Gold, Silver Consolidate On Last Weeks Gains, Palladium Surges 36% YTD To 16 Year High

• Gold and silver rise as stocks fall sharply after Barcelona attack
• Gold, silver 0.6% higher in week after last weeks 2%, 5% rise
• Palladium +36% ytd, breaks out & reaches 16 year high (chart)
• Gold to silver ratio falls to mid 75s after silver gains last week
• Perfect storm of financial and geopolitical tensions is driving safe haven demand and should see higher prices
• Weekly close over $1,300 could see gold quickly test $1,400
• Palladium at 16 year highs today; gold, silver in coming months?

This morning readers woke to the news that a second attack in 24 hours had taken place in Barcelona. So-called Islamic State claimed responsibility for the attacks in Spain.

Global stocks has fallen and precious metals have eked out gains this morning as investors seek out safe haven assets. Gold has risen to trade at its highest level since the beginning of June.

Gold’s reaction to the Barcelona events is likely to last and may continue today. The combination of heightened risk in the global geopolitical sphere is likely to support both gold and silver, pushing them through recent resistance. A weekly close above $1,300 per ounce will be very positive for gold and should see a rapid move to test the $1,400 level.

Relative Performance

2017 YTD Relative Performance (Finviz) - Click to enlarge

Gold and silver outperforming stocks

After losses earlier in the week, gold and silver have come right back and are now up 0.55% and 0.64% respectively. This is very positive as profit taking was to be expected after last weeks strong gains.

Gold and silver have consistently remained in the top-performing assets throughout the year and are beginning to outperform stocks.

In the year to date, gold is up nearly 13% whilst silver has climbed over 7.5%. The benchmark S&P500 is up 8.6% after weakness last week and this.

Both precious metals have performed well thanks to safe haven demand, much of which has been driven by very strong demand in India, China and Asia and ETF-demand in Europe.

Palladium at 16 year highs today; gold and silver in coming months

Palladium is up over 36% in the year-to-date and is the best performing commodity and market this year.

Consumption of the rare industrial precious metal is expected to hit 10.8 million ounces this year, an all-time high. Demand from the automotive industry, the biggest buyer of the metal, is up 4% this year.

Due to the high demand and limited availability of palladium there is market deficit of over 1 million ounces. The apparent five-year-long market deficit has begun to impact the availability of above-ground stocks.

This has prompted leasing rates to dramatically increase, taking the palladium market into backwardation of around 5-10%/year.

Much of palladium’s increased demand is thanks to increased demand for SUV vehicles which have to abide by tightening emission legislation from the EU. The latest announcement in the UK regarding a ban on diesel engines will also help to boost demand as consumers shift from diesel to petrol engines.

This suggests that there is little let-up for the tight supply conditions the palladium market is currently experiencing.

USD Palladium, 1990 - 2017

Palladium in USD – 20 Years (Macrotrends.net) - Click to enlarge

Will gold break $1,300?

In recent months gold has attempted to break through the $1,300 barrier a few times. This level is being touted as a psychological barrier which, when broken, could see gold perform in a way not seen since its 2011 run when the inflows of speculative money drove prices up $500 in just nine months.

However, it might not be political events that push it past this barrier. Interestingly if one looks at gold’s behaviour in the last seven or eight years, it has not reacted to political tensions (see graph below).

Instead, it has been mainly affected by monetary policy, QE, the hunt for yield and shifting inflationary / deflationary concerns. An interesting point to consider as it is, arguably, counterintuitive.

Therefore, we may see gold break through the $1,300 barrier on account of the US Federal Reserve whose last minutes surprised the markets. Whilst they gave no indication as to how the FOMC might move ahead, they did show a lack of consensus between members.

Janet Yellen previously indicated there might be three (or even four) possible interest rate rises for 2017. So far, we have had two of these which have increased U.S. interest rates by 50 basis points.  These latest Fed minutes are perhaps suggesting that the FOMC is unlikely to implement even a third rate rise this year.

This should not be surprising given the lack of recovery in the US economy, inflation not meeting the required 2% and employment levels failing to reach targets.

However, we should not dismiss political tensions and their push for safe haven demand. Central banks may talk and talk but the bottom line is that ultra loose monetary policies are set to continue and remain very supportive.

For many decades we have not seen a geopolitical situation so tense, where it feels so many countries are looking over their shoulders at what could come next both in terms of political and financial threats.

The push over $1,300 could be due to a perfect storm of financial, economic and geopolitical risks, each pushing investors to look for a safe haven and time-proven financial insurance.

Gold vs US Political Risk Index, 2010 - 2017

- Click to enlarge