Precious Metals Price Predictions for 2018

One thing that certainly did not happen to precious metals at the end of 2017 was a price fall-off on the Fed’s fully expected decision to raise interest rates by 25 basis points. Indeed the reverse was true with gold, as the prime example, rising by almost $50 an ounce (or nearly 4%) between the time of the rate increase announcement and the year end. Fear of a rate increase, despite the fact that its near certainty should have been fully discounted in the gold price, did serve to depress the price ahead of the rise announcement. The actuality, however, saw an almost immediate reversal taking the gold price back up above $1,300 by the year end – a level previously seen, very briefly, in mid-October.

Now the precious metals investor will be asking what will happen to gold in 2018. Will it be allowed to rise despite the controls exerted on the price by a relatively small number of big players in the gold futures (paper gold} markets, or will it be restricted to trading in what mighr be considered a broad range – say $1,250 to $1,450.

Arguably gold re-entered a bull market back in 2015 after a four year ‘correction’ or ‘bear market’ depending on how one views these kinds of market moves. If this view is correct then the broad range suggestion may well prevail for another year. Gold will be allowed to rise, but will still be kept under control - much as it has been in 2017. Last year it rose by around 11% and a similar controlled increase in 2018 would take it to around $1,445. Investing in major gold stocks could have delivered better returns – see an article I wrote recently on the Seeking Alpha website: Gold, Silver, Platinum, Palladium - Price And Stock Forecasts/Recommendations For 2018 but stock investment is always riskier than investment in the metal itself. Stocks may do better in a rising metal price scenario but can crash and burn if these prices do not perform as expected. And, of course, there are always the technical and political risks involved in precious metals stock investment.

Further, many people see precious metals as the ultimate insurance policy against financial disaster. Far rather have a stock of easily accessible bullion at hand should markets and the economy truly crash. Paper holdings, however much they may be worth, may just not be accessible in a true crash, nor may be bullion held in vaults in one’s own country let alone overseas as protection against possible confiscation. Gold and silver always have a tradable value – platinum and palladium perhaps less so.

But, coming back to the gold price, its path is always of interest to holders of bullion right across the precious metals spectrum as, rational or not, all the precious metals prices tend to follow the path of gold upwards or downwards. The greater the percentage of industrial consumption, perhaps the less this holds true so perhaps, for example, the palladium price bears a lesser correlation to that of gold, but it still tends to move positively if the gold price rises.

The metal with the strongest correlation to gold is silver. Historically the silver price has tended to move with the gold price, but in a more exaggerated manner. When gold has done well silver tends to have done better, but when the gold price has slipped silver has fallen back even more sharply. It has been described as ‘gold on steroids’. Arguably, given the far higher percentage of industrial usage for silver this fairly direct correlation should be falling away – but it has persisted nonetheless. In this respect 2017 was a bit of an anomaly in that gold rose 11% but silver moved up only 4%, despite starting the year with the advantage.

So to start with perhaps we should forecast where we think the gold price will be at the end of 2018. There are a number of factors which look positive for the yellow metal. There is an ever-continuing flow of gold from West to East and demand appears to be rising in both of the principal Asian consuming nations – China and India. With China in particular gold flows in, but doesn’t come out again as legislation prohibits gold exports despite the nation being comfortably the world’s largest producer of the metal. In general gold holders in the East don’t trade their gold with fluctuations in the price so tend to be firmer holders of precious metals hanging on to it as the ultimate financial insurance.

As witness gold’s performance after the Fed’s latest rate hike, gold is perhaps no longer prone to worries about increasing interest rates. Increases have been very small, and are likely to continue so and as long as inflation rises faster than the rate increases, which it is beginning to do, we remain in a zero or negative interest rate environment which is gold positive. Thus global monetary policy, with some of the Fed’s likely moves being followed elsewhere, a possible fall in the US dollar index, and a switch from what we see as overpriced equities, and even more hugely overpriced bitcoin, into precious metals could all impact the gold price – and thus the other precious metals - positively in the year ahead.

Add into the above a seemingly increasingly aggressive U.S. President who may well be talking himself into some form of overseas military action, and we have a recipe for possible geopolitical conflict which would like.ly impact the gold price – let alone totally unpredictable events which could do likewise.

