A Glimpse into 2016 Precious Metals price action
Gold, Silver, Platinum and Palladium shared many similar characteristics that could determine its future price action. One of the most important link and all the metals depended heavily upon remains to be demand from China. They also have similar problems such as the recent over production (over supply) and undergoing the tulip-mania phase.
Our idea of trading precious metals in 2016 will be closely derived from the main stages below. Since we do not have any crystal ball that can tell us what may happen in the future, we look at historical precedents to give us some clue on what to expect but at the same time discuss the fundamental reasoning. We admit that this depiction is very much a one sided view but this is where discussion can help refine an analysis into an actionable plan.
- Gold price action is often subject to safe haven demand as well as jewellery demand from the ever growing middle class citizen of China.
- Central banks continue to buy physical gold and demand from India and the Middle East remains strong.
- Industrial metal such as Silver often act as a secondary alternative to gold.
- Pick up in the global economy may lift Silver prices higher.
- Platinum prices are heavily influenced by the automobile and jewellery industry. Over the years, Platinum has enjoyed high prices but 2015 has seen the metal plagued by falling prices.
- Scandals at VW and with Chinese equity market in a rut – demand for Platinum has reduced significantly.
- Palladium is a hybrid and trading this particular metal requires a set of technical view and a lot of luck at taking a position.
- It can be rewarding but more often hard to trade as its price action does not play by the rule book like the rest of its siblings. It often has a lagged reaction.
Potential risk events worth considering in 2016
There are many other factors that we have to consider as to what 2016 have in store:
- US kick off with rate hike “Normalization” as a one off or transitory?
- Continuous Dollar appreciation and what are the pros and cons? Is the global economy ready for a stronger dollar?
- Is there a threat to a mini correction in the global equity market?
- Emerging economies at risk of debt restructuring post US rate hike? Is EM at risk of 1998 Asian financial crisis?
- Will we see a strong hint of inflation pressure due to production cuts? Is there a threat that inflation could run rampant?
- Potential Chinese Yuan devaluation due to threat of a more severe economic growth slowdown? China future economic growth has been projected lower – will the PBOC do QE?
- Further intervention by Central banks that may cause Black Swan Events? Will the SNB take drastic action again?
- Geo-political risk events across the Europe, America and the Middle East? Terrorism will be a constant threat while ISIS remains to be a problem.
- How will the Oil & Gas industry holds up if Oil prices continue to slide lower? Will this add pressure to countries that rely on exporting the black gold?
Thread 2016 carefully as volatility starts to pick up from the Equity market. Inter market analysis advised that as volatility picks up in one sector we expect the rest to be affected.
Silver stands out compared to the rest of its siblings – given that its price action may have reached the end of the blow off phase. If this holds true, silver could offer investors a more stable outlook and price action that follows a period of consolidation but also the possibility of returning to the mean (upside potential).
We cannot say the same thing for the other metals. Simple observations points out that the rest of the metals are in danger of further downside – thus selling on rallies will remain the strategy going into 2016. Despite the prospect of additional QE from other central banks, Gold, Platinum and Palladium indicate that further drawdown is expected and sell of rallies could continue.
Upside remain limited but we cannot discount the possibility that Gold could head higher IF there is any geo-political risk events or a threat to the global financial crisis. The yellow metal will face a challenging year and investors who remain long could be in for a wild ride.
IF the above risk occurs, we will be cautious on taking positions in Platinum and Palladium as the price action can be rather erratic. Given their nature, should a crisis happen – the selloff could be severe.