2019 Money Metals Outlook

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by Clint Siegner, Money Metals:

Precious metals markets enter 2019 with an opportunity to shine. Several major bullish drivers are lining up to start the New Year – including technical, fundamental, monetary, and political drivers.

Before delving into each of them, let’s consider where we’ve been over the past 12 months.

To be frank, 2018 wasn’t a particularly bright year for gold and silver prices. Gold will finish with a slight loss; silver with a larger loss just shy of 10%.

2018 Close Yearly Gain/Loss
Gold $1,283 -2.1%
Silver $15.52 -9.7%
Platinum $800 -15.0%
Palladium $1,271 +19.1%
Copper $2.63 -18.8%
Rhodium $2,460 +35.9%

It could have been worse.

Sentiment toward metals got extremely depressed mid year. Speculators took out record short positions in the futures markets. Meanwhile, sales of American Eagles and other popular retail bullion products slowed to a trickle.

By late summer, the money metals were making new yearly lows as the stock market headed for new record highs. But in September, the Fed went one hike too far.

After monetary authorities pushed the Federal Funds Rate slightly above 2% (“neutral”), investors began to fear cascading negative effects in the housing, industrial, and consumer sectors.

That fear – and the rotation out of stocks that followed – helped slowly reinvigorate safe-haven buying in precious metals.

From late November through the end of the year, gold and silver prices rallied to multi-month highs. Momentum could carry forward to a strong first quarter of 2019.

Silver’s Technical Launching Pad

Silver looks especially interesting on the charts. Prices formed a long, drawn out double bottom base from August until Christmas week. Silver then broke out sharply through its $15.00/oz resistance level.

Silver Chart - December 31, 2018

The price action resembles an early stage liftoff from a launching pad. Silver is famous for its vertical moves, both to the upside and the downside.

There is a good chance its downside was fully exhausted in 2018.

One indication of just how depressed silver prices got: the silver:gold ratio hit its lowest point in a quarter century. Silver briefly got as low as 1/86th the price of gold.

One trend to look for in 2019 is a narrowing of the price spread between gold and silver.

The way that usually happens is that silver gains more than gold during rallies, so simply owning silver is a good way for most investors to play it. More sophisticated traders can try putting on long silver/short gold trades or selling their physical gold in exchange for silver.

Supply and Demand Fundamentals

The mining industry has suffered setback after setback in recent years due to low metal prices (sometimes below average all-in production costs) and poor management decisions. The strong companies have managed to survive and some even turned profits in 2018.

Supply and Demand

However, the industry as a whole in its weakened state lacks the capacity to ramp up production in 2019.

Analysts at Refinitiv GFMS (formerly Thomson Reuters) project gold mining output will decrease slightly in the year ahead – from approximately 3,282 tonnes in 2018 to 3,266 tonnes.

Silver mining is more difficult to forecast since two thirds of silver production comes from the mining of other primary metals (mainly copper, lead, and zinc). The share prices of base metals miners got hit hard in the second half of 2018, so some large-scale capital-intensive expansion projects may have to get scrapped.

The physical silver market has been amply supplied in recent years by growing production out of Mexico. But it may have now peaked. We will find out in the year ahead whether the new leftist government in Mexico is mining friendly.

Political risk is growing in other parts of the world, especially South Africa – a major supplier of gold and the world’s leading supplier of platinum and palladium. However, the mining industry there faces escalating political threats as the government threatens to seize white-owned land without compensation and impose crippling regulations on businesses.

Demand for precious metals and base metals is likely to show a small increase in 2019, barring a major global economic contraction. For gold and silver, investment demand could swing prices at the margins.

People tend to buy precious metals when they are fearful of holding conventional financial assets.

If investors continue to flee equities and cryptocurrencies, then it will be a question of whether hard money or the U.S. dollar serves as the premier safe haven. It only takes a small proportion of investors choosing precious metals to have a big impact on these relatively tight markets.

Central bank buying will continue to be a significant source of gold demand.

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