Precious Metals Quarterly

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Dinah Nicholson
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Special report for Strategic Wealth Preservation and its clients.

That is where the similarity ends, however, with the magnitude of the declines and the timings of the declines varying by metal.

Over the course of September, palladium prices rose strongly and had recovered from the losses seen over the summer, but prices were still lower than where they started the year.

1 Special report for Strategic Wealth Preservation and its clients. Precious Metals Waiting For Their Turn At the end of the first three quarters of this year exchange traded precious metals prices are all lower than where they started this year. That is where the similarity ends, however, with the magnitude of the declines and the timings of the declines varying by metal. At the end of August gold had held up the best, with platinum performing the worst and palladium and silver falling between those two metals. Over the course of September, palladium prices rose strongly and had recovered from the losses seen over the summer, but prices were still lower than where they started the year. Gold and silver meanwhile fell further. There have been a variety of reasons both macro and metal specific that have driven prices to form these patterns. Gold has been the most consistent performer and has generally held up better than the others, which highlights its status in the group as a safe haven, a quasicurrency, and a financial asset rather than a commodity. While one might expect gold to be rising in the current environment there are two things that are weighing on its performance. The first is that while there are several macroeconomic factors that could potentially go wrong but have not yet materialized, so they are presently supporting the price of gold to some extent compared to the other metals, but not driving it higher. The second factor weighing on gold is the strong U.S. dollar, which is benefitting from tightening U.S. monetary policy and a generally healthy U.S. economy. There has been some safe haven dollar buying based on the potential escalation of trade wars. Trade wars, if they get large enough, are in fact negative for the dollar in the medium to long term. Trade wars also would likely be much more devastating for the industrially oriented platinum, palladium, and silver than they would be for gold. Through the end of August the more industrially inclined precious metals showed greater signs of weakness than gold. Palladium has the strongest fundamentals among the group of industrial precious metals and its backwardation widened during September, helping to propel October 25, 2018 Read more, visit: prices higher during the month. Platinum has been hurt both because of its pre-existing weak fundamentals and growing worries that these fundamentals may deteriorate further. Meanwhile, concerns that silver s fabrication demand will decline due to an escalation of trade wars continues to weigh on silver prices To The End Of This Year And Beyond There certainly is no shortage or absence of concerned voices warning about a future recession and other financial and economic problems in the present cycle. In the past nine months there has been a plethora of warnings about the potential for recessions and stock market declines. And, as the year has advanced, the warnings have become louder and stronger even as the economy and stock market have faired relatively well. The IMF and World Bank tend to be extremely diplomatic in their warnings about dangerous government fiscal and monetary practices, and their forecasts of the likely consequences of such behavior, but they both are making it abundantly clear that in their analyses the risks of a recession, at least in some major economies and possibly globally, are rising, and that the global expansion that emerged in 2009 is looking increasingly vulnerable to a recession. Indexed Precious Metals Prices Monthly Data, Jan-Sept Jan 2018= Gold Silver Platinum Palladium Jan Feb Mar Apr May Jun Jul Aug Sep Strategic Wealth Preservation (SWP) is an international precious metals dealer and secure storage provider headquartered in the Cayman Islands. The company has sales offices located in Canada and Germany, offering our clients support in English, French and German. Contact Strategic Wealth Preservation by info@swpcayman.com / telephone: 1 (345) / web: swpcayman.com

October 2018 Page 2 These organizations are not alone. Bank analysts and others, including CPM, have been warning of an approaching recession, at least in the United States.

