Gold has failed to live up to its traditional safe haven allure this year.

Sporadically turbulent equity markets, escalating trade tensions and plenty of geopolitical uncertainty have been met with little more than a shrug from the gold price.

Instead the direction of the US dollar seems to have been the key driver of gold prices.

Currently, the US dollar has the tendency to weaken in an environment of strong equity markets. Vice versa, it does well on weakness in stocks, heightened trade tensions and waves of risk aversion.

The US dollar and gold prices have a strong negative relationship. As a result, gold has surprisingly behaved as a risk-on asset in recent months. Whether this will remain the case in coming months and quarters remains open to debate.

Gold bugs will point to solid fundamental drivers for gold this year with solid indicative demand for jewellery, gold’s largest demand driver and a still resilient outlook for the Chinese economy.

Nonetheless our suspicion remains that as the real yield available on the benchmark safe haven, US Treasuries, continues to rise, the safe haven appeal of yield-less gold will continue to wane.

Gold is lacking its safe haven allure

The silver deficit

This year, the gold-silver ratio peaked over the 80x level, a level deeply inconsistent with a positive outlook for the global economy. Silver money manager positioning data was net short a long time in 2018.

Such a short position in silver is unsustainable, prompting a recovery.

This view is reinforced by the 2018 GFMS silver survey recently published. The report shows that the silver market recorded a deficit last year for a fifth consecutive year, even as retail investment fell considerably.

A continued recovery in industrial demand as well as stagnating recycling volume and higher jewellery consumption is expected to support fundamentals this year. China’s expanding middle class and a pickup in investment demand could add to momentum.

PGMs: a wild ride

Palladium has offered investors a wild ride this year. After moving above 1,100 USD per troy ounce in January, subsequent weakness in equity markets and trade tensions between the US and China triggered a sell-off in palladium prices.

Palladium’s price decrease was so pronounced that in just over one day, palladium traded at a rare discount to platinum. Fundamentals, as outlined in the latest Johnson Matthew (JM) report, however continue to favour palladium over platinum.

According to JM, after five years of sustained deficits, the global platinum market reported a modest surplus in 2017 and there is likely to be a moderate surplus again this year. On the other hand, palladium had a deficit in 2017, the sixth consecutive year, and the largest since 2014.

Whilst there is the risk of increasing supply due to metal recoveries from scrapped catalyst converters and ETFs selling off holdings, stricter worldwide emission controls support palladium demand this year.

Investment Conclusion

Looking forward, a continuation of Fed rate hikes and a modest rise in US Treasury yields will most likely result in modest price weakness in precious metals. Precious metals’ appeal as non-yielding assets will probably lose some shine; other commodity sectors like oil look more appealing.1

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