global markets, and to see how precious metals fared in the mix.

Below we show a wide comparison of 48 asset classes which comprise the majority of markets for which futures contracts trade worldwide. The highlights are meant to draw your attention to notable points, discussed below:

Source: Finviz

Volatility in Vogue & Grain Shortages

First, on the very top line (red arrow), we note that by a wide margin, the best-performing "asset" was, in fact, a contract which tracks expected volatility in the US stock market. The VIX, or Volatility Index as it is referred, is also sometimes called the "fear index" because it spikes when traders are pricing in uncertainty on future stock prices. And as discussed last week, the US stock market had recently fallen some 20% from its September highs, causing a temporary panic and surge in the Volatility Index.

Moving on (green circle), we see some of the best-performing commodities were on the agricultural side: cocoa, wheat, and oats. A dry summer is largely to blame for the price rise in these items, which curtailed supply.

Industry Suffers, Liquid Energy in Plentiful Supply

Flipping to the bottom of the chart (red circle), we see that in general, the worst-performing assets were industrial commodities. Note how copper, multiple types of oil, lumber, and gasoline all fell in the double digits.

The world appears to be awash in fossil fuels at the moment. That is the message from the consistent declines in the liquid energy space. For example, note the 800% increase in oil production coming from North Dakota alone between 2005 and 2015 and continuing today:

Source

Precious Metals Pulled in Two Directions

Turning to the precious metals, we see that both metals will put in small losses for the year, with gold holding its value relatively better than silver.

In general, during stock market and broad commodity declines as witnessed this year, gold will serve as a go-to safe-haven metal.

Meanwhile, silver, of which approximately 80% is still demanded by industrial fabrication, will often get dragged lower with the industrial sector. 2018 proved to be no exception:

For the record, when does silver tend to outperform gold? When industry is at least stable and concerns over inflation take center stage amongst investors. Then, silver benefits from a double demand equation, as fabricators continue to consume 80% of the metal's supply while investors compete to exchange depreciating currency for the 20% that remains.

A Return to Volatility

Although in sum stocks look to finish the year down approximately 7%, we note that this is the largest annual percentage decline in the last 10 years since the 2009 bottom.

What does this mean when such a small percentage drop registers as the largest annual decline in a decade?

That volatility had been unsustainably low in past years.

Need proof?

Below is the SVXY fund which tracks the inverse of volatility in the US stock market. Investors had piled into this fund over the last several years, seeing it as a sure bet. As stocks remained in a tight upward channel, volatility remained low. This inverse fund saw a huge growth in popularity.

Yet, those who expected volatility to remain low in the stock market forever were in for major shock in 2018.

The economist Herbert Stein famously once said: "That which cannot go on forever… will one day stop."

The following chart helps to keep gold and silver's single-percentage declines in perspective:

Coming next week, we will examine some of the trends that precious metals investors need to be aware of which will impact our markets in 2019.

A happy New Year to all.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Business relationship disclosure: This article is a third party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.