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US Election Risk Event

30 October 2020

Precious Metals Commentary

Gold broke through $1,900 this week and is down about 2% as we write in response to a surge in coronavirus cases and fears of tighter COVID restrictions/lockdowns, in addition to pre-US election uncertainty. Even though gold is currently below $1,870 it is holding above the bottoms reached in late September.
us gold price chart
The resulting rally in the US dollar put corresponding pressure on gold but as that also put pressure on our exchange rate, the drop in Aussie gold was less than 0.5% and is trading around $2,650 and well within the range it has established since mid-August.

Nick Frappell says that with the recent drop targets to US$1,845 become more plausible and there is also an important 38.20% retracement level at $1,837. He sees rallies back to $1,885 as very likely.

TD Securities says that as the US election is a big “risk event”, speculators aren't willing to take positions ahead of it and as a result the combination of “low volume and aggressive flow combine into sharp price action”.

Taking a longer-term view, Michael Howell, managing director at CrossBorder Capital says that gold’s fair value is close to $2,500 considering that the US money supply has grown by about 30% this year with another 20% expected in 2021.

While the World Gold Council reported that gold demand dropped 10% in the third quarter compared to same period in 2019, bar and coin demand was up 49% year-on-year and inflows into gold ETFs continued reaching a record 1,003 tonnes year-to-date.

Likewise, silver’s long-term fundamentals remain intact with respected research firm Metals Focus saying that looking into 2021 silver should push well above $30. They noted that investment demand has been resilient after silver failed to break through the $30 that triggered profit-taking in August and they see it outperforming gold as money flows back into precious metals in 2021 as central banks and government continue with stimulus to counter the impact of COVID.

US Election

The US election has dominated markets, and gold, these past few months (and may continue to if it is contested). ETF issuer, State Street Global Advisors, performed an analysis of gold’s performance following US elections since 1971, the results of which can be found in the chart below.
gold performance in us elections
They found that there wasn’t much difference between presidents and instead it was who controlled Congress that mattered, with a Democratically controlled Congress resulting in a significant outperformance for gold. This is based on the view that Republicans are generally pro-business and fiscally conservative while Democrats are seen as more tax and spend.

They also found that if there was a new administration then gold performed better (7.9% versus 6.5%) due to the uncertainty of what the change in leadership will mean for government policies and the economy.

Whether Trump or Biden wins, we agree with Joshua Rotbart that “in the long run we expect the price of gold to rise, regardless of the election outcome” as countries resort to printing money.

As Warren Hogan, formerly with ANZ Bank and Commonwealth Treasury and now professor at UTS Sydney, said this week “many of the problems economies face cannot be solved by easy money” and instead are structural and require changes to government policies.

However, making changes to tax or regulations or other policies will impact one group or another and politicians are wary of the resulting vocal and social media opposition.

The end result of this lack of will is that central banks are left to do what they can to get the economy moving but Warren says that “easy monetary policies distort private sector decision making and ultimately reduce the productivity and efficiency of the economy”.

So the current financial repression status quo of easy money and low interest rates looks like it will continue. This will be good for gold, but as John Hathaway of Sprott said recently, “we believe that now is the time to start layering in gold exposure, not when the rest of the world tries to do so”.
 

Platinum

With the launch of ABC Bullion’s new platinum minted bar range this week we thought it would be a good time to have another look at platinum. Last time we covered it in detail was over a year ago and since then platinum started a run up which was unfortunately interrupted by COVID.
us platinum price chart
Platinum has a mix of investor and industrial demand so it got hit, as did silver, by COVID’s impact on the economy. Since its bottom at around $565 platinum has surged 50% to around $850. In Aussie dollar terms platinum is currently just above $1,200.

As you can see from the chart above, there is a very strong technical support level at $800 and on dips below that platinum finds buyers. The result is that at current levels the downside risk in platinum is limited.

The upside for platinum, however, looks good as supply is constrained and while demand is currently flat there is material demand growth potential. Additionally, platinum is historic lows compared to itself as well as to gold – normally trading around twice the price of gold but now at below half gold’s price.

Thirty times rarer than gold, platinum occurs at very low concentrations in the Earth’s crust with only 6 million ounces mined in 2019 compared to gold’s 111 million and silver’s 836 million ounces. Over 80% of the world’s economically viable platinum-bearing deposits are in South Africa.

On the demand side, the use of platinum in autocatalysts is the main source of demand but it has significant demand from industrial and jewellery uses.

Investment demand received a boost in 2017 with the launch of the first platinum ETF and these have grown to hold around 3 million ounces today.
platinum demand components
Looking forward, platinum’s demand growth potential is the highest it has been in the past 5 years with three dominant components:
  • increased diesel vehicle sales in Europe to meet reduced CO2 emissions
  • substitution of platinum for palladium, which is at all-time highs
  • increased investment demand
A new source of demand for platinum comes from hydrogen-powered proton exchange membrane fuel cells, which use platinum catalysts. With more than 70 countries, and the European Union, pledging to achieve carbon neutrality by 2050, green hydrogen is key to decarbonisation represents a new and growing source of demand for platinum.

If you want to diversify into platinum, consider our pool allocated or if you like the feel of physical in the hand, our new minted bars are the way to go.
ABC Bullion platinum minted bar range picture

Until next time,

Bron Suchecki
ABC Bullion

If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at [email protected], or call us during trading hours on 1300 361 261.

Disclaimer

This document has been prepared by Australian Bullion Company (NSW) Pty Limited (ABN 82 002 858 602) (ABC). The information contained in this document or internet related link (collectively, Document) is of a general nature and is provided for information purposes only. It is not intended to constitute advice, nor to influence any person in making a decision in relation to any precious metal or related product. To the extent that any advice is provided in this Document, it is general advice only and has been prepared without taking into account your objectives, financial situation or needs (your Personal Circumstances). Before acting on any such general advice, we recommend that you obtain professional advice and consider the appropriateness of the advice having regard to your Personal Circumstances. If the advice relates to the acquisition, or possible acquisition of any precious metal or related product, you should obtain independent professional advice before making any decision about whether to acquire it.

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