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Goldman Favors Gold Over Silver, Palladium Over Platinum

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(Kitco News) - Goldman Sachs favors a pair of spread trades in the precious-metals complex, looking for gold to outshine silver and palladium to outperform platinum.

Analysts said in a report Thursday that they remain bullish on gold but nevertheless are trimming their forecasts to $1,300 an ounce for three months, $1,325 for six months and $1,375 for a year from now. Previously, these forecasts were $1,350, $1,400 and $1,450.

“Gold has always been primarily a hedge against tail-risk events and the current low-volatility environment reduces investment appetite for gold,” Goldman said. “Despite a significant drop in long-term real rates, gold prices have remained flat YTD [year-to-date] as recession fears have receded since late last year.

“However, we believe gold prices have likely undershot fundamental value. Recent increases in the Shanghai gold premium signals that Chinese are using lower prices as a buying opportunity.”

Further, Goldman commented that central-bank buying of the precious metal has been strong so far this year, with known January-February purchases totaling 90 tonnes, up from 55 in the same two months of 2018.

The bank said it was closing an outright long, or bullish, trading recommendation on gold from late last year. However, analysts said, “we now believe long [bullish] gold and short [bearish] silver is a better approach as silver does not benefit from central-bank buying and remains in physical surplus. We reduce our silver forecast in line with gold.”

In spread trades, market participants bet that one commodity will outperform another.

Goldman listed three-, six and 12-month silver forecasts of $14.50, $15 and $15.50 an ounce, down from $15.50, $15.50 and $16 previously.

As of 8:14 a.m. EDT, spot gold was $3.20 higher to $1,279.90 an ounce, while silver was up 4 cents to $14.99.

“Finally, we think that lack of substitution by auto companies will lead palladium to continue to outperform platinum,” Goldman said.

Palladium prices soared to record highs in 2019 in a market considered tight. Despite a more-than-$200-an-ounce correction lower from the peak, the metal maintains a premium of more than $500 an ounce over sister metal platinum. Both are used for automotive catalytic converters.

Prior to the last couple of years, palladium was cheaper and used for catalysts in vehicles with gasoline-powered engines, such as are popular in the two largest auto markets in the world – China and the U.S. Platinum was used for diesel-powered vehicles, which are more popular in Europe. There has been conjecture that palladium’s huge price premium may prompt companies to substitute toward more platinum, but analysts say this does not appear to be happening yet.

“Palladium is also set to benefit more than platinum from tighter environmental restrictions in China,” Goldman Sachs said. “As such we reopen our long palladium-versus-short platinum trade recommendation.”

Platinum was $1 higher to $886 an ounce, while palladium was $8 softer to $1,400.

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