Further Upside Likely for
Precious Metals prices in 2017
2016-to-date has witnessed a marked turnaround in investor behaviour towards the precious metals. According to Nikos Kavalis, Director, Metals Focus, "An adjustment of US monetary policy expectations, concerns about the rising number of negative policy rates in key economies and worries about the outlook for the global economy saw healthy investment inflows into precious metals."
Among the precious metals, the chief beneficiary of this has been gold, reflected in a sharp rise in ETP holdings, as well as record high net long positions on Comex. Although pale in comparison, investment in silver has also jumped. Finally, platinum and palladium have also benefited from firmer net investor demand, partly owing to lingering disappointment over the lack of South African producer discipline, and partly due to concerns about the outlook for global PGM demand.
Going forward, Metals Focus forecast that the uptrend that gold has enjoyed since the start of this year will continue, although price gains are likely to slow over the course of 2017.
"Negative real or even nominal interest rates in many key currencies will continue to encourage inflows into gold." Nikos added "there is also a distinct lack of safe haven assets for investors to turn to, given that equities are already trading at all-time highs, while yields on high quality sovereign bonds have remained near record lows." Moreover, although there have clearly been some hefty flows into the metal in 2016-to-date, Metals Focus believe that many of those investors that were heavily involved in the 2009-11 rally are still absent. There is plenty of scope, therefore, for further investment inflows into gold.
At the same time, the consultancy warns that there are some downside risks to bear in mind. In the near-term, prospect are growing for a December rate hike, the run-up to which should put the gold price under some pressure. Moreover, market expectations for future US rate hikes seem too dovish at present. Even so, positive data emerging out of the US over the next 12 months could see these expectations adjust, which at times should put short-term pressure on gold.
Meanwhile, support from gold's fundamentals has weakened considerably. In particular, jewellery demand is forecast to fall by 12% this year and remain weak in 2017. As a result, from a broadly balanced stance, the gold market is forecast to post a sizeable surplus in both 2016 and 2017, although this excess supply should be comfortably absorbed by institutional investor buying.
Gold prices are forecast to rise 6% y/y to an average of $1,350 next year, as maroeconomic factors continue to favour safe haven assets.
Metals Focus expect silver prices to strengthen further through (at least) 2017. In line with gold, this forecast improvement is largely premised on assumptions that silver will benefit from a continued recovery in interest in safe haven assets among institutional investors. "Growing signs that the downward trend for industrial commodities may have come to an end should also help investor sentiment." Nikos added "the fact that the size of the silver market is smaller and hence less liquid than gold will help the former attract speculative interest".
That said, the consultancy cautions that, after healthy inflows in 2016-todate, an investor overhang has developed. In spite of profit taking recently, gross investor longs have remained elevated, especially in the futures market. Meanwhile, price support from silver's supply/demand fundamentals will be limited; the silver market is forecast to record a growing fundamental surplus over 2016-17.
Silver is forecast to ride on gold's coat-tails, rising by 13% to average just short of $20 in 2017.
Metals Focus forecast that a lack of investor conviction in platinum will persist well into 2017. "In essence, this reflects continued disappointment towards platinum's underlying fundamentals among investors." Nikos also commented that "the improvement in platinum prices will therefore be mainly driven by positive spill-overs from gold, with the white metal's discount to gold forecast to remain well above $200 over much of 2017".
While wage negotiations have reached deadlock in South Africa at present, AMCU's rhetoric has been less confrontational than in recent years. This suggests that a repeat of the protracted strike in 2014 is unlikely in the coming months. The outlook for platinum demand is also uninspiring next year, as growing anti-diesel sentiment in Europe and lacklustre jewellery demand in China remain key headwinds. As such, even though the market is forecast to remain in a deficit over 2016-17, ample above-ground stocks mean that the gap should be easily filled.
Following a strong comeback in recent months, palladium prices are forecast to move gradually higher over the next 12-15 months. Nikos noted that "of the four precious metals, palladium still enjoys the best supply/demand fundamentals, which eventually should exert some upward pressure on the price."
However, Metals Focus warns that palladium stockpiles remain abundant and they cannot see any physical shortages developing in the foreseeable future. Without a material supply shock, the scale of fresh investment inflows into palladium will be restrained. This also explains why prices next year are forecast to remain well below historic highs.
Palladium is expected to outperform platinum over much of next year, due to the former's solid underlying fundamentals.
Editor's Note: Above are the key findings of Precious Metals Investment Focus 2016/17 a comprehensive annual report on investment in gold, silver, platinum and palladium published by Metals Focus, the independent precious metals research house, www.metalsfocus.com.
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