2 October 2018 Page 2 These organizations are not alone. Bank analysts and others, including CPM, have been warning of an approaching recession, at least in the United States. CPM continues to adhere to its expectations that a relatively short and shallow recession may occur around , followed by a more severe disruption in global economic growth around We also continue to emphasize the difficulties inherent in projecting or predicting the timing, depth, and length of recessions. Some of the political developments of the past two years in the United States, United Kingdom, Europe, Russia, Turkey, and other countries only exacerbate the risks that a larger recession could come sooner due to policy mistakes. The same is true of the stock market. Certain major banks that at the start of 2018 were touting strong economic growth and further advances in U.S. and other equity prices now are warning of the risks of major declines in stock prices at some point. Some banks that were warning of increased risks of a 15% - 20% decline at some point in the stock market a year ago are now warning about declines on the magnitude of 30% - 50%, similar to those seen in 2001 and The concerns are palpable and widespread. They are exacerbated by growing imbalances, both in domestic economies and among national economies. These imbalances raise the risks that policy mistakes will throw the U.S. economy, if not the global economy, into a recession. Global and national political disfunction, in the United States and other countries, adds to the ill-ease toward longer term economic prospects that is present throughout financial markets. These imbalances also make it more difficult to project what will happen next. The advance estimate of U.S. second quarter real GDP of 4.1% released in July was widely expected to be much lower when the second estimate was to be released in late August. The second estimate, released 29 August, was 4.2%. There was no sharp reduction from the early estimate, but rather a small increase. Economic trends are becoming less predictable, even in hindsight. Metals Markets Prices of the industrial precious metals (silver, platinum, and palladium) have been lagging the reported growth in total real GDP. This reflects many factors, including the extent to which real GDP growth has been in services and not metal-bashing industries, the reductions in per unit requirements for many raw materials in advanced designs of major appliances, vehicles, and other manufactured goods. The second chart here shows the ratio of industrial metals prices to the S&P500 stock index. The industrial metals index has been used as a proxy for industrial precious metals. Any precious metals index is heavily weighted with gold, which is presently diverging from the more industrial precious metals, which does not help to delineate the issues that are being faced by the industrial precious metals. As per this chart, metals prices relative to stock prices are at what appears to be a severe cyclical low relative to the stock market. Such extremely low ratios or relationships between metals prices and stock prices occurred twice before over the past 40 years. Met- Commodities Research and Consulting, Asset Management, and Investment Banking CPM Group, founded in 1986, is an authoritative commodities research and consulting company. It is independent of all producers, processors, financial institutions, and other companies having commercial positions in commodities. CPM Group has extensive experience in commodities research, trading, and finance, equipping the company to provide financial advice and consulting grounded in hands-on experience. research@cpmgroup.com Telephone

3 October 2018 Page 3 als market participants are pointing to this and taking hope that the trend will reverse, with metals prices rising relative to stocks. That may not be a reason to be optimistic about metals prices, however, based on consideration of the previous two experiences. In the first instance, in 1987, the ratio hit a low level as stock prices reached high levels. The ratio reversed sharply when the stock market crashed in October It was not that metals prices rose, but that stocks collapsed. The second time the ratio hit such a low was around 1999, the height of the wildly intellectually unsupportable New Economic Paradigm that fueled the tech stock boom, once more spurring talk that, under this new paradigm, there would never be another recession, inflation was dead, and stocks would rise to 40,000 for the Dow Jones Industrial Average within a year or two. Metals prices were depressed at the time as well. Instead, within a year or two there was a major recession, the Nasdaq fell something close to 90%, the S&P dropped about 50%. Even with these sell offs, the ratio did not initially budge. The movement in the relationship of base metals prices to stock prices was much slower this time, rising modestly for about five years before the next bubble pushed metals prices sharply higher for another five years before they crashed back down. So, the lesson to be learned is that this ratio may well have a cyclical nature, but the economic realities behind the ratio may not spell good things for industrial precious metals prices. Increases off of past lows have had more to do with stock market distress than metals strength. The low ratio now largely reflects wild imbalances within both the U.S. and global economies. The real economy, where industrial precious metals are used, is not in such great shape. The stock market has been booming, for a variety of reasons that are not necessarily good for the real economy overall, nor suggestive of longer term real economic strength. Over the past decade stocks have risen steadily in part due to Fed monetary policy, which has paid banks and institutional investors to take low-risk positions in highly leveraged stock derivatives. Meanwhile corporations have been decapitalizing: They have been using profits to buy back stocks, reducing the float of their shares and pushing stock prices higher. When corporations do this, they are not using their profits to build new factors, research new and better products, buy equipment, or hire people. All of this does not portend well for future growth. These bad habits have been shot full of steroids in the past year. Stock prices have been pushed higher by corporations taking more than $1 trillion in tax refunds and reductions this year and using them to buy stock back, reducing the stock of their equities outstanding and raising the price of the remaining shares. Companies are not plowing net profits into new factories, new equipment, and new employees. They are plowing the money into the stock market instead. So, too, are wealthy investors who have reaped enormous benefits from recent tax cuts in the United States. Meanwhile, the tax cuts will take the U.S. federal budget deficit from $438 billion in 2016 to close to $1.1 trillion in 2019, causing the Treasury to need to borrow that much more just as investors around the world. This is happening just as investors globally are deciding to stop buying, and even unloading, U.S. Treasuries, helped in the decision by rude behavior toward their nations by the U.S. government as well as the simple financial reality that a government knowingly doing this to its budget probably should not be lent more money. In this way, the rise recently in stock prices is not really very healthy. Instead, it is worrisome. The boost or goosing of stock prices from a trillion dollars of tax cuts in 2018 and accelerated corporate depreciation tax provisions will not be repeated next year. The resulting imbalance plays a big role in macroeconomic trends. It also plays a big role in micro economics S&P GSCI Industrial Metals Index and S&P 500 Index Weekly Data, through 5 Oct Index Energy Crisis Gulf Crisis Global Financial Crisis Black Monday Dot.com Bubble 0 Jan-77 Jan-83 Jan-89 Jan-95 Jan-01 Jan-07 Jan-13

