Precious Metal Values
Which Precious Metals Do We Invest In
Precious Metals | Gold, Silver, Platinum, Palladium, Rhodium
Gold is globally respected throughout the world for its value and significant history as a part of many cultures for thousands of years. Gold has been seen as a special and valuable commodity with coins containing Gold appearing circa. 650 B.C. and the first pure Gold coins were minted during the reign of King Croesus of Lydia around 550 B.C.
People have continued to hold Gold for a variety of reasons throughout history. Societies and economies have placed a value on Gold, ensuring it’s continued worth. Gold is the metal we collectively fall back on when other currencies or monetary systems fail; and therefore it provides a legitimate and time-tested insurance against such unpredictable times of crisis. Owning gold can act as a hedge against inflation and deflation alike, as well as a good portfolio diversifier. As a global store of value, Gold can also provide financial cover during geopolitical and macroeconomic uncertainty.
Gold is an important part of a diversified investment portfolio because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline. Although the price of Gold can be volatile in the short term, it has always maintained its value over the long term. Through the years, it has served as a hedge against the erosion of major currencies. Gold is a unique asset in so far as it is highly liquid, yet scarce; and it is as much a luxury good as it is an investment. Physical Gold is no one’s liability and carries no counterparty risk, both very attractive attributes in times of crisis.
The combination of these factors means that adding Gold to a portfolio can enhance risk-adjusted returns.
Historically Held Its Value
Unlike paper currency, coins or other assets, gold has maintained its value throughout the ages. People see gold as a way to pass on and preserve their wealth from one generation to the next. Since ancient times, people have valued the unique properties of the precious metal. Gold doesn’t corrode and can be melted over a common flame, making it easy to work with and stamp as a coin. Moreover, gold has a unique and beautiful color, unlike other elements. The atoms in gold are heavier and the electrons move faster, creating absorption of some light; a process which took Einstein’s theory of relativity to figure out.
Sovereign FIAT Currency Weakness and the US$
Generally the markets seem to focus solely on the loss of purchasing power of the US dollar as one of the world’s most important reserve currencies, when the value of the dollar falls against other currencies this often prompts people to flock to the security of Gold, which causes Gold prices to rise.
This is not actually correct as the US$ in 1998 was trading at exactly the same value versus global currencies as of today in 2021 (DXY Index charts) while Gold has risen over 7 times in value in that same time frame versus US$.
In fact we have seen on many occasions the rise in the US$ versus global currencies coincided with Gold rising versus the US$ at the very same time.
What has to be taken into consideration is the global monetary aggregate expansion of sovereign currencies which gives you forward guidance in inflation or more accurately the loss of purchasing power and ongoing debasement of Fiat paper sovereign currencies.
Inflation Hedge or More Accurately: Holder of Purchasing Power
Gold has historically been an incredible holder of purchasing power versus currencies which consistently lose value over time. The market will highlight that Gold is a reliable hedge against inflation but this is not entirely accurate. Between 1980 and 2002 we had very high compound rates of headline inflation and yet Gold fell in value against currencies for over 20 years. Gold is rather a crisis hedge and a fantastic holder of purchasing power over very long periods of time. Gold tends to rise very dramatically and corrects its under-priced situation in times of crisis and hence recognizing where we are on the macroeconomic cycle is of paramount importance. Over the past 50 years investors have seen Gold prices soar and the stock market plunge during high-inflation years. This is because when fiat currency loses its purchasing power to inflation, Gold tends to be priced in those currency units and thus tends to arise along with everything else. Gold is also seen as a good store of value so people may be encouraged to buy Gold when they believe that their home currency is losing value.
Deflation is defined as a period in which prices decrease, when business activity slows and the economy is burdened by excessive debt, which has not been seen globally since the Great Depression of the 1930s (although a small degree of deflation occurred following the 2008 financial crisis in some parts of the world). During the Depression, the relative purchasing power of Gold soared while other prices dropped sharply. This occurs when people choose to hoard cash, and the safest places to hold such cash is in Gold bars and coins.
