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BMO: Gold To Rally Whenever Fed Pauses On Tightening

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(Kitco News) - BMO Capital Markets looks for gold to rebound whenever the Federal Reserve pauses in its rate-hiking cycle, particularly with moves in the currency market looking extended, the bank said Thursday.

Meanwhile, palladium is seen outperforming its sister metal platinum in the foreseeable future, but BMO sees platinum eventually regaining its premium over palladium in the long term.

The bank revised its 2018 gold forecast to an average over $1,273 an ounce, which is 4% lower than its previous outlook. BMO trimmed its 2019 price target by 1% to $1,285, although that would be well above current prices. Spot gold was at $1,204.30 just before 11 a.m. EDT.

“Further out, we maintain the view that prices will average $1,250/oz in both 2020 and 2021, unchanged from our previous update while maintaining our 2022 forecast and subsequently the long-term target steady at $1,200/oz,” BMO said.

Gold is softer for the year to date, hurt by a stronger U.S. dollar. Prices have been sideways around $1,200 an ounce for much of the third quarter.

“Any change in Fed policy hinting to a pause in the hiking cycle, whether due to low [inflation] or weak domestic housing indicators, would likely see a relief rally for gold prices,” BMO said. “We see market positioning as too complacent in projecting a gold trend lower at the present time, particularly given potential emerging-market retail allocation back towards gold.”

BMO noted that since 1985, the average tightening cycle for the Federal Reserve has been nine hikes, averaging close to 25 basis points each.

“By the time the Fed delivers this month’s quarter-point move, it will be squarely upon the average,” BMO said. “We expect any sign of a pause will be highly positive for precious metals, where market positioning has been highly negative. Indeed, while the overall market environment for gold is clearly not good, we believe macro asset allocation has become too complacent in projecting a downward gold trend and would advocate some upside optionality.”

Meanwhile, BMO analysts described themselves as long-term silver bulls as demand improves, mainly as photovoltaic use in solar panels fills the gap left by the demise of film photography.

“Reinforcing our positive long-term silver price outlook is the fact that mine supply continues to struggle, with 2018 output expected to accelerate by only 0.6% [year-over-year] as significant growth projects are pushed out until 2019, where we see an 8.7% y/y rise in mine output,” BMO said.

In step with its gold price revisions, BMO adjusted the 2018 annual average for silver prices 8% lower to $15.80 an ounce and lowered the forecast average for 2019 by 9% to $16. The metal was at $14.22 in late-morning New York trade.

“Further out, we have left our forecasts for the 2020-22 period as well as our long-run forecast of $20/oz, in line with our view of a 60:1 equilibrium gold to silver ratio…,” BMO said. The gold/silver ratio was 83-to-1 as analysts were writing their report.

BMO was more downbeat on platinum, although gains are seen a few years down the road. Whereas the majority of the bank’s long-run price outlooks were unaltered, analyst lowered the one for platinum by 5% to $1,050 an ounce, although this is above current prices, with spot metal at $829 late Thursday morning.

Analysts described 2017-18 as “tough years for demand” as the share of diesel-powered vehicles in Europe fell, as well as investment demand. Platinum is used for auto catalysts in diesel-powered vehicles, whereas gasoline-powered ones use palladium. Historically, platinum was more expensive than palladium, although that changed roughly a year ago.

“With the discount to gold hitting record levels, platinum is not a good business to be in, and we struggle to see marked improvement any time soon, particularly as high-cost production shows few signs of rationalization,” BMO said. “Longer term, there is potential for higher loadings in autocatalysts, while the hydrogen fuel cell truck market should present demand opportunities. Until then, low pricing both in USD [U.S. dollar] and rand terms is likely to be the norm, even if unsustainable in the long term.”

The bank cut its 2018 forecast by 7% to an average of $874.

Palladium, meanwhile, has drawn support from strong sales of gasoline-powered autos in emerging markets and investment demand being less of a drag than in previous years. However, the bank does not expect further upside since there is plenty of above-ground inventory, an expected recovery in scrap supplies, growth in mine supply and slowing auto-sales growth. There is also the risk of substitution to platinum for autocatalysts.

“We have some longer-term worries about palladium being a one-trick pony, in other words having only a single major demand use, which creates medium-term risk as electric vehicle penetration grows,” BMO said. “As a result, we have palladium back below platinum on a longer-term basis.”

 Due to palladium’s resilience, BMO maintained its 2018 annual average forecast of $982 an ounce and increased the 2019 outlook by 5% to $950. “Over the coming years we maintain the view that prices will gradually drift lower, averaging $875/oz in the long run, and reverting to a discount to platinum pricing,” BMO said.
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 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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