G Chandrashekhar

Outlook bright for precious metals this year

G. Chandrashekhar Mumbai | Updated on January 25, 2011 Published on January 24, 2011

Upside potential for platinum, palladium too

The outlook for precious metals this year remains absolutely positive. Not only gold and silver, but also platinum and palladium prices enjoy strong upside potential during the course of the year.

On current reckoning, the eternal favourite of investors – gold – is set to touch newer highs during the year given the favourable market environment for a price surge. Both demand side and supply side factors are at work.

Interestingly, while market fundamentals may not greatly support a sharp price movement upward, investor interest will be the key to price direction.

A clouded macro-economic environment against a backdrop of low interest rates, growing uncertainty surrounding currency debasement and medium-term inflation fears as well as geo-political tensions continue to stoke investor appetite for a portfolio diversifier and haven that is gold, according to Barclays Capital.

This year, gold prices are forecast to average $1,495 an ounce with the high at $1,620/oz and low at $1,300/oz.

“We expect investment demand to propel prices to fresh record highs this year, while its fundamentals are unlikely to drag prices lower”, an expert remarked adding that physical demand for gold has softened but remains healthy for the time of the year.

ETP interest

While central bank sales have been rather limited, buying has been notable.

Additionally, interest in physically-backed exchange traded products (ETPs) continues to grow.

During the year, mine supply is expected to rise modestly, jewellery demand to weaken but scrap supply to respond to higher prices, resulting a notional gold surplus which would be absorbed by investment demand, the expert asserted.

When the pace of investment demand slows, there may not be a massive outflow, given the longer-term allocation in the metal; less-committed long would be flushed out though, Barclays Capital pointed out.

In the event, jewellery demand will provide a cushion for prices, it is believed, based on last year's activity and jewellery demand emerging on higher price dips.

However, improved macroeconomic environment and increased interest rates may allay investors' fears and prompt a slowdown in demand.

Silver market fundamentals are admittedly weak; but when accompanied by investor demand and piggy-backing on gold, the picture turns positive.

In 2010, the metal was a surprise performer despite poor fundamentals.

Weak fundamentals

According to Barclays, the risks to silver supply and demand outlook outweigh its potential upside drivers.

There is a bloated surplus in the market because of rising mine supply since 2004, falling photography demand and sensitivity of jewellery demand to high prices. In the event, investor interest alone can push price higher.

However, if investor appetite sours, silver will suffer the sharpest correction.

Silver is forecast to average $29.1/oz this year with the high at $36.5/oz and low at $18.5/oz, according to Barclays.

Platinum market this year is expected to be driven by supply side considerations because of the dominant supply position held by one origin.

Supply fears

Auto demand coupled with continued investor interest is likely to offset the effect of higher prices on jewellery demand and the potential increase in scrap supply.

This year, platinum is forecast to trade at an annual average of $1,815/oz with a high of $1,955/oz and low of $1,650/oz.

The market for palladium this year looks tighter and the price directions will be determined by Russian shipments and inflows into ETPs. While the Russian supplies are a negative unknown, ETP flows are a positive unknown, Barclays commented. Forecast for 2011 is a price of $820/oz with a high of $940/oz and $650/oz on the low side.

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Published on January 24, 2011
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