PRECIOUS METALS: Price run-up is just taking a breather
The meteoric rise in prices of most precious metals has stalled. However, the new price trajectory is likely to be a rebound in 2010.
By Tom Stundza -- Purchasing, 9/17/2009 2:00:00 AM
With the economy in decline, prices of a market basket of precious metals have dropped 18% so far this year but activity has been erratic—up for gold but down for silver, platinum and palladium. Many economists say the metal-using recovery will be painfully slow, but they also say these precious metals will erupt in price next year by 17% as a group. That's a 35% upward swing as they respond to an expected acceleration in economic activity.
Gold cost $872/troy ounce in 2008 and has averaged $921 through mid-August. Gold is expected to slip to an average $912 for the whole year, according to a consensus forecast of 28 market economists collected by the London Bullion Market Association and Purchasing. The panel's early view for 2010 is $961. Silver, which cost an average $14.95/oz in 2008, has averaged only $13.29 through mid-August. The projected 2009 price is $13.93/oz, rising to $14.95 in 2010.
Precious metals pricing patterns in 2009 have come as no big surprise to market economists. At the start of the year, they suggested that gold prices would strengthen as governments and central banks tried to resolve the worse financial crisis since World War II. However, they also noted that silver, platinum and palladium—metals that are more reliant than gold on industrial demand—were likely to tumble this year as global economies weakened. That's pretty much what has happened.
Fabrication demand looks to be falling 9% this year to 2,598 metric tons. However, investment demand appears to be doubling to 700 tons. Analysts suggest this year's 5% increase in gold's price reflects strong retail demand in the form of gold coins and bars and bullion bought by investors through exchange-traded funds (ETFs) listed on worldwide stock markets. A major risk factor to the bullish gold-price outlook for 2010 is the assumed pace of the world economic recovery.
There has been a significant shift in the gold demand profile this year, says analyst Suki Cooper at Barclays Capital in London, who expects investment demand to account for a third of gold's end use and jewelry to make up just over 50%. Historically, jewelry demand has been as high as 75% of total gold consumption.
The appeal of gold to investors as a store of value increases during periods of market volatility and uncertainty, says analyst Andrew Schultz at Abare, the Australian Bureau of Agricultural and Resource Economics in Canberra. "As such, any weakening in confidence in global financial markets, downgrading of world economic prospects or a further sharp decline in the value of the U.S. dollar against other currencies all have the potential to place significant upward pressure on the gold price," he says. Conversely, if the pace of the world economic recovery proves to be markedly rapid and stronger than currently expected, considerable downward price pressure could emerge on gold, as investors' confidence in other asset classes returns.
Silver's price performance can be compared to the hottest of base metals, rather than gold or even the platinum group metals. Analyst John King at Fortis Bank in London suggests that it is industrial demand—or, at least, the expectation of an increase in industrial demand—rather than "safe-haven demand" that drives prices. But, underlying demand remains weak for silver as consumption in the U.S. market is dropping 5% this year to 23,919 metric tons—and shows little sign of improving beyond 0.5% growth in 2010, says Cooper of Barclays Capital.
"But what goes up sharply can come down just as sharply," King says. "Silver is a relatively small market and is often subject to exaggerated moves in either direction." This means new highs cannot be ruled out, especially if gold rallies again. But it also means that there could be a sharp correction lower, especially if investors decide to take some profits—since most ETF holdings were bought at prices considerably lower than the current price.
Looking at platinum group metals, platinum, which averaged $1,569/oz in 2008, is $1,117 through mid-August; palladium, which cost $348 last year, has averaged $225/oz. Both of these metals are strongly associated with the production of automotive catalytic converters. Looking ahead, the economists expect platinum to fall to an average $1,134 in 2009 but rebound, along with world automaking, to $1,383 in 2010. Palladium is forecast to average $230 this year but bounce up to $355 in 2010. "The extent to which recent price gains are maintained will depend on the rate of the global economic recovery," suggests Schultz at Abare.
When discussing the remainder of 2009, "precious metals have settled into a sideways range, with direction increasingly reliant on movement in the dollar," says analyst Michael Jansen at J.P. Morgan & Co.'s offices in London. "The dollar plus crude oil prices remain the major force behind gold-market pricing," agrees senior analyst Jon Nadler at Kitco Metals in Chicago. Reason: A weaker dollar boosts demand and prices for gold as an investment alternative to dollar-based securities; when the U.S. dollar strengthens, gold's appeal is curbed.
