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Precious Metals Forecast H1 2014

EUR/USD strengthened more than expected in 2013. Primary reasons behind this were the hesitant behaviour of the FED with its monetary policy and the EU-crisis getting pushed to the background. We do not expect a US-Dollar rally on account of the Tapering which has now been set in motion; the time-factor of it is all but certain. To the contrary: in each FED meeting the possibility of a gradual reduction of the Quantitative Easing programme is discussed and decided afresh.

According to market consensus the US-interest rate is expected to stay at current low (0-0.25%) levels well in to next year. This is also likely to apply to the EUR interest rates (0.25%). As such the USD will not benefit from any interest differential. Still, the FED has taken the extraordinary steps by starting the Tapering, whereas the ECB continues to contemplate further measures and potentially the EU-crisis could start boiling again; this could benefit to the USD. Furthermore US GDP growth in Q3 2013 was 4.1%, the EU a meagre 0.1%. We expect the EUR to be tendentially weaker during the course of 2014. Strong support for the currency is at 1,2750, the low of 2013 which has been tested more often than once. Upwards there is little room beyond 1,3900.
The environment surrounding gold in 2013 changed decidedly and the metal started the New Year under new conditions. Once the factors that have been influencing the metal for the past decade started to fade, rather fall-away, for the first time in twelve years gold finds itself in a downtrend.

First and foremost the start of the Tapering in January 2014 is the first step towards containment of the cheap-money policy. With it a strong driver for bull-trends in the past years is being withdrawn. The discussion about further reductions in these monetary measures is going to continue to be with us for a while. Even with the currently reduced bond-buying of 75 billion US-Dollar per month, the Quantitative Easing Programme in the USA continues to be enormous and the scope for reductions substantial. However with Janet Yellen at the head of the FED, decision-makers will continue to have to contend with another proponent of the QE measures.

During the course of the long-drawn and at times contradictory discussions about the timing of a Tapering, a larger part of the effect was already priced in by the market. Nevertheless economic data from the USA will continue to stay in the focus. A sustainably recovering US economy will benefit the US-Dollar – and this will add more pressure on gold. That not all problems are on their way to getting better, let alone solved, is reflected in the discussions about the US deficit. The budget problem and the related debt-ceiling, even with the consensus in the Congress, have not yet been lastingly solved. The US Senate is still to decide and could deflate the tentative euphoria.

In such an environment yield-driven investors may not change their critical view on gold. As such further Gold-ETF outflows are likely – though we expect these to be lower in volume than in the previous year. The need for gold as a “safe haven” is for some time now no longer prevailing: besides the positive signs of improvement in the US economy, the EU-crisis nations are also putting their saving-plans into action and the acute crisis-fear has somewhat abated. The apprehension about inflation as a consequence of excessive money supply has also proved to be untrue and has weakened as a driver for the metal. The prevailing risk-aversion of the past years has recently been replaced by rekindled interest in risk-richer assets classes like equities.

Should this euphoria get dampened – after all equities are at their highest levels – one or the other could find their way back to the precious metals. Investors in physical precious metals continue to remain as buyers and are making use of the opportunity presented by lower prices. This however has not been enough to compensate for the ETF outflows and provide enough support for a trend-change.

Last year China, with its record demand for gold, provided some balance to the ETF outflows. With this gold changed from weaker to stronger hands. As such physical demand from China in 2013 played a decisive role in supporting gold. We do not expect this to continue at similar, high levels, in 2014, even though China will continue to remain an important pillar of support for demand. We continue to see China as the number one consumer, ahead of India. Should import duties in India, against expectations, get reduced, one can expect some catching-up on demand.

Central banks were again net buyers, though not as strongly as previous year. We expect this trend to continue in 2014. The potential of a stronger US-Dollar and the global economy support this.

On the supply side we do not see any change in the mood in the recycling sector. Increased interest in selling scrap (old) gold will more likely be triggered again only by higher prices. Only then do we again see potential – after all, the sharp decline in scrap-gold volumes came simultaneously to the price-correction in April 2013 and not due to increased stocks. The reduced supply from recycling had an effect on physical availability of 999.9 gold and impacted premiums accordingly. Primary production is expected to grow slightly. Among others, high prices in the past years prompted investments into new explorations.

