Precious metals have not lost their zeal yet

  Precious metals have not lost their zeal yet

Despite the recent sell-off, the Fed s continued focus on its full-time mandate will allow gold to recover most of its recent losses. A relatively new flexible policy framework for targeting average inflation and an implied willingness to exceed inflation targets over a period if the output gap remains significant are just a few reasons why very loose monetary conditions are likely to continue into 2023. In this context, the US central bank should keep real interest rate conditions highly adaptive to the yield curve over the long term, which is beneficial for the gold / precious metals complex.

At the same time, various mine disruptions and other restrictions will continue to constrain supply growth as investment and industrial demand remains robust. Thus, the development of the supply is likely to help the precious metals complex, especially industrial silver, platinum and palladium.

Industrial precious metals are also likely to benefit from solid gold performance, the ongoing global economic recovery from the coronavirus, and positive sentiment generated by future efforts to decarbonize the global economy.

We rely on the Fed and data

While the positioning is not very conducive to another sharp rally in the immediate aftermath of the June selloff, very low nominal and real yields and a stable dollar serve as a stabilizing force for gold. Fed Chairman Jerome Powell has begun the process of preparing markets for quantitative easing cuts, it is believed that gold is still in a position that makes possible a return to the $ 1.900 per ounce range in 2022.

Despite massive U.S. stimulus and recent price hikes, the negative impact of new strains of Covid-19 on global economic growth and the Fed s recent hawkish efforts raise doubts that inflation is about to spiral out of control. Indeed, underpinning effects, the recent reversal in non-energy commodity prices, limited long-term upside potential for crude oil prices, and the impending end of supply chain disruptions related to coronavirus, global logistics and microchip manufacturing should all convince markets that growth pricing doesn t have to be cumbersome. Consequently, the Fed is unlikely to be forced to tighten its rates much sooner. Given the recent price movement, it seems that precious metals traders are starting to agree with this conclusion.

Considering that the US central bank is forecasting core inflation PCE of 2% in 2022 and 2.1% in 2023, and considering that the US economy will need to create about 380,000 jobs per month over the next two years to achieve full employment seems to have enough time to maintain a zero-cap policy (with negative real rates) before any overshooting of the inflation target will lead to tightening.

Despite the likelihood that inflation will ease from current highs, the ultra-soft monetary policy practiced by the Fed and other central banks, along with adding trillions to fiscal stimulus during the economic recovery period, should continue to raise long-term inflation expectations above the level that we ve seen in the past few years. And with nominal rates based on a very low federal funds rate, the resulting real rate environment should help maintain strong investment and industrial demand for some time to come.

While the inflation issue should not escalate, given the recent signal from the FOMC that it will not sacrifice long-term price stability for full employment, there are those who can see the world in less rosy colors. They will worry about record government debt, declining purchasing power, and other potential disasters.

For all of these reasons, gold has a good chance of moving back into the $ 1.900 territory between 2022 and 2023. In addition, physical demand in China and India must improve for the optimistic outlook to be justified.

Gold and Silver Price Chart
Real and nominal 10-year bond yields, spot gold price and 10-year expected inflation rate
Spot Gold Price Chart
Industrial PMI

Silver in the game

Silver tends to do well when conditions are favorable for gold. Given that the historical volatility of silver is roughly double that of gold, and that it is synchronized in direction, silver should outperform gold in 2022. Indeed, this is exactly what has happened in a dramatic way since June 2020, as the gold / silver ratio fell by about half from the bad days of March 2020 to 68 now. Given the gold price forecast from the World Gold Council and the fundamentals of silver supply and demand over the next few years, history suggests that silver still has significant relative value and room for recovery.

TD Securities expects investors to favor silver for the same reasons as gold. In addition, silver has a number of advantages as an industrial metal.

In 2020, the investment community and traditional physical silver buyers purchased about 531 Moz of the metal, and they are projected to buy another 885 Moz by the end of 2023. In addition to benefiting from monetary, foreign exchange and macroeconomic factors, as gold does, industrial demand for silver is projected to increase by 115 million ounces over the same period.

With more than 60% of demand coming from the industrial sector, silver should benefit from increased industrial development as the global economy continues to recover from the deep global recession triggered by the coronavirus last year. Demand growth should pick up again in the second half of the year as the microchip shortage that has held back automotive and industrial production and other logistics concerns is addressed.

Spending on green energy infrastructure, decarbonization and electrification should also help silver grow as it is heavily used in solar panels and electrical circuits. The overall use of silver is expected to skyrocket over the next decade, starting in 2021. Biden s Green Initiatives, the European Green Deal and China s 2060 Zero Carbon Target are all initiatives that should boost demand and likely attract investment ahead of the coming tighter supply and demand.

The decline in precious metals production in 2019 and 2020, a relatively modest recovery this year and only limited supply growth thereafter, along with strong investment interest, suggests tighter physical markets and higher silver prices.

Given the state of supply and the long-term positive outlook for demand from investors and industrial users, we can assume that silver should trade at around $ 30 an ounce over the next 12 months. The long-term outlook may be even more impressive, as demand from green sources and limited capital investment in primary and secondary silver mine production capacity tighten the fundamental outlook.

Silver balance is clean
Platinum mining
Platinum and palladium prices

Environmental regulations and concerns for platinum and palladium deposits

Platinum and palladium are up unexpectedly this year as supply problems at the Norilsk mines and in South Africa, as well as rising demand since the coronavirus, have weakened fundamentals. Both metals have also benefited from reflationary trading and tightening emission standards. Easy money and trillions of government spending, progressive vaccination programs in the Western world, and China s astonishing economic performance should continue to be important catalysts for growth in 2022, even as microchip shortages have triggered a slowdown in car production.

As the global economic recovery continues and global pollution standards tighten, recent mine disruptions suggest significant deficits and another attempt to hit $ 3,000 an ounce for palladium and new highs above $ 1.375 an ounce for platinum next year.

If the forecasts for industrial and investment demand in 2022 come true, the recent problems at the mines and the related decline in Norilsk Nickel s production plans should cause the fundamentals of supply and demand to remain tough, especially for palladium. Platinum production from the affected mines is projected to decline by about 185,000 ounces in 2021, reducing the supply of mined palladium by about 681,000 ounces. But 100,000 ounces of palladium need to be compensated due to onshore reserves at the mine. Risks of reduced production remain as unforeseen problems are common when groundwater intrusion is dealt with.

Given that only a limited amount of palladium is in ETF around the world, which has been a source of supply in previous years, and the inelastic nature of physical precious metals prices, it is not clear how the gap between supply and demand will be closed without disrupting demand, which is usually accompanied by sharp price increases. …

It should also be noted that the demand for autocatalysts is dictated by rules that assume an inelastic demand segment. Despite speculation that Russian strategic reserves could be released to the market, relieving some of the pressure, the impact will be limited in the face of severe shortages, as there is enough material for industrial use. Thus, these sources of production are unlikely to significantly change the supply and demand situation this year.

The palladium market is expected to be in large deficits in 2021 and 2022, with a modest deficit in platinum when looking at investment demand over the same period. This suggests that the PGM complex may challenge an already optimistic forecast. Traders should also expect a very strong jump in rental rates as the front of these markets shrinks.

Posted by Bart Melek | Translation: Gold Reserve

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