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BMO Revises Gold Forecast Up A little, Palladium A Lot

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(Kitco News) - BMO Capital Markets has upped its gold -price forecast fractionally, with analysts saying the metal is on better footing than half a year ago and comfortable within the range of the last 1 ½ years.

Meanwhile, they hiked their forecast for palladium sharply, looking for it to remain underpinned by a tight supply-demand picture and maintain a large price premium over sister metal platinum for the foreseeable future.

“We believe that palladium will have to fall and platinum rise towards parity as catalyst chemistry changes, but this may not be an immediate move,” analysts said.

BMO revised its previous average gold forecast for 2019 up by 0.8% to $1,293 an ounce. Analysts look for a 2020 average of $1,306.

“With the Federal Reserve on pause, central banks ramping up purchases, and ETF [exchange-traded-fund] holdings resuming an upward trend, gold is in a much better place than it was six months ago,” BMO said. “While retail demand remains weak relative to recent history, with macroeconomic risk still elevated and asset allocation providing a demand annuity, we see gold as pretty comfortable in the range it has held over the past 18 months.”

BMO described global mine supply as stagnant, calling for this to remain below 2016 levels through 2020 at least. In particular, analysts suggest that No. 1 gold producer China may close some small mines during environmental reform.

“Given the strong price environment expected for 2019, we anticipate further increases in gold exploration to materialize,” BMO said. “Looking over the last couple of years, exploration budgets have been trending up post the steep decline from 2012 levels.”

However, analysts pointed out that exploration budgets do not necessarily correlate well with new discoveries, so it’s hard to conclude that new projects will be commissioned in the next few years. Further, new projects tend to face challenges in getting environmental permits and social licenses to operate.

Meanwhile, BMO said silver cannot seem to break out from its correlation to gold, but should outperform over the coming years, in part due to increased industrial demand. The bank upped its 2019 silver price forecast up by 1% to $15.90 an ounce and expects an average of $17 next year.

BMO upped its average price forecast for palladium by 45% to $1,612.50 an ounce this year and upped its 2020 outlook by 11.3% to $1,112.50.

“As the premium over platinum continues to hit new records, there can be no doubt palladium is in a heavy market deficit at present amid stagnant supply and higher catalyst loadings for gasoline vehicles,” BMO said. “And with substitution being a slow burn rather than an immediate fix, there remains decent potential for further upside. Qualifying a new catalyst is an expensive and time-consuming process, and we would expect this to occur only when the next range of vehicle models emerges.”

Nevertheless, the bank figures that substitution to platinum will eventually occur, thus 2019 will be the peak for palladium prices. “Commodity markets typically have a great ability to solve for shortage situations,” the bank said.

Platinum is “not in a great place” at the moment amid weak demand for both jewelry and catalysts in diesel-powered vehicles, BMO said. Thus, it will rely on other commodities for support and one key may be the trend in gold. BMO projected that platinum will average $873 this year and $900 in 2020.

However, the bank said, “the potential to increase platinum usage in gasoline autocatalysts is increasing as the price spread [with palladium] continues to grow. While supply cuts remain more likely to signify a market floor, in rand terms at least, the rate of demand decline should at least start to slow. We struggle to be constructive on platinum as a market in its own right, but the signals are no longer universally negative.”

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