The precious metals sector of the commodities market posted a gain over the third quarter of 2020, with all members of the sector posting impressive gains. The sector has moved over 17% higher over the first nine months of 2020.

The composite of the four precious metals that trade on the COMEX and NYMEX divisions of the CME dropped by 5.44% in Q1 2020. In Q2, it gained 11.52%. In Q3, it vaulted 14.30% to the upside and was 17.46% higher over the first nine months of this year.

In Q1, the outbreak of coronavirus and the upcoming US election caused volatility in markets across all asset classes. During the final week of February, risk-off conditions caused central banks around the world to ease, which continued to support the price of gold. In March, the US central bank lowered the Fed Funds rate to zero percent and launched bazookas of liquidity in the form of quantitative easing into the financial system. Throughout Q2, the Fed unleashed an unprecedented quantitative easing program that included both government and corporate debt issues. The US Treasury borrowed $530 billion from June through September 2008 in the aftermath of the global financial crisis. In May 2020, the Treasury borrowed $3 trillion, and more borrowing is likely on the horizon over the coming months.

Global interest rates are at record low levels. In Europe, the ECB lowered its deposit rate by ten basis points in September. The central bank also began quantitative easing to the tune of 20 billion euros per month in November. As the virus took a took on Europe, the ECB unleashed an accommodative bazooka on the financial system. Sluggish economic growth in Europe put the ECB on a dovish path when it comes to monetary policy before the outbreak of COVID0-19.

US President Trump favors negative interest rates for the US, but so far, the Fed has rejected the notion. However, future shutdowns of the economy could force the hand of the central bank now that shot-term rates are at zero percent.

The gap between U.S. rates and other currency yields narrowed in 2020. The gap between the US dollar and short-term euro rates stood at fifty basis points at the end of Q3, far lower than over the past years when it rose to over 2.50%. A carry trade between the euro and the dollar began to unwind during the risk-off period starting in late February. As market participants closed the trade, it put upward pressure on the euro and pushed the dollar index and euro versus the dollar currency pair lower. A weaker dollar was also supportive of gold. In Q3, the dollar index fell below its technical support level at 93.395, the September 2018 low. The next level of support is at the February 2018 bottom of 88.15. Moreover, the Fed told markets that they are prepared to tolerate rising inflation over the coming months. the shift from a 2% target rate to a 2% average for inflation is another bullish factor for the gold and other precious metals as well as the commodities asset class.

In the US, the election between former Vice President Joe Biden and President Trump occurs on November 3, in Q4. The election comes with a backdrop of the pandemic and social unrest. The protests, demonstrations, and a level of civil unrest across the US not witnessed since the late 1960s. The 2020 Presidential contest has the potential to be the most contentious in history, given the current environment in the United States. Meanwhile, coronavirus has taken a significant toll on the US as it leads the world in cases and fatalities. At the beginning of October, President Trump was hospitalized with the virus in the first of what could be many October surprises.

The spectacular rise in digital currencies throughout 2017 came to a brutal end in 2018 as Bitcoin and the other cryptocurrencies declined precipitously. The air went out of the cryptocurrency asset class balloon throughout 2018. In 2019, the prices of most digital currencies rebounded. In Q1 2020, many of the cryptocurrencies posted losses, but there were some gains. In Q2, the digital currency asset class posted gains, and the rally continued in Q3, which could be a function of dovish central bank policies that weigh on the value of fiat currencies like the dollar, euro, and other legal tenders around the globe. Central banks can print currencies to their heart’s content in the current environment. Digital currencies are an alternative to traditional foreign exchange instruments as they operate independently from central banks, governments, and monetary authorities. As faith in governments and central banks decline, the cryptocurrencies become more attractive.

Precious metals are moving into Q4 after impressive gains in silver, palladium, platinum, and gold in Q3. Gold moved to new record levels in almost all world currencies except for the US dollar during 2019 and the first three quarters of 2020. The yellow metal surpassed the 2011 peak at $1920.70 per ounce. Gold rose above the $2000 level during Q3. Silver exploded to almost $30 per ounce in Q3. The Aberdeen Standard Physical Precious Metals Basket Shares ETF product (GLTR) holds a diversified basket of physical positions in gold, silver, platinum, and palladium.

