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Precious metals outlook: regaining lustre?

Wee Chian Koh's picture

This blog is the ninth in a series of ten blogs on commodity market developments, elaborating on themes discussed in the latest edition of the World Bank’s Commodity Markets Outlook. Earlier blogs are here.
 
The World Bank’s Precious Metals Price Index is forecast to decline marginally in 2019, following an expected 2 percent loss in 2018. Gold prices are projected to edge marginally lower and silver prices to tick slightly higher, while platinum prices are anticipated to rebound moderately. Key risks to this outlook are U.S. monetary policy, the strength of the U.S. dollar, and global demand.
 
Precious metals price index


U.S. monetary policy tightening and dollar strength

Gold is widely considered a safe-haven asset and a hedge against inflation. Contractionary U.S. monetary policy—the tightening of money supply and raising of interest rates to keep inflation in check—has reduced the attractiveness of gold as an investment asset. The appreciation of the U.S dollar has also made gold more expensive in domestic currency terms for the world’s most important consumers such as China, India, Iran, and Turkey. Rising short-term interest rate expectations and a strong dollar are anticipated to put a lid on gold price increases.
 
Gold prices and U.S. 10-year real interest rate


Gold prices and U.S. dollar index


Demand and supply fundamentals


While supply of gold remains strong and recycling is on the rise, demand in 2018 through the third quarter was at its lowest in nearly a decade (down 17 percent relative to the recent peak in 2011). Gold prices fell steadily from April to August but have since experienced a mild reversal as demand picked up, driven by Chinese and Indian jewelry demand, growth in Russia’s central bank gold reserves, Chinese and Iranian bar and coin investment, and to a lesser extent, technology applications.

Silver prices moved broadly in line with gold prices until August but since then have remained depressed due to the impact of U.S-China trade tensions on industrial activity and global trade (industrial use accounts for more than half of silver consumption). With robust demand from the renewables energy industry, particularly in solar applications (silver has the highest electrical and thermal conductivity and reflectivity among all metals), the current low silver prices point optimistically to a recovery in the near term.

After falling precipitously since the start of 2018, platinum prices partially recovered in September but retreated again in November. Demand for platinum, used extensively in the catalytic converters on diesel engine vehicles, has been deteriorating as diesel car sales fall substantially. In sharp contrast, palladium prices have been on an upward trend due to the metal’s wide use in the pollution-control catalytic converters on gasoline-powered cars. In addition, palladium supply shortages due to mine closures have kept prices high. Looking forward, the pivot to heavy duty vehicles with large hydrogen fuel cells, coupled with potential platinum substitution in gasoline vehicles induced by high palladium prices, could reinvigorate demand for platinum.
 
Gold production and fabrication in 2017


Silver production and fabrication in 2017

 
Platinum supply and demand in 2017