Metals surprise by exerting strength as equities remain near record highs

Since the U.S. presidential election, the stock market has remained strong, but what has surprised some financial analysts have been that the precious metals complex has been ever stronger, says Blanchard President and CEO David Beahm.

“What is notable through the end of May is that gold and silver continue to outpace the strength in the stock market, leaving both precious metals very well-positioned for strong new rally waves if stocks turn lower in a seasonal correction phase or a bear cycle move,” Beahm says. “Typically, gold and silver perform well during periods of stock market weakness, but the fact that metals are climbing alongside the strength in stocks is notable from a historical perspective. It reveals that there is a strong safe-haven bid for metals and a desire to diversify away from stocks in the current environment.”

The Blanchard Index

Here’s how the market performance stacks up through late May:

• Gold +9.45%
• Silver +8.13%
• S&P 500 +7.91%

Beahm says investors around the world continue to turn to gold and silver as uncertainty over the global order continues to unfold, and numerous factors are creating both economic and political uncertainty that is supporting safe haven flows into the precious metals markets.

From President Trump’s tussles with European allies with NATO to North Korean intercontinental missile tests (nine to date in 2017) to an ongoing investigation into the new administration’s alleged ties to Russia, political tensions at home and abroad continue to cause concern and uncertainty for investors who want stability and protection from volatility, Beahm says.

Strong demand for physical metals are also positive for future price increases, Beahm says, pointing to investor demand from China and India – two of the world’s larger consumers of gold – remaining extremely high. A May 25 report confirmed that China’s imports of gold via Hong Kong rose 7.9 percent year-over-year in April, and more significantly, China’s gold imports from Switzerland surged 188 percent year-over-year.

Additionally, Indian imports of gold revealed a staggering 211 percent year-over-year increase in U.S. dollar terms in April, according to Indian Commerce Ministry data.

At home, the U.S. stock market has entered into a seasonally weak period despite high investor expectations for equities, Beahm notes, adding that a downturn in stocks could be another trigger for an increase in volatility and a new wave of buying in the metals complex.

While the U.S. economy continues to expand, Beahm says the current rate of growth remains below long-term historical averages and is nothing “to write home about.”

“Recent data raises fresh concerns about the health of consumer spending, amid new downward revisions to wage and salary income for the fourth quarter 2016 numbers,” Beahm says. “That means consumers may have less to spend going forward than economists previously estimated, and the 3% economic growth target set by the White House will be a high bar to reach without significant fiscal stimulus, and there are no signs of that on the horizon.”

Beahm also suggests that while a quarter basis point rate increase is likely at the Fed’s June 13-14 meeting, the pace of increases off the zero-bound interest rate policy implemented during the 2008 financial crisis has been slow. The current 0.75-1.00 percent rate remains well below historical norms of $.5 percent or higher.

“A Fed rate hike could act as a short-term headwind for the gold market, but for longer-term investors any price retreat should serve as a buying opportunity,” Beahm says. “With the economic expansion cycle in a mature phase, it appears unlikely the Fed will be able to normalize monetary policy before the next recession hits, meaning any modest Fed rate increases should have limited long-term impact on the gold market.”

Blanchard and Company Price Predictions

Blanchard and Company analysts predict gold will trade in the $1,225-$1,375 range over the next 90 days, with moves to the downside seen as buying opportunities. The same holds true for silver, which Blanchard and Company sees trading in the $16.50-$18.50 range in the same time period.