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Market report 5 July 2014 - precious metals

After a steady and consistently positive run until mid-March, which seemed to have dispelled the demons of 2013’s dire performance in the precious metal sector, gold and silver prices then pulled back sharply and markets have been relatively flat and listless for much of the second quarter.

Whilst there are strong fundamental arguments for improved performance across the precious metals complex, it is very difficult to predict what event may act as a catalyst to end the current moribund trading and drive prices upwards.

Gold

The price of gold rose 9% to $1,379/oz (£819) by mid-March, before correcting sharply and then trading sideways through most of the second quarter. Currently the price stands just 1% up year to date. After the strong performance at the start of the year, investor confidence in Western countries was markedly knocked by the correction in March and gold has seen exchange traded fund (ETF) outflows of over $220m so far in 2014.

Negative sentiment within these paper markets is currently suppressing the gold price and may well continue to do so in the short term. Physical demand, however, especially from Eastern economies, continues to outstrip supply. Any significant currency or geopolitical event, such as a Western economy increasing money supply in order to service national debts, or a new war, would be likely to align physical and paper demand for gold and send prices quickly higher.

Predicting when investor sentiment towards gold will shift, however, is far more difficult than forecasting changes in industrial demands, and there could easily be several months of continued poor performance from gold before the price begins to reflect the fundamentals more closely.

Silver

In keeping with tradition, silver’s performance so far in 2014 has mirrored gold’s, but with slightly increased volatility. After climbing around 13% by mid-March, silver has now receded to similar levels to those seen at the start of the year, trading around $19.95/oz at the time of writing.  There are, however some very positive signs for silver in the market (probably above all other precious metals at present).

The gold-silver ratio has been steadily rising for some time and is now approaching levels last seen four years ago, and an improving outlook for US economic growth would suggest improving industrial demand for silver. The price of silver is driven, to a greater extent than gold, by a combination of industrial and speculative demand, and whilst gold has continued to see ETF outflows in 2014, silver ETFs have so far seen inflows of over $116m in 2014, suggesting potential improving investor appetite for the metal.

Platinum

The platinum price has risen fairly steadily in the first half of 2014, rising 5% year to date to the current price of $1,455/oz. Industrial demand for platinum remains relatively strong, and supply is constricted. The major downside risk to the platinum supply comes from likely improvements in supply as progress is made towards agreement to end strikes at platinum producers’ operations in South Africa. 

Palladium

Palladium was the best performing precious metal in 2013 and continues to outperform in 2014. So far in 2014, palladium has continued to rise markedly in the first half of 2014, with the price currently standing at $827, some 15% higher than it stood at the start of the year.

Whilst an improving global economic outlook continues to support the fundamental case for palladium, with its price largely driven by industrial demand, there are a few downside risks: suggestions that the mining strikes in South Africa may be reaching their denouement, thus improving supply, could act as a trigger to send prices downward (and were probably responsible for the 5% correction seen in early June) and, as the price of palladium rises in comparison to gold, demand for palladium jewellery as a cheap alternative to white gold has waned significantly.

Charlie Betts, managing director of the Stephen Betts Group ( www.bettsmetals.co.uk )

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