Gold retains its value not only in times of financial uncertainty, but in times of geopolitical uncertainty. It is often called the “crisis commodity,” because people flee to its relative safety when world tensions rise; and during such times, it often outperforms other investments. For example, Gold prices experienced some major price movements this year in response to the Covid-19 crisis. Its price also often rises the most when confidence in governments is low.
Much of the supply of Gold in the market since the 1990s has come from sales of Gold bullion from the vaults of global central banks. This selling by global central banks slowed greatly in 2008 and since 2010, 22 central banks have been buying Gold in record annual amounts. At the same time, production of new Gold from mines had been declining since 2000. It can take from 5 to 10 years to bring a new mine into production. Generally speaking, a reduction in the supply of Gold increases gold prices.
Historically, increased wealth of emerging market economies boosted demand for Gold. In many of these countries, Gold is very much embedded into the culture. In China, where Gold bars are a traditional form of saving, the demand for Gold has been steadfast. India is the second largest Gold-consuming nation in the world; it has many uses there, including jewelry. The Indian wedding season in October is traditionally the time of the year that sees the highest global demand for Gold.
Demand for Gold has also grown among investors. Many are beginning to see commodities, particularly gold, as an investment class into which funds should be allocated and properly diversified. SPDR Gold Trust, became one of the largest ETFs in the U.S., as well as the world’s largest holder of Gold bullion recently.
The key to diversification is ensuring that investments that are not closely correlated to one another; Gold has historically had a negative correlation to stocks, property and other financial instruments.
Properly diversified investors combine Gold with stocks and bonds in a portfolio to reduce the overall volatility and risk.
Higher Volatility Than Gold
Unlike Gold, the price of Silver swings between its perceived role as a store of value and its role as an industrial metal. Price fluctuations in the Silver market are more volatile than Gold.
So, while Silver will trade in approximate unison with Gold as a hoardable commodity, the industrial supply/demand picture for the metal exerts an equally strong influence on its price.
Price Determined by Both Industrial & Investment Demand
The industrial equation fluctuates with new innovations. The rise of a vast middle class in the emerging market economies created an explosive demand for electrical appliances, medical products, and other industrial items that require Silver. From bearings to electrical connections, mobile phones, digital cameras, computers and iPhones, Silver’s unique properties have made it a highly desired commodity. Silver is also used in batteries, superconductor applications and microcircuit markets.
Silver’s price is affected by its multitude of applications and is not just used in fashion or simply as a long term store of value. It is the second most-consumed commodity after oil, and there is no substitute for Silver on the periodic table given it’s highly unique properties.
This enormous industrial demand, partly responsible for pushing prices up, will not diminish as the Silver price rises because this metal is used in very small quantities in each product. Even a substantial increase in the price of Silver will not cause industrial demand to fall. Contrary to Gold (which can be recycled), Silver, once consumed, is almost entirely destroyed, at present.
Extremely Under-Valued Asset
Historically, one could buy 15 ounces of Silver with 1 ounce of Gold. Today 1 ounce of Gold buys 73 ounces of Silver (as of August 2021).
If we consider the historical trend over millennia, the price of Silver should be $118/oz today (Gold price divided by 15). On January 20th, 2015, its price was $18/oz. Silver is one of the very few commodities trading at less than it did in 1980.
Silver is used extensively in the photovoltaic (solar) industry. With zero-carbon emission targets globally embraced, countries seeking to increase their renewable energy production capacities will invariably consume more Silver.
Monetary demand is added to the industrial demand: Silver has been considered a form of money for centuries, and the destruction of currencies’ purchasing power (as money printing aggressively continues) is contributing to Silver’s return as a critical element of a stable monetary system.
