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Gold SWOT: palladium at $2,300 by quarter end, says UBS

Commentaries & Views

Strengths

  • The best performing metal this week was platinum, off slightly by 0.32 percent, with investors increasing their bullish platinum outlook to the highest in three weeks. Retail investors can’t get enough of gold coins. Consumers typically pay a little more for gold coins than the per-ounce prices quoted on financial markets in London and New York. That premium has surged to $135, more than tripling from two months ago, according to Argent Asset Group LLC. As 2019 saw the lowest gold coin and bar demand since 2009, this year demand has surged amid the coronavirus. The Perth Mint reported sales totaled 120,504 ounces in April and that gold coin sales were the highest ever.

  • Gold performed strongly in April overall. The metal traded near the highest since 2012 on Wednesday after the Fed voiced concern that the pandemic could leave permanent scars on the U.S. economy, reports Bloomberg. Additional liquidity thanks to central bank action benefited gold in the month of April after struggling in March from a selloff.

  • Ghana still plans to move forward with the sale of $750 million of shares in a gold mining fund this year. The top gold miner in Africa will list the fund in London and will pay dividends from the government’s income from mining operations. Finance Minister Ken Ofori-Atta said that “coronavirus makes things difficult but we will not relent.”

Weaknesses

  • The worst performing metal this week was palladium, down 5.71 percent as investors cut their net bullish position to a five-week low; Norilsk Nickel cautioned the palladium market could go into surplus with stalled automobile sales. Gold had its biggest weekly decline since mid-March as major economies are slowly reopening. European nations offered cautious signals that they have moved past the worst of the coronavirus outbreak. Bloomberg notes that U.S. cases of the virus rose at the slowest pace. The European Central Bank increased its coronavirus response by cutting funding costs for banks, but refrained from boosting its bond-buying program, reports Bloomberg.

  • Gold consumption in China fell 48 percent to 148.63 tons in the first quarter, according to the China Gold Association. Buying in the world’s top consumer was hampered by closed shops and higher metal prices. Inflows into commodity ETFs slowed last week by 55 percent to just $1.9 billion. However, precious metals ETFs led the inflows with $1.3 billion.

  • The global silver surplus is expected to more than double in 2020 as falling demand outweighs mine shutdowns, according to CPM Group. Supply is expected to surpass demand by 78.9 million ounces, compared to a surplus of 36.2 million in 2019. “While supply disruptions themselves would have been extremely positive for metals prices in another environment, the same factors that are causing supply disruptions are also resulting in less demand for silver for use in fabricated products.”

Opportunities

  • UBS raised its second quarter-end price forecast for palladium to $2,300 an ounce, up from $2,000. The group expects a supply deficit to continue in 2020 of 500,000 ounces, compared with almost 1.2 million ounces in 2019.

  • State Street Global Advisors is bullish on gold. The group says gold will trade between $1,700 and $1,800 an ounce for the next few weeks due to lower interest rates and expectations that fiscal stimulus will weigh on the U.S. dollar, reports Bloomberg.

  • Silvercorp Metals is buying Guyana Goldfields for a 71 percent premium – giving the company diversified exposure to precious metals. MAG Silver announced a private placement with Eric Sprott for over C$60 million. The company will use the net proceeds of the offering to fund exploration and development. Newcrest Mining Ltd., Australia’s largest gold producer, plans to raise as much as $720 million in cash to accelerate growth at a key mine in Ecuador.

Threats

  • First quarter earnings for miners aren’t a sure bet even with gold prices higher. Gold prices were up about 20 percent from the first quarter a year ago, but companies are still dealing with operation shutdowns and supply chain disruptions due to the coronavirus. Bloomberg’s Aoyon Ashraf writes that investors shouldn’t be fooled by gold’s rally. CIBC’s Anita Soni says that operational results will likely be “mixed and messy” and that estimates are less meaningful given the recent disruptions.

  • Bloomberg’s Eddie van der Walt writes that an ounce of silver has never been this cheap relative to gold and that as long as the coronavirus batters economies, there’s nothing to stop the ratio from moving higher. Although silver is moving closer to a supply and demand balance, the years of oversupply still have to be soaked up by markets before it can rally on fundamentals.

  • The central bank gold buying spree could slow in 2020 as the coronavirus ripples through global economies and creates a cash crunch, reports Bloomberg. Russia announced in April that it has paused its domestic gold buying. Standard Chartered Plc expects net purchases to drop to 360 tons from last year. The World Gold Council doesn’t expect central banks to become net sellers, but that demand will likely decline this year.
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