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Precious Metals Forecast H1 2015

Precious Metals Forecast
2014 brought us the expected as well as promoted devaluation of the Euro by 11% from 1.36 to 1.20 by the ECB. Substantial contribution came from the outlook of oppositely positioned monetary policies between a normalizing (increase of interest rate level) Federal Reserve and an expansive ECB (through Quantitative Easing). The divergence was mainly priced in in the second half of 2014 which was also the major contributor to the Euro devaluation. Investors increasingly transfer their funds into a growing US economy while funds are being pulled from the stagnating Eurozone. Renewed discussions on the crisis around Greece since December and the corresponding questioning of the Eurozone stability as a whole further complicate matters. End of January there will already be important indications with the ECB meeting (and supposedly the decision on the start of large scale government bond purchases) on January 22nd 2015 as well as the Greece election on January 25th 2015 (as well as the potential victory of the extreme left). As the Euro is already significantly devalued we currently see the majority of risks priced in and a limit in devaluation to 1.1500. An upward recovery to 1.26 can be possible due to the closing of short positions as well as the recovery of the Greece situation. We see the average rate at 1.1850 for H1 2015.
Since 2013 Gold has been in a downward trend. However, the last year has shown that the momentum in this development has passed. Thus, Gold closed 2014 almost unaltered and entered into a tighter range (1,132 – 1,392 $/oz) and therefore into calmer waters. A trend reversal in H1 2015 is however not to be expected. In the last quarter of 2014 the Quantitative Easing program in the US expired as planned. Thus, not only did the years of cheap money in the US-Dollar sphere end but one of the significant drivers of the yellow metal was eliminated. Now the heavily discussed as well as expected interest increase in H1 is in the forefront which however has already been partly priced in due to repeated remarks by the FED. However, the actual implementation would still have a signaling effect even if it would not severely burden the gold price in the medium to long term. Economic data from the US will continue to be in focus in order to be able to evaluate when and if the US Central Bank will actually implement its plans. A stable economy will be the requirement for this. The continuous strong US Dollar as well as falling energy prices should further burden Gold. Investors will also be guided by the economic development. In 2014 investors have parted from ETFs in net terms– even if in a significantly smaller scope than in the previous year – in order to achieve higher profits in other investment classes. The all-time highs of the stock markets are witnesses of this development. Whether this peak stage do not almost scream for a correction remains to be seen. Then a return to gold – as observed repeatedly however in short-term phases of insecurity in the last months – is to be expected. Retail investors are expected to await a convenient moment to increase their portfolio and to hold their stocks. Also the central banks should continue to stay on the purchasing side in net terms. At the very date of preparation of this forecast the desire for a safe haven as gold has been sparked again and has supported the gold price accordingly. The reignited tailspins around Greece have created some concerns. However, we expect that these kinds of reactions to unrests – whether of geopolitical or financial nature – will remain moderate and will only support the metal price in the short to medium term. After the dramatic crisis years extreme situations are required in order to bind the market to gold by conviction as well as in the long term. Physical demand from China may offer compensation for the factors burdening gold in the coming months. After building up stocks in the course of the price correction in 2013 demand from China was rather disappointing last year. A pickup in demand would be the logical consequence now – particularly now that the trend of shifting demand from west to east should continue. Furthermore it is expected that China will be the number one in gold demand in 2014 despite of the relatively weak year. On second place comes India. Here import duties continue to burden demand and are the reasons for increased demand in other metals. The imbalanced trade balance will lead to difficulties for the import of gold and artificially lower demand. But oil affects the Indian trade balance to an even larger extent than gold. In the course of the significantly falling oil price India could achieve an easing of the balance and thus consider the import duties on gold more benevolently. When the restrictions are softened official demand from India should pick up again. Despite of positive signs for an increasing demand from Asia we do not expect that this will significantly drive up the gold price. Moreover it will offer the compensation to the price burdening factors and may provide certain stability in the metal. From the secondary market we expect a similar low level as in the previous year. Outflows in ETFs should only increase supply moderately. The primary gold production from mines should not further grow after reaching a peak of around 2,900 tons in 2014 as an efficient production is not possible anymore in many cases given the low prices. Given the mentioned factors we see continued trading within a tighter range with the lower limit at 1,125 $/oz in the first 6 months of this year at an average price of 1,230 $/oz and potential for maximum values up to 1,325 $/oz.