As the price of Gold increases, it becomes unaffordable for millions of people (especially in Asia). This is not the case with Silver. Millions of people will rush to this metal as they witness the destruction of paper currencies’ purchasing power. This global demand wasn’t present during the last major Gold and Silver boom of the 1980’s, so this could play a very important role.
Silver Short Positions
One phenomenon must be taken into account to understand the potential for Silver: There are enormous short positions on the Silver market. With Silver prices going up, investors and traders holding those positions will have to cover, which will accelerate the rise in price dramatically.
As with Gold, many Silver “paper” certificates have been sold without enough physical Silver in reserve to actually satisfy eventual delivery to all holders of such “paper” certificates. This abundant “paper” offer has contributed to limiting the increase of Silver prices for years by taking attention away from the physical market itself. But this rush towards tangible assets (and physical Silver in particular) will make those paper certificates (ETFs etc.) explode, along with the price of Silver. One should only invest in and own Silver in its physical form.
Like Gold and Silver, Platinum is traded around the clock on global commodities markets. It often tends to fetch a higher price (per ounce) than Gold during routine periods of market and political stability because it is much rarer. Far less of the metal is actually extracted from the ground annually.
Platinum has seen a huge surge in popularity among investors. Unlike Gold, Platinum has not been mined for thousands of years. Thanks to its higher boiling point and the fact that it rarely occurs in its natural form, Platinum wasn’t discovered until 1735.
Over 73% of the world’s Platinum comes from mines in northern South Africa where extraction is extremely challenging, especially from super-heated magma mines deep below the earth’s surface. Platinum is rarely found in isolation, it is more usually found alongside other base metals such as nickel, copper and chrome. Therefore, deposits discovered underground must be refined before they can be considered pure and the complexity and cost of this process makes Platinum extremely rare.
Platinum has a silver appearance and it is extremely hard. While jewellers value its malleability, it’s also ductile, rigid, dense and extremely unreactive.
Not Only a Precious Metal but also an Industrial Metal
Like Silver, Platinum is considered an industrial metal. The greatest demand for Platinum comes from automotive catalysts (about 40%), which are used to reduce harmful emissions. Following their inclusion in catalysts, jewelry accounts for the majority of demand. Petroleum and chemical refining catalysts as well as the computer industry use up the rest, and it is also found in everything from fertilisers to pacemakers.
Because of the auto industry’s heavy reliance on metal, Platinum prices are determined in large part by auto sales and production numbers. Increasing requirements by “clean air” legislation will require automakers to install more catalytic converters, raising demand. Carmakers have started turning to recycled auto catalysts or using more of Platinum’s reliable sister group metal, Palladium. When the price of Palladium rises, substitution into Platinum will occur.
The remainder is turned into bullion to make Platinum bars and coins for the investment market.
Geographic Concentration of Mines
Platinum mines are heavily concentrated in only two countries, South Africa and Russia. This creates greater potential for cartel-like action that would support or even artificially raise platinum prices or indeed for geopolitical considerations in either country.
Hydrogen Fuel Cell Technology
Platinum is used as the exclusive precious metal catalyst in hydrogen fuel cells, alongside Iridium. This fast-growing hydrogen-fuel-cell technology relies on Platinum, as it can withstand considerably higher temperatures than other metals. A fuel cell needs Platinum for the catalyst that separates hydrogen into protons and electrons, which then generate the electrical current, making it an alternative to battery-powered vehicles. Hydrogen fuel cells, though presently expensive in their infancy, are expected to be a massively important part of reducing global carbon emissions.
The balance of any investment portfolio depends on appetite for risk. Many investors consider a precious metal holding a safe haven – a form of protection against riskier exposure elsewhere. Demand for Platinum investment bars can increase when the price of Gold rises and the Platinum/Gold ratio increases. Platinum is however deemed to be the most volatile of the precious metals.