Gold Review

Gold was 18.87% higher in 2019. In Q1, the precious metal continued to march higher as it gained 3.96%. In Q2, it moved 13.71% higher. In Q3, gold continued to move to the upside as it gained another 9.44% and was 29.37% above the price at the end of 2019. Gold traded in a range between $1450.90 and $2089.20 over the first nine months of 2020 and settled on September 30 at $1887.50 per ounce. The dollar index fell by 3.52% in Q3 and was 2.22% lower over the first nine months of this year. Gold’s rise continues to be a testament to its overall strength and the weakness of all fiat currencies.

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Gold has not only been moving higher in dollar terms but also in all other currency terms, which is the sign of a bull market in the precious metal.

The GDX, which is an ETF that represents the leading gold mining companies, closed Q3 at $39.16 compared to $36.68 at the end of Q2 2020. GDX rose 6.76% in Q3. The leading gold mining stocks outperformed the yellow metal in 2019, which was a bullish sign for the gold market. The stocks underperformed in Q1 as risk-off conditions weighed on prices of the mining shares, but the gold mining shares came roaring back in Q2 as they outperformed the percentage gain in gold by more than four-fold. In Q3, they marginally performed the precious metal.

The GDXJ, the ETF that tracks the junior gold mining companies, closed Q3 at $55.36 after settling at $49.58 at the end of Q2 2020. GDXJ moved 11.66% higher in Q3 after moving 76.44% higher in Q2. GDX and GDXJ outperformed the price action in gold in Q3 after significant gains in 2019 and Q2. In Q3, Warren Buffett’s Berkshire Hathaway made a substantial investment in Barrick (GOLD), one of the world’s leading gold mining companies.

Source: CQG

As the monthly chart of COMEX gold futures highlights, price momentum in the yellow metal was trending higher as the price broke out to the upside out of a multi-year trading range late in Q2 2019 and continued to move to higher highs throughout the first three quarters of 2020. At the end of Q3, momentum and relative strength remained in overbought territory but were threatening to cross lower.

Gold is moving into Q4, making higher lows and higher highs. Price momentum and relative strength were trending lower and were on either side of neutral conditions. The weaker dollar, which fell in Q3, is supportive of the price of gold. A dovish Fed is a supportive factor for the gold market. Central banks continue to be net buyers of gold. Central banks continued to buy gold throughout 2019, but Russia suspended its purchases. The Fed told markets that they are prepared to tolerate inflation at above the 2% target rate and will strive for an average of 2% over time. Higher inflation, central bank liquidity, government stimulus, a falling dollar, and rising inflation continue to be a bullish landscape for gold.

Analysts at Citigroup raised their forecast for the price of gold in Q1, saying they expect the price to reach $2000 over the coming 12 to 24 months. In Q3, they checked that box as the price exceeded their target. Bank of America expects gold to rise to $3000 per ounce. Gold has made new record highs in all currencies, including US dollars. In Q2, the Swiss franc fell to a new record low against gold. In Q3, the dollar was the last currency to fall to an all-time low versus gold. The rate cuts by the Fed, a return of quantitative easing, and accommodative central bank policy around the world are bullish rocket fuel for the gold market. While the risk of price corrections will rise with the price, I continue to believe gold is on a path for higher highs in the coming months and years.

Meanwhile, the leader of the digital currency asset class moved higher over the third quarter of 2020, with Bitcoin rising from $9,135.53 at the end of Q2 to $10,737.07 at the end of Q3. The cryptocurrency rose by 17.53% in Q3 and was 48.57% higher over the first nine months of 2020.

Silver Review

Silver was 15.32% higher in 2019. In Q1 2020, the price of silver plunged 21.01% as the precious metal underperformed the price action in gold. In Q2, silver came storming back after the dramatic downside spike in Q1. In Q3, silver broke out to the upside, rising 26.71% and was 31.10% higher over the first nine months of 2020. Silver traded in a range between $11.64 and $30.19 so far in 2020. Silver fell to its lowest price since 2009 in highly volatile conditions in Q1 and rose to the highest price since 2013 in Q3. Silver is a highly volatile precious metal that attracts speculative interest when the price trends. Silver closed Q3 2020 at $23.494 per ounce on the continuous futures contract.

Source: CQG

As the weekly chart highlights, price momentum and relative strength indicators were just above neutral territory at the end of Q3. There is a small gap on the weekly chart from $16.975 to $17.015, which could possibly act as a magnet for the price during a correction.

Silver blew through the 2016 highs in Q3 2020 like a hot knife goes through butter. Silver is a metal that tends to surprise, as we witnessed in Q1 and Q3. Expect the unexpected in the silver market, and you will never be disappointed.

