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Data Wrap Up – February 2015

Metals Prices
ResourceLast1 Month Ago3 Months Ago1 Year Ago

It was a mixed bag for precious metals this last month, as our four metals holdings returned an average of -0.63%.

Gold—which is up 3.50% over the last three months—fell 2.98% over the last thirty days. Much of this weakness stems from profit taking, as the metal had been on a hot streak since November. On the other hand, silver continued to rise, as the metal squeezed out a healthy 1.11% gain. This adds to silver’s hot streak, as the metal has more than doubled the S&P 500 return over the last three months by appreciating 6.00%.

Much of the bullish trends in the precious metals market are a result of wonton actions by global central banks over the last three months. In addition, the prospect of a Greek exit from the eurozone has become much more likely with the election of the radical Syrzia party, which threatens to unravel the monetary union.

Investors often flock to precious metals—particularly gold and silver—as a safe haven in times of uncertainty. As long as central banks continue to recklessly devalue their currencies, these precious metals (and their owners) should continue to benefit.

On the other end of the spectrum, platinum had its worst month since October 2014, as spot prices fell 4.32%. Much of the weakness comes from the metal’s exposure to the eurozone, as its demand is linked strongly to catalytic converters found in diesel engines, which are common in Europe.

Palladium—which is also used in catalytic converters, though it has much greater exposure to US demand—had a strong showing over the last month, as prices rose 3.66%. Strong demand for new cars in the US, the prospect of supply shocks from further strikes in South Africa, and crippling sanctions on the Russian economy are all working in palladium’s favor.

Although the overall return for the month was flat, the current macroeconomic environment looks bullish for precious metals. We’ll continue to follow developments in the precious metals market, and will alert you if anything of note comes to our attention.

Wave of Share Buybacks to Hit Europe: What That Means for Precious Metals

Quantitative easing is coming to Europe. Will Draghi’s massive bond-buying program be enough to get the European economy on track? The Hard Assets Alliance team doubts it, but we are expecting European equities to rally just as US and Japanese stocks did after their central banks unleashed similar asset-purchasing schemes.

One way quantitative easing supports stock market rallies is by suppressing rates. Companies then use this cheap credit to build new factories and purchase new equipment, right? Not quite.

In the United States and Japan, firms have been reluctant to make capital investments due to lingering uncertainty. Instead, they have taken advantage of rock-bottom rates to buy back shares. Just look at what happened in Japan once rates started heading south:

There is nothing inherently wrong with stock buybacks. They are shareholder friendly, low risk, and effective at boosting stock prices. Share repurchases are also more flexible than dividends—the market punishes companies that suspend or reduce dividend payments.

However, by not building factories or purchasing new equipment, companies are tacitly expressing concern about the future. It’s important to understand this because share buybacks shrink share count and thereby juice the earnings per share (EPS) figure, making a company look more profitable.

QE is slated to have the same impact on European stocks, and that means a near-term investment opportunity. However, it’s also a reminder that market intervention is the only game in town these days. Sooner or later, the efficacy of these policies will wear off. When that occurs, you will surely want to own precious metals.

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