In view of the downward trend, already last year a few mines hedged – to a limited extent – their future production through forward sales. We do not expect a sustained effect from the development.

After gold repeatedly defended the 1,200 $/oz mark, for the moment it appears a floor has built around this level. However, for reasons mentioned earlier, we expect further temporary setbacks to 1,175 $/oz in the first half of this year. On the upside we see medium-term potential for price-rises. 1,390 $/oz is our expectation of the upper-limit for the first six months of 2014.
With the worst result in over 30 years (-35%), silver continues to find itself under pressure at the start of the New Year. However we see some factors that could give support to the metal in the medium-term and help it reach higher levels.

To begin with, the economic recovery in the USA means that silver as an industrial metal could attract more demand. Also, new and diverse applications with silver-components in nano-technology and in the electronic industry in the coming years will provide further support.

Additionally, a recovery in the photo-voltaic sector could assist in stabilising the price. This sector benefits from the lower price-levels, which reduce the pressure on silver-substitution and on the need to reduce the silver content in pastes.

Beside the industrial demand, the small-investors stay faithful to the metal: we expect stable sales of silver coins, which will of course also benefit from the lower prices. And investment demand from India is not to be disregarded. Since import of gold has become considerably more expensive on account of the new restrictions and duties, a part of the traditional demand for gold has been substituted by silver. Under the present circumstances this trend could continue or even get stronger.

On the other hand, hitherto interest of institutional investors and ETF holders brings with it dangers: their appetite appears – after the silver-backed exchange traded investments funds reached an absolute record high in 2013 – to be satisfied for the moment. As such it is unlikely that ETF demand will continue to stay at this level. More likely, as in the case of gold, a flight out of this assets-class could develop. A possible liquidation of these positions of course gives reason for concern and this would structurally change the silver supply-excess by further exaggerating it. After all in 2013 the excess of ca. 6,000 tonnes was reduced by a good 1,000 tonnes by the ETFs.

Analogue to gold, the start of the QE Tapering in the USA and its effect on the “safe haven” aspect is not going to go unnoticed by silver. However with economy growing positively, the effect here should be tendencially milder.

Under the mentioned environment we see silver tending to be weaker. The downtrend does not seem to be over, though we feel that the larger correction phase is behind us. We think the metal could test a low of 18.21 $/oz in the first half of 2014. Should it break below this, then a continuation of the correction to 17.00 $/oz is possible. We see resistance at 23.00 $/oz.

One has to keep in mind that the sentiment could change very quickly, should the Tapering pause or the Euro-crisis and discussions around the US budget heat up again. Additionally Silver would profit from a new flight into metals.
There are three essential criteria that influenced the platinum price in 2013 and will continue to do so in 2014.
To start with, the situation in South Africa: the world’s largest platinum producer, Anglo American Platinum, plans to shed 3,300 employees, which goes along with reduced production. In contrast to the bloody strikes in 2012, the situation has now somewhat eased. Accordingly a sustainable increase in the price of platinum – pushed up due to continual strikes – is rather unlikely. At least some support to platinum will be provided by the power-price increase by state owned Eskom. Of late, due to maintenance work, Eskom has requested larger industries, which included the platinum miners, to curb their demand.

Another important criterion is industrial demand. Platinum as a catalyst is used mainly as an auto-catalysts in diesel-driven automobiles, primarily in Europe. Demand from the automobile sector alone accounts for 40% of total demand. Admittedly automobile sales in Europe were weak in 2013, however a recovery is expected in 2014. Platinum demand will also be increased due to the stricter emission-regulations like EURO VI or TIER 4 that will come into effect. Furthermore demand from the electronic, chemical and glass industry is developing positively. Due to this, the currently high platinum sponge stocks will in all probability reduce in 2014. Some reduction in stock was already evident in recent weeks.

As mentioned in our outlook six months ago, investment demand is also an important factor. Worth mentioning here is Absa Capital’s platinum ETF. This soaked up, more than surprisingly, over 900,000 ounces in the year and was one of the factors preventing further declines in the price of the metal. Together with increased industrial demand, the ETF is responsible for the expected supply shortfall of 600,000 ounces as reported by Johnson Matthey. As against this, we have an expected excess supply of ca. 71,000 ounces according to Thomson Reuters GFMS.

