Bart Melek

Disappointing many investors, gold followed a boom-bust pattern last year. It moved to a high of just over $2,050/oz in March, then dropped to a low of $1,617/oz in early November, only to rebound into the $1,820s at the end of the year. The global inflation spike and the sharply higher real interest rates along the Treasury curve, driven by the Fed’s aggressive tilt to a restrictive monetary policy stance, are largely responsible for the downside moves experienced last year. The sky-high US dollar, as the Fed became the most hawkish central bank, along with CTA trend following funds and spec selling, also played a very big role in knocking gold from its highs in 2022. In early 2023, the yellow metal jumped above $1,900/oz amid growing expectations that waning inflation, a weakening economy and post-COVID supply chain normalisation will prompt the US central bank to pivot toward a more dovish policy. Strong private physical demand, very aggressive central bank and official sector buying, which likely totalled as much as 1,000 tonnes over the previous 12 months, also played a big role in providing fuel for the gold market recently. To the extent that official sector buying and strong physical product demand has propelled gold over and above what is dictated by the foreign exchange, interest rate and macroeconomic environment, we believe that gold is at risk of trending lower in early 2023, as it is too soon to say that the FOMC will deliver an early monetary easing. The likely normalisation of feverish official sector buying may also serve as a catalyst for a limited downside in the short term, which may see the yellow metal gravitate down towards $1,825/oz over the first three months of the year. However, once rate cuts become more certain, we expect the combination of lower real rates along the short end of the curve and a weaker US dollar to push gold toward the highs seen last year. Speculative investor long participation, improved ETF sales, weaker US dollar and more favourable carry will likely be the most important upside drivers.

Similar to gold, silver posted a volatile performance over the last 12 months as it moved from a high of just over $26.40/oz in March to a low of $17.81/oz in early September, then back up to just over $24/oz. This seesaw behaviour was a key characteristic of the silver market, even as an increasing body of evidence suggested that the white metal posted its biggest deficits in decades and despite the fact that Indian consumers were bingeing on the metal. The anticipation of weak industrial demand, large ETF disposition of over 130 Moz, and speculative investor long position liquidations driven by sharply higher carry and opportunity costs, have prevented a more robust rally from materialising. On the other side of the coin, aggressive physical silver purchase in India, very robust retail investment product demand and the more recent belief that the Fed will pivot toward a more dovish monetary stance sooner, rather than later, have been the key supportive catalysts. After posting the largest primary deficit in decades, as demand has reached some 1.14 billion oz in 2022 and amid a lacklustre supply environment, the silver market is set to be significantly less tight as industrial demand moderates due to slowing global growth and as physical uptake in India slows. This suggests that a sustained rally is not on the cards in the early part of the year, particularly if gold retraces lower due to a hawkish Fed. However, the silver outlook should improve a great deal, as the Fed pivots to a more dovish policy and industrial demand is re-energised, as China normalises post-COVID and Western economies start to climb out of their troughs. The combination of unimpressive supply growth, industrial uptake and improved investor demand should see silver tighten later in the year, which should send prices up significantly above $25/oz in the final months of the year.

For the most part, platinum prices have performed well in 2022, despite significant headwinds associated with slowing global demand, a surging dollar and large outflows from ETPs. Platinum’s resilience has been driven by a sharp recovery in the automotive sector, as COVID and microchip-driven backlogs were being filled, amid significant South African output disruptions and Russian by-product metal not being well received by the market due to its war with Ukraine. With global economic headwinds set to weigh on industrial metals broadly, the coming end to pent-up autocatalyst demand due to the backlogs from early 2022, along with a lack of investor interest, will likely serve as a negative for platinum, preventing the recent rally from being extended for the rest of Q1 2023. The platinum market will look significantly healthier as China normalises post-COVID and as the Western world readies for growth to bounce off the bottom. A much better supplied microchip market, and regulations requiring heavy-duty vehicles to have Euro VI or China VIa compliant after-treatment systems, should see demand recover smartly later in the year, as macroeconomic headwinds stop. With that and a weak supply growth profile, prices should move north of $1,125/oz in the latter part of the year. Given the possible demand from hydrogen and the possibility of new supply problems in South Africa and Russia, the risk is to the upside.

In an unusual development, palladium underperformed platinum in 2022. It finished the year some 2% below where it started, meanwhile platinum was about 12% higher. Like platinum, it benefitted from a sharp increase in automotive demand as backlogs were filled in the Western world; however, it suffered from being intensively used in China, which for most of the year, was under strict COVID lockdowns. Demand should post a sharp rebound once China is operating at full speed and Western macro headwinds stop blowing. Considering that the sector is operating beyond the primary mining capacity, where demand destruction and investor metal are required to balance the market, the current price of $1,750/oz seems likely to move significantly higher in the latter part of the year. A much higher price will be needed to balance the market, as demand recovers due to macro and regulatory factors requiring high loadings to satisfy more stringent pollution standards. As such, given continued issues surrounding Russian and South African supply, we see palladium reaching highs near $2,300/oz in the latter part of the year.