Gold Tied To Fed; Palladium Or Platinum?

May 08, 2015

[This interview originally appeared on and is republished here with permission.]


Mike McGlone is director of U.S. research for ETF Securities, where he leads U.S.-based commodity research and strategy focused on the precious metals for the ETF issuer. HAI Managing Editor Sumit Roy caught up with McGlone to discuss precious metals and financial markets.


HAI: Gold prices didn't move much last year and they haven't moved much so far this year. Why do you think that is?


Mike McGlone: In U.S. dollar terms, gold has been resilient despite the strength in the U.S. dollar. In terms of most other currencies, gold has strengthened. Gold is often considered the quintessential currency and/or the primary currency without counterparty risk, so it is significant that gold appears to be not moving much; particularly since the U.S. dollar has experienced one of the highest-velocity rallies since the early 1980s. The implication is if/when the U.S. dollar rally stumbles, gold should be a primary beneficiary.


HAI: With the Fed hinting that it may raise rates this year, can gold rally or is it more likely to decline?


McGlone: Fed-tightening rhetoric has been a pressure factor on gold the past few months. Historically, the price of gold has actually performed better during tightening cycles than easing cycles. The most recent example was the last tightening cycle from June 2004 through June 2006. Gold increased about 50 percent during this period. Tightening normally has coincided with inflation, which has been notably absent in this Fed-tightening “hinting” phase.


The word “hinting” is key, as the anticipation of Fed tightening in an environment that appears more deflationary than inflationary has been pressuring gold. Historically, the primary reason for Fed tightening has been to suppress inflationary forces. Inflation has historically been good for gold. The Fed and its tightening rhetoric appear to be somewhat fearful of the run-up in equity prices and may be trying to prevent excessive irrational exuberance (Fed governors Bullard and Dudley have explicitly mentioned such).


Similar to the consensus at the beginning of 2014 that interest rates and commodities would rise, the consensus at the beginning of 2015 of Fed tightening is at risk of being incorrect. If the Fed begins a tightening cycle without clear inflationary signs, notably from the U.S. bond market, it is then likely the price of gold would suffer—at least in the short term. However, the Fed appears to be doing a good job of warning the market about a potential rate hike which may be already priced in.


If the Fed does not hike, gold should benefit, especially if it refrains from tightening due to a long overdue correction on the stock market. In this case, the alternative asset gold would likely prevail. A worse case potentially for gold with Fed tightening could be if no inflation shows after the cycle begins and the stock market continues to rally. A Fed misfire—i.e., they tighten then have to take it back—would likely benefit gold (similar to what happened to the ECB in 2011).



HAI: Platinum hit a five-year low earlier this year; why is that? Aren't supplies tight following the South African strikes of last year?


McGlone: Key pressure factors for platinum have been the weaker euro, recession in Europe and the overall plunge in most industrial commodities. Platinum trading below the price of gold has historically been a bullish factor for platinum, notably due to the demand for platinum jewelry in China, now about 25 percent of total platinum demand. The latest China platinum import figures are encouraging: up 26 percent in March 2015 from March 2014.


However, on a 12-month basis, China platinum imports show the fall-off in demand which has suppressed prices the past 12 months. Supplies are tight. Platinum is expected to remain in deficit again this year. But the market and supply have recovered from last year’s strikes. In the longer term, it is unlikely platinum will be able to sustain current low prices, as most analysts estimate the cost of production at much higher levels.


HAI: Is platinum or palladium the better buy?


McGlone: Hard to say, as platinum appears rather cheap and palladium has been one of the best performers among most commodities the past few years. Platinum should be well-poised to be a primary beneficiary of a potential recovery and increasing auto sales in Europe (diesel- and platinum-focused). Palladium remains a primary beneficiary of increasing auto sales in China and most emerging markets (more gasoline-focused). We like them both. However, we do not expect the longer-term trend of palladium outperforming platinum to shift.


HAI: Is there anything else you'd like to add?


McGlone: Inflation expectation is the primary reason the Fed has increased rates in the past. One of the best forward-looking indicators of future inflation is the bond market. Until—or unless—the U.S. bond market begins to price for increasing inflation (i.e., the U.S. 10-year sustaining above 3 percent), the Fed probably should not consider beginning a tightening cycle.



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