There has been sufficient political, financial and economic uncertainty to support gold’s safe haven status and it has outperformed the rest of the sector, which has a more industrial bias, over the last few years. This was particularly the case for platinum and palladium. However, Natixis Commodity Markets (NCM) expects a mirror image of this in 2011 as some of the arguments for holding gold become less relevant. For the PGMs, the auto sector, particularly in the developing economies, should support some modest gains in average annual prices for platinum and palladium.
Having rallied strongly to a fresh all-time record of $1,265 in late June, the gold market has since experienced a setback, slipping below the $1,200 mark in July to a low of $1,157. NCM believe there is the potential for further weakness. With the increase in supply and suppression of fabrication demand at current high prices, this requires a constant stream of investment inflows to balance the market.
Critically, NCM feel that the arguments supporting investment are steadily being eroded. The sovereign debt problem is slowly becoming less of an issue, or is already priced into the market, and as such the need to hold gold as an alternative safe haven asset is being progressively reduced. Another bearish factor is producer de-hedging, which having averaged around 350 t/y for the period 2006-09 is set to fall to trivial levels due to the much reduced scale of the outstanding hedge book.
In 2009, mined output rose by an estimated 6.5%, and NCM expect this to rise further in 2010 and beyond. In combination with potential net selling from investors, higher mined output will lower the equilibrium price at which jewellery demand can balance the gold market. We forecast a slide in prices in the third quarter, perhaps accelerating in the fourth quarter, with the market at some point this year approaching the $1,050/oz mark to give an annual average of $1,125/oz. With gold’s negative fundamentals being deep-seated, further weakness in 2011 could take the average price down as far as $950.
Given NCM’s negative outlook for gold prices it anticipates silver prices following in tandem, with the third quarter generating an average of around $17.75/oz, after which losses could accelerate to give a fourth quarter average price of around $16 (and an annual average price $17.30/oz). A more bullish base metals market in 2011 is expected to give some support to industrial silver demand, justifying an average price only a little lower at $15.50/oz, avoiding the more overt weakness likely in gold prices. As a result, the gold:silver ratio should narrow considerably to an annual average just over 61, taking it closer to its longer term average in the high fifties.
NCM expect global automobile production to maintain its recent strong growth driven by the emerging markets, despite the end of the scrappage schemes in a number of the mature regions. With automobile growth being dominated by petrol-driven cars, and palladium continuing to make in-roads into the diesel sector, NCM continues to favour palladium over platinum from a demand perspective.
The supply side, especially in South Africa, should offer some support with the potential for electricity supply bottlenecks, labour disputes and safety issues all to impact negatively upon the supply of platinum in particular. NCM therefore project a rising trend in both pgms’ prices over the rest of this year. Overall, the review expects platinum prices to average $1,600/oz for 2010 as a whole, with the average palladium price at $465/oz. Next year, ongoing increases take NCM’s forecast for platinum to an average of $1,700/oz and palladium to $510/oz.
Precious metal price outlook 2008-2011
Cash price $/oz % Change
2008 2009 2010 2011 10/09 11/10
Au 872 973 1,125 950 15.6% -15.5%
Ag 15.00 14.70 17.20 15.50 17.0% -9.8%
Pt 1,577 1,205 1,600 1,700 32.8% 6.3%
Pd 352 264 465 510 76.1% 9.7%