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General Market Commentary
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General Precious Metals
CPM Group’s Jeffrey Christian reflects on 2019 and forecasts what’s ahead in 2020
Jeffrey Christian is the managing partner of CPM Group, a commodities research and management, consulting and financial advisory firm in New York. He founded the company in 1986, spinning off the Commodities Research Group from Goldman Sachs & Co., and its commodities trading arm, J. Aron & Company. Christian is an expert on precious metal markets and took time to speak with The Northern Miner about key trends in 2019 and his outlook for gold, silver and platinum group metals in 2020.
The Northern Miner: It’s been a crazy year with the U.S.-China trade war, impeachment hearings, worries about economic growth in the U.S. and Europe. And in the precious metals space, we’ve seen a wave of mergers and acquisitions that shows no signs of diminishing. Let’s start with some of the macroeconomic issues that have dominated the headlines this year. How do you see the U.S.-China trade war playing out next year?
Jeffrey Christian: I have taken a somewhat contrarian view about the trade war and that’s actually a great place to start. We can talk about the trade war and pivot to all of the other political issues that I think are going to be much more important.
I keep telling my clients and colleagues to pay less attention to the trade war. It’s interesting because I was in China in May, right when U.S. President Donald Trump escalated things. I got off the plane on Sunday evening here and Monday morning there, and all these people were watching all of these nasty tweets from Trump. I said the trade war was a bogus thing.
There have been trade imbalances for years that have gone unattended. Trump started the trade war not because of the longstanding trade imbalance, but as a distraction from his domestic legal and political issues. The problem for the Chinese government is that there’s nothing they can offer for him to say the trade war is resolved, because it’s got nothing to do with the U.S.-China trade war. Chinese Premier Xi Jinping said the exact same thing that Thursday. He said there’s nothing China can offer the U.S. because it’s based on Trump’s domestic political, and legal problems, and said he doesn’t see any need to meet him at the next G20 meeting.
That was in May and now it’s December, and it’s the same story. But markets have been obsessed with this straw man. Market participants get optimistic that the trade war is going to be resolved, and then it’s not going to be resolved and they turn bleak. It’s like the guy sitting on his front porch with a shotgun on his lap waiting for the Feds to come down the lane, and meanwhile, the Feds came in his backdoor and cleaned out his house. There are all these big issues that are being ignored, and we aren’t dealing with the big issues.
CPM’s view is that our clients should stop paying attention to the trade war. The key is to work around it because if you’re looking to wait for it to resolve, well, that’s not an effective business plan. An effective business plan is, how do you play your hand given the cards you have been dealt, and those include the U.S. wild card trade wars against China and any number of other countries.
It’s important to realize that we are seeing a slowdown in the economy of the U.S. and in other countries, but we’re not seeing a recession. The difference between a recession and a slowdown is that the economy is still growing in a slowdown. China has seen a contraction in auto production, but every other country has seen continued expansion of auto production, but at a slower pace. So, yes, they are still making cars and using platinum and palladium in their catalytic converters.
The trade war will go back and forth in 2020 and we will continue to see a slowdown in economic expansion. We may avoid a recession in 2020 and 2021, but A) you’ve still got a lot of political troubles; B) fiscal, monetary, and financial issues are going to be problematic in nature; and C), there’s no capacity it seems intellectually or morally to deal with the deficits and problems facing the U.S. Then you’ve got the U.K. and an upcoming election that won’t resolve anything; you may have a referendum in Scotland; you have issues within the European Union; problems in Russia; increased nationalism in Eastern Europe; a range of economic and political issues in China; a number of countries in Africa that are experiencing protests, revolutions, and worse; problems in South America in countries like Ecuador, Chile, Venezuela, and Brazil. So there are a lot of economic and political issues that the world is going to be struggling to deal with in 2020 and the trade war is sort of a distraction.
TNM: Where do you see interest rates going next year?
JC: They’ll probably stay relatively flat in the U.S. You’ll probably see an increase in the spread between U.S. Treasury rates and commercial rates for corporate borrowing. On the one hand, I think the Fed will continue to be accommodative because the economic environment won’t be overheated, and they have this enormous deficit to underwrite.
More important than the levels of benchmark rates, we think, could be issues arising from structural changes in the debt market.
While rates may remain relatively flat this year, you have this shift away from LIBOR to something new. There are various new overnight benchmarks that people are looking at. All have issues to be resolved and are not as liquid as the well-established, albeit flawed, LIBOR system. What the banks are warning regulators about is that these things aren’t as stable or balanced as LIBOR, so you could have disruptions in the lending market next year. Even though the economy is puttering along and central banks are being accommodative, you could have problems in the lending and debt markets because of changes in the mechanics of banking. Obviously, central banks are extremely worried about that, but they know they have to find a replacement for LIBOR, so the risk of something happening that might upset the apple cart in terms of mechanical changes is probably greater than what some of the people outside the banking sector realize.
TNM: There’s been a flood of mergers and acquisitions this year, starting with Barrick and Randgold, then Newmont Mining and Goldcorp, and more recently Kirkland Lake Gold’s proposed takeover of Detour Gold and Endeavour Mining’s bid for Centamin. Do you see this wave continuing and what’s driving it?
JC: What’s driving it is somewhat higher prices in gold and silver and some of the base metals, and a lack of organic growth opportunities on the part of these large companies. As a result, it will continue, and it might accelerate, but it’s really about the failure to develop their own companies. It’s easier for these guys to merge and acquire than to find their own mines.
TNM: Let’s move to your precious metals forecasts for 2020.
JC: We expect gold and silver prices to rise modestly on an annual average basis — about a 10% increase, which would put gold close to US$1,600 per oz. by the end of 2020 and perhaps a 17% increase in silver on an average annual basis, which would put it at around US$18.00 per oz. by the end of 2020.