Precious Metals Watch – New silver & platinum forecasts

by: Georgette Boele

In this publication: Gold prices have hit our end of June target of USD 1,300 per ounce… and we expect the rally to continue in 2016 and 2017. We have become more positive on silver and platinum … because they remain relatively cheap,… the relative technical picture has turned positive… and we expect some improvement in the cyclical demand outlook.

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Gold prices have hit our end of June target of USD 1,300 per ounce…

Since our latest Precious Metals Watch on 20 April 2016, precious metal prices have continued to rally. The rally has been broad-based with cyclical precious metals such as platinum and palladium outperforming gold and silver. The most noticeable event was that gold prices finally broke out of the range and cleared the price peak (USD 1,280 per ounce) that was in place since 10 March 2016. This week, gold prices rallied to above USD 1,300 per ounce, our end of June target. Since then, there has been some consolidation ahead of the US employment report on Friday. A weaker US dollar after the weaker-than-expected Q1 US GDP data has been a crucial driver for higher precious metal prices.

…and we expect the rally to continue

Since 18 February of this year we have had a strong conviction for higher precious metal prices. Prices have rallied sharply, some faster than we had anticipated. Investors have built into precious metals’ speculative net long positions. As a result, net long positions in gold, silver and platinum have increased dramatically, especially in gold and silver. This could be a warning sign of near-term upside in prices. However, net positions could be substantial for a prolonged period of time. We think that the positive momentum is here to stay and that prices will rally further during the course of this year and next year. However, on an intra-day and intra-week timeframe, price volatility could happen as we saw two weeks ago when silver prices dropped around 5% after having rallied to a new high (21 April 2016).

Precious metals remain an attractive investment…

The big picture is that precious metals are an attractive investment in an environment of
• a lower US dollar,
• the Fed fearful of raising rates prematurely
• low or negative real yields

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Price levels remain at relative attractive levels, taken into account the peak set in August 2011. Gold, platinum and silver prices are still down 30-60% compared to their end of August 2011 levels, despite the price rally this year. So, they are still relatively cheap. In addition, gold prices are also at attractive levels compared to other safe have assets.

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…and we expect cyclical precious metals to outperform gold

In addition, we expect some improvement in the overall demand outlook (jewellery, car sales, investor and industrial demand). We expect economic data from the US and the eurozone to modestly improve during the course of this year and next year. Hence, the cyclical demand outlook for platinum, palladium and silver will likely improve resulting in further upside in prices and an outperformance versus gold. As a result, we think that the long-term trend in the gold/silver and gold/platinum ratio has turned negative (they have both broken below the 200-day moving average). The average since 1987 is around 66 for the gold/silver ratio and 0.78 for the gold/platinum ratio. So there is still substantial room to go. Our new forecasts reflect a further decline in the ratios from current levels (73.9 gold/silver and 1.20 gold/platinum) more towards the long-term averages.

 

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