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Precious metals: myths and facts about silver, platinum and gold

Max Holzer

An article by Max Holzer

Head of Relative Return within the Multi Asset Portfolio division and a member of the Union Investment Committee

Precious metal markets are exhibiting a growing number of anomalies. The price of silver abruptly jumped by 20 per cent to US$ 30.10 per troy ounce at the start of the year, while platinum climbed to a multi-year high of almost US$ 1,340 per troy ounce in mid-February. Gold, however, has fallen sharply to US$ 1,800 per troy ounce after hitting a record high of US$ 2,075 per troy ounce in August 2020. What are the influences on precious metal prices, what is the effect of the economy’s shift towards greater sustainability, and is gold able to compete with cryptocurrencies? In short, what should we expect from silver, platinum and gold?

1.  Silver price still offers potential despite the hype

The myth: The silver market has a reputation for being easy to manipulate. At the end of January, the price of silver surged by 20 per cent within three days. In terms of the fundamentals, there appeared to be no particular reason for this increase. Retail investors who are active on social media were said to be responsible. They were supposed to have forced professional investors to cover their short positions, thus driving up the price of silver.

The facts: A comparison with the price swings of small- and mid-cap US stocks such as GameStop, which originated from social media investor forums, does not tell the whole story. The short selling ratio in the silver market was far lower than in the GameStop scenario, for example. According to silver trading market Comex, financial investors actually bought more futures than they sold. With an estimated market volume of around US$ 1 trillion, the silver market is too big to be easily manipulated.

Recovered after slump

Indexed performance

Recovered after slump
Quelle: Bloomberg, Statista, Stand: 1. Februar 2021.

However, there has long been a shortage of coins and bullion in the silver market. Investors are therefore prepared to pay a premium for physical silver. To this end, they acquire silver exchange-traded funds (ETFs) that, in turn, have to buy the precious metal. This may push up the price of silver in the short term.

Silver is also used in industry. It is an extremely good conductor of electricity. This makes it an important commodity in the solar industry, which accounts for about a tenth of demand. Eco-friendly energy initiatives from governments in China, the US and Europe are therefore likely to create a significant tailwind. The US Silver Institute also expects a substantial boost to demand from the automotive industry, which is increasingly using silver for applications such as control systems in self-driving vehicles, as well as for electric drives and charging stations.

Our forecast: Relative to the price of gold and the market more generally, silver is currently fairly priced. A further uptick in demand could provide further momentum for this cyclically sensitive metal. The price of silver – and gold – will be heavily influenced not only by the speed of economic recovery but also by real rates of return, i.e. nominal rates after deduction of inflation. If these were to rise, there would be a negative impact on the silver price.

2.  Platinum: a coveted ‘green metal’

The myth: Platinum is the ‘green metal’ par excellence. It is used as a catalyst in electrolysis for fuel cell technology and is thus playing a key role in reducing greenhouse gases. This has got investors excited, and the price is therefore climbing rapidly.

Platinum is likely to be more valuable than gold in the medium term.

Max Holzer

The facts: Platinum is benefiting from the trend towards green industry and business. However, the price of the precious metal is currently being driven up by the buzz around fuel cells and by real demand, such as in the automotive sector. Tighter emissions limits in Europe, China and the US are a major influencing factor. Moreover, platinum offers further upside potential because it can be used as a cheaper alternative to other metals. It is increasingly replacing palladium and rhodium in car and truck catalytic converters. This trend, which was primarily triggered by costs, is only just starting in China and the US, for example. Another reason for the price rally is strong demand from financial investors and temporary shortages of supply as a result of the pandemic.

Nonetheless, the prospects for the success of platinum in fuel cells are not yet clear. The extent to which further developments in this market will actually push up demand for platinum is currently difficult to predict. However, the price effect could be substantial. This can be seen from nickel, an industrial metal. In recent years, demand for batteries with a high nickel content has risen sharply as a result of the strong sales figures of US electric vehicle manufacturer Tesla, resulting in a rally in the nickel market.

Our forecast: Platinum is our favourite among the precious metals. Overall, less platinum is currently being produced than bought, which makes price increases probable. Despite the cautious assessment with regard to fuel cells, we believe that the precious metal is attractive. Platinum is likely to be more valuable than gold in the medium term. The factors contributing to this include investment programs aimed at a greener economy and continuing strong demand from investors.

Brilliant run

Silver, platinum and palladium catch up with gold
Price per ounce, indexed to 100

Brilliant run
Sources: Bloomberg, Union Investment.

3. Gold an invaluable instrument for risk management

The myth: As a scarce resource, gold is the ideal protection against inflation. However, the precious metal may lose this role, in part because of the upswing in cryptocurrencies.

The facts: Gold offers much more than just potential protection against rising inflation, but its other advantages are often overlooked. There is little correlation with the performance of assets such as equities and bonds. Gold therefore enjoys a reputation as a safe haven. And it lived up to this reputation during the coronavirus crisis. However, historical data shows that gold has also been able to hold onto its value in real terms, i.e. after inflation is taken out of the equation.

Gold remains an important instrument for spreading risk more evenly within the portfolio. That is why the central banks have become major buyers of gold, for example. However, demand from them has recently softened. Companies also use gold as an investment. Tesla, for example, wants to use gold to diversify its cash holdings and achieve a higher return on its investments. To this end, it is investing in gold and securities that track the gold price and also in cryptocurrencies.

This shows that gold and cryptocurrencies are likely to be rival investments in future. Over the past year or so, the cryptocurrency bitcoin has presented itself as an alternative to gold when it comes to protecting against potential inflation. This does not necessarily have to be detrimental to the price of gold. Instead, there are likely to be tactical shifts between gold and bitcoin investments. Moreover, inflows into bitcoins have recently been much higher than those into gold. Following the rapid bitcoin rally, holdings in the cryptocurrency may be reallocated back to gold. This should support the price of gold in the medium term.

Our forecast: There is currently little demand for gold as a crisis currency because the progress being made with vaccination programmes is pointing to economic recovery. Nevertheless, the price of gold could benefit in the short term from rising inflation expectations that are being driven by the prospect of further fiscal stimulus in the US. But for this reason, we anticipate only a brief rather than a substantial rise in inflation. The gold price will be determined by interest rates and inflation alike. Rising real interest rates would make gold unattractive in comparison with bonds, as gold does not offer a coupon and incurs storage costs. However, the continuation of expansionary monetary policy will generally support the price of gold.

Summary: The precious metal market still offers a few investment opportunities, even though prices have already gone up. The transformation towards a greener economy is a particularly significant factor. However, selection is crucial. We favour platinum in view of the increased demand from the automotive sector. Gold remains invaluable as a liquid alternative investment and means of protection against risk, especially in a multi-asset portfolio. Under the investment strategy, it will continue to be used as an instrument for distributing risk more evenly.

 

As at 22 January 2021