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Material Focus: Precious metals

gold

The recent annual survey by the London Bullion Market Association of 30 lead­ing precious metal analysts demon­strated a thorough lack of consensus on market directions, with wide-ranging predictions seen in all four of the pre­cious metals.

The global macroeconomic outlook, to some extent, seems to be that ‘winter is coming’ and that safe-haven buying will make gold a likely beneficiary – but the timing and extent of such a move is extraordinarily hard to predict.

The degree of consensus on expected performance of the other major pre­cious metals is even weaker. The aggre­gate position of all forecasts suggests steady gains across the sector, with the exception of palladium.

Gold

Gold opened 2019 at $1,287 per oz and is standing at $1,291 at the time of writ­ing, despite having risen sharply in Jan­uary to reach a high just over $1,345 per oz. There is clear resistance in the gold market around the $1,350 level, but a relatively firm base of support around the current level.

Gold saw a slight return to favour with investors in Q4 2018 in the face of increasing international trade tensions. Flatlining interest rates, falling treasury returns and prospects of a weaker dollar all reduce the opportunity costs of hold­ing gold, making another rally likely.

The resilience of the dollar and equity markets in recent months have acted as a headwind for the yellow metal, but the likelihood of significant macroeconomic stimuli during 2019 (such as an equity market sell-off, US-China trade war or fallout from Brexit) seems very high.

“The global outlook seems to be that ‘winter is coming’ and safe-haven buying will make gold a likely beneficiary.”

With many portfolios currently light on gold, the metal could see significant benefits from safe-haven buying during the year. The 2019 forecast is for an average price of $1,325 per oz.

 

Silver

Historically, when gold rallies, being a smaller and more volatile market, silver rockets. But silver’s recent perfor­mance has been lacklustre. The metal opened 2019 at $15.44 per oz, rallied to $16.08 in gold’s footsteps and has since receded to $15.21 per oz.

With the gold/silver ratio still at a his­torically high level of nearly 1:85, the risk outlook for silver would certainly seem to be heavily tilted to the upside.

Poor performance in base metals and efficiencies in photovoltaic cell manu­facturing, coupled with fairly well-balanced supply and demand, have cer­tainly acted as something of a drag on silver’s recent performance. But supply will further contract in 2019, creating an imbalanced market and likely gains.

While industrial and investor demand currently remains muted, increasing solar demand and supply shortages should drive prices upwards in time. The 2019 forecast is for an aver­age price of $16.25 per oz.

Platinum

Platinum has been the sick man of the precious metals sector of late, but was clearly oversold coming into 2019. The metal opened the year at $796 per oz and has made steady gains in Q1 to the current high of $909 per oz.

With palladium prices still elevated, there has been a sharp move back in by jewellery markets, but catalytic demand from the automotive sector remains weak, with diesel likely remaining out of favour for the foreseeable future.

Platinum was in oversupply during 2018. With South African mine output remaining viable thanks to the value of palladium and ruthenium outputs, this oversupply seems set to extend into this year.

The significant price differential between platinum and palladium could in time drive some catalyst demand back into platinum, but with strong supply available, steady growth is more likely than stellar performance. The 2019 forecast is for an average price of $935 per oz.

Palladium

After the white-hot performance seen for this metal in the second half of 2018 – rising from $864 per oz in August to highs of $1,604 early this year – some kind of correction seemed inevitable. This has indeed materialised in the past fortnight, with a sharp fall before rally­ing slightly to the current $1,354 per oz.

There is little consensus among ana­lysts regarding palladium at present, with many feeling it has over-extended. But others are looking at the fundamen­tals and still seeing potential for gains.

With 80% of palladium demand coming from autocatalysts, palladium has benefited from the shift from diesel (largely platinum) to petrol (largely pal­ladium) catalysts. Although some manufacturers may look to move back to platinum, such a shift will not happen quickly and there is clearly a big gap between supply and demand.

Palladium supply shortage in the market is evidenced by double-digit lease rates. With limited options for bringing new supply on to the market and more stringent environmental standards further driving catalyst demand, this structural deficit looks set to drive continued strength for palla­dium in 2019. The 2019 forecast is for an average price of $1,310per oz.

Charlie Betts is managing director at The Stephen Betts Group

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