Summarised, in view of the situation in South Africa and the positive outlook for industrial demand, we see platinum well supported, with a tendential upward bias. Additionally, with falling prices the mines will have a feasibility problem to deal with, which in turn should be price-supportive.
Palladium was the most stable of the precious metals in 2013 and in fact closed the year marginally stronger.
The outlook is also positive. Johnson Matthey as well as Thomson Reuters GFMS expect supply-deficits of ca. 740,000 and 850,000 ounces respectively. Keeping in mind that primary palladium supply is mainly from Russia and South Africa – together they make up for ca. 75% of it – lack of sales from the Russian State reserves would be supportive for the metal. Norilsk Nickel, the world’s largest palladium producer (here palladium is a by-product of nickel mining), anticipates that the Russian State will not sell any palladium in 2014. The yearly increasing secondary supply of palladium from recycling of auto-catalysts can however partially compensate this.

On the demand side, the automobile industry with a share of ca. 70% in total demand remains by far the most important sector. Palladium is used mainly in petrol-driven vehicle auto-catalysts and is as such more dependent on the US and Asian markets. Both markets are presently viewed as having a healthy outlook and as such should positively affect palladium demand and thereby its price. There may be some headwind on account of possible substitution with cheaper raw material; however we do not see this as a significant factor at the moment.

Investment demand, compared to platinum, is very low. Should Absa Capital, with its already approved palladium ETF, have similar success as its platinum ETF, this would have a positive supportive effect on the price.

Summarised we continue to see palladium well supported and as such will stay with our outlook.
Rhodium, Ruthenium, Iridium
Rhodium moved relatively calmly in the in the past six months - in a range of a “mere” 120 $/oz. The price moved between 890 $/oz and 1,010 $/oz and our previous outlook seems to have been on the spot. Early December the metal was trading under 900 $/oz; a low not seen since 9 years.
End 2013, early 2014 considerable buying interest from traders as well as the industry moved the metal upwards a good 160 $/oz within a relatively short span on 3 weeks. This move was larger than the whole move in the second half of 2013.
In view of the increased demand for rhodium from the Asian automobile market, continual regular buying from investors and sustained demand from the glass industry, the price should stay stimulated. Rhodium demand from the chemical industry has remained unchanged in the past years.
The downtrend of the past months and years seems to have been arrested and we see limited potential of a moderate increase in price. The rhodium price should move in the range between 950 $/oz and 1.250 $/oz in the coming six months.

Ruthenium, as far as its price is concerned, has six curious months behind it. It started at 87 $/oz in July and in the first three following months dropped ca. 20 $/oz and then in the 4th quarter did not move at all, dull and uninterested. It is rare in the world of precious metals that one of them remains so unmoved over such a long period of time.
Experience shows that buyers, especially in the electronic industry, tend to stay away in a falling or side-ward moving market as there is no pressure to get active in such a situation.
Even though the economic situation surrounding ruthenium is not exhilarating, similar to rhodium, there are signs of improvement and with that of rising prices.
Due to the abundant availability of physical metal, here also a quick and strong rally is not to be expected, but the given overall economic situation should be enough for price-increases. Stocks at the largest consumers, namely the electronic industry, should by now be depleted enough to require fresh buying.
The price range in the next six months should be between 55 $/oz and 85 $/oz.

Iridium has a serious slide behind it lost in fact more than we had predicted. Our predicted low of 650 $/oz has been considerably undershot. The lowest price of 400 $/oz was reached early December. Since then, in the past 5 weeks, it has not moved further downward, which leads one to believe that it has bottomed out. The drop of over 55% in less than 6 months has left deep wounds at many of the consumers, such that confidence is not at its best here. Despite this, there are signs that iridium could also show some recovery. The metal is currently being supported by a wide range of industrial segments, e.g. the chemical and electro-chemical sectors, electronic, medical and the automobile industry, through fresh buying. However new technologies for the manufacture of crucibles for the production of LEDs and OLEDs are not on the cards as yet.
Given the small size of the market and a fairly transparent supply, we can imagine a recovery up to 550 $/oz.