Looking back Silver had to put up with losses particularly in the second half of 2014 and was trading in a Low around 14.40 $/oz, a level seen last mid 2009. Silver thus significantly overdrew the price fall of gold which led to a gold-silver-ratio of over 75. When looking at the full year 2014 Silver was the weakest of all precious metals and booked an annual loss of around 20%. In our view the weaker quotations should support the silver prices. We explain this with a recovering demand for silver bars as well as silver coins resulting from the lower prices as well as a possibly increasing safe haven character. Plus, we expect a more robust ETF demand as well as jewelry demand. We consider the industrial demand to remain unchanged. Thus, less silver is applied in silver solder pastes per cell but it should be compensated by an increased demand in photovoltaic plants as well as in new application areas such as medical or nanotechnology. From experience we know that the recycled supply should be weaker at times of lower prices which leads to an overall low supply. The recycling business is responsible for 20% of the global silver supply. In contrast there is the mine production which is forecasted to be higher in 2014 which should eventually lead to an excess supply. In summary the lower prices should support Silver. With regard to this we expect, analogously to Gold, a slightly increasing average price of 17 $/oz for the first half-year and see the metal within a range of 14.20 $/oz and 18.70 $/oz. The strong USD in combination with increasing interests in the US as well as lower inflation should however limit strongly increasing quotations. Furthermore Silver will continue to orientate itself to the price development of Gold and if applicable strongly simulate it (the historical correlation of gold to silver is at 0.80).
A scenario of significantly rising silver quotations could however occur if the still high debt levels of the EU nations come to the fore again. The safe haven character would then be the driver for price movements.
After an overall dull price development in 2014 which was characterized by a rather sideways price movement despite of the 5-month mining strike a “quiet” first half-year 2015 is to be expected. This expectation is amongst other explained by the turbulent events of last year in the South African mines. The strike left its footprints after 5 months and the platinum giants are slowly back to 100% of their capacity. According to the World Platinum Investment Council (WPIC) there was a shortage of supply of around 885,000 ozs in the past year. It was particularly the above-ground stocks that created some relief and did not let the price fall significantly despite of the mine strike. The proven stocks are still at a level of 2.56 Mio. ounces after a reduction by 38%. As already mentioned in our last forecast the automobile industry (platinum is applied as a catalyst in diesel engine vehicles) continues to provide positive outlooks. Thereby it is also environmental topics like the Euro-5- as well as the Euro-6 emission standards that will support demand for platinum through higher loadings. Besides the automobile industry platinum demand from the jewelry industry is expected to grow whereby particular focus lies on China and India. Additionally new applications like the fuel cells enter the market. Investor demand in contrast has weakened compared to the previous year and has gone through a less dynamic development. “Only” 108 thousand ounces flowed into platinum ETFs in the past year. The increasing European or in other words French efforts to permit less and less diesel engines on the roads in order to reduce pollutant emission could affect investor sentiment in the long run. Industries as well as investors should however use the low price level for purchases or price hedging so that there is upside potential in the first half-year. Additionally the newly founded World Platinum Investment Council as a new association gives hope for a stronger increase in investment demand. After the sideways price movement of the last quarter we see a tendency for increasing prices for the first half-year in 2015. In summary we expect that the low price level will be used by the industry as well as by investors. Furthermore, we continue to put our focus on the robust demand from the automobile industry as well as from the jewelry industry which give room for price increases. We thus see the average price at 1,270 $/oz with a trading range of 1,125 $/oz – 1,395 $/oz.
Palladium can look back on a positive price development in 2014. The price was mainly driven by 4 factors: the Ukraine crisis and the fear of shortage in supply from Russia as the worldwide biggest Palladium producer, a robust investment demand, the strike in South Africa ( Platinum) and last but not least the automobile industry which most significantly influences the palladium price. Some of these reasons also led to increasing premiums for palladium sponge used in different industries temporarily to new record highs. Sanctions against Russia in the Ukraine crisis had a price-positive effect whereby the downward trend in the palladium price by 18% from September to October of last year could not be prevented. Still, the metal could reach a better price development than all other precious metals. The ongoing positive development in the automobile industry in the US and in China where gasoline vehicles are almost exclusively sold and where palladium is applied in the catalysts give hope for a sustained positive development in H1 2015. Thus, in December the US auto sales again grew by 11%. And overall 16.4 Mio. vehicles were sold in the US in the past year which accounts for an annual increase of 6% in comparison to the previous year. Falling oil prices give additional incentive to purchase cars. Approx. half of the global palladium supply is applied in autocatalysts in order to convert exhaust gas emissions. Thus the palladium price strongly correlates with the developments of the automobile industry. The positive price development in Palladium in the last year also influenced the investor mood. In comparison to platinum the investor demand in palladium was by far more positive than in platinum. Thus in 2014 there was a total inflow of 900 thousand ounces which in particular benefitted the newly established South African palladium ETFs.
