Gold, Silver, and Palladium Commentary June 3, 2020
The ratio of the 1-month Gold contract to the 1-month Silver contract (Figure 1) continued its decline this week. With the front month silver and gold contracts closing yesterday at $18.207 and $1,725.20, respectively, the gold/silver ratio is now 94.75, down 23.7% from its all-time high set on 3/18/2020. Gold (Figure 2) continued to trade sideways while July silver (Figure 4) continued to rise after breaking out of a channel the in the early part of May. This breakout was combined with an increase in open interest, signaling continued new longs into the market. While the total silver open interest is still 20% below the four-year average, silver is now above its five-year average.
On 6/2/2020 the August COMEX gold contract (Figure 2) ended the day at $1734, up slightly from $1728 at the close on 5/26/2020. We expect gold will continue to trade in the range between $1,688 and $1,179 for the next 7 days. We continue to believe that rising tensions in the United States and around the world, economic slowdowns as well as zero and negative interest rates will in the longer run continue to push up the value of gold. In their annual report on gold “In gold we trust” published by Incrementum, May 7, 2020, the authors mention coronavirus is an accelerant of an overdue recession due to a debt-driven expansion that has been cooling off since the end of 2018. This can be seen in Figure 5. Moreover, as it can be seen in Figure 5, the reversion to the mean that has started (Dow to Gold ratio) has a pretty good chance of continuing if we take into account current valuations and risks.
Palladium is essentially unchanged since last week while total open interest in the metal continues to fall week over week. For the short term, we are not seeing any major drivers to drive up prices. For longer term, an article published by the World Platinum Investment Council June 3, 2020 states that BASF recently announced that it has successfully developed and tested new autocatalyst technologies that enable the partial substitution of high-priced palladium with the relatively lower priced platinum in light duty gasoline engines by February 2021.
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The Fundamental Analytics Team
The information provided here is for general informational purposes only and should not be considered individualized investment advice. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.