Gold will be the precious metal in deficit this year – UBS

Gold is on a roll, with investors ready to take up any retrace in the price.

“Gold’s the one precious metal that’s going to be in deficit this year. Platinum, we think, is going to be in a small surplus,” UBS bullion bank precious metals strategist Dr Edel Tully tells Mining Weekly.

Gold has appreciated 14% in the year to date, compared with platinum’s 2% and palladium’s 1% appreciation.

Tully says that the yellow metal is sidelining platinum and palladium, the latter two experiencing an investor step back.

She forecasts that gold will hit $1 800/oz by Christmas, the bullion bank’s same forecast for platinum, which for some time has traded at a higher price than gold.

Central banks have already bought 150 t of gold in the year to date and Tully expects this year’s total central bank buying to challenge the high 1988 level of 282 t.

Despite gold helping platinum to appear relatively cheap, Tully describes investor sentiment towards platinum as “not that high currently”.

Her $1 800/oz-by-Christmas gold-price forecast is, however, predicated on European and US macroeconomic woes remaining “unsolved”.

She describes European debt efforts to date as being mere “band-aid” and sees a US credit downgrading as being “a strong likelihood”, which would be positive for gold.

Conversely, a “surprise” positive agreement between US Democrats and Republicans would see retracing of some of gold’s recent gains, but this retracing would only be of short dura- tion, owing to the number of gold investors still willing to buy gold, but not during periods of record highs.

Should European and US debt problems fade, there would be no reason for gold to remain at record highs, but any downside would cause strong physical demand, irrespective of whether or not it takes place inside or outside the high-demand Indian wedding season.

The fear factor is prompting Europeans to buy significantly more small gold bars and coins and an investor angle is also present in Indian gold jewellery buying.

While there is 165 000 t of gold in the world, its availability is restricted. For example, much of the gold that has been in India for generations is unlikely to be sold.

With central banks no longer being net sellers, current supply is currently limited to the 2 600 t/y from mining and 1 600 t/y from recycling.

Although the third European central bank gold agreement allows official gold sales of up to 400 t a year, few are opting to sell.

There is currently a general reluctance to sell what is regarded as the world’s foremost safe-haven asset.

While gold recycling is also brisker, 2009’s record first-quarter levels are unlikely to be exceeded, as there is not the same need to raise dollars.

On the demand side, physical sales to India for fabrication and jewellery are 25% higher year-to-date than in 2010, the rising gold price notwithstanding and India being less seasonal than in the past.

China has become more seasonal than India, with turnover on the Shanghai gold exchange easing off in the summer months and picking up again in September.

There was a scramble for physical gold during 2011’s Chinese New Year, which led to bullion banks like UBS sending high-premium consignments to China, which is likely to result in China securing supplies earlier.

Platinum and Palladium

Considering the impact of the earthquake in Japan, the US slowdown and the European issues, platinum demand is holding up quite well with a small improvement on 2010 expected.

On the supply side, it will probably be an achievement for the strike-hit and safety-stoppage-affected South African mining industry to match 2010’s primary production levels.

“The issue with platinum, though, is that you have to be very patient – more patient than we thought we would have to be,” Tully comments.

UBS has lowered its platinum production forecast in the last commodity review, not because the bank sees dramatic change, but, for both platinum and palladium, the investor side of the market has taken a step back, which is most pronounced in exchange-traded fund (EFT) holdings.

While platinum buying is up by 200 000 oz, for palladium there has been a net outflow so far this year, with signs of investor fatigue.

After extremely strong palladium ETF buying last year, ETF holders are currently net sellers of palladium, which is set to force the palladium market into a surplus.

Palladium performed super impressively in 2010, but the rise from the $400/oz to $800/oz was a lot easier than the current slog of trying to get to the “all singing, all dancing” $1 000/oz target.

Many of the fundamentals are already priced into the palladium price, whereas, in 2010, there was excitement around Chinese demand and the perceived lack of Russian stocks, but China’s sales of petrol-driven cars have slowed from the heady sales of previous years.

UBS forecasts an average price of $800/oz this year.

Silver Lining

Not fundamentals but speculation by investors has largely determined the fantastic year that silver enjoyed, which saw its price rise to just a smidgen under $50/oz.

The increase in silver demand became evident in ETF holdings, Chinese imports and its use in solar panels.

Unlike gold, silver is primarily an industrial metal.

China was one of the biggest marginal silver-market participants in the move towards $50/oz, a level that has proved unsustainable.

The fundamentals are not seen to warrant a $50/oz silver price and the UBS – a market maker for gold and silver for more than 100 years – is forecasting an average 2011 silver price of $36/oz.

The issue with silver on the supply side is that there is significant new production coming on stream from 2013.