Precious Metals Weekly – Adjustments in forecasts

by: Georgette Boele

160112-Precious-metals-weekly1.pdf (297 KB)

In this publication: Weak start to the year for precious metals except gold prices. We expect gold prices to reach 1,050 USD/per ounce end of March and 900 USD/per ounce end 2016. We have kept our forecasts for silver unchanged. We expect modest downside in platinum and palladium prices in Q1…and a recovery later in the year.

Weak start of the year except gold prices

Cyclical precious metal prices have had a dreadful start to 2016; palladium prices dropped by close to 17% and platinum prices have fallen by 6%. Meanwhile, gold prices have moved higher by around 2.5% while silver prices have modestly underperformed the US dollar. Higher gold prices have substantially dampened the decline in silver prices.

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Why have palladium prices been so weak? For a start, uncertainty surrounding China has dampened the industrial palladium demand outlook. In addition, the outlook for economies of other emerging markets has remained weak. Furthermore, economic data from the US (manufacturing data) have disappointed as well. All in all, the demand outlook has deteriorated. Moreover, investor liquidation has been ongoing, also accelerated by economic developments and uncertainty in China. Meanwhile, platinum prices have been less weak mainly because a substantial part of investor liquidation has already happened and the demand outlook for Europe (an important market for platinum) has not disappointed. On the other hand, gold prices have had a good start of the year because the US dollar stayed under pressure and investors favoured gold somewhat in the current uncertain times. However, if uncertainty about the state of the Chinese economy were to increase, gold prices could move lower because of lower jewellery demand. Moreover, a further deterioration of investor sentiment would also support the US dollar and therefore gains in gold prices will be unlikely. Interesting to note is that over the past 5 years gold prices have had a tendency to strengthen at the start of the year. However, often the move runs out of steam in the third week of January. All in all, we believe that most upside is behind us for gold prices and prices will trend lower from here.

Adjustments in forecasts

We have made adjustments to our precious metal price forecasts. We expect gold prices to move lower because of a higher US dollar, improvement in investor sentiment and higher US yields this year. However, gold prices will unlikely reach 975 USD/ounce at the end of March (our previous forecast). Therefore, we have changed our forecast for the end of March 2016 to 1,050 USD per ounce. We have kept our forecasts for silver unchanged. We still expect price weakness in Q1 followed by a recovery afterwards because of a pick-up in industrial demand. In the case of platinum and palladium, we see modest downside in prices from current levels, but we judge that most price weakness is behind us. Speculative investors have closed a substantial amount of net-long positions in platinum and palladium. In addition, total ETF positions have also fallen considerably. Our China growth outlook is in line with market consensus, however we feel that fears about the Chinese economy are overdone. In addition, we expect Chinese imports to improve and global growth to pick up this year, which is supporting the commodity price outlook including cyclical precious metals (platinum, palladium and silver).

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