BMO: Gold To Rally Whenever Fed Pauses On Tightening
(Kitco News) - BMO Capital Markets looks for gold to rebound whenever theFederal Reserve pauses in its rate-hiking cycle, particularly with moves in thecurrency market looking extended, the bank said Thursday.
Meanwhile, palladium is seen outperforming its sister metalplatinum in the foreseeable future, but BMO sees platinum eventually regainingits premium over palladium in the long term.
The bank revised its 2018 gold forecast to an average over$1,273 an ounce, which is 4% lower than its previous outlook. BMO trimmed its2019 price target by 1% to $1,285, although that would be well above currentprices. Spot gold was at $1,204.30 just before 11 a.m. EDT.
“Further out, we maintain the view that prices will average$1,250/oz in both 2020 and 2021, unchanged from our previous update whilemaintaining our 2022 forecast and subsequently the long-term target steady at$1,200/oz,” BMO said.
Gold is softer for the year to date, hurt by a stronger U.S.dollar. Prices have been sideways around $1,200 an ounce for much of the thirdquarter.
“Any change in Fed policy hinting to a pause in the hikingcycle, whether due to low [inflation] or weak domestic housing indicators,would likely see a relief rally for gold prices,” BMO said. “We see marketpositioning as too complacent in projecting a gold trend lower at the presenttime, particularly given potential emerging-market retail allocation backtowards gold.”
BMO noted that since 1985, the average tightening cycle forthe Federal Reserve has been nine hikes, averaging close to 25 basis pointseach.
“By the time the Fed delivers this month’s quarter-pointmove, it will be squarely upon the average,” BMO said. “We expect any sign of apause will be highly positive for precious metals, where market positioning hasbeen highly negative. Indeed, while the overall market environment for gold isclearly not good, we believe macro asset allocation has become too complacentin projecting a downward gold trend and would advocate some upsideoptionality.”
Meanwhile, BMO analysts described themselves as long-termsilver bulls as demand improves, mainly as photovoltaic use in solar panelsfills the gap left by the demise of film photography.
“Reinforcing our positive long-term silver price outlook isthe fact that mine supply continues to struggle, with 2018 output expected toaccelerate by only 0.6% [year-over-year] as significant growth projects arepushed out until 2019, where we see an 8.7% y/y rise in mine output,” BMO said.
In step with its gold price revisions, BMO adjusted the 2018annual average for silver prices 8% lower to $15.80 an ounce and lowered theforecast average for 2019 by 9% to $16. The metal was at $14.22 in late-morningNew York trade.
“Further out, we have left our forecasts for the 2020-22period as well as our long-run forecast of $20/oz, in line with our view of a60:1 equilibrium gold to silver ratio...,” BMO said. The gold/silver ratio was83-to-1 as analysts were writing their report.
BMO was more downbeat on platinum, although gains are seen afew years down the road. Whereas the majority of the bank’s long-run priceoutlooks were unaltered, analyst lowered the one for platinum by 5% to $1,050an ounce, although this is above current prices, with spot metal at $829 lateThursday morning.
Analysts described 2017-18 as “tough years for demand” asthe share of diesel-powered vehicles in Europe fell, as well as investmentdemand. Platinum is used for auto catalysts in diesel-powered vehicles, whereasgasoline-powered ones use palladium. Historically, platinum was more expensivethan palladium, although that changed roughly a year ago.
“With the discount to gold hitting record levels, platinumis not a good business to be in, and we struggle to see marked improvement anytime soon, particularly as high-cost production shows few signs ofrationalization,” BMO said. “Longer term, there is potential for higherloadings in autocatalysts, while the hydrogen fuel cell truck market shouldpresent demand opportunities. Until then, low pricing both in USD [U.S. dollar]and rand terms is likely to be the norm, even if unsustainable in the longterm.”
The bank cut its 2018 forecast by 7% to an average of $874.
Palladium, meanwhile, has drawn support from strong sales ofgasoline-powered autos in emerging markets and investment demand being less ofa drag than in previous years. However, the bank does not expect further upsidesince there is plenty of above-ground inventory, an expected recovery in scrapsupplies, growth in mine supply and slowing auto-sales growth. There is alsothe risk of substitution to platinum for autocatalysts.
“We have some longer-term worries about palladium being aone-trick pony, in other words having only a single major demand use, whichcreates medium-term risk as electric vehicle penetration grows,” BMO said. “Asa result, we have palladium back below platinum on a longer-term basis.”
Due topalladium’s resilience, BMO maintained its 2018 annual average forecast of $982an ounce and increased the 2019 outlook by 5% to $950. “Over the coming yearswe maintain the view that prices will gradually drift lower, averaging $875/ozin the long run, and reverting to a discount to platinum pricing,” BMO said. By Allen SykoraFor Kitco News
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asykora@kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.