February 20, 2012

Major Metals Regaining Luster

In the current environment, investors are likely to continue to favor hard assets, with gold standing out as key focus, experts say

So far 2012 has been good for the major metals. Gold, palladium, platinum and silver prices have moved up strongly off their late 2011-early 2012 lows.

AdvisorOne asked Will Rhind, managing director, ETF Securities U.S. LLC, which has assets under management of $4.5 billion in the U.S. and US$30 billion worldwide, for his thoughts on the key recent and emerging trends in the metals market.

Gold

According to a recent research report form ETF Securities: “The gold spot price saw its 11th consecutive annual increase in 2011, its longest unbroken rise since its post-Bretton Woods free-float in the early 1970s. The gold price also set a record by rising above US$1,920/ounce last year.

"Despite the strong performance, the gold spot price ended 2011 below US$1,600/ounce as a result of exceptionally volatile trade, with prices dropping through their 200-day moving average trend line for the first time since the 2008 credit crisis," the report explained. "Gold futures net long speculative positioning hit its lowest level in over 2 years at the end of 2011.”

The spot price had recovered to over $1,700 by mid-February, so what should investors focus on for the year ahead? ETF Securities’ research highlights several themes:

- High macro uncertainty, easy monetary policy by developed economy central banks, low real interest rates and sovereign debt risks: In this environment investors are likely to continue to favor hard assets, with gold standing out as key focus.

- Sustained growth in net official sector purchases and exchange-traded product holdings paints an optimistic gold price picture from strategic investors.

- A sustained move in the spot price back above its 200-day moving average could signal that gold is setting a base for further gains.

Silver

The key thing to bear in mind with silver is that it’s more of an industrial metal than gold, notes Rhind. Consequently its price is more correlated with manufacturing and industrial activity. Silver prices last year were affected by the economic slowdown but the improved economic data and outlook in 2012 are moving the price higher.

Rhind also points to the gold/silver ratio, which measures how many ounces of silver are in an ounce of gold (by cost). Last year that ratio rebounded from a near 30-year low. “That ratio has rebounded off the bottom,” says Rhind, “and if you look purely from a ratio perspective, it may indicate that silver prices are undervalued relative to gold.”

Palladium and Platinum

2011 was not a great year for palladium and platinum because these metals are the most geared to industry and cyclical indicators, says Rhind. In particular, palladium’s price dropped with the slowdown in global growth and concerns over the European debt crisis.

This year is off to a more promising start, however, Rhind notes: “(Since) the beginning of this year, that’s reversed along with the improving economic outlook. So, palladium prices have recovered and obviously if this is an indicator at all, then perhaps palladium and platinum, for that matter, may indeed have a good year in 2012 if the economic recovery and the key industrial indicators keep improving.”

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