So for gold we will take a leaf out of one of the most accurate gold price analyst’s books, that of Canada’s Dr Martin Murenbeeld, and come up with three gold price scenarios to which we will attach likelihood weightings and derive an average from that as our prediction as to where gold will end the year. Our scenarios are as follows: if gold performs badly we would anticipate a year-end price of around $1,250 – to which we’d attach a likelihood rating of 20%; our base case scenario – the most likely in our eyes – of a year-end price of $1,450 (a 60% weighting); and if gold flies then perhaps it could reach $1,600 (20% likelihood). Applying the weightings we end up with a year-end overall average of $1,440 – roughly 10.6% higher than where it closed at the end of 2017.

The silver price is, and has always been, perhaps more unpredictable leading to traders sometimes referring to it as the ‘Devil’s metal’. The smaller size of the silver market makes it more prone to manipulation than the gold market by big money players (and many commentators reckon the gold market is suppressed too which make price predictions difficult as one has to second guess external influences playing the futures markets.) As an example of the potential impact of big money making a run at a small market like silver, one only has to go back to 1979/80 when the Hunt Brothers tried to corner the silver market with the price of silver futures rising from around $11 an ounce in September 1979 to $50 an ounce in January 1980. Silver prices ultimately collapsed to below $11 an ounce two months later when the attempted corner failed – or rather was thwarted.

With silver one of the things to watch is the Gold: Silver Ratio (GSR) – effectively the number of ounces of silver it takes to buy an ounce of gold. At year-end 2017 this stood at a shade over 77. When the gold price rises the GSR tends to fall – which means silver rises faster – and when gold falls the reverse tends to be true. When silver and gold were both monetary metals the ratio ranged from 14–16 – a level the out and out silver bulls think (hope) will return although we think this hugely unlikely. In recent years the GSR has ranged between around 35 and 100 which we feel is more realistic, although the extreme ends of this range are also probably unlikely targets – particularly at the lower end of the scale. We think a more likely range under current circumstances is from say 50 to 85. One great analyst, now deceased, used to say that when the GSR is at 85 buy silver and when it is at 50 buy gold. That advice would have served anyone who followed it really well.

However under current price scenarios we feel that if gold does badly the GSR may rise to 80, or a little above, and if gold does particularly well the ratio may fall to 65, and that around 70 is where it is likely to end up if gold does moderately well. Applying these GSR levels to our gold price scenarios we see silver at a disappointing $15.60 at the low end of the likely price range, at between $20 and $21 on our most likely forecast level for gold and as high as $24-$25 should the gold price hit our high level forecast. Applying the same weightings as for gold to these price levels we get an average year-end silver price likelihood of $20.32.

Platinum and palladium are effectively industrial metals, although have a small precious metals element in their price patterns. As readers will know, the palladium price has surged above that of platinum over the past month due to supply/demand concerns and their prices going forward remain very much subject to these factors.. I have suggested that the current price differential if maintained for several months will lead to reverse substitution in auto exhaust catalysts and a switch in price levels back to platinum being price-dominant by mid-year.

However I have had an email from Frank McAllister, former CEO of the Stillwater Mining Co. – a primary U.S. palladium mine, now owned by South African headquartered Sibanye Stillwater – who disagrees with my assessment. He says After having visited one of the US car makers technical teams in 2012, I wrote a piece regarding the price ratio between Pt and Pd concluding that it should be at parity, if not with palladium at a ~ 10% premium, after having been informed that the catalytic converter technology had evolved so that palladium had a modest technical advantage to platinum —meaning you could use a marginally smaller amount of palladium than platinum to reach the same emissions conversion. So — no it has not been a surprise to me to see the palladium price move from 25% to 50% and then to 75% and so forth to where it is currently ~ 110% of the price of platinum.  In particular following the move away from diesel — and more to gasoline --- cars in Europe.

McAllister goes on to say that if reverse substitution were to take place and platinum return to being the preferred catalytic metal for exhaust emission control it would take up to two years to move through the approval and build process.

McAllister has far more expertise on this matter than I do even though I worked in the platinum mining sector many years ago, but also do bear in mind that as the former CEO of a palladium miner he will have an inherent belief in the metal his mine produced. I’m not saying he is wrong – market prices often do not follow logical patterns – but his email has caused me to mitigate my views somewhat and I now see platinum and palladium both advancing (the automobile market is vast) and perhaps ending the year at around parity, rather than the latter being re-overtaken in price by the former.   I now forecast that both pgms will be at, or around $1,200 to $1,300 by the year end.

So there you have it – my overall forecasts for the year and having put them into writing that definitely makes me hostage to fortune! To recap I see gold ending the year at around $1,440 {$10 lower than my Seeking Alpha prediction Of only a couple of weeks’ ago), silver at $20.50 and platinum and palladium both at around say $1,250.

By Lawrence (Lawrie) Williams

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