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Precious Metals Forecast H2 2014

Precious Metals Forecast
EUR/USD
The macro-economic scenario developed as expected: after the drop in Q1 GDP, US growth is on a path of recovery, unemployment has reduced further and the FEDs schedule for a gradual reduction of its Quantitative Easing Programme is very much in place. Interest rate hikes are expected sometime next year, though the timing is still unclear. On the other hand the Euro zone is fighting against high unemployment, moderate growth, too low an inflation and the high debts of some member nations. In the first half of the year the ECB therefore went more expansive with extraordinary measures in order to crank up growth. Interest rate increases are not expected till 2016. Our prognosis for the H1 of 1.39 turned out to be correct and since May the Euro has weakened considerably. We will stay with our outlook that Euro-Dollar will weaken further, whereby the slide should gain speed around the end of the year as diverging central bank policies on either side of the Atlantic become more apparent day-by-day. For H2, we see the Euro-Dollar averaging at 1.3550 with a high-low corridor of 1.3800 / 1.300.
Gold
In the first half of 2014 gold traded in a relatively tight range, between 1,198 - 1,391 $/oz (Heraeus H1 prognosis 1,175 - 1,390 $/oz). It recorded a gain of 9% during these six months. This positive development has, however, not been enough to draw it out of its continual downtrend. The previous drivers are pointing too strongly towards a retreat.

Since the start of the year the US central bank has put into motion its tapering policy and has reduced its bond-buying by $ 10 billion a month. As such, and expected, the FED is on its way to ending its Quantitative Easing Programme by the end of this year. However, the market reaction to this, often discussed, tapering, has been restrained – the end of bond-buying is already priced in. Thus, while the era of cheap-money in the USD zone is coming to an end, the combination of a generally dovish tone from Janet Yellen and the assertion, that interest rates will not be raised for the time being have tended to benefit gold. The economic development in the USA will remain in focus in the coming months to see whether the current interest-rate policy of the FED will stay or change. After the weather-battered difficult economic start to the year, the market expects the second half to record a better GDP, which then will strengthen the USD to the disadvantage of gold.

Such an environment should further strengthen the already critical view of investors towards gold. After a slight increase in ETF stocks earlier on, as expected, the rest of the first half of 2014 saw net outflows. However, the speed and volume of this trend was much lower when compared to the previous year. The need for a “safe haven” has for some time now not been predominant anymore and the all-time highs in the equity markets reaffirm the investor’s return to preferring riskier asset classes. Geopolitical tensions in the Crimea or the Iraqi crisis existing at the time of writing this report have not led to the same “flight to safety” as happened during the banking and Euro-crises. The influence of such tensions compared to financial and economic dangers is considerably less and helps gold only in the short to medium term. After the USA, the outlook for Europe has also improved, as such the need for physical gold as a safe investment is today somewhat restrained.

As such, in the coming months we expect a further reduction in ETF stocks. However, the supply side will not be affected as much as in the previous year. This fits in with the present demand picture from Asia, especially China, where since the beginning of the year (and more so after the Chinese New Year festival), demand has been cautious. Premiums have accordingly reduced in H1. After ETF outflows in 2013 were soaked up by the extraordinary demand, vaults are now full and demand is, as expected, lower. Nevertheless, we still see China as the number one consumer world-wide and ahead of India this year too. After the recent elections in India the chances of a gradual easing of import restrictions on gold are generally better, provided that oil’s price development due to the Iraqi tensions does not continue. We will have to wait and see how much of what was promised was election propaganda and how much genuine intent. Ultimately the new government will also have to take measures to balance the trade deficit, thus we expect only a mild easing. Despite the forthcoming wedding season, official demand will therefore be kept “artificially” low. Nevertheless, we are of the opinion that due to such seasonal events, demand in the second half of the year will strengthen. The overall movement in the centre of gravity of demand from West to East will continue.

The first quarter showed that central banks, against expectations, are tending to be stronger net buyers than in 2013. We will have to wait and see if this tendency will continue for the rest of the year but our expectation is that it will.

In terms of secondary supplies, at prices above 1,300 $/oz we have repeatedly seen selling interest in gold. However, generally seen, the supply side in the second half of the year too will get little support from scrap gold recycling.