Lesser known than the above three metals is Palladium, which has more industrial uses. Palladium is a shiny, silvery metal used in many types of manufacturing processes, particularly for electronics and industrial products. It can also be used in dentistry, medicine, chemical applications, jewelry, and groundwater treatment. The majority of the world’s supply of this rare metal, which has the atomic number 46 on the periodic table of elements, comes from mines located in the United States, Russia, South Africa and Canada.
Industrial & Auto Industry Demand
This is by far the number one driver for prices of Palladium around the world. The auto industry accounts for approximately three quarters of the global demand for Palladium. Palladium is a key component in the manufacturing of catalytic converters because the metal serves as a great catalyst that speeds up chemical reactions. This and the demand for vehicles in large markets like the US and China have a sizable bearing on the price of Palladium.
Metalworkers can create thin sheets of palladium down to one-two hundred fifty thousandths of an inch. Pure palladium is malleable, but it becomes stronger and harder once someone works with the metal at room temperature. The sheets are then used in applications like solar energy and fuel cells.
This shiny metal is 12.6% harder than Platinum, making the element also more durable than Platinum.
Much of the world’s Palladium supply (circa 80%) comes from Russia and South Africa. Any interruptions to this supply or process, be it in the form of sanctions as Russia sometimes deals with, or power supply problems (currently faced in South Africa) can cause a fluctuation in prices.
Substituting Palladium for other metals within the auto industry is coming under increasing scrutiny. This is in large part due to the high price of Palladium, and also the fact that a number of substitutes, including Platinum can be used.
US Dollar Strength
The US Dollar forex market is facing numerous challenges. The weakening dollar can certainly have an impact on Palladium prices as it does on other precious metals, though the reasoning may be different. Palladium is typically purchased from suppliers in US Dollars. Any downward movement in the Dollar has the potential to act as a disincentive to suppliers. This can reduce the supply of the precious metal which in turn can lead to upward price movements.
Jewelry & Coinage
Jewelers first incorporated Palladium into jewelry in 1939. When mixed with yellow gold, the alloy forms a metal stronger than white gold. In 1967, the government of Tonga issued circulating Palladium coins touting the coronation of King Taufa’ahau Tupou IV. This is the first recorded instance of Palladium used in coinage.
Rhodium has rarely been considered an investment precious metal like Gold, Silver, Platinum and Palladium. However, it is considerably rarer than all of these precious metals and thus merits investment consideration. Only 28 tons of Rhodium are mined annually compared to 220 tons of Platinum and over 2,300 tons of Gold.
Rhodium is a lustrous white metal that is both hard and dense. It has very high reflective properties and is an excellent conductor of both heat and electricity. Like Palladium, it is one of the six Platinum Group Metals or “Noble Metals”. Rhodium was discovered in 1803 by the British chemist and physicist William Hyde Wollaston along with his discovery of Palladium.
Alloy or Coating Agent
Engineers understand Rhodium as an alloy or coating agent that improves the corrosion resistance of both Palladium and Platinum. Rhodium is often used by jewelers as a coating on Silver, Platinum and Palladium jewelry to make the items more scratch resistant and improve luster and shine.
Because of its reflexive properties, Rhodium is also used in high quality glass and LCD screen production.
Auto Industry Demand
Like Platinum and Palladium, the majority of demand for Rhodium comes from the auto industry for its usage in catalytic converters where Rhodium catalyzes the reduction of nitrogen oxide to nitrogen.
Rhodium is extracted as a byproduct of Platinum mining. Therefore, like Platinum, the majority of the world’s Rhodium supply (80%) comes from South Africa in the mining region called the Bushveld complex. Rhodium is extremely difficult and costly to extract as compared to other elements in the earth.
The price of Rhodium has been very volatile in recent years. Rhodium traded up from US$600/oz in 2016 to a record high of US$29,800/oz in Q1, 2021. Strong demand from China for auto manufacturing due to increasingly stringent emissions regulations globally, together with the threat of lower supply amid a lack of investment in new mines over the past decades have made Rhodium the strongest performing commodity in 2020.