Precious Metals Review

“Gold Price Outlook
Gold prices had a rough July, with prices slipping to an intraday low of $1,678.40 on 21 July. This was the lowest level that gold prices had reached since 9 August 2021, when prices had touched an intraday low of $1,676.40.

U.S. inflation figures for June, both headline and core, came in stronger than markets expected. This resulted in a sharp decline in gold prices. While in theory gold prices should benefit from higher inflation numbers, the reality is that these higher inflation figures suggested to the market that the Fed is likely to become even more aggressive in raising interest rates to quell strong inflation. This resulted in a stronger U.S. dollar against other major currencies as well as placing a lid on future inflation expectations. For a brief period following the June U.S. inflation report the markets began to price in a 100-basis point increase for the July Federal Open Market Committee meeting. The Fed ultimately announced a 75 basis points increase at its late July meeting and did not provide specific guidance with regard to future increases, saying only that the increases would be data dependent.

Various economic reports that came in after the U.S. June inflation report suggested a loss in growth momentum, which lowered the markets’ expectations of the pace of future inflation and interest rate increases. The market also began to price in interest rate cuts in the summer of
2023. These expectations regarding interest rates coupled with an initial reading of the second quarter U.S. gross domestic product showing a -0.9% contraction in economic activity, and most recently the visit by Nancy Pelosi to Taiwan, were all factors that drove bond yields lower and weighed on the U.S. dollar, driving gold prices above $1,800 on an intraday basis on 2 August.

Financial markets have a tendency to overreact to news, and the news and various economic indicators are expected to give confusing signals to the market regarding the future course of economic growth, inflation, and the Fed’s course of action. This is expected to keep gold and other precious metals volatile for some time.

While economic conditions have cooled from levels last year and even earlier this year, based on the information available at this time it does not seem that the U.S. or global economies are in a full-blown recession. Inflation is expected to be problematic in the near to medium term, requiring monetary authorities to continue tightening policy.

Gold prices could move sideways to lower in the near term. Persistent signs of weakness in the labor market could be the trigger for gold prices to rise strongly. This is a key metric that the Fed is watching for cues on when to slow or pause monetary tightening. At this time the job
market is still strong. Initial jobless claims have been ticking higher and non-farm payrolls have been slowing, but this is to be expected at the current stage of the economic cycle. In the absence of any meaningful deterioration in the labor market, the Fed is expected to continue to focus on reducing inflation, which should act as a headwind to gold prices.

Market participants are attempting to push gold prices to settle above $1,800 on a firm basis. If this is accomplished a move higher toward $1,820 or even $1,850 is possible. The trigger for such a move higher could be any meaningful deterioration in economic conditions or heightened concerns over political missteps by global leaders. In the absence of these risks, seasonal weakness in prices and tighter monetary conditions could keep gold around and below $1,800 for the rest of August or even soften gold prices from present levels toward $1,740 or even $1,680 once more.

Silver Price Outlook
Similar to gold, silver prices also declined sharply during July. Silver prices touched their lowest level for the month of $18.01 on 14 July, earlier than gold. Silver prices moved in a range between $18 and $19 for much of the second half of July, until in late July precious
metals prices rose sharply.

While investors in silver exchange traded funds and in Comex futures and options were net sellers of the metal during July, there seemed to be greater interest in owning the metal from longer term coin investors. These investors used the weakest silver prices in nearly two years as a buying opportunity, which provided some support to silver prices.

Concerns about slowing growth, high inflation, and rising interest rates are expected to weigh on silver prices in August at least. While silver prices could decline toward $17.50, prices seem to have put in a short-term bottom for now around $18.

On the upside, silver prices are likely to face strong resistance around $21.30. For prices to forcefully break above this level would require a meaningful deterioration in economic and/or political conditions, which would drive investors toward the metal as a safe haven or portfolio diversifier.

Investment Demand
Net positions held by institutional investors on the Comex slipped into negative territory in the middle of July. Net positions slipped to negative 3.4 million ounces on 19 July and continued to sink to negative 28.9 million ounces by 26 July.

The weakness in net positions was driven entirely by an increase in gross short positions, reflecting the rise in bearish sentiment toward silver. Gross short positions stood at 297.8 million ounces on 26 July, their highest level since July 2019 when they stood at 313.7 million
ounces. Gross long positions meanwhile stood at 268.9 million ounces on 26 July, up modestly from 262.2 million ounces at the end of June.

Given that futures contracts have two sides, and that investors get the liquidity for their positions from commercial traders who serve as market makers, as the investors have gone short on a net basis, the commercials have gone long – the offset of the investor short position. This is the way futures markets work. However, people who promote and believe in silver conspiracy theories and other nonsensical fantasies about the silver and gold markets apparently do not, cannot, understand this or simply refuse to acknowledge it. As a result, they have flooded the darker corners of the internet with commentary about how ‘commercials’ have ‘liquidated’
their short positions and gone long because the commercials ‘know that silver prices are about to explode to the upside.’ This is not the case. The commercials are net long mechanically because the investors are net short.

As in the case of gold, total open interest for Comex silver contracts has been declining since 26 July. The price of silver has been rising, however, which suggests that these market participants were closing out their short positions in greater numbers than they were opening long
positions. If this trend continues the upward momentum in silver prices that has been observed in the past few days may stall out.

Platinum Price Outlook
After falling during the first half of July, platinum prices made a strong recovery during the second half. Platinum prices slipped to $806.70 on 14 July, their lowest level since June 2020. The decline during the first half of July was in line with the other metals in the precious metals
complex. Platinum prices recovered from the losses during the first half of the month, essentially ending July at price levels where it started the month.

