LAWRIE WILLIAMS: Revised gold, silver and pgm price forecasts for end-2021

Back in December last year, just before Christmas, we were brave enough – some would say foolish enough! - to publish our precious metals price predictions of  for both June 30^th and for the  end of 2021 (see A $2,200 plus gold price this time next year? Christmas cheer for gold and silver).  At the time we noted that price forecasting was an invidious exercise, and the ensuing few months have demonstrated that this is certainly the case and most of the precious metals, with the exception of palladium, have strongly underperformed our prediction for H1 2021.

It’s not that we feel our predicted price forecasts for the year-end are unattainable – six months is a long time in market terms and prices could move sharply in response to geopolitical and geo-economic events occurring between now and the year-end.  However,  price movements in the interim, coupled with the rather unpredictable impact of inflation on the markets as the world begins to unwind from the effects of the COVID-19 virus pandemic – have caused us to reconsider our year-end estimates.

The weak performance of gold, silver and platinum prices so far, in comparison with our December predictions, has prompted a downgrading of our price forecasts for these three precious metals, and an upgrading of that for palladium for which we were almost certainly unduly pessimistic.  Our revised price forecasts are set out in the table below:

Table.  Predictions for precious metals prices H2 2021 (US $s).

Perhaps these new forecasts require some explanation with respect to our reasoning behind the changes as follows:

Gold

We remain bullish on gold, but perhaps not quite so much as we were back in December given the yellow metal’s below par performance in H1.  There do, however, seem to be a number of positives relating to global gold demand.  These include not least a seeming new interest in gold from some central banks.  For example Hungary added some 63 tonnes to its gold reserves in March and Thailand 90 tonnes over April and May.  Whether this continues in the second half of the year remains to be seen given that neither of the two global gold reserve adders of the past couple of years, China and Russia, both appear to have withdrawn from making further additions. 

In Russia’s case this appears to have been prompted by the big fall in oil and gas prices – previously the nation’s principal export earner, which had put a big dent in the nation’s balance of payments current account.  This has been countered by Russia’s gold miners now selling their output on international markets and generating huge export income by so doing (Russia is reckoned to be the world’s second largest gold producer, after China, so gold availability to boost export earnings is massive.

As for China, although the country ceased reporting any gold reserve increases a couple of years ago, the country’s dealings in the global gold market, based on recent history, remain obscure and steeped in secrecy.  Many analysts believe the level of China’s gold reserves may be very substantially higher than the 1,948 tonnes reported to the IMF.

ETF flows appear to have stabilised.  H2 2020 and Q1 2021 saw big gold outflows from the gold-backed ETF sector, but this seems to have died down in Q2 with gold withdrawals mostly matched with gold deposits for now.

Regarding global demand in general, the two leading consuming nations, China and India, seemed to have been seeing a demand pick up in the first half of the year, but this seems to have tailed off in India as the COVID pandemic showed increasing infection rates, although one should recognise in this respect.  Even so this almost certainly still represents an overall increase on 2020.

In the U.S., where the global gold price is most heavily influenced, the Federal Reserve at recent FOMC meetings has intimated it is unlikely to raise interest rates before mid-2022, if then, despite rising inflation.  This combination means net real rates are likely to remain heavily negative, and gold tends to thrive in a negative interest rate scenario.  Market expectations have, however, led to dollar strength - which tends to equate to gold price weakness, but we do not anticipate this continuing for the remainder of the year, and we do foresee the dollar resuming its downward path before the year end.

Silver

Despite it largely being an industrial metal nowadays, the silver price has always moved pari passu with gold, although in the past this has usually been in a more volatile manner.  Recent price movements suggest that some of this volatility may be falling away and it has been noticeable that the Gold:Silver Ratio (GSR) – which follows the price relationship between the two major precious metals - has been pretty steady through gold’s recent period of weakness.  We suggest that the GSR is still a relevant guide to the two metals’ price relationship, but is unlikely to move as much as it may have done in the past.  We have thus assumed a GSR of 67 – a little below where it is now -  and with our year-end forecast for gold at $1,975 that would put silver at around $29.50.

As noted above, silver is pretty much an industrial metal nowadays and the price may well be being supported to an extent, by the economic recovery from the global pandemic and a consequent boost to the industrial sector.  It is also a ‘green’ metal with its strong usage in the photo-voltaic (solar panel) energy sector providing additional demand growth potential.

Even so, silver does seem to have a huge mountain to climb if its year-end price is to meet some of the price growth expectations of earlier in the year and a year-end price of $30 or more, as we had previously predicted may be impossible for it to achieve.  Despite there being an apparent shortage of coins and small bars in the U.S.for example, the price has remained comparatively unmoved. Price premiums for small units – coins and 1 ounce bars – are sky high and this may be putting a dampener on the price too.

Platinum Group Metals (PGMs)

Historically, platinum had tended to be the most expensive among the major precious metals (gold, platinum and palladium).  Up until around ten years or so ago it had dominated as the catalyst of choice in auto exhaust cleaning systems and the price rocketed accordingly. But the big price gap between platinum and palladium led to considerable research into, and the eventual dominance of, palladium as an alternative, to the extent that the huge demand in the gasoline exhaust cleaning sector led to palladium supply moving into major deficit and a big fall in demand for platinum, which developed into a supply surplus and a consequent massive price reversal.  

This has all led to palladium now being pricier than both platinum and gold and while the huge supply deficit continues the palladium price will remain strong.  Longer term when battery electric (BEVs), or hydrogen powered vehicles may dominate the market, the future for the palladium price may be bleak, but this looks like it won’t occur for several years yet. We had assumed in our previous estimate that the growth in BEV sales would happen faster than appears to be the case, or perhaps there would be substitution of the now far less costly platinum to replace palladium in the autocatalyst market, but if this is indeed happening it is taking place more slowly than we had foreseen.

Overall, we thus remain positive on the price prospects for the whole precious metals price complex, but in general gold, silver and platinum have strongly underperformed our expectations in the first half of 2021 while palladium has done far better than we anticipated.  Year to date (July 2nd) gold is down around 6%, silver and platinum are just about even and palladium is up nearly 14% and we have taken this half year price performance into account in our new price forecasts for the year end.

02 Jul 2021 | Categories: Gold, Silver, China, Dollar, US, Russia, FOMC, Platinum, Palladium, India

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