Conference 2018: Interview: Bart Melek

Global Head of Commodity Strategy, TD Securities

Transcript

We are quite optimistic about where precious metals are going in 2019. We think gold has quite a bit of upside to go, though we will tell you as well that it will be quite turbulent and range-bound trading for now. By year-end, however, we are looking at gold at around 13.25 as a quarterly average. Silver, we are looking at silver improving as well, for very similar reasons to gold, but I think silver also benefits from a bit of less tensions in emerging markets. By then, we hope that we will see a bit of calm in the global trade dispute between China and the United States. So silver to us, then, silver looks favourable as well, and we think we could go as high as $16/$17.

Platinum and palladium, Platinum i think platinum will do a little better. We suspect that the supply-and-demand fundamentals will be fairly firm. We look at global growth being 3.5% or maybe slightly below that 3½, but, in the end, we think that global growth continues on a fairly decent path. And as such, demand for products that contain platinum should be fairly healthy. That probably means that jewellery, we expect China to stimulate sometime next June. We see IO demand certainly stabilise. We are not quite convinced that you are going to see as much supply as we did over the last few years, so there could be some arbitration at these levels right now, platinum producers are not making an awful lot of money, and we suspect that there will be some deterioration in production. What that means to me is that we should see platinum at over $1,000, somewhat getting converged with palladium.

That brings us, of course, to palladium – the only precious metal that has outperformed its January performance. But, we think that much of the upside has already been factored in. We continue to see tightness in the forwards, and probably an extension of tenures for leasing. Higher prices, may. But probably not a large change from current levels by year-end. Certainly, we think that there will be a growing incentive out there, maybe on the margins, to start substituting platinum for palladium wherever possible, not only because of the cost but also for security of supply.

I think the gold price has not performed well, for three basic reasons: the Federal Reserve, the Federal Reserve and the Federal Reserve. Ultimately, we started the year very strongly but, as we moved out of January, after a few months of stability, things went wrong for gold, and much of this can be attributed to what the Fed has done – and not only the Fed but also the ECB. Via messaging from the US central bank, I think the markets started to believe that they may be underestimating the path of interest rates going into 2019 and 2020. The market was adjusting, that essentially meant that the US dollar did very well.

Why I said ‘the Fed’ for a second time was because it was really a strong US dollar that was triggered by Mr Powell projecting a path of tightness as we moved through 2018 and into 2019, and by the ECB postponing its normalisation of monetary policy. That has sent the US dollar, relative to some of the G10 currencies, significantly higher, and that weighed on gold and other precious metals, quite considerably palladium as we know has been one of the exceptions. And this leads us to a third reason, which is the Fed again, but through the channel of emerging markets. The high dollar has made it very difficult and risky for investors to be positioned in emerging markets. These countries will need to roll several trillion dollars of debt a year, primarily denominated in US dollars, so a high US dollar makes it expensive, puts growth at risk. And of course, I should have also mentioned the President of the United States, who has been following a very restricted trade policy, and we have started to see concern that a global trade war might emerge. That has been a very big reason behind why we have seen a very sharp drop in many emerging-market currencies and equity markets, which again fed into the US-dollar optimism was not very positive for gold. And of course, there is the RMB – the Chinese currency – which has been weakening by 10% or so, which is another factor. And i think that is pretty much it. The only thing I can add to this are some regulatory changes in China that mandated the participation of leasers of gold in the commodity exchange there. Those factors I think were the primary drivers.

I think monetary policy will be key. I have talked ad nauseam, about the impact of higher rates, but interest-rate environments are tightening up. We suspect that China will be a very important driver. We know now that they have been slowing somewhat, and this process will likely continue. I am not quite sure when the Chinese will get aggressive with stimulus but we suspect that there will be incrementally more and more stimulus. It is our view that the Chinese government will continue to follow a policy of full employment and stimulating their economy in a way that does not increase leverage. So China is a big driver, together with the fiscal policies there. In terms of the United States, we suspect that the very robust cuts in taxes have generated a lot of economic growth but we suspect that that will be waning as we move into the second half of 2019. At the same time, higher interest rates will start biting into demand, so those factors are the key ones moving the global economies. And I think higher oil prices may take some enthusiasm away from growth as well – not much but on the margin a little bit.