Gold and Other Precious Metals: Price Movement Analysis and Predictions

Precious metals can offer great investment opportunities. These asset classes respond differently to market conditions than stocks and bonds. Precious metals offer risk management, diversification and potentially high returns. Having said that, a buying frenzy is gambling, not investing. Here, the curious investor is presented with an overview of likely future price movements of gold, silver, palladium and platinum. It should be noted that price movements are mentioned as averages and tendencies expected to take place over at least several years. Short-term price movement caused by reactions to news, institutional trading moves and market “noise” is not considered here.

A comprehensive long-term price chart by shows several features that imply gold prices will decrease in the near future. MacroTrends provides a chart, which gives price data from January 1915 until December 2012. Three timespans merit a closer look:
•Dec 1929-Mar1949
•Feb 1972-Jan 1980
•Jan 2000-July 2011

December 1929 marks the beginning of a gold price boost coinciding with the start of the Great Depression. Between Dec 1929 and Jan 1934, gold prices rose from $273.05 to $601.01, corresponding to a 120% price increase in about four years. Note what happens next: gold slides back to $250-300. All the panic and uncertainty of the great depression was factored in relatively early. Investors hoping for a continuing price rally based on economic uncertainty were disappointed. Even participation in WW2 did not rally gold. By March 1949 the price of gold is practically back where it was in the late 1920s. This 20-year timespan shows that uncertainty can boost gold prices relatively quickly. Attempts to “get in on the action” after the start of 1934 would have given an investor negative returns despite economic events that, at first glance, would imply a rising price of gold.

February 1972 marks the approximate start of a rally culminating with the 1980 spike. Consumers may remember the 70s as a time of bitterly high inflation. Here was a classic situation of gold acting as a “store of value.” As more and more money poured in to hedge against inflation, gold prices soared. Finally, prices oscillated wildly in 1980, then went down over the next twenty years.

Consider the gold bull market of 2000-2011. Bull markets are shaped roughly like parabolas. Significant price swings after a steep rise often hints at a reversal. Of course, this guideline does not always hold. Imagine an investor who went long on gold in 2000 or 2001. In late spring of 2009, he may have noticed that Nov 2007-May 2009 had intense price swings after a sustained bull run. Consolidating gains and exiting gold would have been prudent, but such a move would have missed all the significant gains from May 2009 to the present. Nevertheless, the pattern is not likely to repeat again because the bull-market parabola is steepening; a sign of the last phase in a bull run. Observe the price movements before and after the Nov 2007-May 2009 oscillations:

•Jan 2000 – Jan 2008: 381.79 to 955.28. This corresponds to 12.147% compounded annually over eight years.
•Jan 2008 – July 2011 (most recent price peak): 955.28 to 1618.81, a rate of 15.858% compounded annually over 3.583 years.

Assets that annually compound nearly 16% in a largely free-market environment pose substantial risk for investors looking for further gains. By comparison, long-term gains from the stock market are roughly 7-10% over a year.

Lastly, note the price swings since 2011 draw a textbook-narrowing triangle about to break out. Considering gold’s very impressive gains so far, there doesn’t seem to be much room for further price increase.

Silver/gold is a high-correlation pair. Morgan Stanley’s Smith Barney Investment Strategy concerning gold, silver, palladium and platinum point out that over the past 5, 10, and 30 years, silver and gold had correlation coefficients of 0.71, 0.66 and 0.88. Over the long term, gold and silver move in tandem. Therefore, whatever predictions one makes for gold will almost necessarily hold for silver. Since gold prices are likely to decrease, silver will also go down. The MacroTrends graph plots gold and silver together and it is easy to see that overall, price spikes and drops occur largely together for both metals. Comparing the most recent timeframe of Jan 2000- July 2011 gives:

•Jan 2000 – Jan 2008: 7.06 to 17.98, corresponding to 12.395% compounded annually.
•Jan 2008 – July 2011: 17.98 to 40.32, corresponding to 25.28% compounded annually, an even steeper price bubble than gold.
Monex Live Silver Prices
Once again, note the formation of a narrowing triangle. As with gold, there is little reason to suppose prices will break out in the up direction after such prolonged and steep gains.

Technical indicators for palladium are not as clear as they are for gold and silver. Palladium price charts do not seem to show any clear continuation or reversal signals that may hint at future price action.

Relying on fundamentals, several relevant facts jump out. According to Barron’s Financial Investment News, as of 2012, 63% of palladium comes from just Russia and South Africa. Disturbances in those countries could generate short-term price spike as supply is squeezed. Causes of such a squeeze could be workers’ strikes, mine shutdowns, prolonged bad weather or anything else that may influence mining and production. The price spike will not be prolonged because producers, including those in Russia and South Africa, would jump at the now-very profitable opportunity for producing palladium. The resulting supply increase would, in time, drive prices back down.

Palladium is a key component in electronics, vehicle catalysts and several industrial processes. Though a detailed analysis of electronics, the car market and heavy industry is beyond the scope of this article, curious investors can safely assume that electronics and cars as a whole will continue to increase. It may seem like developed nations are awash in electronics and cars, that the market is saturated. Even if so, many in India, Africa, Asia and Latin America still live in poverty and are definitely a potential market for electronics, cars and trucks. As such, demand is likely to remain strong. Palladium will most likely generate positive returns above the stock market averages of 7-10%. If a large-scale supply squeeze occurs in South Africa or Russia, palladium will spike to very high prices. Palladium prices may drop precipitously if research finds a new cost-competitive catalyst for industries and vehicles.

Platinum has similar uses to palladium. It is not as prominent as palladium in electronics, but compensates by a presence in dental/medical applications. Platinum/palladium price movement correlations are usually high. Years 1979-2009 shows a 30-year average correlation of 0.71 between platinum and palladium. Shorter time frames such as the most recent 10 and 5 years show even higher correlations of 0.74 and 0.90, respectively.

This correlation will extend into the future because both metals have similar uses and are produced mostly in South Africa and Russia. This similarity means that platinum and palladium prices respond in like manner to geopolitical events, market conditions, currency movements and technological developments. Knowing likely price behavior of either metal gives reliable insight into the behavior of the other. As with palladium, continued industrialization in the developed world will keep strong demand on platinum. Similar supply dynamics are likely due to the dominance of Russia and South Africa. This near-monopoly of just two national suppliers will likely prevent long-term platinum price decreases.

“10-Year Historical Daily Closing Prices” Monex Precious Metals Investing

“Gold and Silver Prices. 100 Year Historical Chart.” MacroTrends Economic Charts and Analysis

“Portfolio Investment Opportunities in Precious Metals” Morgan Stanley Smith Barney Investment Strategy

“Palladium Price Has Many Catalysts” Barron’s Financial Investment News


Gold and Other Precious Metals: Price Movement Analysis and Predictions
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