4 October 2018 Page 4 at the household level. Much of the tax cuts went to the top 1% of households and corporations. It pushed stock prices higher. Sure, 47% of U.S. households own stocks, but the top 10% owns 81% of the privately held stock in that country. Meanwhile, 40% of U.S. households forego basic necessities for lack of money and 60% do not have $1,000 to cover even a small personal emergency like an uncovered illness, auto repair, or house repair without borrowing to cover the costs. The charts at the bottom of this page drive home the growing imbalances. Stock values have doubled since Industrial production and real medium personal income meanwhile have risen a small fraction of that. Total real GDP has increased less than half as much as the S&P500, pushed higher than industrial production by the rise of the service economy and growing government employment. The number of manufacturing jobs meanwhile has contracted roughly 25%. These and other imbalances bode ill for continued economic growth, and consequently for industrial precious metals demand and prices. Meanwhile U.S. Treasury interest rates are rising. The pressure is not just a reflection of Fed policy. It also reflects the aforementioned investors turning away from Treasuries and diversifying into other debt instruments and the upward pressure on interest rates as the U.S. federal budget deficit triples in three years. Of course, a recession would balloon the deficit even more, reducing government tax receipts and raising government outlays in support of industry and unemployed individuals. While all of the aforementioned developments are bad for U.S. Economic Indicators Indexed 2000=100, Monthly Through Aug Industrial Production Manufacturing S&P 500 RealGDP Real Median Personal Income the U.S. and global economy and as a result for platinum, palladium, and to some degree silver, they are good for gold. A deflation of the stock market, decline in the value of the U.S. dollar, and a reversal of monetary policy from its current trajectory are all factors that bode well for future gold prices. Silver is a hybrid between an industrial metals and safe haven asset; while the initial impact of weaker economic growth is negative for silver it typically get pulled higher by investor interest in the metal s safe haven attributes. Gold and Silver The gold and silver markets have seen several false starts in the past few years. Prices rose in anticipation of various risks materializing and then slipped right back to where they started. It is not that these risks do not exist, but instead that they have been successfully rolled forward, in many cases made much larger than they were, and rarely resolved. The problems are there, but they are not upsetting global and national economic growth to date so far. Markets have not dismissed these risks, which range from enlarged government debts to heightened social and political stresses around the world, but have instead chosen to focus on the short term, planning on dealing with these problems when they do materialize later. Still loose monetary policy, a booming stock market, and healthy economic growth make it easy to ignore the risks that could end the party. It could be some time before these risks upend the present economic environment. That said, with every passing year stock valuations get that much richer, global debt gets that much bigger, and U.S. Economic Indicators Indexed 2017=100, Monthly Through Aug Industrial Production Manufacturing S&P 500 Real GDP Real Median Personal Income 95 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18

