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Markets - Precious metals 22 March 2014

Market sentiment regarding the outlook of precious metals has recovered markedly in recent weeks after performing poorly in 2013, with gold, silver and platinum all falling by over 25% by year end from highs earlier in the year, and only palladium remaining relatively robust.

Market sentiment regarding the outlook of precious metals has recovered markedly in recent weeks after performing poorly in 2013, with gold, silver and platinum all falling by over 25% by year end from highs earlier in the year, and only palladium remaining relatively robust. Despite strong physical demand, market sentiment turned against gold in particular, leading to massive exchange-traded fund (ETF) outflows sending gold and, consequently the other precious metals, downwards.

The New Year saw an end to the decline, with precious metals steadily gaining ground during February and March.

Gold

At the start of the year, the London Bullion Market Association (LBMA) issued a summary of 28 leading precious metal analysts’ forecasts for prices in 2014. The aggregation of these forecasts predicted average gold prices for 2014 of $1,219 (£733) per ounce, with highs 10% above this level and lows 10% below. If this tells us anything at all, it is that analysts have very little conviction about what lies ahead for gold in 2014. On the one hand, the extension of US tapering of quanative easing and weak global inflationary pressures could drive prices lower. On the other hand, continued strong physical demand from China and constraints on new mine development due to depressed exploration company valuations could catalyse a price increase.

So far in 2014, the price has risen steadily by 11% from a low of $1,220/oz on 2 January and has now broken through the $1,350/oz mark, having completed one of the most consistent upward trends on record. A noticeable element of the gold market so far in 2014 has been the shift from paper to physical markets as the key driver to the gold price, with apparent flows of physical metal from Western to Eastern economies. ETFs have followed physical demand, becoming net buyers of gold in February. Looking forward, the gold market does have positive momentum, whilst not overheating. Should market rumours that China’s long term policy is to increase its holdings in gold to eventually displace the US dollar as the reserve currency prove to have substance, performance would likely be more spectacular.  

Silver

Historically, silver loosely tracks gold, but with greater volatility. In 2013, silver recorded the heaviest losses of the precious metals, standing approximately 40% lower at year end, at $19.50/oz, than at the start. In 2014, silver prices have largely followed gold upwards, albeit with predictably great volatility and a less linear ascent. Silver’s price increased by around 13% before falling back slightly at the start of March, and currently stands around a little over 5% up so far. Silver’s performance is likely to continue to be driven by the gold market in 2014, although an improving macro-economic outlook globally could lead to greater industrial demand, especially from the automotive and photovoltaic industries, spurring prices upwards. Whilst gold saw huge sell offs from ETF investors in 2013, silver ETFs only dropped by around 4%. Consequently, any move lower in the silver price could potentially be exacerbated by distressed selling from paper investors.

Platinum

Again influenced by gold, platinum rose by over 6% in the first quarter of 2014 after performing poorly in 2013. Forecast consensus on platinum is relatively bullish, given its constrained supply and increasing industrial use. Due to its tight supply, platinum is particularly susceptible to sudden increases if South African strikes were to disrupt production.

Palladium

Palladium significantly outperformed its peers in 2013 by not declining and closing the year at $711/oz, 0.5% above its January opening. Perhaps less directly influenced by the performance of gold than other precious metals, as it is still seen primarily as an industrial rather than investment metal, palladium’s underlying fundamentals continue to make a strong case for outperformance. So far in 2014, palladium has risen by over 6%, with constrained supply and increasing industrial demand from the autocatalyst sector likely to continue to drive outperformance. 

Charlie Betts, Managing Director, The Stephen Betts Group ( www.bettsmetals.co.uk )

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