Fundamentally gold has stabilised in the first half year. In the second half there is potential for higher volatility within the range. The various factors influencing price appear to be relatively well balanced; as such we do not foresee any extreme break-outs. Under these circumstances we will stay with our H1 prognosis and expect till the end of the year a low of 1,175 $/oz, average of 1,290 $/oz with an upward potential till 1,390 $/oz.
Silver
Analogous to gold, silver also recovered somewhat in the first half of this year (+8%). The metal was supported by increased interest from investors and the consequent growth in ETF stocks. While gold saw heavy outflows last year, we do not see a sell-off in silver of such a nature in the coming months. Instead we expect stock levels to remain stable. Investment bars and coins could gain in popularity in the second half of the year – however, their influence will be less than in the previous year. After the under-performance of silver against gold during the months February to May (ratio moved from 60.30 to 67.50), we now expect the ratio to keep up its recently acquired momentum of moving towards the average of 58.25 (2012 - 2014) and consequently see silver outperforming gold. Should the high debt situation of the EU nations again come to the fore, “safe haven” buying would again provide the metal support.

On account of the recovery in growth of the global economy we expect H2 industrial demand to rise slightly. Recycling supplies, as in 2013, should remain at low levels. The global physical deficit reported in the World Silver Survey 2014 should therefore persist although a real shortage of physical metal is not to be feared due to existing stocks.

Speculative positioning pushed the price down below 19 $/oz in the first half of the year, whereby the early year’s test of the low of 2013 of 18.21 $/oz expected by us was just missed. As a result of the short-coverings we are starting the second half of the year at a price level of 21 $/oz. Levels above 22 $/oz will probably trigger price-hedging and limit further gains. Prices under 19 $/oz have proven to be good entry-levels. Compared to the first half of the year, we see prices in the coming months slightly higher, in the range between 18.50 $/oz and 24.50 $/oz with an average price of 20.80 $/oz.
Platinum
As already mentioned in our first half-year outlook for 2014, three main criteria are influencing the platinum price, and these will continue to be the main ones in the second half of the year too. The most prominent of the three is the five-month old miner’s strike, which in the 26th calendar week finally saw an agreement announced. Over 950,000 ounces of platinum production have been lost due to the strike. Despite an agreement being reached between the platinum giants Anglo American Platinum, Lonmin and Impala Platinum and the radical union AMCU, there are still some issues that need to be ironed out, including the very contentious issue of job-cuts. The agreement does not mean an immediate downtrend in the platinum price. On account of the “clean-up” needed, it will be months before production can be brought up to its normal levels. It can be expected that the platinum deficit in 2014 will run up to a minimum of 1.3 million ounces. As such we see platinum well supported in H2 too, especially due to the continuing supply deficit.

Furthermore the platinum price is getting solid support from robust industrial demand. Platinum, used in auto-catalysts in diesel vehicles, is mainly getting its support from the European as well as the Chinese automobile industry, both of which have reported growth in new registrations compared to previous year.

And lastly investor’s appetite for platinum ETFs has gone up – we pointed this out in our previous outlook – which has given the metal tailwind too. The ABSA platinum ETF currently holds 1.2 million ounces; at the end of 2013 this ETF’s stocks were at around 900,000 ounces.