5 October 2018 Page 5 unresolved political problems get that much more complex. The S&P 500 Price/Earning ratio presently is around 25:1, high by pre-1999 levels and heading back toward the over-bought peaks of the tech stock bubble around 2000 and the start of the Global Financial Crisis in The U.S. is likely to lead the world into its next recession. Tightening U.S. monetary policy is likely to expose many of the global economic vulnerabilities that have built up over the past several years or problems that have been swept under the carpet. The intensification of trade wars with China, the second largest economy in the world, is also likely to negatively affect the country s economic performance. While trade today accounts for a smaller share of Chinese gross domestic product (~20%) than it did a decade ago (~35%), it is still a large share. In addition to the negative impact that the United States could have on the global economy it also is facing several challenges on the home front. While investigations against Russian election meddling are ongoing, the belief that the United States cannot rule out presidential impeachment proceedings, whether right or wrong, will undoubtedly be a major disruption for global world order and its economies. The importance of the midterm elections on 5 November in the course of such matters means that many capital investment and other decisions will be put on hold until November, pending some clarification as to the likely course of U.S. politics and governance. The media is donning punching bags, while the public is subject to gusts of hot air about America First, a strong economy, low employment numbers, and the record breaking stock market. For now U.S. animal spirits are strong, as seen in personal consumption, which makes up over 70% of GDP. But appetites look to dissipate in the coming year. The pace of hourly wage growth is rising but lags company profits post-2008, coupled with an S&P Supercomposite Homebuilding Index down 21% year-todate as of 24 September, on track for the biggest annual drop since 2008, when it fell 32%. The U.S. economy may be feeling the positive short-term effects now of a tax cut, as reflected in a stock market that continues to break record highs. While the Tax Cuts and Jobs Act increased first-year capital investment depreciation rates to 100%, in each year following the percentage decreases, eventually disappearing by Businesses were encouraged to take advantage of the tax cuts this year, meaning fewer purchases going forward. Tax cuts are expected to take the U.S. Federal Budget deficit to $1.1 trillion next year, as mentioned above, making U.S. growth rates above its 2% non-inflationary potential unsustainable. The frothy stock market may see valuations deteriorate as stock buybacks start to wane and business expenses increase. Strategic buyers, which include long term investors and central banks, have been building their gold and silver positions over the past several years, taking advantage of the lower gold prices and remaining cognizant of the growing risks. Meanwhile, shorter term investors that have been using these metals more for tactical purposes have been behind the swings in prices that we have witnessed since the sharp decline in prices in The strategic buyers have helped gold prices hover around $1,200 for the most part since Meanwhile tactical buyers have been responsible for the swings in prices down to $1,045 and up to $1,380 during this period. For prices to make a sustainable move higher it will take both shorter term and longer term investors buying metal more consistently than they have been during the past several years. This will occur only when there is a true realization of one or more of the underlying risks. Near-Term Outlook Gold Gold prices are forecast to rise over the last quarter of this year. That said, prices are not expected to rise significantly. Prices are expected to average around $1,217 during the quarter, up from $1,213 during the third quarter. While the gold price is not expected to rise sharply over the remainder of this year, neither should a sharp decline in prices be expected. Weakness in prices has been met by demand from the more price sensitive sectors of the market such as central banks, for example, which purchased large volumes of the metal when prices softened during the summer. Fabricators would also rush into buy metal if prices softened sharply during the festival and wedding season, which should provide support to prices during this period. Silver Silver prices are forecast to rise during the last quarter of this year, but only slightly and not to higher levels such as had been since prior to August or earlier in the year.

6 October 2018 Page 6 Prices are expected to average $14.70 during the quarter, higher than they were during most of September but still far below early 2018 levels. Even though the forecast is for silver prices to rise, the average silver price for the fourth quarter is lower than the third quarter s $14.99 average price. This is because of the sharp decline in silver prices over the course of the third quarter, which lowered the base from which silver prices are forecast to rise in the fourth quarter. Platinum Platinum prices should be expected to move sideways to higher over the remainder of this year. Prices are forecast to average $825 over the course of this quarter. On the upside prices are expected to be limited by some of the broader market factors such as a strong U.S. dollar, concerns regarding the eventual outcome of various trade negotiations, and uncertainty about the Fed s actions at its December meeting. On the upside platinum prices are likely to face resistance at $840 with the next resistance level at $850. Palladium The palladium market is expected to remain in backwardation over the course of the fourth quarter of this year. That said, the backwardation could potentially narrow in coming months relative to levels seen in the second half of September. This would occur in part because of slowing passenger vehicle demand from major auto markets like China and the United States and in part because some investors may see this slowing demand as a sign to get out of the market. Both of these factors could weigh on palladium prices at current levels. That said, prices are expected to remain at elevated levels, averaging around $988 during the quarter. Palladium prices could move between $ and $1,100 over the remainder of this year. Three-Month Gold Price Projections Three-Month Silver Price Projections ,240 1,250 1, ,215 1, Acutal ,180 1,180 Three-Month Platinum Price Projections 1, Actual Acutal Three-month Palladium Price Projection 1,150 1,100 1,005 1,100 1,100 1, , Actual 800

Precious Metals Quarterly

Precious Metals Quarterly Special report for Strategic Wealth Preservation and its clients. A Year For Accumulation CPM Group expects gold prices to consolidate over the course of the second and third