Financial services firm UBS reports that the value of gold is currently being linked to US inflation and lower government bonds, while silver’s price gains will not be sustained in the longer term.
Platinum, meanwhile, was undersupplied in the first quarter and palladium prices will peak this year, it states.
The firm notes that gold is currently up 11% from its mid-March low of $1 680/oz, with its latest support coming from falling real US interest rates, which are back to below -0.9%, and amid surging US breakeven rates.
In addition, gold is being buoyed by falling government bond yields.
While the rebound in gold goes against its view, UBS says that, given where ten-year real yields are currently hovering (about -0.9%), its fair-value model predicts a price of $1 870/oz.
Nonetheless, UBS expects fading inflation surprises, higher US government bond yields and increasing vaccination roll-outs to reduce uncertainty, while the dollar is expected to peak.
Therefore, UBS forecasts that gold will be valued at about $1 600/oz by year-end.
As for silver, UBS notes that the commodity’s price has increased because of falling real yields and the weakening dollar and US inflation expectations, which temporarily crossed the 2.5% mark for the ten-year benchmark.
This resulted in inflation rising more than expected, while nominal yields have not really moved.
This has caused real yields to fall back to between –80 basis points and –90 basis points from levels close to –60 basis points at the end of March.
The futures market in silver reacted, states UBS, noting that investors have been adding fresh new long positions. However, the firm notes that the same did not happen with silver exchange-traded fund (ETF) flows, where positions have only stabilised despite the latest price uptrend.
While this trend might persist in the near term, UBS expects these price-supportive drivers to stagnate, and while the firm thinks inflation will peak in the second quarter of the year, real rate expectations are likely to rise as the Federal Reserve starts to guide for a tapering in the second half – factors limiting dollar weakness in the second half.
As such, considering the risk to investment demand, both to ETFs and futures, UBS predicts that silver prices could fall back rapidly to $24/oz.
With the platinum market being undersupplied in the first quarter of the year, UBS predicts a small market deficit for the remainder of this year of about 185 000 oz, equivalent to about 2.3% of demand.
Although total supply will be higher this year than in 2020, UBS also expects demand to rebound owing to rising vehicle production (where platinum is used in catalytic converters for diesel vehicles), stronger jewellery demand (which makes up about 25% of total demand) and healthy investment demand.
The firm also thinks investment demand will benefit from expectations of palladium to platinum substitution in catalytic converters for gasoline cars.
UBS also points out that Johnson Matthey, a producer of catalysts, is expecting platinum demand in gasoline cars to “climb steeply this year, albeit from a low base” as vehicle producers aim to reduce costs.
Going into the rest of this year and 2022, the firm reiterates a positive platinum price outlook.
UBS also retains a positive price outlook for palladium as the commodity inches towards the $3 100/oz mark in the second half of the year.
The firm’s palladium forecast profile points to a peak in palladium prices this year and a drop into 2022.
UBS also notes that palladium’s sharp outperformance, compared with that of platinum, is likely to spur substitution in automotive catalytic converters from palladium to platinum in the coming years.
Also, the firm expects a larger deficit of 9.5% this year, as it anticipates a larger drop in Russian mine supply of palladium following the disruptions in two of Nornickel’s mines.
UBS says high palladium prices are also likely to encourage scrap supply from automotive catalytic converters, but this amount might be limited by high demand for used cars in the US.