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Palladium Price Plunge

29 March 2019

Precious Metals Commentary

After reaching for $1,325 this week on the back of the FOMC meeting, gold weakened during the week and then broke through $1,300 on the back of a stronger US dollar following positive US jobless claims, and is now trading at $1,291. After peaking at $15.58 this week, silver followed gold but fell at a more rapid rate (causing the gold:silver ratio to crack 86), briefly moving below $15 but is currently trading around $15.04.
Earlier this week, the Aussie dollar climbed to 0.715 but has since given all this up to finish the week somewhat square at 0.7080. Therefore there was little impact on gold and silver in AUD, with both finishing down this week at $1,823 and $21.38 respectively.

Palladium’s Price Plunge

We said last week to “proceed with caution” with palladium and that was probably an understatement, as it dropped through $1,600 late last week, tried to hold $1,540 but then broke down in a big move towards $1,340, circa a 20% fall from its high of $1,613.90 only seven days ago.
TD Securities was reported as saying it was time to short palladium “in anticipation of prices dropping towards $1,230/oz”. We don’t want to be too harsh as price calls are a tough game but suggest that making that call after palladium has taken on a 14 handle is less impressive than doing so when it was at $1,600. We do feel for the analyst who said Thursday last week “not to rule out the $2,000 an ounce level” (and no, we won’t supply the link to save him further embarrassment).

Last week analysts were expressing some caution but now that palladium has cracked they are more forceful, saying that “prices may have been in a bubble“, “vehicle sales are some 15% lower”, “lease rates off their highs”, “prices are well above where fundamentals”.

Our advice this week: don’t proceed, it is just too hard to call.


Monthly Technical Report

Nick Frappell released his technical analysis earlier this week. Overall, he saw US dollar gold remaining bullish although a test of short term support levels around $1,315 would not be unreasonable before any push above $1,340 and higher, and he got that right. He noted that managed money positioning was more negative on price but that there was notable open interest in June call options at $1,365 and $1,385, so there is some money betting on a move up over the next few months.

Nick felt that the AUD was trading indecisively but may strengthen towards resistance at 0.726-0.729 in the short to medium term before heading lower, with 0.6415 as a low probability two year target.

For Nick’s targets and support levels, geek out on the detailed analysis and charts in his monthly technical report.


Yield Curve Inversion

Following on from the FOMC meeting and the Fed pausing on interest rate changes, which we covered last week, the market continued its obsession with interest rates, this time focusing on an inversion in the US yield curve.

The yield curve, a graph showing what interest rates can be earned for locking away your money for different periods of time, usually slopes upward as investors expect higher interest rates the longer they are being asked to put their money away. In an inversion, interest rates on short term maturities are higher than those for longer dated bonds.

On Friday, the US yield curve inverted when 3-month interest rates went higher than those for 10-year bonds. The reason this drew attention was because it was the first time this has happened since the financial crisis but more importantly, such inversions almost always precede recessions, which usually follow within a year or two afterwards.

David Scutt (Business Insider Australia) noted that the Australian 3-month rate had moved above the 10-year rate. The chart below compares the US and Australian spreads (or gap) between 3-month and 10-year rates, where an inversion shows up as a negative figure.
3M to 10Y spreadsThe Australian curve has inverted a few times yet Australia hasn’t had a recession and in the case of the US, this inversion has just poked its head below zero – a sustained and continued inversion would really be necessary before any firm conclusions could be drawn. The Macro Tourist noted that the US inverted briefly in 1998 and no recession followed so we feel the market is getting ahead of itself.
The Fed's Yield Curve

It hasn’t stopped people talking about it, and debating that the real signal is the 10-year minus the 1-year, or the 2-year and whether there is any real causality in the relationship (if you want to geek out, we suggest this San Francisco Fed blog post).
Our view is that any inversion needs to be sustained and coincide with other indicators, such as the unemployment rate, however we think that the headlines this move has generated is an indicator of the general skittishness of the markets about the strength of the global economy and conflicting views on that. A lack of consensus on whether rates will invert and move lower represents a higher risk environment for investors.

Gold can provide protection in such situations. Additionally, World Gold Council research shows that gold performs much better when interest rates are low and that “investors may benefit from increasing their gold holdings up to 2.5 times, depending on the asset mix”.

Six Tips for Improved Investing

We came across these six tips suggested by Joe Wiggins (Aberdeen Standard Investments) to overcome common investor biases and improve one’s investment decision making:

1.         Do have a long-term investment plan
2.         Do automate your savings
3.         Do rebalance your portfolio
4.         Don’t check your portfolio too frequently
5.         Don’t make emotional decisions
6.         Don’t trade! Make doing nothing the default

In terms of precious metals, we’ve seen many investors with bad behaviours. By far, #5 making emotional decision is the most common, which is understandable given how much gold commentary is clickbait/pumper/FOMO in nature.

The fact that the gold price is quoted on TV (and, yes, on our website) also contributes to #4 and #6 where the temptation is to trade too frequently compared to other investments you may have whose prices are not so visible.

Fortunately, we have many clients who do #2 and have regular buying patterns, either via our Gold Saver or calling up our team for an over the phone chat and trade. Doing so means you are dollar cost averaging and avoiding making a one-off purchase at a less than ideal time, accumulating metal at times when it is cheaper and minimising buying too much when it is high. While gold and silver can have rapid price moves that can make speculative trading attractive, we feel that precious metals are more about providing your portfolio with insurance over the long-term.

Rebalancing is also something that shouldn’t be forgotten. Often investors make an initial allocation to gold and/or silver, say buying to set the allocation at 10%, but then forget about it and the result is that precious metals part becomes too little or too much of their overall portfolio as metal prices and prices of stocks and property change. To minimize transaction costs we recommend only rebalancing when the percentage allocation diverges significantly or ideally, if you are accumulating via “gold saving”, then just decrease or increase your regular purchase amount to bring the allocation back to your initial target percentage.

Until next time,

Bron Suchecki
ABC Bullion
This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.