While most attention has been paid to the strong performance of mega-cap tech stocks like Microsoft (MSFT ), Apple (AAPL ), Google (GOOG ), and Amazon (AMZN ) and the explosive price action in speculative stocks like Tesla (TSLA ), Virgin Galactic (SPCE ), and Beyond Meat (BYND ), precious metals have staged their own breakout.
The primary driver has been the decline in short-term and long-term interest rates. And this decline seems likely to persist as the coronavirus outbreak will negatively affect global demand for the next couple of months leading to another round of policy loosening.
Despite recent excesses in financial markets, monetary policy is too tight by many measures. The yield curve is close to inverting as the 2-year Treasury note is at 1.39%, and the 10-year is at 1.52%. The current fed funds rate is 1.50-1.75%. If the U.S. Federal Reserve feels the need to stimulate the economy to offset a slowdown from the coronavirus, it's likely to cut further and expand its balance sheet even more.
A long-term fundamental driver for gold includes the upcoming U.S. election which is likely to pit the incumbent President Donald Trump against the self-described democratic socialist Bernie Sanders. Both are likely to expand deficits in the upcoming years and appoint dovish members to the Federal Open Market Committee.
Precious Metals Breakout
For most of the year, gold (GLD ) has consolidated between $1,550 and $1,600. And in recent days, it's broken higher. Gold's advance has been strong from a technical perspective as it's been following advances with periods of sideways price action to relieve bullish sentiment and shake out impatient holders. If the slowdown from the coronavirus is worse than feared, gold could exceed its all-time highs before the year is over.
Silver's (SLV ) gains have been more muted than gold, but it has more potential to the upside. Silver bottomed in early 2016 around $14. Since then, it's been range-bound between $14 and $20. Since August, silver has traded between $15 and $19 in a tight range and is now threatening a breakout. This consolidation is likely to break higher due to the positive fundamentals and price action in other precious metals.
Palladium (PALL ) is actually the best-performing precious metal in recent years. It made new, all-time highs in October 2018 and has nearly tripled since then. Palladium benefits from the strength in the precious metals, but it's also seeing increased demand and interest as exposure to alternative energy given its role in energy storage.
