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Market Focus : Precious metals

Much like a British summer, the sunshine continues to be deeply elusive in the precious metals sector.

From junior exploration companies to global mining behemoths and, of course, the precious metals themselves, the directions of travel and market sentiment have been relentlessly downward for almost three years, and recent trading suggests no marked changes in this trend. Mining and exploration companies have, on average, seen more than 90% wiped off their value since the heady days of 2010.

In this context, the staggering losses in precious metal prices of 41% (gold), 57% (platinum), 32% (palladium) and 68% (silver) look relatively subdued. The overall momentum in the precious metals sector is still downwards or at best flat and, if the newspaper columnists are to be believed, gold is in terminal decline.

It is not. As with almost any sector one looks at rationally, prices will eventually revert to the mean.

Precious metal prices were too high in 2012 and they are currently too low. With current prices dropping below the average cost of production for great swathes of the world’s mines, supply and demand fundamentals will eventually take over from investor sentiment and drive up prices. There could, however, be plenty more pain to endure before that happens.

Gold

Gold rose sharply at the start of 2015, climbing 9.6% by 21 January to record a high of $1,298/oz. Since then, the price has moved steadily but inexorably downwards. The price is currently $1,119/oz, having marginally recovered from the year’s low of $1,080/oz on 31 July.

A couple of recent factors have had negative effects on the gold price, perhaps the most notable being China’s announcement in June that its gold reserves stood at 1,658 tonnes, a relatively modest increase of 604 tonnes since last reported in 2009 and a figure that left some commentators rather sceptical given the amount of gold known to be produced in the country, none of which is exported.

Although there has been a notable uptick in demand for physical ‘investment’ metal in recent months (in the form of bars and coins), overall market sentiment on gold remains negative and exchange-traded funds continue to see outflows.

Contrarians would argue that when sentiment on gold is so universally negative, you generally know you are approaching the bottom of the cycle. But with little demand in the market, downside risks remain, and there is certainly a possibility that gold will test the psychologically important $1,000/oz mark before beginning to recover.

The fundamentals of the yellow metal look better than they have for quite some time, but negative sentiment should not be underestimated.

Silver

Once again, silver’s performance has mirrored that of gold in 2015. The fundamentals of the metal, with demand on the increase from industrial applications as the global economic picture strengthens, continues to be overlooked as the price is driven down by negative investor sentiment in precious metals (and commodities) in general.

Silver currently stands marginally above its July lows of $14.49/oz, with the price at the time of writing being $15.36/oz, 2.2% below January’s opening price and 15.7% below the highs recorded later that month.

Volatility, as always, remains higher in the silver market than in gold, largely because of its relatively smaller size, but there does not seem any likelihood of silver’s trading direction decoupling from gold in the immediate future.

Platinum

Platinum has been the worst performing of the precious metals so far in 2015 and currently stands at $983/oz, 18.6% below its January opening price and continuing to fall sharply. This performance is also, perhaps, the most inexplicable of the precious metals.

Negative speculative sentiment is clearly affecting the entire precious metals complex, but platinum’s relative performance to gold is difficult to explain. Supply remains constricted and demand, especially from the catalyst and fuel cell industries, remains robust.

For platinum to have remained at a discount to the gold price for the entire year to date is highly unusual.

Palladium

Palladium’s price has not correlated as directly with gold as the other precious metals in recent times, but has seen an increased degree of correlation in recent months. For the first half of 2015, palladium saw less volatility than other precious metals and performed more robustly. However, the recent downward movement has been sharp.

The argument that palladium’s price is driven more by fundamentals than speculative demand continues to hold to some extent, but the general negative sentiment towards precious metals appears to have caught up with the metal in the past two months.

At present, the palladium price is $613/oz, 23% below its January opening price, with this entire loss having been recorded in June and July.

Charlie Betts is the managing director of The Stephen Betts Group

www.bettsmetals.co.uk

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