LAWRIE WILLIAMS: Metals Focus' precious metals predictions for 2018
Now 2018 is with us predictions of what may – emphasise may - happen in the current year are beginning to flow thick and fast. Most are personal views from bank analysts and commentators like myself, but shouldn’t be disregarded because of that as there is a considerable amount of experience of past patterns behind these views. But, in reality, these are all best guesses because so many unforeseen external factors can have a significant impact – particularly with regard to global geopolitics, given the unpredictability of a number of the world’s leaders, and also the strange popular vote patterns which have been emerging as well.
Some of these predictions are, at least in theory well-researched – we have already looked at Martin Murenbeeld’s prognostications and those of John Reade of the World Gold Council, although the latter only looked at his view of trends and didn’t give any price predictions (See: 2018 gold price forecasts - Murenbeeld and World Gold Council). Now we have just received the latest general forecast from one of the top precious metals consultancies – Metals Focus - in its latest free weekly newsletter, although here again the consultancy is not predicting actual prices, but overall trends.
In summary the consultancy’s findings for the four principal precious metals are as follows,and we wouldn’t argue in principle with any of the consultancy’s general predictions:
- Gold: further upside expected this year
- Silver to outperform gold this year
- Platinum boost from gold, but gains capped by poor fundamentals
- Palladium enjoys the strongest supply-demand fundamentals, but is likely to experience a period of consolidation in 2018
For my own precious metals forecast for 2018, which does incorporate price targets, you can view this by clicking on Precious metals price predictions for 2018 – gold, silver, pgms.
But, back to the Metals Focus views, we'll look at each of the major precious metals in turn:
Gold: Looking ahead, Metals Focus analysts expect US dollar weakness may persist, lending support to gold, while, changes in the US tax law are set to result in faster than previously expected growth in US government debt, from arguably already problematic levels.
Strength in equities last year also may have undermined gold and while this strength is seen as continuing in early 2018, for instance, relating to the boost in earnings that lower taxes will result in and potentially also President Trump’s expected infrastructure bill. Sooner or later, though, the consultancy expects to see an equity market correction emerge which should be beneficial for gold.
One final point Metals Focus feels worth making on gold is that markets still seem to be under-pricing risk with the VIX Index continuing to trade at historic lows. This ultra-low volatility environment means that if a risk, such as a correction in equities, crystallises, it would likely send ripples across other markets. While initially such an event would likely see gold also sell off, its aftermath would be positive for the yellow metal, as investors are once again drawn to its safe haven properties.
Silver: Silver underperformed gold in 2017. As a result, the Gold:Silver Ratio (GSR) rose from an already elevated 72:1 at the start of last year, to almost 80 by early-December although it did fall to a little below 69 in between. What is perhaps surprising is that in 2017 the silver price did not seem to benefit significantly from the improvement across much of the base metals complex. We would strongly agree with this overall viewpoint and would anticipate the GSR coming back to 70 or below suggesting a boost in the silver price vis-à-vis gold during the year in any case.
Looking ahead, Metals Focus reckons that the forecast rise in the gold price this year is expected to deliver positive spillover effects for silver, particularly if the GSR does come down. Silver’s smaller and less liquid market, coupled with a modest recovery in investment, would thus see silver outperform gold in 2018.
Platinum: In 2017 platinum underperformed the other major precious metals and moved into a discount to palladium for the first time since 2001, while its discount to gold widened further over the year. This price weakness has reflected a challenging supply/demand backdrop, which, the consultancy believes will remain in place in the months ahead.
On platinum demand, Metals Focus sees the most significant challenge facing the metal as being the ongoing decline in light duty diesel’s market share, especially in Europe which accounts for around 50% of global platinum automotive demand. It also faces falling jewellery and bar and coin demand.
The Metals Focus analysis suggests that 2017’s estimated physical surplus of around 300,000 ounces could increase further this year, adding to platinum’s above-ground stocks, which are forecast to exceed 9 million ounces by end-2018. In terms of price expectations, this means the consultancy reckons that the outlook for platinum will remain largely contingent on the trend in gold prices. As a result, while it expects the platinum price to strengthen this year, without a supportive supply/demand backdrop it does not expect platinum’s discount to gold to narrow.
Palladium: Perhaps the best performing commodity of all in 2017. Annual average prices rose by 42% year-on year, while on a spot basis palladium broke through $1,000 and moved into a premium over platinum for the first time since 2001. Metals Focus notes that prices in excess of $1,000 an ounce now appear to be a near-permanent feature of the market, backed-up by massive physical deficits, which in 2017 may well have exceeded 1.5 million ounces. Analysts have now been predicting palladium’s likely outperformance due to strong demand to supply fundamentals but it took until 2017 for this to come about. Above-ground stocks are reckoned to be sizeable, at an estimated 14 million ounces, but they are declining fast.
What the consultancy is not taking into account though is whether the petrol (gasoline) engine autocatalyst sector – the principal demand element – will see reverse substitution now that platinum is less costly than its sister metal. Manufacturers are already geared up to produce platinum-based catalytic converters for diesel engines – how simple would it be to apply minor modifications to these to petrol-driven engines? We don’t know. Frank McAllister, former Stillwater CEO, reckons palladium has been a more efficient catalytic metal for petrol driven internal combustion engines than platinum anyway, but then research into reducing platinum loadings may well have fallen away when palladium was at such a substantial price deficit to platinum – until this year.
However, Metals Focus reckons that if general equities do fall off this year, this could also lead to seeing palladium prices falling too, although it suggests that any such weakness should be short-lived. As a result, the consultancy still expects annual average prices to rise this year, albeit modestly.