Commodities | May 16 2012
– Precious metals outlook remains broadly positive
– Market uncertainty prompts revisions to price forecasts
– Gold's bull market not over
– Palladium preferred to platinum
– Silver prices also expected to gain
By Chris Shaw
While gold has returned to price levels not seen since December of last year, Morgan Stanley remains of the view the bull market for the metal is not over. Recent trading appears consistent with distressed selling and long liquidation in the view of Morgan Stanley, which implies a recovery in coming weeks.
Fundamental factors such as European sovereign debt issues, negative real interest rates in the US and continued buying by central banks remain supportive, while Morgan Stanley suggests investors in gold should also take confidence from trends in CFTC (futures) positions and physical ETF volumes.
The broker suggests buying gold at current levels, as the limited size of the available scrap pool, continued demand from ETFs, physical gold hoarding and coin sales all create upside potential for the market. Price forecasts reflect this, Morgan Stanley expecting average prices of US$1,825 per ounce this year and US$2,175 per ounce in 2013.
Fundamentals are also expected to underpin solid investment demand for silver, even without a renewed round of QE in the US. This leads Morgan Stanley to suggest silver should also enjoy a generally rising price trend, albeit with some volatility. Price forecasts stand at US$35.10 per ounce this year and US$41.83 per ounce in 2013.
Barclays Capital has revised down its price forecast across the precious metals to reflect an escalation of uncertainty with respect to Europe and concerns over a slowdown in China. The price action in recent sessions has seen gold trade more like a risky asset than a safe haven and a lack of physical buying by key markets such as China and India has not helped support prices.
Deutsche Bank agrees gold has been treated as nothing like a safe asset in the latest "risk-off" period as investors have been happier to buy US, German, British and Japanese bonds. In Deutsche's view this is a liquidity issue, meaning the current correction in the gold price offers a good opportunity for investors to build long positions. Deutsche is forecasting an average gold price this year of US$1,825 per ounce, rising to US$2,000 per ounce in 2013.
Looking forward, Barclays remains positive on gold given the combination of ongoing market uncertainty, continued central bank buying and a relatively light tactical positioning. At the same time, the group notes the physical market for gold remains fragile at present.
A weaker than expected start to consumption in China this year offers some downside risk to palladium prices according to Barclays, but with a deficit likely this year the metal should be the most supported across the complex in the year ahead.
A lack of investor demand has contributed to silver prices coming under pressure and this is reflected in the price forecast of Barclays, while expectations of a net surplus for the year in platinum should weigh on the price of the metal to some extent.
Revised average price expectations for 2012 for Barclays stand at US$1,716 per ounce for gold, US$33.20 per ounce for silver, US$1,622 per ounce for platinum and US$700 per ounce for palladium. These forecasts represents cuts relative to previous estimates of 8% for gold, 5% for platinum and 12% for palladium.
As noted by RBS, on May 3 Thomson Reuters launched its annual Platinum and Palladium Survey 2012 with a bullish view on both metals. Palladium is the favoured of the two on market fundamentals, though platinum is expected to see support from tight producer margins and ongoing increases in production costs.
RBS estimates production costs for platinum averaged US$1,190 per ounce last year, meaning at price levels of around US$1,500 per ounce as much as 70% of the industry is losing money. This suggests further downside in prices is limited.
On palladium the market is expected to tighten shorter-term given solid automotive demand and a lack of Russian stock sales, which are forecast to decline by as much as 50% or 400,000 ounces this year. Thomson Reuters consensus suggests a forecast price range for palladium for the rest of this year of US$575-$775 per ounce, which compares to the RBS forecast of a 4Q12 average price of US$800 per ounce.
For platinum, Thomson Reuters' survey is forecasting a range over the balance of 2012 of US$1,475-$1,775 per ounce, while RBS expects averages of US$1,650 per ounce for the year US$1,750 per ounce for the fourth quarter.
Macquarie's annual gold conference showed Australian producers continue to attempt to achieve strong growth at low cash costs, this despite management having to deal with challenging operating environments.
Macquarie notes all companies presenting at the conference remain committed to sustaining exploration spending, though less focus is being applied to significant greenfield exploration given the current difficult state of capital markets.
As direct mining costs have risen significantly in recent years, capital cost blowouts are a recurring theme, Macquarie noting contingency allowances of 10-15% are in many cases proving to be insufficient.
The issue of labour shortages is also persisting. Macquarie expects this will remain an issue for some time as the need to pay above average salaries to poach workers is putting pressure on operating cost parameters.
Longer-term Macquarie remains positive on the Australian gold sector, though shorter-term the broker notes investors wnat to see signs of consistent earnings and production delivery before turning more confident on a stock.
Given the current operating environment Macquarie prefers Alacer Gold ((AQG)) for its significant free cash flow generation and organic growth outlook, along with Newcrest ((NCM)) given historically low valuation metrics.
Current market data indicates net speculative length for COMEX gold has fallen dramatically of late, with the past week seeing a fall of 84.9 tonnes in net speculative length as more shorts were added to the market.
Despite this, in Standard Bank's view despite the apparent lack of confidence in the market at present it is now too late to turn bearish on gold. Rather, the risk/return on offer suggests gold should in fact be bought rather than sold on any dips to lower levels.
In contrast Standard Bank suggests silver is likely to continue to struggle, particularly for as long as Chinese stockpiles remain high. Shorter-term the suggestion is selling into rallies, though from a medium-term perspective the metal offers good value in Standard Bank's view as there is potential for a rally to US$40 per ounce towards the end of this year.
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