Although there remains huge uncertainty concerning the economic and financial markets, we feel the balance of probabilities favours an eventual resolution of economic imbalances, such that investor interest in gold and silver will gradually begin to unwind, according to London-based Natixis Commodity Markets Ltd. We could also see the economic recovery gather pace and solidity, underpinning conventional asset values but undermining those store-of-value assets with low yields. Such a retreat could also prove self-fulfilling, with bouts of long liquidation further undermining remaining investor positioning. In such an event, an average gold price for this year of below $1,000 would become likely and it could end up close to $950 or even lower.
The other key reason for expecting a marked price descent is unhelpful fundamentals. On the supply side, for instance, mine production is forecast to grow and the market will have to digest the IMF's sale of its remaining 191 tonnes. Indeed, overall net official sector sales could prove much higher than many expect if the large scale purchases hoped for by some fail to materialise. The volume of scrap likely to hit the market, however, might not overwhelm, if prices were to begin to fall.
As for demand, one big negative the market will have to contend with is the slump in producer de-hedging as a result of the now much reduced outstanding hedge book. We do not as yet expect a swing to substantial strategic hedging, but that potential should always be borne in mind. As for the main area of physical demand, jewellery production, this should rise as global economic growth returns and the price falls. However, it might be rash to expect much active price support from this sector; we only expect buying to be strong on price dips, thus making the retreat in the price smoother than might otherwise have been the case.
With investment continuing to unwind in 2011, we would anticipate further price weakness, with an average below $900 probable. However, with the 'blip' of IMF sales out the way, jewellery continuing to recover and fresh producer hedging being thin on the ground, the price retreat should not be spectacular and so this average could end up in the mid-$800s, although a slight retreat yet further cannot be discounted. Given silver's poor underlying fundamentals, we are cautious about the prospects, forecasting an average price in 2010 of $15 per oz followed by $13.30 per oz in 2011.
Although consumption of platinum group metals should grow in 2010, offsetting part of this positive impact is our expectation of a gold price correction this year. And while platinum and palladium prices will continue to receive marginal support from the impact of supply concerns on investor sentiment, we believe that further gains from current levels will be limited. In the case of palladium in particular, following the recent rise to the mid-$400s, a correction would seem likely. As such, we forecast prices to average $1,550/oz and $362.5/oz for platinum and palladium this year respectively.
