What Alchemists Think About The Impact Of Changes In Automotive Industry On The Precious Metals?

February 7, 2019

The new Alchemist is out. What can we learn from the latest publication of the LBMA? We invite you to read our today’s article and find out!

Oesterreichische Nationalbank (OenB) and Gold

In the previous edition of the Gold News Monitor, we have already analyzed one article from the newest Alchemist about the gold outlook for 2019. Today, we would like to return to the publication and examine the remaining ones, which are no less interesting.

The previous edition of LBMA’s Alchemist focused on the link between Banque de France and gold. The most recent issue (no. 92) describes the gold strategy of the Austrian central bank. We can learn, for example, that since 2007, OeNB’s gold holdings have held constant at 280 tons, currently representing about 48 percent of the bank’s foreign exchange reserves.

Interestingly, in line with the recent international trends in the management of gold reserves, the OenB changed its gold storage policy, shifting it towards domestic storage. By the end of 2014, OeNB held around 80 percent of its gold reserves in the United Kingdom, around 17 percent in Austria and around 3 percent in Switzerland. According to the new gold storage policy adopted five years ago, by 2020 at the latest, half of OeNB’s total gold reserves (280 tons), are to be stored in Austria, 30 percent of them are to remain in the UK, while 20 percent are to be kept in Switzerland.

The shift reflects the central bank’s response to a significant increase in public interest in OeNB’s management of its gold reserves. The rise in people’s awareness about the importance of gold reserves and in central banks’ transparency should be welcomed by all gold-lovers.

Inside Perspective on the Global Financial Crisis

Another interesting article is “Inside Perspective on the 2008 Financial Crisis and the Lessons Learned” by Mike Silva, who served as Tim Geithner’s (and later William Dudley’s ) chief of staff at the New York Fed during the Great Recession. The author clearly explains why the Fed rescued Bear Steans and AIG, but not Lehman Brothers. The issue was simple: the latter did not have adequate collateral for the Fed to lend against, as, according to the Federal Reserve Act, the US central bank could lend to a non-bank if it determined that it was “secured to its satisfaction”.

Silva believes that the next financial crisis is likely to happen sooner rather than later “because of the large number of possible crisis triggers that are currently being squeezed” (think about Brexit, nearly inverted yield curve or record leveraged lending). This is good news for gold. However, the author adds that because of the improved capital, liquidity and risk management, “the next financial crisis is unlikely to result in a banking crisis”. This is not so good news for gold, as the yellow metal shines the most during recessions which are accompanied by a banking crisis.

Changes in the Automotive Sector and Their Impact on PGM Usage

The third article we would like to analyze is “Future Propulsion System Mix and Its Impact on Automotive PGM Usage” by Rahul Mital, the Global Technical Specialist for Diesel Aftertreatment at General Motors. The author examines the impact of the automotive propulsion system mix on precious metals usage in the coming years. According to him, 86 percent of passenger cars are still expected to have an IC engine and, hence, a catalytic converter by 2030. This implies no drop in demand for converters, and the usage of the precious metals, for the next 10 years, as the lower percentage share will be counteracted by the higher car sales. In fact, we could see a marginal increase from now till 2030, as lower emission levels would mean that the converters will need more precious metals to achieve those more stringent emission levels. Indeed, Amanda Josey, in a complementing article (World Emissions

Standards: Opportunities & Risks for PGMs in Automotive Catalysis), projects a 3-percent increase in demand for platinum-group metals until 2027 driven by regulation.

Centenary of London Gold Price

Last but not least, the newest Alchemist notes that this year marks the centenary of the first gold London gold fix or what is now known as the LBMA Gold Price. The first fixing took place on 12th of September 1919, and the price of gold was settled at £4 18 s 9d by the five founding members: NM Rothschild & Sons (chair), Mocatta & Goldsmid, Pixley & Abell, Samuel Montagu & Co. and Sharps Wilkins. Over the years, the London Fix has evolved and modernized. One of the most significant changes occurred in 1968, when the price changed from sterling to dollars and took place twice a day. Today, it still remains the international benchmark price for the gold market used as reference price by miners, refiners, central banks, investors, traders and fabricators around the globe. Indeed, as we pointed out many times, the international price of gold is set in the London gold market and in Comex, not in India or China, despite their large retail markets.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieroń is the author of Sunshine Profits’ monthly gold Market Overview report, in which he keeps subscribers up-to-date regarding key fundamental developments affecting the gold market and helps them prepare for the major changes. Arkadiusz is a certified Investment Adviser, a long-time precious metals market enthusiast and a Ph.D. candidate. He is also a Laureate of the 6th International Vernon Smith Prize.  You can reach Arkadiusz at Sunshine Profits’ contact page.

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Gold is impervious to rust.