Precious Metals: Mixed Fortunes

We expect increasing price divergence between precious metals over the coming quarters. Gold prices have rebounded 4.0% since hitting a three-year low of US$1,195/oz in December 2013. However, the medium-term outlook for gold remains precarious. We expect prices to buckle under the pressure of rising US Treasury yields on the back of an improving US economy. In contrast, we continue to expect platinum and palladium prices to hold up better.

The liquidation of gold investments, particularly holdings in exchange-traded funds (ETFs), will continue to build and offset the price-supportive impact of rampant Chinese demand. Demand growth for gold will be stemmed by import restriction in India, as well as reduced appetite from central banks to diversify their reserve holdings away from the US dollar. We forecast gold prices to average US$1,150/oz in 2014, compared with an average of US$1,409/oz in 2013 ( see 'Gold Prices To Average US$1,150/oz In 2014, December 20, 2013).

In contrast, the outlook for platinum and palladium is more positive. While prices for both metals were weighed down by deteriorating sentiment towards the precious metals complex in 2013, this is unlikely to be sustained in 2014. Subdued growth in mining supply, coupled with improving demand for catalytic converters, should prevent significant additional declines in prices.

Less Precious With Rising Yields
Spot Gold (US$/oz) & Generic US 10 Year Treasury Yield (%, Inverted)

Precious Metals: Mixed Fortunes

We expect increasing price divergence between precious metals over the coming quarters. Gold prices have rebounded 4.0% since hitting a three-year low of US$1,195/oz in December 2013. However, the medium-term outlook for gold remains precarious. We expect prices to buckle under the pressure of rising US Treasury yields on the back of an improving US economy. In contrast, we continue to expect platinum and palladium prices to hold up better.

Less Precious With Rising Yields
Spot Gold (US$/oz) & Generic US 10 Year Treasury Yield (%, Inverted)

The liquidation of gold investments, particularly holdings in exchange-traded funds (ETFs), will continue to build and offset the price-supportive impact of rampant Chinese demand. Demand growth for gold will be stemmed by import restriction in India, as well as reduced appetite from central banks to diversify their reserve holdings away from the US dollar. We forecast gold prices to average US$1,150/oz in 2014, compared with an average of US$1,409/oz in 2013 ( see 'Gold Prices To Average US$1,150/oz In 2014, December 20, 2013).

Diverging Paths
Select Commodities - Total Known ETF Holdings (moz)

In contrast, the outlook for platinum and palladium is more positive. While prices for both metals were weighed down by deteriorating sentiment towards the precious metals complex in 2013, this is unlikely to be sustained in 2014. Subdued growth in mining supply, coupled with improving demand for catalytic converters, should prevent significant additional declines in prices.

The production base of both platinum and palladium is concentrated in South Africa and Russia, which together, accounted for 86% and 77% of global mine production for platinum and palladium in 2012, respectively. We expect mine supply growth in these countries to remain subdued over the medium term, due to mine strikes and shaft closures in South Africa and depleting stockpiles in Russia.

Platinum On Better Footing
Spot Price Ratio: Platinum/Gold

Amidst the production struggles in major producing countries, we believe rising demand for catalytic converters in key markets such as China and the US will establish a firm support for platinum and palladium prices. Indeed, auto-catalysts accounted for 41% and 65% of global demand for platinum and palladium in 2012, respectively.

With all these factors in mind, we will consider re-initiating a bullish platinum vs. old position in our Commodities Strategy Table over the coming months. As spotlighted by the chart above, the ratio of platinum to gold remains low by historical standards, indicating the outperformance of platinum has ample room to run. Despite the stellar jump in platinum prices of recent days, gold prices would have to make a decisive break lower before we would pull the trigger and re-enter the relative value play that we held between May and October 2013 at a gain of 1.7%.

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