The gold price came under pressure recently on the back of a firmer US dollar. Moreover, demand for jewelry, coins and bars is subdued at present, especially in Asia. The bank expects Asian demand to pick up, which should result in higher prices over the next few months. Silver is likely to recover in gold’s slipstream, though it is dependent on the global economy. The tight supply situation points to rising prices of platinum and palladium – in the case of the latter, a correction cannot be ruled out in the short term following its sharp increase, Commerzbank said in a report.
The platinum price had risen to a ten-month high of a good $1,520 per troy ounce in July but proved unable to maintain this level and is currently trading around $100 lower. It has thus increased by 4% since the beginning of the year. Platinum has clearly been caught up in gold’s downward pull recently, the latter having fallen significantly. Platinum has been more expensive than gold almost continuously since April of last year, the “premium” at times exceeding $220 per troy ounce, as was last the case in June. Because platinum has not only accompanied gold on its downward trajectory in recent weeks, but has actually dropped more sharply than the yellow precious metal, this “premium” is currently a good $130 again. This should also make platinum more attractive as compared with gold again in terms of jewelry demand.
By contrast, the palladium price has detached itself from the weak gold price and also significantly outperformed platinum. In mid-August, it exceeded the $900 per troy ounce level again for a time, the first time it has achieved this since the end of February 2001. At present, palladium is trading only just below this threshold and has thus gained 24% since the start of the year. Of all the commodities we monitor, palladium has performed third-best so far this year, after Arabica coffee and nickel. Palladium has increased noticeably in price, not only in absolute terms but also in relation to platinum: one ounce of platinum is currently worth 1.6 ounces of palladium, the lowest amount for twelve years. A year ago the ratio was still 2:1, at its peak in March 2009, an ounce of platinum was worth a full 5.5 ounces of palladium.
As far as the supply-demand situation is concerned, both markets appear very tight. As we already reported in our last “Commodity Spotlight Precious Metals” at the end of June, Johnson Matthey expects the global platinum market to show a record-high supply deficit of 1.22 million ounces in 2014. At 1.61 million ounces, the palladium deficit looks set to achieve its highest level since records began 34 years ago, both latent risks to supply and robust demand playing their part in this.
The situation in South Africa still does not appear to have entirely settled down even after the five-month strike in the platinum mining industry there came to an end in June. Anglo American Platinum, the world’s largest platinum producer, has announced that it will be abandoning several mines and joint ventures after half-year profits in 2014 collapsed by nearly 90%, by the company’s own account. If this were to entail sweeping job cuts, this would give rise to renewed potential for conflict with the unions. In early July, Impala Platinum, the world’s number two, saw 2,000 workers go out on an unexpected short-term strike. Lonmin, the third-largest platinum producer, is also said to be planning considerable job cuts. What is more, the biggest mine in Zimbabwe had to be shut down indefinitely for safety reasons, which is likely to result in major production outages. According to industry sources, this could lead to the loss of up to 70,000 ounces of platinum and 50,000 ounces of palladium.
Because palladium tends to be mined as a by-product of platinum mining, the aforementioned risks also apply to palladium. In the case of palladium, however, the situation is compounded by the Ukraine-Russia crisis. According to media reports, Russia, the world’s largest palladium producer, is planning to introduce an import ban on cars from Western Europe and the US in the event of the West imposing further economic sanctions. However, it is also conceivable that Russia would reduce its palladium shipments and thus contribute to a further tightening of the market situation.
The automotive industry unequivocally remains the most important component on the demand side. According to Johnson Matthey, it is heading for a record year, at least as far as palladium is concerned. Vehicle sales in the US totaled 17.45 million units on a seasonally-adjusted annualized basis in August, which is the highest level since January 2006. If the monthly figures available for China so far are extrapolated for the year as a whole, more than 19 million cars in total will probably be sold there for the first time ever. Both markets are gasoline- dominated, which should be reflected in robust demand for palladium. In Europe, meanwhile, the year-on-year change rate for new car registrations was positive recently for already the tenth month in a row. After six consecutive years of decline, 2014 looks set to be the first year with higher new car registrations again. Although the European auto market is diesel-dominated, which would generally be more beneficial to platinum, platinum in autocatalysts is increasingly being replaced by palladium these days. That said, if palladium becomes any more expensive relative to platinum, this could put the brakes on such substitution efforts.
The picture that has been painted of very strong investment demand in the first seven months of the year has suffered somewhat in recent weeks, however. From January to July, the platinum and palladium ETFs tracked by Bloomberg still saw inflows of 351,000 and 900,000 ounces respectively. This trend appears to have come to an end since the start of August, however, holdings of platinum ETFs and palladium ETFs having been reduced by 116,000 and 111,000 ounces respectively in the meantime. In the case of palladium, this was mainly due to a single outflow from the provider ETF Securities, which suggests that an institutional investor sold holdings/took profits there. In the case of platinum, on the other hand, the reduction in holdings was spread across several different providers and trading days. Clearly, a large number of investors are willing to jettison their holdings, which points to somewhat more negative sentiment among this group of investors.
In turn, speculative financial investors have been betting increasingly on climbing prices of both platinum and palladium this year, thereby playing their part in the price rises of both precious metals. In the case of palladium, net long positions currently total 24,600 contracts, putting them only just short of their record high of April 2013. Although net long positions in platinum have meanwhile been reduced to 28,900 contracts, they likewise still find themselves at a relatively high level in absolute term.
In our opinion, the latent supply risks and the robust demand, above all from the automotive industry, point to higher prices in the medium to long term. That said, prices could come under pressure in the short term if ETF outflows were to continue and speculative financial investors were also to (further) retreat from the markets. We expect to see a platinum price of $1,450 per troy ounce by year’s end, while palladium should then be trading at $900 per troy ounce.
The gold price came under pressure recently on the back of a firmer US dollar. Moreover, demand for jewelry, coins and bars is subdued at present, especially in Asia. The bank expects Asian demand to pick up, which should result in higher prices over the next few months. Silver is likely to recover in gold’s slipstream, though it is dependent on the global economy. The tight supply situation points to rising prices of platinum and palladium – in the case of the latter, a correction cannot be ruled out in the short term following its sharp increase, Commerzbank said in a report.
