From the Trading Desk: Thinking About Precious Metals?

Let us recap my previous post. Tesla posted positive earnings for the fourth quarter in a row and opened the door to being added to the S&P 500. Thanks to Tesla’s stock price surge this year, Elon Musk is among the world’s wealthiest individuals. As a reminder, a committee will decide whether Tesla will be added to the index. 

This week, I became intrigued by the amount of news and posts that showed an increase in the fear of inflation and headlines of various precious and commercial metals reaching new highs. Precious and commercial metals like Palladium, Silver, and Copper, are widely used in the production of countless items such as electronics, cars, solar panels, batteries, jewelry, etc. With the reopening of China’s economy, many industrial metals and commodities have gained momentum after March’s sharp sell off. There is also optimism on global growth led by Asia, reopening of various industries, and a Covid-19 vaccine, which have pushed the prices of industrial commodities higher. Additionally, precious metals are also used as a hedge or as diversification in a traditional stock and bond portfolio. 

The recovery from March’s sharp selloff has been led by a few of the largest companies in the world causing uncertainty regarding how solid this bull really is. Investors are looking for alternatives to diversify their portfolios and establish some “insurance” in case things change. 

Gold recently hit its all-time high price and is approaching $2,000 an ounce. The classic safe-haven asset is getting significant attention from investors looking for a hedge.  

Silver is another precious metal getting attention from investors. Increasing demand from industrial production and investors looking to diversify away from Gold and bonds have pushed its price to the highest in recent years. 

Palladium is yet another precious metal that has been used in the past as a store of value. It is commercially produced from nickel-copper ore deposits and is a critical component of catalytic converters. Historically, there has been higher demand than supply of it because of a structural deficit. Palladium is the most valuable precious metal in the world, and it is used by many investors as a portfolio diversifier. 

Despite the US stock market at or near all-time highs, it is interesting to see how investors are starting to feel worried about the market. Articles and news stories surrounding hedging and diversification have been few and far between in the past several years. Investors felt they really did not need it. In fact, diversification has cost investors over the past 10 years, yet as having any type of insurance, true diversification (non-correlated diversification) should be considered when creating a proper asset allocation. The bad thing about insurance (like toilet paper) is not having it when you need it.