Precious Metals Weekly – Forecast adjustments

by: Georgette Boele

150113-Precious-Metals-weekly.pdf ()
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  • We have adjusted our precious metal price forecasts…
  • …to reflect higher 2014 closing levels and a strong start to 2015
  • But our overall view has not changed…
  • We continue to expect weakness in gold for the coming years…
  • …and weakness of silver, platinum and palladium in first half of 2015 followed by a recovery

Adjustment in forecasts…

We have adjusted our precious metal price forecasts higher. The main reasons are as follow. The closing levels for 2014 for gold and palladium were considerably above our year-end forecasts. This combined with a strong start to 2015 has led us to adjust our precious metal forecasts, otherwise the forecast fall in prices would be unrealistically steep in the first half of this year. Moreover, we judge that silver and platinum are closer to their bottoms than we had originally thought.

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…but no adjustment in view

In the first half of 2015, we still expect precious metal prices to fall reflecting US dollar strength and upward adjustments in US rate hike expectations. While we expect gold prices to remain under pressure up to the end of 2016, for the other precious metals, positive global growth outlook will dominate and support prices.

More dynamics at play for platinum and palladium

The dynamics for platinum and palladium may be different than for gold and silver. Both markets experienced large supply deficits compared to demand in 2014. The sharp divergence in price action in 2014 can only be explained by the following forces.

For platinum, inventory sales by mining companies during the strikes in South Africa seriously dampened the impact of lower mine output. Moreover, once the strikes were over investors liquidated positions pushing prices much lower. Therefore, this large supply deficit failed to push prices higher in 2014.

In the case of palladium, the large supply deficit did provide considerable support to prices in 2014. This was mainly because investors did not aggressively sell positions except in September 2014 when prices dropped from 912 USD per ounce to 766 or 16%.

It is likely that supply deficits will be smaller in the years ahead mainly because of higher supply (compared to lower demand). As a result, this will give smaller support to both palladium and platinum prices. Meanwhile, we expect investors to liquidate part of their large net outstanding positons. Investors currently have more substantial positions in palladium than platinum taking the market depth into account. Therefore, the downside in prices in the first half of 2015 should be more substantial in palladium than in platinum.

Near-term support for gold

Gold and silver prices had a good start to 2015. Lower oil prices failed to hurt gold prices, because investor sentiment also deteriorated. At the same time, there are doubts that the Fed will start hiking interest rates this year with inflationary pressures being this low. Moreover, there are expectations that demand from China will be strong ahead of Chinese New Year. These developments are only temporary in our view. Once Chinese New Year is behind us, sentiment improves and the financial markets start to embrace for higher US interest rates, the US dollar should move higher and precious metals lower.