Platinum Review

Platinum was the second-best performing precious metal in Q2 after tanking in Q1 2020. In Q1, platinum fell 25.43%, but it recovered by 16.05% in Q2. In Q3, it moved 7.17% higher. Platinum was the worst-performing precious metal in Q3 and was still 7.25% lower over the first nine months of 2020. The metal continues to underperform the precious metals sector. Platinum is the only member of the sector that has not posted a gain since the end of 2019.

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Platinum traded in a range between $556 and $1054.60 over the first nine months of the year and closed the third quarter above the midpoint of the range. In Q1, the price fell to $556, the lowest since 2002. Platinum is a metal that offers significant value on a historical basis compared to the prices of all of the other precious metals. However, in Q1, platinum tanked, and fell to the lowest price in almost two decades and underperformed gold, silver, palladium, and rhodium prices. In Q2 and Q3, the price rallied, but the metal remains a laggard.

Platinum is a rare precious metal that is expensive and difficult to mine. The vast majority of platinum production, around eighty percent, comes from South Africa. Most of the balance of output comes from Russia, the largest palladium producer, and the metal is a byproduct of nickel production in the Norilsk region of Siberia. As an industrial precious metal, a large percentage of platinum demand comes from its use in automobile catalytic converters. Industrial demand continued to be weak for the rare precious metal as palladium use in automobiles has grown at the expense of platinum. The global pandemic only exacerbated the demand destruction. For years, platinum traded at a significant premium to palladium, but that changed starting in Q4 of 2017 and has continued.

As the weekly chart shows, price momentum was trending lower below neutral territory at the end of Q3. Relative strength was also under a neutral reading.

Platinum had been cheap against gold for years, and it became more inexpensive on a historical basis in Q3. Meanwhile, platinum also underperformed palladium over the third quarter and remained historically cheap versus its sister metal. Platinum continues to be a metal with a compelling case for a significant price recovery. However, it also continued to hand out pain to anyone dipping a toe into the platinum market on the long side during attempts at a rally. Platinum has not traded above the $1054.60 level since late 2016.

Palladium Review

The price of palladium increased by 59.48% in 2019. Palladium was the star performer in the commodities market in 2019. In Q1, the bullish party continued as the price of palladium rose by 20.71%. In Q2, gravity hit the palladium market as the price fell by 14.66%. In Q3, it made a comeback and appreciated by 18.49%. Palladium was 22.06% higher than the price at the end of 2019 on September 30.

Palladium, a platinum group metal, is a rare precious metal. Russia, more precisely the Norilsk Nickel mines in Siberia and South Africa, produces the majority of the world’s palladium. Like platinum in Russia, palladium is a byproduct of nickel production. Before the explosive move to the upside, the previous all-time high for palladium came in January 2001 at $1090 per ounce. In Q1, the metal peaked at $2815.50 per ounce. Palladium outperformed platinum, its sister metal, in Q3, and the price remains historically high against platinum at the end of the first nine months of 2020.

Source: CQG

The weekly chart shows that price momentum and relative strength indicators in NYMEX palladium futures were above neutral readings at the end of Q3.

The palladium market was in deficit as supplies could not keep up with demand as Coronavirus spread. The demand for palladium-based catalytic converters around the world that clean emissions from the air have exploded over the past years. However, the slowdown in the global economy was a bearish factor for the precious metal. Palladium was at $2330.50 per ounce on September 30. Betting against the rally in palladium had been a losing proposition since early 2016.

Rhodium, another PGM that had been a bullish beast, moved higher in Q3.

Source: Kitco

At the end of Q1 2020, rhodium was at the $7,000 level, $1,220 higher since the end of 2019. On June 30, the midpoint price was at $6800, $200 per ounce lower than at the end of Q1. On September 30, the midpoint at $12,100 was $5,300 higher for the three-month period. Since some South African mines are cutting platinum output because of low prices, rhodium supplies have dwindled to levels, which took the price appreciably higher. Rhodium rose to a new record high in 2020, but gravity hit the rhodium market during the risk-off period in March. Throughout most of Q2, the price of rhodium was steady and edged higher despite the loss on the quarter-by-quarter basis. In Q3, it moved to a new peak as demand outstripped supplies.

