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The Outlook for Precious Metals in 2020

Metals Focus, one of the world’s leading precious metals consultancies, present their Outlook for Gold, Silver, Platinum and Palladium in 2020.

Bull market for gold to remain in place

Gold started 2020 on a bullish note, after the US killing of a top Iranian commander stirred fears of a wider conflict in the Middle East. As we write, gold has slipped back below the $1,600 threshold having hit an almost seven year high of $1,611.

In the very short-term, investor sentiment will continue to be dominated by developments in the Middle East. More aggressive actions by the White House will clearly provide another catalyst for price gains. That said, it is worth stressing that sharper geopolitical tensions usually generate a short-term boost for gold prices. Without a dramatic escalations, we would not be surprised if gold retreats towards or below $1,500 in the coming weeks.

Another near-term headwind for gold comes from improving bond yields since last September, particularly in the US where the yield curve (as indicated by the 2yr-10yr spread) hit a 15-month high by end-2019. Broad based optimism in global markets is also visible in equity market strength, after growing expectations and then the apparent confirmation of a “phase one” trade deal between the US and China. In the US, for instance, stock markets have hit a series of new record levels since November. The inverse is true for the stock of negative yielding debt, with its total value falling by more than 30% peaking last August.

That said, from a wider macro-economic perspective, Metals Focus remains confident that the bull market for gold will continue. Chiefly, the global economy remains in the midst of a broad slowdown, notwithstanding accommodative central bank policies and confirmation of the “phase one” trade deal between the US and China. Once fears about a global economic downturn re-emerge, this may well result in further loosening of monetary policy for key reserve currencies and liquidations in key equity markets. We also need to be mindful of broader, rising indebtedness, notably among Chinese corporates, and still possible economic/political risks in the Eurozone.

Against this backdrop, there is clear scope for renewed, net investor inflows into gold in the medium-term. Despite both ETP holdings and Comex net longs standing near previous records, this is not necessarily cause for concern for the medium-term. The overall value of global assets has been increasing in recent years and we believe this also justifies a higher value for gold investment. In particular, the proliferation of negative yields in recent years also calls for higher than previous investor allocations in gold.

Silver to outperform gold this year

Silver will continue to take its cue from gold over the course of 2020. Given its far smaller market size (relative to gold) and therefore its higher volatility, we also expect silver to outperform the yellow metal, resulting in the gold:silver ratio falling to the low 70s later this year. That move will certainly not be harmed by some investors still feeling that silver is undervalued.

Silver’s upside would have been even stronger, if the metal were not held back by weak supply/demand fundamentals. Following four years of consecutive losses, mine supply is forecast to start improving. While physical investment will also edge higher, the absolute total will stay well below the 2015 peak. Even though we forecast a modest recovery in industrial offtake, overall the silver market is still on course to generate another physical surplus.

Platinum relies on positive spillover from gold to edge higher

Metals Focus are cautiously optimistic about platinum prices in 2020, although this has little to do with the fundamentals. Even though platinum autocatalyst demand is expected to start improving from 2020 onwards (due to rising heavy duty vehicle production and tightening emissions regulations), gains will be fairly modest. In addition, after falling to a decade-low in 2019, platinum jewellery sales will remain soft this year. This in turn reflects the continued weakness in China where a slowing economy and unfavourable structural changes in consumer preferences continue to weigh on platinum jewellery.

Support from the supply side is also expected to remain, if anything, limited. Fears about large-scale labour actions in South Africa have dissipated following the signing of three-year wage deal in late 2019.

More importantly, record PGM basket prices (as a result of significant gains in palladium and rhodium prices) have alleviated cost pressure, which make voluntary supply cuts unlikely in the foreseeable future. This also helps to explain why the loading shed in South Africa has failed to stimulate higher prices, as significant and rising above-ground inventories mean that supply will remain ample. The good news for platinum prices is that it looks like the investor community is no longer as negative towards the metal. Rising macroeconomic uncertainties have played a large part, as they make for a more positive environment for gold, with which platinum tends to be positively correlated. This is also partly due to some investors buying into the thesis that substitution of palladium with platinum in autocatalysts is on the horizon (a shift that Metals Focus remain sceptical of). Looking ahead, the seemingly less hostile investor sentiment, coupled with our constructive view towards gold, gives us some confidence that the recovery in H2.19 for platinum could extend into 2020. Still, with its unfavourable fundamental backdrop, the upside for platinum prices is expected to be limited.

Palladium to continue rallying in uncharted territory

With a 54% intra-year increase in 2019, palladium remained the best performer of the four main precious metals for the third year in a row. The start of 2020 has seen the palladium rally continue into uncharted territory, with the price already rising by almost $200 to exceed $2,100 for the first time. As was the case in 2019, palladium’s remarkable gains in early 2020 reflect its healthy consumption in the automotive sector, which is expected to deliver another all-time high this year. Despite a notable slowdown in global light vehicle sales in 2019, palladium benefited from higher PGM loadings amid tightening emission control standards, especially in China. Palladium has received another strong boost following a power supply shortage in South Africa in late 2019. Even though the country produces more platinum than palladium, potential restraints in palladium output will certainly exacerbate the tightness in the physical palladium market. Indeed, following a decade of almost uninterrupted deficits, above-ground stocks by end-2019 were only sufficient to cover 14 months of demand, compared to 24 months at the start of 2010.

Going forward, an ongoing deficit should justify further gains in palladium prices this year. That said, calling the market’s top is tricky given the speed of the rally and the fact that the palladium market is comparatively small and hence relatively inelastic. It is perhaps easier to argue that any near term correction may not prove that significant given limited investor participation at present.

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