Precious Metals Watch – Lower cyclical precious metals

by: Georgette Boele

  • After the downward revision in gold price forecasts…
  • …we also downgraded our other precious metal price forecasts
  • Lower gold prices will weigh on other precious metal prices…
  • …but also some deterioration in industrial and car sales outlook…
  • …resulting in investor position liquidation
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Silver tracking gold

Following our gold forecast revision that was released yesterday, in this report we focus on the other precious metals: silver, platinum and palladium. We start of with silver. Silver prices have declined in line with gold prices. Silver has a long history of tracking gold prices. Therefore, it will not come as a surprise that they also strongly react to movements in the US dollar, monetary policy expectations, real yields and investor sentiment. For example both gold and silver have strong negative relationships with US dollar,10y US Treasury yields, a modest negative relationship with equities and a mixed relationship with equity volatility.

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In a way this seems odd as industrial demand accounts for around 60% of global demand for silver. Meanwhile, jewellery demand accounts for around 20% of global silver demand and coin & metal around 13%. This is in sharp contrast with gold where jewellery demand and retail demand are the two largest sources of demand.

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Occasionally, there can be periods that silver prices move more in line with the industrial demand outlook. However, this will generally add on to the prevailing sentiment. This means that if gold prices move lower and the industrial demand outlook for silver deteriorates, silver prices are hit harder and vice versa. It is unlikely though that the industrial demand outlook will more than outweigh the financial factors driving both gold and silver prices. In the table below we have defined two scenarios for silver prices. First, the ideal scenario in which silver prices should rally. In short, a combination of higher gold prices, a lower US dollar, lower US yields and an improvement in the industrial and jewellery demand outlook is supportive for silver prices.

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As investor demand is key for the direction in silver prices, we need to assess the number of outstanding positions and the likely action of investors. As the graphs below shows, investor positions are enormous. Since 27 September, only a small amount of these positions have been closed. Therefore, we think that there is further position liquidation to go. It is likely that a move back to the average amount of contracts in the futures market is on the cards, implying that silver prices could drop to USD 15.5 per ounce. Therefore, we have downgraded our silver price forecasts.

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Cyclical factors play a larger role in platinum & palladium price outlook

As is the case for gold and silver prices, platinum and palladium prices have also fallen recently. The higher US dollar, some deterioration in sentiment and lower gold prices all weighed on platinum and palladium prices. In the table below we have defined the ideal scenario for both precious metals. Platinum and palladium are more driven by cyclical factors compared to gold, such as demand for autocatalysts and industrial demand. Demand for platinum and palladium is high if the global economy grows strongly, resulting in a substantial rise in industrial and autocatalyst demand. Meanwhile, if supply does not rise as sharply as demand and if investor demand for these precious metals also picks up prices should rally sharply. Next to the ideal scenario we have also defined our base case. If we compare both scenarios, the risks are clearly pointing to lower prices. This is not only because investor related factors have become more negative, but also because overall car sales and industrial demand will grow only modestly in our view.

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Investors also have substantional net long positions in platinum and palladium. A position liquidation in gold and silver likely spill over to platinum and palladium as well. Therefore, we have also revised downwards our forecasts for platinum and palladium.

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