Bart Melek

Despite the Federal Reserve delivering a progressively more restrictive policy environment in 2023, gold posted a very respectable performance, with prices hitting $2,000+ numerous times. Sharply higher real interest rates along the Treasury curve and a very firm US dollar, which typically spells bad times for the yellow metal, have been offset by strong physical markets. Aggressive central bank buying of late and Asian investor purchases has negated the impact of carry costs resulting from the highest interest rate environment in over two decades. Gold was strong despite a spec move away from long exposure and notable ETF liquidations.

We believe that the combination of an expected Fed dovish pivot in the months to come should prompt traders to grow additional length, and very strong official sector buying will lift prices to a high of $2,200+/oz. Given that the US central bank is very likely to moderate rates before the 2 percent target is reached, and that geopolitical tensions emanating from the Middle East and Eastern Europe will remain elevated, the yellow metal is projected to trade above $2,000/oz for most of the next 12 months.

Despite a projected 110Moz annual deficit, concerns surrounding higher-for-longer interest rates, a lack of speculative appetite, weakening physical demand amid Chinese economic weakness, and slowing US growth have kept silver quite weak in 2023.

Since the white metal behaves both as an industrial and a monetary metal, it reacts negatively to elevated interest rates and industrial demand weakness. Investors have little appetite to build long positions when rates are projected to rise or stay at restrictive levels. They also tend to reduce length when the economy is set to slow materially, as this implies less uptake of the white metal by the industrial sector.

However, the pending reversal of hawkish monetary policy should help catalyse more supportive flows in early 2024, after it becomes clear that the Fed and other central banks will pivot to a more dovish monetary policy stance. Once the market is convinced that rates are indeed set to drop and economic recovery is on the horizon, the white metal should get a boost from both the industrial side and rate-driven spec flows, which could see the white metal target $26+/oz toward mid-2024. At that time, lower interest rates, firmer physical investment, ETP purchases and industrial demand will work together to tighten market conditions.

The lack of mining capacity, its more intensive use in electric vehicles, and growing demand for solar panels as the world transitions into a net-zero economy will also serve as upside catalysts for the white metal.

While averaging some two percent above 2022 levels, for the most part, platinum performed poorly last year. Demand concerns prompted specs to lighten their long exposure. This occurred despite significant headwinds associated with slowing global supply of recycled product, sanctions targeting Russian supply and weak growth coming from the South African mining sector. This kept prices below the $1,000/oz mark for most of the last 12 months.

With global economic headwinds blowing away, the coming year should see firmer demand from the autocatalyst sector, as automakers restock for the pending improvement to the auto sector. The recent bad press surrounding EVs suggests that hybrids, which have strong PGM loadings, may get a disproportionate lift from a macro turnaround. Substitution away from palladium for platinum in autocatalyst units and the continued implementation of stricter pollution standards should also be important drivers helping platinum recover. Indeed, we project that platinum will increasingly come closer to palladium prices, to average $1,025/oz. The upside tilt should be reinforced by firmer spec interest, as the precious metals complex benefits from lower rates, and as investor interest focuses on the metal’s association with the extraction and the use of hydrogen in power cells.

In an unusual development, palladium has greatly underperformed platinum in 2023. It averaged some 37 percent below the levels recorded in the previous 12 months, meanwhile platinum was 2 percent higher. Like platinum, it was depressed by expectations of a sharp decline in automotive demand amid rising rates, which convinced Western world producers to source less of the metal, and as China’s expected post-COVID auto demand jump did not materialise as expected. The metal is intensively used in China, which posted a lacklustre recovery following the reopening after the previous year’s strict COVID lockdowns. The redesign of autocatalysts to use more platinum also played a role in palladium’s very poor performance. In this context, speculators built a behemoth net short position which notably weighed on prices over the last year.

Demand should post a rebound later in 2024, once China’s economy impacts further and Western macro headwinds stop blowing as rates moderate. Considering that the sector will continue to face constraints on the mining side and there will likely be a reduced availability of recycled material, following weaker auto sales, the tighter market should see palladium recover some of its previous glory. The metal is expected to trend toward $1,175/oz by year end. Higher loadings associated with stricter air quality rules across the world will also contribute to the move higher, whereas risks to primary and secondary supply also appear to be noteworthy upside catalysts.