Market Reports

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Heraeus Precious Appraisal

  • Edition 22 - 29 June 2020

Precious metal prices vulnerable to further declines

PGM and precious metal prices tend to reach their highest levels in the run-up to a recession and then fall during the recession. During the last recession, commodity prices peaked in the early months but fell quickly to reach their low points before the recession ended. Commodity prices peaked over a period of two years prior to the onset of the recession in 2001 and reached their lows after the nine-month recession had ended. Post-World War 2 recessions in the US averaged 11 months. We are now experiencing a much larger economic shock than occurred in the financial crisis of 2008/09 and that recession lasted for 19 months.

If the recession continues, commodity prices could have further to fall. Stock prices decline during recessions as the business environment deteriorates. Based on its forward price-to-earnings (P/E) ratio, the S&P 500 Index is as overvalued now as it was during the dot-com boom in 2000. The economic situation does not warrant stocks trading at these levels. The IMF has revised down its economic outlook and noted significant uncertainty about the recovery. The economic contraction this year looks set to be the worst since the Great Depression. The recession could last for many more months and that would mean that the March low in the stock market will not be the end of the bear market. If that is the case, then stock and commodity prices have not reached their lows yet.

Precious metal prices dropped significantly in March, but it is unlikely that the lowest prices have already been seen. The time taken to go from a peak, in some cases a record, price to the low was a matter of only a few weeks. Even in 2008, which saw some very rapid price declines, it took from four to seven months for metal prices to fall from their peaks to their low points. In addition, gold and ruthenium made new price highs after March and iridium has not even dropped from its record high price. The iridium price held up longest in 2008, but finally succumbed to the reduced demand in the recession, so it looks like the price risks are to the downside.

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