While there are a few bright spots for platinum prices such as the suspension of Sibanye’s Stillwater mine and the reintroduction of platinum in gasoline autocatalysts, there are broader issues such as a slowdown in economic growth, weak auto production and sales, and concerns
about a recession that are weighing on commercial vehicle demand, which is one of the largest sources of platinum demand, as well as light duty vehicle markets. There also is an ongoing loss in diesel passenger vehicle market share in India and Europe, which is further reducing platinum demand and applying downward pressures on prices.

While platinum has some price supportive medium- and long-term fundamentals, in the shorter term the prospects for platinum do not look particularly compelling. This is expected to result in investors adding to their platinum holdings when prices decline, but they are likely to pull back from making fresh purchases when prices rise. In such an environment, platinum prices are expected to move $100 on either side of $900, over the next few

Fabrication Demand
Commercial vehicle demand in most major markets remained weak during June. Of the major markets, the United States showed the least weakness, with other markets experiencing double digit declines during the first half of the year. Commercial vehicle demand in the Unit-
ed States, meanwhile, declined by 6.2% relative to the same period in 2021.

Europe’s diesel passenger vehicle market share continued to decline during the first half of 2022, accounting for 17% of the passenger vehicle market compared to 18% at the end of 2021. European market share for gasoline and battery electric vehicles (BEV) rose during the first half
of 2022 compared to the end of 2021. During this period market share for gasoline passenger vehicles rose to 42% from 40% and BEV market share rose from 10% to 13%. The ongoing decline in diesel passenger vehicle market share coupled with an increase in BEV market share is bad for platinum group metal demand from Europe’s passenger vehicle market. That said, the reintroduction of platinum in gasoline engine vehicles coupled with some growth in gasoline engine market share in Europe is supportive of platinum fabrication demand from the auto sector.

Investment Demand
The U.S. Mint sold another 15,500 ounces of Platinum Eagle coins to dealers during July, taking cumulative sales through the first seven months of the year to 79,000 ounces. This was higher than the 75,000 ounces in full year sales during 2021.

Palladium Price Outlook
Palladium prices moved mostly sideways between $1,825 and $2,150 during July. Palladium prices have been moving largely sideways for several months. Palladium prices have been supported by supply side issues on the one hand while concerns regarding weak fabrication demand fundamentals on the other hand have been weighing on palladium prices. Palladium prices look vulnerable to the downside, with initial support for prices
at $1,840.

Concerns regarding lost supply out of Russia have died down significantly from levels earlier this year, even as the war between Russia and Ukraine continues and the tensions between the West and Russia also continue. This is because palladium supplies out of Russia have made
their way into global markets since the war started earlier this year.

While there has not been any direct stoppage of palladium out of Russia, the supply crunch in the European energy market is a constant reminder that palladium supply disruptions out of Russia should not be fully ruled out. This has helped to support palladium prices. Additionally, Norilsk Nickel, the palladium mine producer in Russia, stated in July that its operations have been negatively affected by sanctions that have caused tightness in supplies it needs for mining and smelting.

Additionally, there was an actual loss in palladium supply due to the flood at Sibanye’s Stillwater mine in the United States, which is helping to further provide support to palladium prices.

The fabrication demand side of the palladium market has been weak, however. Demand for passenger vehicles in most major auto markets has not been particularly strong, and the prospects for demand growth do not seem particularly promising at this time either. In China, where vehicle sales have picked up since June, post covid related lockdowns, a lot of the gains came from smaller vehicles or battery electric vehicles, due to various fiscal incentives attached to these vehicles. These smaller or battery powered vehicles are not supportive of palladium
fabrication demand.

Fabrication Demand
U.S. auto sales during the first half of 2022 stood at 6.8 million vehicles, down 18% from the same period in 2021. Slowing economic growth, high inflation, rising interest rates, and a shortage of chips are all factors expected to continue hurting U.S. auto demand during the
second half of the year.

While the total volume of sales has declined in the U.S. one factor that is supportive of palladium fabrication demand is the ongoing increase in market share of light
duty trucks versus cars. At the end of the second quarter the market share of these larger vehicles stood at 79%, up from 78% at the end of 2021. The rising price of gasoline is likely to act as a headwind to demand for these vehicles, but nonetheless the market share for larger
vehicles continue to grow in the U.S. market.

While Chinese auto sales had a rough start to his year, with covid related shutdowns choking off demand, there has been a strong rebound in June sales, following the reopening and the introduction of fiscal incentives to buy small cars or battery electric vehicles (BEVs). Sales
driven by these fiscal incentives are not likely to be very positive for palladium demand, however, because they favor the sales of smaller and or electric vehicles.

Chinese passenger vehicle sales jumped to 2.2 million in June, up 41.6% from the same period in 2021. Sales during the first six months of 2022 now stand at 10.3 million vehicles, up 3.5% over the corresponding period in 2021.

Investment Demand
Net palladium positions held by institutional investors on the Nymex have been net short for a year. The consistent net short positions held by these investors suggests that they remain nervous regarding the future prospects of palladium.

At the end of July institutional investors collectively were net short 340,800 ounces, down from 382,000 ounces at the end of June. The reduction in net short positions during July can be completely attributed to a decline in gross short positions, with gross long positions declining.
The spike up in palladium prices on 7 and 8 July induced some of the shorts to liquidate. Further liquidation appeared to occur over the following five trading days as prices subsided.

Gross long positions had dropped to 67,600 ounces on 19 July, which was the lowest level that these positions had reached since May 2003. Gross longs recovered some at the end of July, rising to 72,400 ounces by 26 July. While up from the previous week, these levels still are very low by historic standards and highlight investor concerns about the future of this market.”