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World Bank forecasts divergent trend in precious metals prices in 2018

G. Chandrashekhar, Commodities Market Specialist

 

 

Precious metals prices are projected to fall 1 percent in 2018 but with some divergence. While gold prices are expected to drop one percent as anticipated US inter rate hikes materialize, silver prices are forecast to ease in line with investment demand for gold. Platinum prices are seen climbing four percent in increasing catalyst demand and tightening mine supply, the World Bank said in its latest Commodity Market Outlook. 

 

Upside risks to the forecast include widening geopolitical tensions, delay in central bank rate increases, a weaker-than-expected dollar and mine supply shortfall, while downside risks include stronger economic growth, rising equity markets, a stronger-than-anticipated dollar and weaker physical demand, World Bank added.

 

In the third quarter of the year, gold and platinum received support from a weaker US dollar and geopolitical tensions between the US and North Korea, and their prices increased by 2 percent and one percent respectively. At the same time, silver prices fell by 2 percent.

 

Interestingly, prices for all the three metals surged in July and August but receded in September on expected tighter monetary policy including higher interest rates. Importantly, the US Federal Reserve Board said it will start reducing its $ 5 Trillion Balance Sheet in October, and pointed to another interest rate hike this year and three more hikes in 2018.

 

On gold, the report observed that prices 2 percent rose in the third quarter and to near $ 1350 an ounce in early September on strong investment demand reflecting a weakening US dollar and heightened geopolitical tensions. Prices then retreated to $ 1280/oz in October on a strengthening US dollar and expectations of higher US interest rates; but remained volatile.

 

It is well known that higher rates tend to reduce investment demand for non-interest bearing assets.

 

Jewelry demand rose sharply in the first half of the year. This was especially true in India, a market that was hit by regulatory changes, a government-induced cash shortage and industry-wide strike in 2016, the report observed. However, Indian demand surged in the second quarter ahead of a new Good and Services Tax on July 1.

 

According to the World Bank, the introduction of GST is expected to increase paperwork and compliance; and gold imports are expected to slow, at least temporarily.

At the same time, jewelry demand in China continued to fall, owing to changing consumer tastes among younger consumers. Gold mine supply retreated this year in the wake of lower investment and rising costs.

 

Despite expanding industrial demand and tightening mine supply, silver prices slid 2 percent on weak investment (relative to other precious metals). Demand from the photovoltaic industry remains strong, but silver use is expected to contract because of substitution and technology advances. Mine supply is slipping and lower by-product output from declining lead/zinc production may limit growth, the report said.  

 

Platinum prices edged higher by 1 percent on firm investment demand. Auto catalyst demand, the largest component of platinum consumption, remains robust, and new emissions regulations in Europe are anticipated to intensify platinum use. However, the

auto sector faces reputational damage following the diesel emissions scandal, the report alleged.

 

Diesel vehicle sales are falling, and some countries favour phasing out diesel vehicles sales by 2040 (Britain and France). Some cities want to ban diesel use much earlier (Athens and Madrid). Mine supply in South Africa, which produces 70 percent of world’s platinum, remains financially fragile.

 

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