At a Glance
- Commodities for battery production set to grow with rise of electric automobiles
- Gold behaving more like a currency, says analyst
As one of the oldest transferable stores of value, gold, silver and other precious metals have always had their place as alternative assets, rising largely when other asset classes have exhausted their potential.
This year, however, everything is different.
All the precious metals from gold to platinum and from silver to palladium, have been on a tear in lockstep with equities. Helped by solid global economic growth, metals returned nearly 12 percent in 2017, according to the S&P GSCI Industrial Metals Total Return index.
While China’s renewed growth goes part way to explaining this slow-burn commodity boom – the country consumes half the world’s commodities output and its order books are filling fast in 2018 – it’s not the whole story.
For many analysts, the changing nature of energy production means the commodities firmament may never be the same again.
“When you look at what’s driving commodity prices there are two large conversations,” says Keith Pogson, Hong Kong-based financial service partner at Ernst and Young.
“One is around energy supply and the former nature of that energy supply, and there’s an overlay on top of that of global warming. And then there’s the other topic which is the specifics of technology trends.”
Battery Metals on The Rise
With many positing that viable electric cars, which can retail for the same price as diesel and gasoline-fueled cars only five years away, the commodities and metals needed for battery production will gain in value and importance.
“With batteries, nickel and lithium cadmium are clearly the key focus areas,” Pogson says. “With cleantech palladium is a key ingredient.”
The price of lithium carbonate has jumped 36 percent over the year and cobalt prices have doubled in what has been dubbed “battery gold.”
Palladium, meanwhile, a key component of catalysts in cars, was the best performing commoditiy of 2017 and outstripped platinum for the first time since 2001, raising fears that carmakers may return to platinum for their catalysts.
“And then it’s the precious metals and the rare earth metals such as molybdenum and rhodium which are mainly used in these high-tech manufacturing evolution processes – these are at the interesting end of precious metals,” says Pogson.
While developments such as graphene – whose science fiction properties make it both the world’s hardest material and a superconductive one – could yet prove to be another game changer, it has yet to be made at a viable scale.
Gold, Platinum and Cryptos
With silver unlikely to move beyond its position as a vanity commodity, having fewer technology applications, the role of gold and platinum remains mixed.
“With gold and platinum, the price drivers at the moment are probably U.S. dollar weakness rather than a sentiment towards those commodities,” Pogson says. “Those commodities are acting more as a currency than a commodity at this point in time.”
However, one phenomenon stands to change the way the market views gold: cryptocurrency.
“The gold and platinum story is interesting because of the cryptocurrencies out there and it’s changing people’s perceptions,” says Pogson. “Gold and platinum havetraditionally been alternatives to fiat currencies when there’s a rising risk in the market.
“But now we’ve got these other external stores of wealth that people are being speculative around, but people are also speculating around gold.
“Does this mean that with the existence of an alternative to fiat currencies, that people are just excited and keen to be in this space? Both cryptocurrencies and gold really are currencies without a country and both are having their day.”
Copper: An Unsung Hero
While not strictly a precious metal, copper is one of the unsung heroes among metal commodities and is likely to be in huge demand going forward.
Five years ago the metal was at $10,000 a tonne before slumping to $4000,but is now back up to $7000 – a fact not lost on mining unions in Chile and Peru.
Some 30 sets of labor contract negotiations are set to take place over the next 12 months, potentially affecting 25 percent of global copper supply. Unions at the world’s largest mine, Escondida, have already staged a one-day strike and industrial action could cause volatility over the course of 2018.
Over the longer term, however, the prospects for copper look set to outshine even those of hydrocarbons.
“To me copper still has a long way to go as people recognize that electric cars and electric transmission, solar power stations, wind farms – all of those things rely on a lot of copper to move the electricity as a source of generation and then onward to grid,” Says Pogson
“Until we come up with a better solution – and graphene is the only other commodity that can conduct electricity as well as copper – I can’t see any other alternatives.”.