Precious Metals were among the best performing asset classes in 2016 following three years of underperformance. Why would we be interested in precious metals at this juncture? Over long periods of time different assets perform differently under varying market and economic conditions.

Each of the four primary precious metals — gold, silver, platinum and palladium — has its own key drivers of supply and demand. No one metal continuously leads the others and each can be volatile alone, so a basket of all four precious metals is preferred to owning just one. In this analysis, we will address our outlook for the price of each.

Gold is the most widely traded of the precious metals and is considered a store of value in periods of weakening local currencies, rising inflation, increased market volatility and black swan events (i.e., BREXIT, perhaps spring ’17 elections in France, fall ’17 elections in Germany). Rising interest rates will work against the price of gold IF they are increasing in real terms, that is, after taking into account the rate of inflation.

Alternatively, the rising U.S. dollar versus other currencies following Trump’s election pressured the price of gold in the final weeks of 2016. The thinking was that rising tariffs and other protectionist moves under our new president would erode overseas growth going forward. In an increasingly interconnected global economy, we believe this is less likely than the rhetoric to date would indicate. In fact, gold has been one of the best performing assets at the start of 2017, up by 5 percent, on top of a 9 percent gain for all of last year.

On the supply side, gold mine production is expected to rise very slightly this year to peak levels* before dropping in the coming years as miners continue to cut investments. We believe investor demand will rise in a year of:

• low real interest rates
• increasing inflation for inputs and wages
• rising political uncertainty around the world

Tempering the demand for gold will likely be continuing pressure in a major key market, India, where there has been a focus on currency corruption. Taken together, we believe the price of gold still has the potential for 5-10% gains over the remainder of 2017.

Silver production is expected to drop 1 percent this year after ten years of increases.* We expect production will continue to drop in the coming years based on cuts in mining operations. From the demand side, we believe global economic recovery (infrastructure and industrial activity plus rising costs of inputs) will be favorable for holders of silver. Following a 12 percent gain in 2016, silver could rise double-digits again this year in our opinion.

Platinum supply is expected to decline 3 percent this year* following a similar decline last year when prices for platinum were up just 1 percent. Demand meanwhile is expected to be flat or up slightly in 2017 based on global economic recovery including rising European and Chinese auto production.

Palladium supply deficits have occurred in each of the past four years, and are expected to persist for the next few years.**** Here we are forecasting continued increases in demand given our outlook for rising U.S. infrastructure spending, accelerating global auto sales and global economic growth. On top of a 21 percent gain last year, we expect palladium prices to rise again in 2017.

Nevada Retirement Planners offers an actively managed Precious Metals strategy to complement stock and bond allocations for many investors. We also include precious metals in our ETF Endowment Series. Please contact us to discuss how precious metals may be applicable to your long term financial goals and objectives.

Sources:
* Metals Focus Ltd.
** Metals Focus Ltd.
*** Metals Focus Ltd.
**** Johnson Matthey, November 2016

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

The year was a tale of two markets. The first six weeks belonged to the bears, and the last six weeks the bulls were in charge. The bulls had the final say once again.

The year got off to a rough start as major stock indices were down double digits, reaching their eventual low water mark for the year. The Dow Jones Industrial Average bottomed at 15,450, the S&P 500 hit 1,810, the yield on the 10-year U.S. Treasury was 1.63% and oil was $26.19 per barrel. Fast forward to the post-election euphoria and we almost saw Dow 20,000, the S&P 500 hit 2,270, the 10-year U.S. Treasury yield north of 2.50% and the price of a barrel of WTI crude settled in the $50 area. What a difference 10 short months can make.

The election provided a new coach with a new playbook. The market obviously likes what it is hearing, but the new team has not taken the field yet. The new playbook has plans to be pro-business with lower taxes, less regulations, reformed health care, energy independence and a keen focus on growth and jobs. The plan on paper looks great, but it still needs to be executed on the field with opponents fighting hard at every turn. The market has given us a glimpse of what could be, but keep in mind the market will eventually trade on what will be.

After a gut wrenching start, stocks turned the corner and produced solid returns this year. The Dow Jones Industrial Average gained 16.50% for the year, the S&P 500 was up 11.96%, and Emerging Markets delivered 11.19%, while MSCI EAFE added just 1.00%. The big stories for stocks this year was the turnaround in oil prices, low interest rates and the beginning of an earnings recovery. The prospect of a new pro-growth political environment added to the bullish momentum.

Bonds generally moved in opposite directions from stocks this year. Bonds rallied early in the year as oil prices collapsed and it became apparent the Federal Reserve was not going to raise interest rates at the pace they themselves had projected. The post-election stock rally negatively impacted bond prices as the Federal Reserve is now in play and increased economic growth may pave the way to higher rates.

If the economy begins to grow faster, expect interest rates to move higher in an orderly fashion. For the past two years the Fed told us they expected to raise the Fed Funds rate four times at 25 basis points in each year. Their eight forecasted rate hikes became one 25 basis move in 2015 and one in 2016. This will likely be the year when we finally get the four 25 basis point hikes. This is not all bad news, just reflective of a stronger economy where the Fed finally has room to maneuver.

Bond investors will need to prepare their portfolios and their expectations for a new world of gradually higher interest rates. Defense in bonds will be the name of the game. Short duration, floating rate notes, TIPS and asset-backed securities should provide the best opportunities in 2017. Own bonds to diversify your overall portfolio. Positive low-single digit returns would be the best outcome next year, and slightly negative returns would not be a surprise.

The New Year may see some consolidation from the post-election rally. If it comes, don’t be tricked into thinking it is the beginning of the end. Economic optimism and higher corporate profits fuel rallies. Our forecast is for 5-10% upside in equities next year with bonds struggling to produce positive returns. Stay positive, stay invested.

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

In the month of November, we have seen a reversal of the long term trend of flows into bond investments. The chart below reflects cumulative flows of assets into equities/stocks (black line) versus flows into bonds (blue line). As the data shows, since the severe downturn of the equity markets in 2008, fund flows into bonds have been significantly higher than flows into equities.

This is despite performance that has generally been favorable to equity versus bonds. During the last five years, US equity performance (based on the S&P 500) has had a 15.9 percent annual return compared to International equities at 3.8 percent and US bond performance at 2.3 percent. Clearly, investors have remained cautious of equity markets post the financial crisis, and have preferred the relative stability of bonds despite the lower return rates.

As the chart below reflects, this trend has shown some recent signs of change. According to data from EPFR Global, bond outflows for the week ending Nov 16th, 2016 were the largest in over three years. The outflow trend has continued in recent weeks as rising rates have had a negative effect on price performance for bond funds and ETFs.

If interest rates continue to rise, as we anticipate, prices on existing fixed income/bond investments tend to fall. If investors see prolonged declines of fixed income prices, it is likely to accelerate the trend out of fixed income and into equity. This would have a positive effect on equity markets as increased demand should increase the price of stocks.

Historically, fixed income/bond investments have been less volatile than the stock markets. That doesn’t mean, however, that bonds cannot lose value during certain periods. As we look to 2017, we anticipate a rising interest rate environment, and bond investors should expect low total returns with a possibility for slightly negative returns. Despite the lower expected returns, we continue to believe that bonds should remain as part of a strategic portfolio allocation due to their diversification benefits and lower volatility.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222