All-in-all we have a positive outlook for platinum for the second half of the year too, which will primarily be supported by the situation in South Africa, industrial demand as well as investment demand. Compared to the first half, we expect the metal to trade in a tighter range between 1,325 $/oz and 1,575 $/oz and an average of 1,460 $/oz.
Palladium
Palladium was the most stable of precious metals in 2013, and it already belongs to the winners in 2014. Since the beginning of the year, palladium has been in an upward trend and in June it touched 862.50 $/oz, its highest level since February 2011. Palladium has primarily been influenced by events in South Africa and Russia, the latter being the largest palladium producer in the world. Due to possible sanctions against Russia on account of the Crimean crisis, the country continues to be considered an uncertain palladium supplier. Also palladium will not be subject to a downtrend due to the agreement between South African platinum mines and the union AMCU in South Africa, as in the coming months various issues still need to be addressed, among others, repairs as well as training of the miners, before production can take off again. Palladium production losses due to the strike in South Africa have so far added up to 530,000 ounces. According to Thomson Reuters GFMS the 2014 palladium deficit is forecast to be around 1.3 million ounces. On the demand side the automobile industry in emerging markets is playing a central role in driving the palladium price, as demand for automobiles is growing appreciably. Also, in the US automobile industry outlook for demand is positive; here palladium is used in petrol vehicle catalysts. This demand growth in auto-catalysts will in future also play a dominant role in the demand for palladium, as more than two-third of demand is taken up by diesel applications. More so, the Euro VI emission regulations play an increased role in the automobile industry; as such palladium can hope for good demand from the industry in future too. Additionally the initially restrained investment demand has taken off and ABSA’s South-African palladium ETF currently holds 412,000 ounces of the metal. This increased interest is founded on the positive expectations of investors in industrial demand. As it is going to take many months before production in South Africa can get back to normal levels, palladium should continue to have a tailwind behind it in H2 too, which will further be supported by positive industrial demand. As such our prognosis for the second half of the year is higher, with the metal trading in the range between 750 $/oz and 950 $/oz (average 850 $/oz).
Rhodium, Ruthenium, Iridium
Rhodium moved relatively moderately in the first half of 2014. Our prognosis made earlier this year was on target as far as this tendency and price are concerned. The rhodium price, this time too, moved in a tight range between 1,000 $/oz and 1,200 $/oz. However, the average price, compared to the previous half year, was a good 250 $/oz higher. This is mainly due to the long strike in South Africa, which lasted for almost the whole of the first six months of 2014 and had the consumers nervous about the physical availability of metal. The higher price is also partly due to increased demand; primarily from the automobile industry in the USA and Asia. Demand from the chemical and glass industry was also up considerably, though this resulted mainly from Asia, and compared to last year reflected a distinct tendency that we will see this continue in the future. Of special mention are China, Taiwan and Korea who were the largest of the consumers. Even though 80% of rhodium comes from South Africa and Russia, we do not believe that there is a physical squeeze on its liquidity and as such do not expect a large rise in prices. There was sporadic selling during the strike from South Africa, whereas Russia continued to keep the market regularly supplied. Investors will certainly be keeping an eye on rhodium and in case of large movements will probably want to get involved. Historically seen, the metal is presently very cheap and funds and investors will try and benefit from this. However in this case, in the recent past, the metal has also been sold in small rallies to take away profits. Despite all caution, we see rhodium still relatively cheap and our outlook is for a moderate firming of prices.
For the next 6 months we see the metal trading in a range between $ 1.050 / oz and $ 1.275 / oz.

Ruthenium succeeded the turnaround and recovered from the weak price at the end of 2013. This recovery, however, only took place in the first quarter of the year, whereas from early April to the end of June the prices have barely moved and traded in a sideways motion. We had been a bit too optimistic concerning the reactivation of acquisitions in the electronic data storage industry. Despite of a high demand for hard disks, stocks are being reduced, which explains the hesitation in purchases. According to given information this is going to last some more months which is why we do not expect any big price movements. The chemical and the electrochemical industry do not show any considerable changes, the sector demand have remained stable and should be constant in the future as well. The strikes in South Africa didn’t influence the price of Ruthenium because apparently the mines possess sufficient levels of stocks. There are still some investors holding ruthenium in their portfolios. These have the tendency to act at a price level of around 60 $/oz but also to use little rallies to take away profits. We continue to see Ruthenium develop in an “undramatic” manner and expect it to trade at a price range between 60 and 80$/oz in the second half of 2014.

In Iridium there was a comparable price movement in the first six months of 2014 as in Ruthenium which was accordingly reported very precisely in our previous prognosis. The lowest price was reached in the beginning of the year. Then there were strong upward movements in the months of January, February and March. This was due to a 4-year low price which made various industries react with a very good demand. Thereby the biggest consumers were the automobile suppliers (spark plugs) as well as the electrochemical industry. Larger purchases from the semiconductor industry for the production of crucibles have not taken place yet because this industry has consumed all of its stocks only in the second half of 2013. In the second quarter the rally did not continue and the price has only slightly risen by just 40 $/oz. The average price was at around 530 $/oz and starting from the annual-low price in the beginning of January of 400 $/oz we could see a 50% increase to 600 $/oz which has by far been the strongest movement of all precious metals.

Although the availability is comparatively low and the price has already moved strongly we see a weaker price movement in the second half of 2014. Due to continuous positive and constant demand Iridium should move between 545 $/oz and 675 $/oz in the next six months.