In a volatile market environment, people may turn their eye toward investments that are designed to provide greater security. We connected with abrdn, creators of the Aberdeen Standard Physical Precious Metals Basket Shares ETF (GLTR) to understand the impact on the current market environment in the precious metals arena. GLTR aligns with the Security TIFIN Personality type and is designed for investors seeking a convenient way to invest in physically backed precious metals, including gold, palladium, platinum, and silver.
TIFIN Personality: Precious metals are seeing a boost from the current geopolitical environment. Why is that so?
abrdn: Gold and silver prices have seen a boost as safe-haven assets are attractive as global stock markets remain on shaky ground. Additionally, using the US dollar trading system (SWIFT) to enforce US foreign policy incentivizes other countries to “de-dollarize” a portion of their foreign reserve holdings and buy gold for their central bank reserves.
Russian-produced resources across the board have spiked as sanctions have prompted trading restrictions on some Russian goods and limited transportation through Europe. One standout in particular has been palladium. Palladium is used by automakers in engine exhausts to reduce emissions. Palladium prices have benefited from years of undersupply as emission standards have become stricter. Palladium prices have rocketed this year to all-time highs as financial sanctions were implemented on Russia, which produces more than a quarter of the global supply, disrupted shipments and worsened the supply shortage.
Another interesting shift we can expect from gold is that during the pandemic, gold was impacted negatively by the lack of festivals and weddings in China and India. Gold is typically given as gifts for these events, helping propel China and India to the largest consumer gold markets in the world. As global lockdowns are eased, weddings and festivals will return and the demand for gold with it.
TIFIN Personality: What are some scenarios you see potentially playing out in the next year? How will that affect precious metals?
abrdn: If the global conflict in Europe continues, pressures on trade flows will incentivize methods to trade away from SWIFT. This includes heavy discounting of goods, using alternative currencies and surreptitious goods deliveries like we have seen with Iranian and Venezuelan oil deliveries over the last few years.
If the conflict spreads, there will be severe shortages in a number of commodities that given the already stiff inflation backdrop may send the global economy into recession and could itself cause civil unrest.
If it ceases in the short term, we revert to our pre-conflict analysis which was less bullish but still saw a favorable fundamental backdrop for oil – due to five years of underinvesting in future production, dramatically lower global oil inventories over the last year, and very slim spare capacity in case of supply disruptions. In Agriculture, the back-to-back years of “La Nina” conditions which cause drought in North and South American growing regions may lower crop output even if Russian crop fertilizer is available globally. In base metals, the US, Europe and China are all increasing renewable energy projects which rely on copper, aluminum, zinc and nickel. The supply of these materials is unlikely to meet demand over the medium term.
TIFIN Personality: Beyond the many uses and potential benefits of these precious metals, what are some risks that investors should be aware of?
abrdn: China’s zero covid policy may cause lockdowns in their still highly commodity intense economy. Any sustained lockdown may negatively affect commodity demand. Additionally, countries may introduce policies that make it easier for commodity producers to increase supply, having now seen how vulnerable their economies are to supply shortfalls from foreign countries. Although certainly not our base case, a dramatic shift in the political landscape away from renewables and toward further reliance on fossil fuels could negatively impact base metals demand. Currently, renewables and electric vehicles have never been more popular in the US, even though they are still largely unavailable for purchase in sufficient quantities.
Overall, it’s worth noting that sometimes commodities, like all investments, have idiosyncratic properties. For example: Gold was one of the few disappointing commodities last year. In a period of rising inflation, particularly surprise inflation, more price appreciation should have been expected. Yet 2021 was a highly ‘risk on’ year with trendy new investments taking the spotlight temporarily, notably special purpose acquisition companies (SPACs), non-fungible tokens (NFTs), and crypto. All of these can affect “normal” market reactions. But it’s key for investors to understand that alternatives and untested, newer asset classes generally suffer from much higher volatility, making the case to continue to diversify with safe-haven assets.
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