Global market analyst group Natixis Commodity Markets warns that the strong run in precious metals prices may be coming to a end much sooner than miners and investors would have hoped.
The company reports that the gold price has benefited substantially from the escalating sovereign credit crisis in Europe so far this year. This has brought gold’s role as a store of value in times of economic crisis to the fore, most clearly demonstrated by the rapid rise in the euro-denominated gold price. European investors have invested significantly in gold exchange-traded funds and gold coins during the recent period of stress.
The company adds that whether the gold price can rally further from its current base will depend on whether the European situa- tion improves and whether any other sovereign nations begin to suffer a similar fate to Greece’s. The declining attractiveness of gold, despite the sharp appreciation in recent months, suggests that further price gains will prove difficult, says Natixis.
High gold prices have stifled demand from jewellery fabricators, while, at the same time, encouraging new supplies of scrap and mined gold. Gold miners have almost universally dehedged all forward gold production.
With China’s trade position shifting into balance, its reduced accumulation of dollars may, in turn, lead to reduced demand for gold as a reserve asset, reports Natixis.
While the company does not rule out the possi- bility of further sovereign debt crises pushing gold prices higher, it argues that further gains in gold prices will prove increasingly difficult.
Natixis expects that prices could well top out around current levels, before starting a protracted slide. Such a scenario would be hastened by a continuing improvement in the global economic outlook, in particular once it has enabled the US Federal Reserve to begin withdrawing monetary stimuli.
This could see the gold price dip below the $1 000/oz mark as early as the fourth quarter, generating an annual average for 2010 of $1 040/oz. This is contrary to fellow market analyst company GFMS, which predicts that the gold price will gain in strength and finish the year at about $1 300/oz.
Natixis reports that, as the gold market starts its protracted slide, silver prices will inevitably suffer as a result.
Natixis reports that, while silver prices will benefit from a continuing recovery in industrial demand, by late 2010, average prices are expected to average $16/oz.
The company points out that silver is not subject to the price elastic cushion of gold jewellery and scrap, and this could see the market experiencing substantial volatility, particularly if prices trend lower.
However, this limited supply-and-demand price response does not spell relative weakness in prices as Natixis expects a continuing recovery in demand from silver’s industrial uses. Natixis fore- casts that silver will average $17/oz in 2010.
The company’s outlook for palladium is towards the downside. It reports that supply and demand conditions have seen the market move from a broadly balanced state last year to a modest deficit in 2010, as a result of gains in auto- catalyst demand more than offsetting limited losses in jewellery consumption. Natixis reports that the recent speculator-driven outperformance of palladium against platinum has already priced in much of these relative benefits.
While Natixis continues to expect outperformance by palladium over the longer term, it would not be surprised to see palladium prices underperform platinum over the next few months. Natixis forecasts average prices of $485/oz for palladium and $1 700/oz for platinum this year.