The price strength in both the rhodium and the palladium markets over the past years could eventually impact the price of platinum, which has a higher resistance to heat, is denser, and is the only platinum group metal that has a history of significant investor demand. The price action in platinum was encouraging in Q2 and Q3, but the price remained at a depressed level compared to gold, silver, palladium, and rhodium.

The bottom line on precious metals and cryptocurrencies in Q3

Gold, silver, platinum, palladium, and rhodium all posted significant gains in Q3. At the end of the first nine months of 2020, silver is the leader of the exchange-traded precious metals with an over 31% price jump. Silver tends to attract the most speculative demand, and it exploded higher in Q3. Gold and palladium were both over 22% higher in 2020, and rhodium posted the most substantial percentage gain so far this year. The prospects for Q4 and beyond are different for the various metals. Palladium and rhodium are industrial metals. The decline in platinum output should continue to provide support for rhodium, but it is at a lofty level at an all-time high. When it comes to palladium, rising demand for catalytic converters across the globe is supportive of the price of rare metal. Economic contraction could weigh on the demand for new automobiles and palladium. Platinum continues to disappoint investors as it is lower compared to the price at the end of 2019.

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Meanwhile, lower interest rates and falling currency values worldwide provided support for the level of digital currencies in Q3.

In Q3, Bitcoin rose 17.53% and was 48.57% higher since the end of 2019. Ethereum moved 58.23% higher in Q3 and was 173.51% higher over the first nine months of this year. Litecoin’s value moved 11.24% to the upside in Q3 and was 10.23% higher in 2020. Ripple was 36.61% higher during the third quarter and rose 23.99% since the end of December 2019. Bitcoin Cash rose 2.15% in Q3 and was 9.79% higher so far this year. Bitcoin Gold fell 18.81% in Q3 for a total gain of 53.27% in 2020. The market cap of the entire digital currency market, which comprises 7,254 tokens, up 1,566 from the end of Q2 2020, increased from $259.705 billion at the end of Q2 to $344.464 billion at the end of Q3 2020 or 32.64%. The market cap moved 79.47% higher since the end of last year. The market cap peaked at over $800 billion in December 2017. Bitcoin underperformed the sector in Q3 and throughout the first nine months of 2020.

The significant increase in new tokens diluted the asset class. An ETF product that trades on the stock exchange and solves the custody issues could turbocharge gains in the world of cryptocurrencies. However, governments continue to express concerns as they will not relinquish their control of the money supply to the new breed of currency instruments. China and Russia have currencies that are not fully convertible, so those governments are likely to crack down on digital currencies. In those countries, the need for cryptocurrencies is compelling for individuals. The US remains concerned about the rise of the popularity of the instruments. Congress was uniformly opposed to Facebook’s attempt to put together a consortium for the Libra token.

Meanwhile, I am bullish on the digital currency asset class as it is a rejection of central bank and government management of the money supply in individual countries and from a global perspective. The rise of the asset class is a freight train that could be impossible to stop. However, I expect lots of wild volatility. I would only buy Bitcoin or the other tokens during periods of price weakness.

I am going into Q4 with the same bullish orientation to the precious metals sector at the end of Q2 and 2019.

The GLTR is an ETF that represents a basket of the four precious metals that trade on the COMEX and NYMEX divisions of the CME for those who want exposure to the sector without trading the individual metals. GLTR is a liquid instrument with $556.26 million in net assets, and an average of 49,400 shares trading each day. Both the net assets and average daily volume increased from the end of Q2 2020. The top holdings of GLTR include:

Source: Yahoo Finance

Precious metals may continue to be one of the most exciting sectors during the second half of 2020, given their long history as monetary instruments and stores of value. GLTR moved from $83.53 at the end of Q2 to $93.96 per share at the end of Q3 2020, an increase of 12.49% for the quarter that ended on September 30. GLTR marginally underperformed the composite given GLTR’s holdings, which were 60.72% invested in gold and 22.47% in silver. Gold and silver were 4.83% and 26.71% higher for the quarter, respectively. The next leg of the bull market in gold began in the early 2000s. It continued in 2019 and the first nine months of 2020. The prospects for Q4 continue to look golden. Expect lots of volatility in all members of the sector over the coming months. If seasonal weakness takes prices lower over the final quarter of this year, it could set up for another explosive year in 2021.

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.

The Hecht Commodity Report is one of the most comprehensive commodities reports available today from the #2 ranked author in both commodities and precious metals. My weekly report covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. I just reworked the report to make it very actionable!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.

The author is long gold, silver, and platinum.



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