Gold has seen elevated prices in 2023, heading towards the US$2,000/oz mark. What are some of the main pressures on the market pushing gold up to this place and where do you see pricing moving as we head towards the end of the year?
As we have this conversation, we are once again getting close to US$1,900/oz, having traded within the US$1,900 to US$2,000 range now for the past couple of months. Negativity in the market about gold’s ability to move higher is something that I disagree with. The drivers that we are seeing in the gold market are worth mentioning as we are still up around 5%. This year, we’ve seen a fresh spike in bond deals, which tends to have a negative impact on gold. The dollar has been fluctuating as well, but generally on the weak side, which has added some support. However, the focus is still transfixed on the US economy and where the FMC go regarding interest rates.
We saw that spike back in March, when we had the banking crisis and the market was rapidly priced from a rate-hike cycle to a rate-cutting cycle. That was quashed because economic data has continued to hold up. Inflation is slowly coming down and that has reduced the need for gold as an alternative portfolio investment. At the same time, we had the artificial intelligence hype, which has been underpinning sectors and parts of the stock market, again, reducing the need for alternatives. So, this is where we are now. What we’re looking for in the months ahead is the risk of stagflation light — that the US economy will slow. It will reduce companys’ earnings abilities, thereby reducing the upside potential in the stock markets.
We believe that inflation is much stickier than the market is pricing it. We have come down quite rapidly from the 40-year high we had last year, but getting it back down to the 2-2.5% area (which is the target for the central bank) is not something that we see will come to fruition. When that realization starts to emerge in the market, we will see real yields come down because, right now, real yields are a massive problem for central banks, due to the very heavy debt they’re carrying. They need to force real yields down at some point, and obviously higher than expected inflation would support that movement. Maybe we’ve seen a peak in rates already. We may even see a cut before year-end.
This is not really what the market is expecting, so that could be a major driver for gold prices to be on the upside. For now, it’s a patience game. Quite often with gold price and gold investment, you must fall out of love with it before you can fall in love with it again. I feel that we are seeing quite a few of those developments. So, it’s under-owned by ETF investors, the futures, by leveraged funds, and we are waiting for a spark. We may have to be patient before we see that venture spark. So, US$1,900, US$2,000 for now.
Moving on to silver, this metal has a dual role. It’s both a precious and an industrial metal, so the influences come from a variety of different factors. What are some of the key points of interest that you see for silver moving forward?
Well, silver really depends on three different markets. Most importantly, it depends on gold, the dollar, but also on what happens in the industrial metal space. Earlier this year, where we were looking for stimulus to support the Chinese economy (which is still not forthcoming), we did see quite a jump in the industrial metals before they traded lower again. We had a period, just recently, where both the industrial metals and the dollar were moving higher, and then gold was moving up and the dollar was moving down. That’s really the foundation for a strong higher move in silver. Right now, some of these are not really playing their parts. We’re seeing industrial metals still trading sideways, looking for the green technology development, or the green transition to have an underlying support for key industrial metals. But, at the same time, we also have weakness in China, where we see the latest data pointing towards deflation.
Both PPI and CPI were negative in the recent update. We are waiting for a stimulus bazooka from China, which I think we will see later this year. When and if that occurs, we’ll add some fresh support to industrial metals, and that will also play through to silver. For now, it’s just mostly stock watching gold prices. But as we can see from the recent development and price actions in general, silver will be a high beta and gold will move higher — rallying and jumping faster. That’s just the nature of the beast, but generally, supply seems to be tightening in the silver market. With that in mind and based on our beliefs that we will see higher gold prices than industrial prices, (especially copper), we’ll eventually find fresh support. We see silver potentially outperforming once again, thereby driving the gold-silver ratio back down below 80 once again, and perhaps even lower than that.
Platinum and palladium are largely impacted by the growing EV economy. What’s your outlook here?
I’m not a strong watcher of palladium. It’s simply too small, but platinum has my interest because, to a certain point, it is linked to gold and investment in general. Platinum has been, I would say, a bit of a disappointment this year. The markets are starting to tighten up, but for now, we’re missing the ETF demand to tighten the market further and drive it higher. At this point in time, it’s still trading at a discount of around US$1,000 to gold. I see that discount narrowing over time. The demand for better emission engines in diesel cars is still growing. While we can move away from gasoline-driven cars and towards EVs; diesel, heavy trucks, and so on, that’s still an area where we will continuously see growth and that will require strong demand for platinum.
