LAWRIE WILLIAMS: Bank picks gold and silver as likely outperformers next year
Despite Goldman Sachs being bearish on gold yet again and predicting a downturn to around the $1,100 level, other bankers, some with perhaps a better track record on precious metals price forecasts, beg to differ. Australia’s Macquarie Bank, for example, picks out gold and silver, alongside nickel and uranium, as being the likely metal commodity outperformers in the next 12 to 24 months – at least in US dollar terms.
For gold Macquarie sees a weaker dollar and increased geopolitical risks outweighing any likelihood of U.S. Fed rate rises in the forward pricing equation. (In contrast, Goldman reckons on a stronger dollar in its forecasts). Silver is seen as a corollary to gold in the Macquarie analysis, as its price tends to move up with the gold price, but historically in a more volatile manner when the gold price increases, while the bank also points to increasing industrial demand for the metal alongside a global economic upturn in the short to medium term at least.
Looking deeper into its gold forecast, Macquarie qualifies its deeper analysis with the subhead: ‘Too much too soon, but outlook bright’. The bank goes on to note that gold’s recent rally was built on a weak dollar, falling real interest rates and rising political stresses. This it considers as a little too much, too soon, and sees current price levels as being more sustainable. It goes on to point out tha in recent year the tail end of the year has been a weakish period for the gold price. It recognises that this could be true again this year, but overall has seen nothing to alter its analyst’s convictions that gold is on track to reach US$1,400 an ounce, or higher, next year for the first time in five years.
The bank sees the recent July-September price rally as a test run for what will ultimately drive gold over $1,400 an ounce in 2018 – the end of US economic outperformance. Its US economist believes the long-term trend growth rate of the US economy has fallen and, given the long expansion, is much nearer to full employment that than other economies. e is recognition that the Fed will have to raise rates – growth remains higher than trend – but this is becoming true elsewhere. Crucially it suggests that the dollar is more likely to weaken than strengthen while political risk factors – an unpopular President unable to match up to his domestic promises and facing complex and potentially unsolvable foreign problems – are also likely to work in gold’s favour.
But – and it’s an important but – the bank also sees gold struggling at levels of over $1,400 an ounce as it reckons gold’s fundamentals are not as good as they were. Imports into the two main consuming countries, China and India, have been slightly higher but it sees investment demand as weakening. Central bank net purchases have remained relatively firm with Venezuela no longer selling. Purchases continue to be dominated by one country though – Russia - with very few other buyers, with one exception: Turkey has begun to add to its reserves, buying 37tonnes between May and August. However the possibility that China may be buying gold for its reserves without reporting such reserve increases to the IMF as we suggested in our article The fiction in Chinese gold reserves and media import coverage is not considered which could change the fundamental supply/demand picture if this becomes recognised. However we suspect China will manage to keep its true central bank gold purchasing statistics under wraps for the next few years – or until it aims have been achieved leaving us just to speculate.
Silver, Macquarie sees as the big disappointment in 2017 despite a near 20% rally from the beginning of the year to its peak in July, but even so feels that the metal should be the best performing precious metal in the year ahead. The reason for expecting silver to outperform gold is that Macquarie reckons that the global industrial economy is doing very well and industrial metal prices have been strong. The correlation is not perfect, but normally when LME metals are doing this well, silver should be as well – indeed at present the chart would imply a gold:silver ratio of 60, and hence a silver price of over $21 an ounce Two key areas of silver demand – semiconductors and solar – are seen as remaining robust. Thus Macquarie analysts see silver as having the potential to “re-rate” against gold, allowing it to make substantial gains even if gold remains range-bound and investors remain on the sidelines. But the bank’s price forecast is even more bullish than this, factoring in both higher gold prices and a return of the retail investor as inflation picks up.