Jason Toussaint, a managing director of the World Gold Council at its New York offices, also bullishly expects gold prices to be around the $1,000 level in the near future because of rising production costs, dwindling supply and demand for gold by exchange traded funds. Sales of gold to investors through ETFs surpassed sales to jewelers for the first time in the first quarter of 2009. Toussaint, an expert in exchange-traded gold, suggests this trend will continue and support gold prices due to growing fears of inflation in 2011.
Jamie Sokalsky, executive vice president and CFO at major gold producer Barrick Gold in Toronto, tells analysts at a recent quarterly conference call that "there continue to be a lot of reasons to buy gold (since) it is very reasonable to expect additional dollar weakness as global monetary and fiscal inflation will (continue) for years to come." He adds that "clearly, investment demand by the Gold ETF appears to be in a long-term up trend."
Platinum group metals will inflate
Meanwhile, there's much optimism about future prices among producers of platinum and palladium. "I wouldn't be surprised to see a divorce between the platinum group metals and gold and silver in the near future," writes sales vice president Miguel Perez-Santalla at Heraeus Precious Metals Management in New York in a report to clients. "One group could rise and hold as the other drops. If the demand holds in the industrial sector, then the platinum-group metals will be the ones to benefit most."
About 60% of all platinum is used in pollution-control devices in cars, designed to curb noxious tailpipe emissions, according to Johnson Matthey, which accounts for a third of global manufacture of the devices. CEO Neville Nicolau at Anglo Platinum in Johannesburg, South Africa the world's largest producer, has forecast a near-term rally in prices on increased demand for platinum metal from makers of jewelry and autocatalysts.
Johnson Matthey's "Platinum 2009 Review" estimates that the platinum market moved into a wider deficit of 375,000/oz in 2008 from 80,000 oz in 2007. Global demand last year was 7.35 million oz but it looks to be falling to 7.03 million this year—with only a 3% recovery forecast by Barclays Capital to 7.24 million oz in 2010. Jewelry demand has moved up slightly this year, industrial demand has slipped and use in autocatalysts has declined sharply because of the global drop in motor vehicle assembly. Looking ahead, jewelry use will be flat, analysts forecast, but they are divided on strength of purchasing for industrial use and autocatalysts fabrication.
Johnson Matthey, for example, expects supply and demand to be closely matched in 2009 and 2010, which can result in either a modest surplus of around 15,000 oz—or a modest deficit of about the same size. In any event, producer Anglo Platinum forecasts that platinum will "find support" above $1,200/oz for the rest of 2009—bringing the annual average around $1,100—as automakers boost purchases because of low inventories and increased jewelry demand in China. Platinum will "trend to a long-term level" of $1,350/oz in 2010, according to Anglo Platinum. Some other forecasters are even more bullish.
However, GFMS analyst Peter Ryan in London has bearish views on the rate of inflation for platinum, noting that global purchasing is en route to a 5% drop this year. Ryan's 2010 demand outlook shows growth of 4% or so because of moderate demand increases from automakers and less-than-robust purchasing by the jewelry sector.
That's why GFMS anticipates the platinum market to be in surplus in 2009 and in 2010. Besides, Ryan says that "jewelry is reactive to prices rather than a driver of prices." That could keep prices at the low end of the $1,250–$1,500 range, he suggests.
Chinese and U.S. car sales present contrasting fortunes lately but combined sales have risen in recent weeks. This is important to palladium since both auto markets are gasoline-engine dominated. And, since palladium has cost advantages over platinum, automakers in both nations tend to use palladium-rich catalysts. However, with no real secondary market, overall demand has been falling in 2008 by 4% and in 2009 by 4.4%. Use may grow 3% next year, analysts forecast, but that all depends on the rebound in global motor vehicle manufacturing.
Precious metals prices continue marching ahead
(annual average, $/troy ounce)
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009/f | 2010/f | |
| Source: Purchasing from industry reports |
|||||||
| Gold | 409 | 444 | 603 | 697 | 872 | 912 | 955 |
| Silver | 6.66 | 7.29 | 11.55 | 13.37 | 14.95 | 13.92 | 14.62 |
| Platinum | 846 | 896 | 1147 | 1304 | 1569 | 1134 | 1383 |
| Palladium | 230 | 200 | 320 | 354 | 348 | 230 | 355 |
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