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Commodity outlook: precious metals

In 2020 gold led the way as investors turned to this safe haven asset amid turbulent international markets brought on by the COVID-19 pandemic.

Will the trend continue in 2021 or will silver outshine gold? And what does the year hold in store for other precious metals?

Gold’s stellar run expected to continue

Gold achieved a remarkable rally in 2020, with the price up 20% year-to-date (December 2020).

This article first appeared in Mining Review Africa Issue 1, 2021
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That said, after notching fresh all-time highs in August, the metal has struggled to regain the US$2 000/oz level as sentiment in global financial markets has been lifted by vaccine-driven optimism and the US election uncertainty resolved.

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Looking ahead, the backdrop of rising COVID-19 cases and challenges related to vaccine production and distribution in the short-term will continue to weigh on the global economic recovery.

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Equities, therefore, will remain vulnerable to sharp corrections, especially given the pace and extent of the recent price rally. In that context, notwithstanding the recent sharp pull-back in the gold price, I would maintain a positive view towards gold and my projection still sees gold regain the $2 000/oz threshold in early 2021 before challenging $2 300/oz later in the year.

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This is premised on the assumption that the global economy will require further monetary easing/fiscal stimulus for economic momentum to revive materially.

This, coupled with the persistence of negative real yields will limit the cost of carrying precious metals. That aside, ballooning US debt and rising inflows into emerging markets will also continue to put pressure on the US dollar and provide a supportive environment for gold.

All these factors, together with ongoing geopolitical risks, should continue to underpin gold investment. With positive vaccine developments now largely priced in by financial markets, the downside in the gold price should be limited going forward.

Will silver outperform gold?

After under-performing gold in early 2020 when the gold:silver ratio touched a record high of 127, silver has witnessed a notable recovery with the metal up more than 30% year-to-date (December 2020).

More recently silver, in keeping with gold, came under sustained pressure following the Pfizer-BioNTech vaccine news. After a brief rally to $26 in early November, the metal lost almost 16% by end of the month to trade just below $22, a level last seen in September.

Importantly, in contrast to previous sell-offs when silver tends to underperform gold, the gold:silver ratio moved sideways within a 75-79 range over much of November, underlining silver’s resilient performance relative to gold.

To some extent, this reflected growing investor confidence in industrial metals, thanks to a V-shape rebound in Chinese GDP and the country’s massive stimulus plans for new infrastructure investment.

Silver’s use in the photovoltaic (PV) sector has also played an important role, especially in light of a growing call for a green economic recovery among major economies.

Looking ahead, the macroeconomic outlook will remain supportive for precious metals investment, which will benefit silver. The metal’s outperformance during the summer rallies should also boost its appeal with professional investors looking for enhanced returns. As a result, one can expect to see further investment inflows into the white metal this year.

Economic recovery to drive platinum prices

Having underperformed the precious metals complex for much of 2020, platinum broke ranks from gold and silver in November, steadily rising by $123 intra-month.

By early December the spread to gold had fallen by over $220 to $780 as news about the vaccine punished gold while platinum benefited from the emergence of supply constraints in South Africa.

Looking ahead, as operational problems in South Africa are largely addressed and demand recovery lags pre-pandemic levels, the market is expected to return to a marginal surplus in 2021 which will act as a headwind as the platinum price rallies.

That said, the strong recovery expected in automotive demand should lend some price support as we progress through 2021. This year, we also expect jewellery offtake to recover, but absolute volumes will still be lower compared with 2019s pre-COVID-19 levels.

Automotive demand to underpin palladium

Although palladium has been the best performing precious metal over the last couple of years, the gains in 2020 have been overshadowed by gold and silver as the pandemic hit automotive demand significantly. That said, it is forecasted that the annual average palladium price will achieve a new high for the fourth year in a row.

Looking ahead, optimism about a COVID-19 vaccine means that automotive production is forecast to achieve double-digit gains in 2021.

And although 2021 production will still fall short of 2019 levels, palladium automotive demand is expected to recover notably, driven by tightening emissions legislation, specifically in China.

As a result, palladium is expected to continue its gains next year, with the potential to reach a high of $3 000/oz during 2021.

A key risk to the forecast is that the Biden administration could support powertrain electrification in the US. While this may not impact demand in the near-term, it could influence sentiment and dampen palladium price expectations.


Philip Newman is a founding partner of Metals Focus and has over 25 years of experience. He holds a BSc (Hons) Economics from the University of Surrey.