GLTR - GLTR: Time To Add To Precious Metals Positions

2023-06-27 13:11:52 ET

Summary

• Gold and silver prices have declined due to double top formations and prospects for higher U.S. interest rates, but factors such as the future trajectory of interest rate hikes, the dollar's decline, and the geopolitical landscape may provide support for the precious metals.
• Platinum group metals (PGMs) have become inexpensive at current prices due to green energy initiatives, a deficit in the platinum market, and illiquid futures markets.
• The Aberdeen Physical Precious Metals Basket shares ETF offers a diversified investment in gold, silver, platinum, and palladium, with gold being the most dominant exposure.

Precious metals are industrial commodities with many applications. The four precious metals trading on the CME's COMEX and NYMEX divisions, gold, silver, platinum, and palladium, have a role as investment assets. Gold and silver have long histories as means of exchange. Platinum also has garnered financial interest, but palladium is primarily an industrial asset.

Gold is the most liquid precious metal, while silver offers significant liquidity. Platinum and palladium are far less liquid, with lower daily volumes and open interest, and the total number of open long and short positions in the futures arena.

The Aberdeen Physical Precious Metals Basket shares ETF ( GLTR ) holds the four precious metals, with over 50% of its assets invested in gold. GLTR has an over 25% exposure to silver, while its palladium holdings are under 10%, and it currently has under a 4% platinum exposure. After the recent selloffs, GLTR offers investors a vehicle to buy the precious metals dip.

Gold and silver prices have declined

COMEX August gold futures reached a $2,102.20 high on May 4, 2023, before running out of upside steam.

The chart illustrates the pattern of lower highs and lower lows in May and June, leading to the latest $1,919.50 low on June 23.

While August gold futures reached a new record peak, the continuous contract put in a bearish reversal pattern at the early May high.

The 20-year chart displays the continuous contract reached $2,072 per ounce, the same high as in March 2022, creating a double top formation. Gold's failure to reach a new record peak caused the price to drop over the past two months.

Silver, the second-leading precious metal, also declined from the early May high, the same price as the April 2023 peak price.

The chart shows COMEX July silver futures reached $26.435 per pound on April 14, 2023. On May 5, silver could only climb to $26.435, also creating a bearish double top formation, leading to the decline to its most recent low of $22.14 on June 23.

A pair of double tops in the gold and silver futures market was bearish. The prospects for higher U.S. interest rates propelled the prices lower. While the U.S. Fed left the short-term Fed Funds Rate unchanged at the June FOMC meeting, the message remained hawkish as the central bank is committed to battling inflation and returning the economic condition to its 2% target level. Rising interest rates increase the cost of carrying gold and silver, and higher yields on fixed-income investments attract capital away from the gold and silver markets.

PGMs have moved lower

Palladium, the least liquid precious metal, reached a record $3,380.50 per ounce high in March 2022 as supply fears gripped the palladium market. Russia is the leading palladium producer, with most of the production coming from Russia and South Africa. Since the March 2022 high, NYMEX palladium futures have made lower highs and lower lows.

The chart highlights the decline to the most recent $1,261.70 low, 62.7% under the March 2020 high. NYMEX palladium futures experienced the most significant percentage decline of the four precious metals trading on the COMEX and NYMEX futures exchanges.

Platinum prices also have declined after reaching the highest price in 2023 in April.

The chart illustrates NYMEX platinum futures' 17.5% drop from $1,129.80 in April to its most recent $931.80 per ounce low.

Rising interest rates and the threat of a U.S. recession have weighed on the platinum group metals with industrial applications.

Rhodium, another platinum group metal that only trades in the physical market, has done even worse.

The rhodium price dropped from $27,000 per ounce in nearly 2021 to a midpoint value of $4,950 per ounce. Rhodium's 81.7% decline exceeded palladium's loss since the 2020 high.