For H1 2015 we continue to see the palladium price well supported and expect an average price of 840 $/oz. We see the trading range at 740 $/oz – 900 $/oz.
Rhodium, Ruthenium, Iridium
Rhodium has developed according to our expectations in the 2nd half-year of 2014 whereby the price increase was much stronger than expected by us. However, the peak prices were reached during a 2-week extreme phase in August which was abandoned fairly quickly due to profit takings. In this short period of time the price increased by almost 150 $/oz – if taken to the beginning of the half-year even by 350 $/oz in total. This rally was carried out by news about issues in the availability in South Africa. Despite of the over 5 month long strike in South Africa the impact in the Rhodium market remained rather limited. The rest of the 4 months the movements were much less and without any big amplitudes. Rhodium continues to have its space in the autocatalyst industry and is surely difficult to be replaced due to the very good effectiveness. The average price of the past 10 years has always been at almost 3,000 $/oz and thus still 2.5 times above the current price. Therefore there is surely no reason for doubting the application of this metal in the catalyst industry. For the PGM producers it was overall a very difficult year as the prices have not developed in the way it was logically or in other words economically expected. On the one hand the strike did not affect the price too positively and on the other hand positive auto sales were not the promising drivers for price movements as they once used to be. Of course there are also investors in Rhodium trying to improve their portfolios with niche products. In absolute terms they are a relatively small group in comparison to other investment classes, yet still price-influencing for the Rhodium market. The explanatory power of the demand and supply statistics is therefore only limited and makes respective forecasts even more difficult. Other industries which use Rhodium continue to play a subordinate role. The chemical industry as well as the glass industry are mentionable here. In view of the global economic situation and the significance of the automobile industry for the Rhodium market we are carefully optimistic with regard to the price. Should the positive US car sales continue and the global economy remain stable we expect an average Rhodium price of 1,250 $/oz for the next 6 months. We see the peak at 1,415 $/oz and the low at 1,125 $/oz. The significantly cheaper gas prices are supportive for new vehicle purchases on the one hand and also give incentive to buy bigger vehicles. This will contribute to the demand for Rhodium.
Ruthenium surely was a disappointment in the second half-year for almost all market participants. In principle the price moved almost on the same level in the months of July/August and from October to December each from the beginning to the end. Only end of August to the beginning/mid of October there was a bigger price movement which however went downward without any countermovement. The price weakened by 10 $/oz, from 68 $/oz to 58 $/oz in this timeframe. Buyers who have been patient were the winners in the half-year. For active sellers in turn the market constellation turned out to be difficult. However, this – as reported thoroughly in our weekly reports – has not often occurred since bigger quantities would have been required in order to achieve substantial profits. This magnitude however was not placeable as the market simply did not provide it. The electronics industry which dominates in this metal has sold relatively little since all of the “Big Players” still have sufficient stocks available. Analogously to Rhodium the next big applicants of Ruthenium do not play a major role and thus have little influence on market events. The chemical and the electro-chemical industry were stable buyers in this reporting period. We see the peak and the low price for the next 6 months at 70$/oz, 53$/oz and the average price at 60$/oz.
In Iridium the environment has developed in such a way within the first two months of the 3rd quarter as expected by us in the first half-year. The demand of all application areas was robust and thus the price held up at a rather high level or in other words even climbed up a bit up until 630 $/oz. Afterwards however the price went downhill for 3 months and reached its so far lowest level of 500 $/oz. We reported this low level repeatedly as a psychological support in our weekly reports. Falling markets often have a crippling effect as potential buyers who are not in a hurry to buy simply wait and observe the price. Since the beginning of December there have not been any active sellers and with constant or in other words even increasing need particularly from the chemical and electro-chemical industry as well as from the electronics sector (spark plugs) the price has climbed again by almost 10%. The demand mainly came from Asia and Europe. We can imagine prices to climb a bit further for the coming half-year in case of further strong demand particularly from the automobile industry. Here we should be able to observe to what extent mines can supply this demand in order to stabilize the price as this is always negative in the long run for metals with a strong industrial character. We see the peak as well as the low price at 640 $/oz, 485 $/oz and the average price at 565 $/oz.