Highlights from the metal reports
November 15, 2006
Last night and this morning we had a raft of metals reports hit the wire from the World Gold Council, Johnson Matthey, GFMS, and investment banks.
I've pulled some highlights from each report and pasted below, but the executive summary is quite similar to what we've been telling clients to expect over the coming year for the last several months. Silver has explosive potential, gold will eventually be trading $200-300 higher per ounce once the dollar begins it's drop, and platinum is going to be caught in a trading range. Keep a longer term view of the precious metals markets, knowing that the metals will begin trading like currencies more than commodities and that gold and silver will eventually make new highs in the coming year. Don't let your clients get caught up in the day to day trading of the markets. That's for us to get worked up about every day!
In an interesting turn of events that from the outside wouldn't seem to have much to do with the precious metals markets, the Big Three US auto companies went to visit with President Bush yesterday to talk through some serious problems that are affecting their industry. One of the top issues on the list was to discuss how to force Japan to begin revaluing it's currency in the near future because the car companies believe it is being kept artificially low. Combine the chatter about forcing a Yen revaluation and persuading China to revalue the Yuan (lest they invite protectionist policies from the newly anointed Democratic controlled Congress) and we've got a situation shaping up that could potentially devalue the dollar in short order. Throw on top of those potential fire starters the US debt and deficits and the US dollar is looking quite vulnerable. Remember, gold and silver are going to trade as currencies first, commodities second.
The rest of this week we have a few data points coming out (release of past Fed minutes today and CPI numbers Thursday) that should push the US dollar index around and we believe help push the gold price above the $630 resistance level.
PRICE STABILITY DRIVES RECOVERY IN Q3 GOLD DEMAND
- * Total demand for gold fell 3% in tonnage terms but increased 37% in value terms year on year
- * Gold jewellry demand reached a quarterly record of $11.8 billion
- * Industrial demand for gold rose 5% in tonnage terms, 49% in value terms year on year
- * Strong consumer demand from September as gold price stabilised
15 November 2006:
Gold demand figures for the third quarter 2006, compiled independently for the World Gold Council by GFMS Ltd, concealed a dramatic shift in gold demand over the three month period from July to September. In line with spending patterns during the first half of this year, consumer and trade demand for jewellery and net retail investment was subdued at the beginning of the quarter. But as price movements stabilised later in the quarter and then fell below $600/oz in September, consumer demand surged. The last few weeks of September saw vibrant demand for jewellery and retail investment, particularly in Asia and the Middle East, with Indian imports in September at the second highest monthly level ever.
GFMS’ Interim Silver Market Review
Fabrication demand forecast to fall by just over 3% this year, largely shaking off impact of the massive price rise in 2006. Only modest growth in mine production and scrap expected. Investment demand has driven price higher and could take silver back to the $15 level in the next few months.
Prices
For the first ten months of this year the average silver price basis the London fixing was $11.24, up no less than 58% year-on-year.
Investment demand remains the main driver of the price and has raised silver to well above the equilibrium level that would likely prevail in the absence of investment.
The silver ETF has continued to attract investors. An efficient vehicle therefore exists if / when investor demand surges again. But at some point the ETF could start to represent an overhang, although arguably this risk is moderated partly because the ETF’s ownership is broad rather than narrow.
Industrial demand (half of total fabrication) is vulnerable to a slowdown in world GDP growth / downturn in the electronics cycle next year.
Mine production growth will start to come into play in 2007, with a substantial rise forecast.
Nevertheless, GFMS believe that silver is more likely to follow gold’s lead (higher) than base metals’ direction (lower) over the next year.
GFMS expect significant price volatility but, over the next few months at the least a bias to the upside, with a spike to $15/oz very possible.
Johnson Matthey's Platinum 2006 interim Review has suggested that the platinum deficit is set to reduce over 2006.
According to the report, global demand for platinum in 2006 is expected to grow by five per cent over the course of 2006, reaching a record 7.02 million ounces.
The increase is believed to be driven by the increasing importance of green technology in the automotive industry, with demand for platinum in catalysts increasing substantially over the course of the year.
Production of diesel vehicles has also increased this year, which has had an important impact in increasing demand for platinum.
In 2007, the report predicts that the platinum market will again be close to balance, as autocatalysts again absorbing much of the expansion in primary output.
However, the jewellery sector will again depend on the price of platinum, as fluctuations in price will make a significant difference to the cost of platinum items.
The report predicts that palladium supplies are likely to exceed demand by the end of 2006. Lower purchases in the jewellery sector are largely to blame, with increases in the autocatalyst industry unable to offset that slowing demand.
A 310,000 ounce drop in demand for palladium in the jewellery sector will result in demand exceeding supplies by 1.63 million ounces in 2006.
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