Three factors that should support gold and silver

The three factors that stand to provide support to gold and silver over the coming weeks and months are:

• The future trajectory of interest rate hikes: The U.S. Federal Reserve increased the Fed Funds Rate from zero to over 5% since March 2022. While a few more 25 basis point increases could be on the horizon over the coming months to combat inflation, at a midpoint of 5.125%, the trajectory of rate hikes will slow in 2023 and 2024. While gold and silver prices have declined from the 2023 highs, the prices remain in long-term bullish trends.
• The dollar's decline and global de-dollarization: Gold and silver prices are highly sensitive to the value of the U.S. dollar as the world's reserve currency is the metals' international pricing mechanism. A strong dollar tends to be bearish for gold and silver, while a weakening dollar supports higher prices. The U.S. dollar index reached a two-decade 114.745 high in September 2022, where it ran out of upside steam. At the 102.370 level on June 27, the dollar index remains in a short-term bearish trend. The 100 level has held, but the critical downside technical support level stands at the January 2021 89.165 low. Moreover, the trend towards global de-dollarization, with China leading the way for a potential BRICS currency to challenge the dollar's dominant position, supports higher gold and silver prices. Worldwide central banks continue to add to gold reserves, with the official sector as net buyers over the past years.
• The geopolitical landscape: The Chinese-Russian alliance, the war in Ukraine, divisions in Russia that could cause concerns over nuclear weapons falling into dangerous hands, deteriorating relations between Washington and Beijing, and Washington and Moscow relations destabilize the geopolitical landscape. Traditionally, gold and silver are flight to quality assets during geopolitical turbulence.

The factors supporting higher gold and silver prices remain compelling, despite the recent corrections and double-top technical formations.

Three issues that make PGMs inexpensive at the current prices

The three factors that could mean PGMs have declined to unsustainable levels on the downside are:

• Green energy initiatives: Platinum group metals have high heat resistance and clean toxins from the environment as they're required for catalytic converters and fuel cells. As the U.S. and Europe address climate change, the demand for platinum, palladium, and rhodium should increase. Meanwhile, since most platinum group metals come from Russia and South Africa, the geopolitical landscape could limit supplies over the coming years.
• A deficit in the platinum market: The World Platinum Investment Council projects a 28% year-on-year increase in platinum demand with a 1% decline in supplies, leading to a one million-ounce deficit in the platinum market in 2023. Moreover, the WPIC forecasts an increasing supply-demand deficit out to 2027, supporting platinum prices.
• Illiquid futures markets: Platinum and palladium futures are far more illiquid than gold and silver futures, with lower volume and open interest. Less liquidity tends to lead to more volatility. Therefore, rallies and corrections can lead to price spikes as bids disappear when prices fall and offers to sell evaporate during rallies. A recovery in the platinum and palladium futures markets could cause significant price spikes to the upside.

Platinum and palladium price declines have made the metals inexpensive at their current levels.

GLTR is a diversified physical precious metals ETF

The most direct route for investment in precious metals is via the physical market for bars and coins. Futures are the next level of exposure as they offer a physical delivery mechanism as the futures expire. ETFs that hold gold, silver, platinum, and palladium are available from various issuers and administrators. The leading diversified precious metals physical ETF product available to market participants that trade on NYSE Arca is the Aberdeen Physical Precious Metals Basket shares ETF. The most recent top holdings include:

The chart shows an over 60% exposure to physical gold, with over one-quarter of the assets invested in physical silver. GLTR holds more palladium than platinum but has exposure to the four precious metals.

The fund summary states:

GLTR owns the gold, silver, palladium, and platinum bullion, allowing owners to hold the ETF in standard stock market accounts and avoid storage and insurance costs.

At $87.22 per share on June 27, GLTR had $1 billion in assets under management. The ETF charges a 0.60% management fee and trades an average of 37,424 shares daily.

GLTR settled at $89.23 per share on Dec. 30, 2022, and traded to a $96.05 high in May 2023, when precious metals prices peaked.

At $87.22 on June 27, GLTR is well below the 2023 high and under the 2022 closing price level. Buying the dip in precious metals has been the optimal approach over the past years. GLTR's dominant exposure to gold makes the ETF highly sensitive to the price action in the leading and most liquid precious metal.

The long-term gold chart dating back to the 1970s highlights that buying dips in the gold market has been the optimal approach since the turn of this century. While the double top formation caused the price to correct, the bull market that began at the 1999 $252.50 per ounce low remains firmly intact in late June 2023. There are many compelling reasons for new record highs in gold and higher prices for silver, palladium, and platinum. GLTR will follow the leading precious metal, and buying on the dip to add to existing risk positions or establish new ones could lead to handsome returns over the coming months and years.

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