Commodities | Jan 28 2010
By Andrew Nelson
2009 was surely a year when gold exhibited its dual role as a commodity and a currency, but the traditional buyers of gold have now changed. Whether we’re talking about retail investors, or institutions, buyers seem to have become friendlier towards this precious metal, with its safe-haven appeal not only drawing in individuals and funds, but also the government sector (central banks), which has been a net seller of gold for the past 20 years.
If investors do remain concerned about the US dollar or inflation in the year ahead, or that the global economic recovery will fall off the wagon, they will likely keep turning to gold. However, if these fears subside and the recovery plays out, as is increasingly expected, then gold’s appeal is likely to dwindle.
Barclays Capital precious metals analyst Suki Cooper thinks the downside, if one emerges, will be determined by jewellery demand, which she expects will kick in at around US$1000/oz. Cooper expects the overall market balance will improve in 2010, with the surplus narrowing, but still remaining sizeable. Ultimately, however, she believes that high and volatile prices will keep a lid on jewellery consumption.
Yet if jewellery consumption shows us where the floor is, it will be investor appetite that becomes the critical factor in determining the gold price’s upward trajectory, if there is to be one. On Barclay’s numbers, investment demand increased last year from less than 10% of gold demand to around a third. Physical ETP (Exchange Traded Products) holdings hit a record high at 1782 tonnes, speculative positions in Comex gold peaked at over 800 tonnes, while the US Mint reported that gold coin sales reached their highest level in a decade.
All of this adds up to some pretty solid evidence that investors have played an increasingly important role. In light of the weak projected market balance and the dwindling global hedge book, Cooper thinks investor demand will remain a pivotal factor for gold in 2010. All up, Barclays forecast that gold prices will average US$1180/oz in 2010, with little in the metal’s physical underlying market to offer much support this year.
It should be a similar story for silver, thinks Cooper, with the metal remaining detached from its underlying supply and demand fundamentals and thus dependant upon investor interest. Cooper expects that silver’s fundamentals wont be any better this year, although demand should start to show signs of recovery, led by growth in industrial use as the recovery progresses.
However, Cooper also believes scrap and mine supply will continue to increase, which will keep the silver market firmly in surplus. Unlike the base metals, she notes that the primary supply of silver has continued to grow given prices never really fell far enough to test the lows required to put the squeeze on primary silver producers.
So despite the prospect of improving industrial demand, the large surplus will mean that prices will remain heavily dependent on continued investor interest. In the meantime, improving macroeconomic data will indeed support industrial demand, but if this comes along with an end to USD weakness, then Cooper thinks silver could be the metal most at risk of price corrections in 2010. Ultimately, Barclays forecast silver prices will average US$18/oz in 2010.
Platinum prices really started to gain some momentum last year and this was despite the market moving into surplus, with jewellery demand and investment demand lending the most support to prices. Here too, investor demand has been one of the crucial factors in driving prices higher, especially in light of the platinum ETP finally being launched in the US.
Looking at the supply side, Cooper doesn’t think the higher prices will stimulate much if any of a supply response given the ongoing difficulties facing producers, especially in South Africa. In fact, she sees a number of downside risks, like a slower than expected recovery in auto sales, the possibility the US ETP will turn out to be a dud, or a surge in scrap supply in response to higher prices.
That said, Cooper thinks the economic recovery will be an irresistible force, bringing about rising demand, which when coupled with challenged supply, will make for a much tighter balance this year. Add to the mix the real possibility of a successful launch of the investment product in the US and Cooper thinks there is a lot of potential for platinum to add significantly to its price trajectory.
She notes that speculative Nymex positions hit an all-time high over 1.1Moz, while physically backed ETPs hit a record 683koz even before the US launch. Thus, if this US product is as successful as its gold and silver counterparts, Cooper thinks the market will likely move deeper into deficit. If the launch of this product coincides with the expected period of recovery in the auto and industrial sectors, then the sky could be the limit.
Barclays expects platinum prices will average at US$1,690/oz in 2010, extending 2009 gains as the demand picture becomes increasingly positive.
That takes us to palladium. Cooper expects supply will remain healthy this year, but she also thinks “the demand picture has turned more constructive”. Making things look even brighter will be the launch of the first physically backed exchange-traded product in the US, and given robust investor appetite, she believes the palladium market could fall to its smallest surplus in a decade, if not into deficit.
With the macro environment improving, auto industrial demand should start to improve as well, with manufacturers increasingly restocking after drawing down inventories to what are now multi-year lows. In fact, auto sales in palladium-heavy markets have already shown some promise, she notes, with Chinese auto sales now the world’s largest market, while sales in the US have also been stronger than expected following the end of the cash-for-clunkers programme.
The big question mark in the year ahead for palladium will be the size of Russia’s state stocks, while investment demand from the US is also uncertain. But even assuming supply continues to increase from above ground stocks, Cooper thinks the growth of investment demand could balance excess supply. Barclays expects palladium prices to average US$470/oz in 2010, the highest annual average since 2001.