Metals Markets in 2014

Also at the start of the New Year, we participated at some polls about price forecasts for precious and base metals. Unfortunately, a sick leave prevented us from writing about these forecasts in this blog earlier. In-between, the LBMA has published their analyst polls in the 2014 LBMA Precious Metals Forecast Survey, a 29 page document containing the forecasts of various analysts as well as some short arguments for their predictions. Another poll by ThomsonReuters just published the consensus forecasts for precious and base metals.

There is an old adage at Wall Street that as the first week goes, so goes the year. A similar one is called the January effect and states that the performance of the stock indices in January indicates whether the stock market will be up or down for the whole year. The first few weeks of the year 2014 indicate that the factors having an impact on metals in 2013 will also drive the markets this year.

While the S&P 500 index is down compared with the end of last year, precious metals posted gains with the exception of silver. However, when we refer to the January effect, we don’t predict that the bear market in precious metals would be over and that gold would be in a bull market in 2014. What could have been observed already in the second half of last year was a significant, negative relationship between the returns of gold and the S&P index, while in the period from 2009 until the end of 2012, this relationship was positive. This pattern also prevailed so far this year and we expect it will also persist during the remainder of 2014. The reason of the structural break in the relationship between returns on gold and the US stock market was a change in the behavior of major institutional investors. The Abenomics in Japan as well as the announcement of QE3 by the Fed induced considerable shifts in asset allocations by large investors. Furthermore, the expansionary monetary policy has not led yet to a rise of inflation rates, which many fund managers expected. Nothing currently indicates that this behavior would reverse again this year.

After the strong performance of major stock markets in 2013, it was not surprising that the year started with a consolidation. The US economy is in a good shape, which should be supportive for the stock market. Thus, a severe correction or even a bear market are not the base scenario for the US stock market. Therefore, gold is not out of the woods and could even fall below last year’s low. On the other hand, a consolidation of the US stock market could lead to gains in the price of gold, which could slightly exceed the high reached in August 2013. All in all, we expect a broad sideways trading range around current levels. However, for the average price of gold this implies another negative year.

For the PGMs, we expect a similar trading pattern. However, already last year, they performed better than gold and silver. Based on forecasts of a stronger global GDP growth, the demand for PGMs from the automotive sector should increase. Labor unrests remain the risk factor on the supply side. Based on the statistics from Johnson-Matthey, we expect that the supply/demand balance will support the PGMs further. Thus, they are expected to outperform gold and silver also in 2014.

For the base metals, China and Indonesia will remain the key factors also this year. For tin and nickel, the export ban on unprocessed metal is a supportive factor. Also the stronger global growth should be supportive for these metals. For aluminum and copper, the key factor continues to be the state of the Chinese economy. The central bank, the People’s Bank of China, first led short-term interest rates rise but finally provided liquidity to ease the tensions in the money market. This demonstrates that the PBoC on the one hand will act if rising interest rates endanger the current pace of economic activity. But on the other hand, it would do nothing to spur GDP growth. Thus, we expect that the growth rates will remain in a narrow band around 7.5%. This will translate into fluctuations of the widely followed PMI indices slightly above the crucial 50 threshold, which does not exclude that the HSBC PMI might be in some months below this level. Therefore, we also expect a sideways movement for the base metals in our central case scenario.