As long as energy demand remains robust, then we need continued investment coming into the space
With that in mind, and the tightness that we are seeing, I maintain a positive outlook for platinum as well. If we do get some investment demand into the market and that tightens it up further, I see this discount narrow from US$1,000 easily back to less than US$800, maybe even US$700.
Can you talk a bit about which commodities you are most positive on now? Is this related to the energy transition/EV thematic that’s quite strong in the industry right now?
Well, I think we have to observe that commodity prices are not only driven by demand, because right now there are a lot of question marks around demand. We’ve got this slowdown in China. We’ve got economic weakness in Europe. We have a potential for US growth to also slow in the coming months. So, demand outlook is clearly not as strong as we would have seen previously. But adding to that, we need to be very careful about the supply side as well, as supply has been tightening up. We’re seeing that in the oil market right now. Some of that is politically and financially motivated by Saudi Arabia’s 1M barrel cut, but that will not last forever. It highlights the importance of supply in a market, and the prices can rise even though we have an economic slowdown.
I think that’s what the supply side would focus on, and the reason why we still see upside potentials for commodities in general in the coming quarters. We haven’t had quite a significant correction since the panic peaks last year when Russia invaded Ukraine. We corrected around half of that rally during that time, and now we’re seeing the bounce of June and July. Into August, it’s become a little bit more of a one-cylinder engine because, right now, the strength is primarily coming from the energy sector, and that is likely to continue. I don’t see oil prices returning to US$100 plus, but I see it at least staying in this area. If we have tightness in the market, we must remember from an investment perspective, you have backwardation in the market. This basically means, if you are investing into commodities, you are getting free money monthly because of the positive role that occurs when you’re rolling positions in the backward data market.
We’re seeing backwardation not only in energy, but also across some of the agricultural commodities. Where I’m most interested, I think, is still in the green transformation metals, and the lack of additional supply that’s risen over the coming years. One thing is, as we roll out EV batteries; eventually, the whole grid system will need to be upgraded and that is a copper-intensive project that will unfold over the coming years.
With supply being tight, we still have an upside potential for copper. Just the price action in the last six months speaks volumes. We’ve been trading sideways even though the Chinese economy has been disappointing, and up until now, has accounted for around 50% of global copper demand. That highlights a market that is reasonably well-supported. I like precious metals simply from the fact that we are seeing inflation starting to become stickier. We are seeing the risk of stagflation, which will underpin investment metals in general. I think that’s really where my focus lies. Then, still wondering why a very, very key source of energy, natural gas, (especially US natural gas), has continued to remain so cheap at a time of energy scarcity.
What theme would you use to define what’s going to be happening in the commodities and investment market in the coming years? Over the past few years, we’ve seen distinct focuses on ESG, the energy transition, and market volatility, such as what we saw during the pandemic. What do you think is going to be that main theme to define next year?
I think it is still the energy transition, because it means that investment into traditional energy sources is struggling. If you’re an energy company and a big oil major, and you’re worried about peak oil within the next five to 10 years, are you then willing to put billions of dollars into new investments where you’re going to make your money back in five to 10 years? That’s really the big question that’s being raised. Also, we all talk about the energy transition, but so far, it’s really only been an energy addition because global energy demand has not come down. It’s still rising, and that means the only thing we achieved with renewables is that it has managed to cover the increase that we’re seeing in global energy demand. As long as energy demand remains robust, then, we need continued investment coming into the space.
That is really the big question — whether that’s going to be enough. The energy transition is where, in the interim, we could see higher prices for traditional fuels, but it’s also where we’ll continue to see rising demand for key industrial metals. I think that theme will continue to play out. Also, I think as we talk about next year, we will realize that inflation is not going to return to the Goldilocks scenario we had for the past couple of decades, where inflation was nowhere to be seen. We must get used to a higher-level inflation that is raising some challenges, but it’s also raising the awareness about investment, where you can perhaps conceal to yourself against higher than expected inflation. That’s obviously where commodities come in.
