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Citi Looks For Stabilization In Gold Prices, Upbeat On Palladium

By Kitco News
Monday July 14, 2014 9:40 AM

(Kitco News) - Citi Research looks for gold to stabilize for the rest of 2014 and is most bullish on palladium among the precious metals.

The bank has revised its forecast to $1,300 gold in 2014, followed by $1,365 next year.

“Essentially we see stabilization in gold prices through this year in a $1,290/oz.-$1,350/oz. range, with stronger physical market activity from retail investors, ETF (exchange-traded-fund) flows and central banks essentially limiting any potential downside moves,” the bank said.

With the Federal Reserve’s tapering of asset purchases “truly priced in,” gold has found other sources of support in the first half of 2014, namely geopolitical factors, while the continued global low interest-rate environment is bringing back inflation concerns, Citi said.

The bank said there are still expectations that Indian authorities will relax restrictions on gold imports, even though this was not included in Thursday’s budget announcement. The duty on gold imports was hiked last year to 10% and an 80-20 rule was instituted that calls for 20% of all imports to be re-exported as a finished good. The rules were enacted to counter a wide current account deficit, but a new government was elected this spring.

“Any further measures to cut the current 10% rate of import duties and/or remove the 80-20 rule we believe will be highly supportive for gold India’s gold import going forward,” Citi said. “Indeed, we believe expectations of moves to cut duties to as little as 2% are already supporting gold prices even though the recent budget left that out for now. We still expect strong H2 Indian imports to somewhat counter Chinese import weakness.”

Citi looks for central-bank buying of 420 metric tons in 2014, which would be slightly up from the 409 that the World Gold Council said was bought in 2013. “Given that central banks tend to be price followers, tending to buy in a rising market, we expect the positive price gold price moves since mid June to spur stronger central bank buying in H2,” Citi said.

Meanwhile, Citi said it looks for the combination of mine supply growth and “sluggish” fabrication demand to hamper silver’s price performance relative to gold. The bank listed silver forecasts of $20.30 for this year and $21.20 for 2015.

“On the supply side, we continue to expect close to 10 million oz. of new mine production this year principally from gold from operations such as Barrick Gold’s Pueblo Viejo project (and) Frisco’s Concheno project,” Citi said. “However, scrap supply remains a concern, with volumes expected to contract by 14% y/y (year-on-year) this year in response to weak H1 prices. Despite struggling scrap availability, we expect the market to remain oversupplied, requiring a stronger physical investor response.

“We expect fabrication demand for silver to show no growth through 2014, with modestly positive industrial demand due to improving electronics and PV (photovoltaic) sector demand to essentially be matched by weakness in photographic demand and medal and coin fabrication,” Citi said.

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Meanwhile, Citi said the end of a five-month strike against three major South African producers has not dented optimism about prices of platinum group metals, calling for 2014 supply deficits in both. The platinum deficit is seen at 1.451 million ounces and the palladium deficit at 2.247 million.

“Fundamentals for both platinum and palladium remain largely positive,” Citi said. “However, we continue to favor palladium for its significantly more positive auto demand outlook, strong physical investor uptake and limited supply growth potential.”

Higher platinum prices already seem to be impacting jewelry demand in China, Citi said, pointing out that import volume in the year to May fell by 8%. Meanwhile, the country’s imports of palladium were up 22%, mainly due to strong auto demand.

“Despite the South African strikes ending, we see little prospect of downward prices corrections for either of the PGMs,” Citi said. “We expect it will take at least three months for mines to be able to return to 90% of their pre-strike utilization rates. In addition, given...mine supply losses forced miners to draw down both mine and metal inventory levels, miners will need to rebuild buffer stock inventories. These factors suggest there will not be a surge in new maternal availability through the second half of this year.”

Citi currently looks for $1,475 platinum this year and $1,600 next, with $835 palladium in 2014 and $925 in 2015.

By Allen Sykora of Kitco News; asykora@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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