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SWOT Analysis: Palladium at $2,500 an Ounce

Commentaries & Views

Strengths

  • The best performing metal this week was palladium, up 17.92 percent on tight supplies and strong demand. One-week lease rates for palladium rose for a seventh day to 32.56 percent. The majority of gold traders and analysts were bullish on gold in the weekly Bloomberg survey, as attention turns to the next stage of the U.S.-China trade deal. Turkey’s gold reserves rose $478 million from the previous week to total $27.9 billion as of January 10, according to data from the central bank. South African gold output rose for the first time in more than two years in November, according to Statistics South Africa. Output rose 5.2 percent from a year earlier, compared to a 1.4 percent contraction in October. Producers have been able to take advantage of higher gold prices.
  • Palladium has surged to a whopping $2,500 an ounce and had its biggest one-day increase since 2008 on Friday. Bloomberg data shows that the metal jumped as much as 9.3 percent on Friday to $2,528.51. Palladium has added over 70 percent in the last 12 months, driven by a combination of tight supply and strong demand for use in autos to meet emission standards.
  • BloombergNEF says that mines, especially those in remote locations with high energy costs, can now develop onsite renewable energy as a cost-effective way to reduce carbon emissions and electricity costs. According to BNEF, an off-grid copper mine in Western Australian could use onsite renewables to meet up to 40 percent of its electrical demand at a lower or equal cost to diesel generation. Renewable energy costs continue to fall, with solar down 11 percent and wind down 6 percent in the last year.

Weaknesses

  • The worst performing metal this week was silver, down 0.41 percent. Gold was under pressure early this week before the signing of phase one of the trade deal between the U.S. and China. “Investors who bought gold for the trade uncertainty will likely take profit,” said ABN Amro strategist Georgette Boele to Bloomberg. The SPDR Gold Shares saw more than $1 billion of outflows last week – the most since 2016. Russia’s gold buying spree has slowed. Russia purchased 149 tons of gold in the first 11 months of 2019, which is 44 percent less than the year before.
  • The Treasury Department monthly budget released on Monday shows that the U.S. budget deficit widened to $356.6 billion in the first three months of fiscal 2020 and is on pace to exceed $1 trillion by year-end. A deficit of that amount would be the highest since the financial crisis when the government boosted spending.
  • According to Bloomberg data, shareholder activists launched 518 new campaigns in 2019, up slightly from 512 campaigns in 2018. Vinson & Elkins, known for its energy-related work, said “2019 was the busiest year our shareholder activism defense practice has ever had.” Endeavour Mining Corp announced that it has closed merger talks with fellow Africa-focused gold miner Centamin Plc this week after it didn’t receive enough information in the due diligence process to make a formal offer.

Opportunities

  • Bridgewater Associates’ Greg Jenson told the Financial Times this week that gold could spike 30 percent as central banks allow inflation and political fears mount. “There is so much boiling conflict, that gold being part of a portfolio makes sense to us,” Jensen said. This would mean a gold rally to more than $2,000 an ounce. Peak gold could be more distant in the future than originally thought due to increased exploration spending. 2019 saw a flurry of gold M&A activity and a return to levels last seen during the 2011 boom. There was around $26.5 billion worth of completed deals last year.

  • Palladium might continue to see its price boom. Joni Teves at UBS said in a note this week that the price forecast was raised to an average of $2,200 in 2020, up from $1,875. HSBC is also bullish, raising its near-term palladium price forecast by over 30 percent.
  • According to five fund managers interviewed by Bloomberg, gold’s price increase, “combined with capital discipline among the larger miners, is generating a bonanza of free cash flow while mergers could spark share gains among smaller players.” Catalysts for more gains include a weaker dollar, lower-for-longer interest rates and the U.S. presidential election. RBC Global Asset Management’s Chris Beer said “I have covered the gold sector for more than 20 years and I have never seen this kind of cash flow generation.” Roxgold released strong exploration and drilling results this week and RBC Capital Markets commented that it expects to see a positive reaction from the company’s shares. Red Cloud Research released a note this week saying that it has initiated coverage of Group Ten Metals, which holds the second biggest land package in the prolific Stillwater Igneous Complex of southern Montana. “Group Ten is our favorite PGM explorer in the public domain and we expect big things from this currently small company.”

Threats

  • Alastair Pinder at HSBC released a note this week warning that equity markets have been showing signs of exuberance and that global equity markets “may have moved too much, too soon.” Stifel also released a report this week commenting about the risks of unlimited free money. Morgan Stanley said in a note on Monday that the top five publicly-traded American companies now make up a record 18 percent share of the S&P 500 – higher than the tech bubble. Oaktree Capital Group LLC Co-Chairman Howard Marks said in an interview on Bloomberg TV this week that the odds are against investors now. “We’re in the longest bull market, the longest expansion in history, profits are not rising, stock prices are, and it’s what we call a liquidity-driven rally.”
  • Several top U.S. automakers are reducing production and cutting jobs in a warning sign of a slowdown in the auto industry. Bloomberg reports that Fiat Chrysler is sending workers home at four factories, Ford has two factories operating on fewer shifts and General Motors might dial back output just after enduring its long strike. American consumers are finding new cars less affordable as the average sticker price approaches $35,000. A greater volume of car purchases last year went to rental companies and other fleet purchasers, rather than individual consumers.

According to Bank of America Global Research analysis of income migration data, in 2018, low- and lower-tax states gained $32 billion more in adjusted gross income than higher tax states. This is evidence that President Trump’s SALT cap has fueled a wealth exodus from high-tax states. Bloomberg reports that states like Florida and Texas, with no income tax, are seeing more people move there while New York, California, Connecticut and New Jersey, which had the highest average SALT deductions, lost nearly 455,000 people in the last 12 month measurement period, according to U.S. Census data.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.