by Commodity Online
The potential for higher interest rates folloiwng the recent ECB hike in rates and possibility of ending of QE2 in USA would strengthen the dollar and raise the opportunity cost of holding a low-yieding asset such as gold resulting in weakening of precious metals prices, according to Natixis Commodity Markets (NCM) Metals Review Q2 20l1.
The bottom line is that one of the key drivers behind the rapid expansion of high powered money may be coming to an end, NCM Metals Review said. The underlying fundamentals for the precious metals are deteriorating. A sustained period of high and rising prices has eventually filtered through to higher supply. The same factors have also had an adverse impact on price sensitive sectors such as the jewellery market.
The bottom line is that one of the key drivers behind the rapid expansion of high powered money may be coming to an end, NCM Metals Review said. The underlying fundamentals for the precious metals are deteriorating. A sustained period of high and rising prices has eventually filtered through to higher supply. The same factors have also had an adverse impact on price sensitive sectors such as the jewellery market.
As such, the surplus for investors to absorb has increased. "The ETF disinvestment of early 2011 may have finished, but there has been very little fresh buying and we believe that the majority of institutional interest is now in place. Some investors have already started reducing their positions, either on ETFs or in the OTC market. Once we reach the point at which investment demand is no longer able to absorb the surplus, a case can be made for a downturn in gold prices."
NCM has projected an average annual gold price of $1,360/oz in 2011. With the prop of investment inflows potentially much reduced in 2012, there is scope for gold prices to drop further, and has forecast an average price of $1,140/oz. This implies a move towards, or perhaps below, $1,000/oz at some stage during this period.
Silver prices have been exceptionally volatile in recent time having spiked to almost $50/oz in early-May, prices corrected by 30% in just six trading sessions. With the combined effects of squeezes, producer hedging and abrupt changes in investor sentiment, it is hard to know whether the recent run up in prices is over yet, or whether the sharp fall in silver prices represents the beginnings of a more significant correction, NCM said.
"With the recent decline in other commodity prices such as crude oil (including a $12/bbl one-day fall) we would be tempted to see the recent price action as the beginning of a more protracted correction. With gold also expected to correct during the middle part of this year, we are looking for silver to continue its recent decline below $35/oz. Support at $30 should hold in the near-term, and we would expect an average price of between $31 and $32/oz for the year as a whole."
NCM continues to be constructive towards the outlook for palladium's fundamentals, with the market almost certain to generate another deficit this year. On the supply side, sales from Russian stockpiles may not last much longer. "Coupled with investor expectations remaining positive towards industrial commodities, we feel that prices should remain resilient over the rest of the year."
For platinum the picture is less rosy. The backdrop of structural oversupply means that the metal will continue to rely on investors absorbing excess production. "As far as investors are concerned, we were a little surprised to see such strong support emerge at $1,700/oz during the recent correction, but sentiment towards both main PGMs appears to be positive, and as such we have maintained our projections for 2011 average prices to $1,750/oz for platinum and $800/oz for palladium. Looking further ahead, we continue to expect palladium prices to fare better than platinum, the former maintaining its price gains and the latter receding somewhat, resulting in projected 2012 average prices of $875 and $1,800/oz respectively," NCM Metals Review added.
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