Commodities: Precious metals lack lustre

Has gold lost its sheen? For most of this year, it has been trading in a range around $1,200, and analysts expect the price to drop in the third quarter.

“The worst is to come for gold,” says Suki Cooper, head of metals research at Barclays in New York. She says the gold price could drop to an average of $1,150 in the third quarter. The world’s largest gold ETF, SPDR Gold Shares, was down 0.82% year-to-date at the end of May, and trading at $112 at the end of June, compared with a peak of $129 over the previous 12 months.

Part of the drop is due to seasonal demand, but also as a result of a stronger dollar and a Fed interest-rate hike on the cards. “Other asset classes are just more interesting – particularly for Chinese investors,” says one gold trader. 

Tushar Yadava, BlackRock

Even with concerns about Greece, the price of gold cannot seem to get upward momentum. Tushar Yadava, iShares investment strategist at BlackRock, says gold as an asset class in times of fear has diminished. “Flows have been driven by moves from policymakers, not fear or recessions as has often been the case historically,” he says.  “First, the SNB de-peg in January caused a popular misconception that gold could become the new reserve asset the SNB switched to from peg-related EUR assets, and this occurred at the same time the ECB’s significant QE program was launched. As Greece has come to the fore over the last month, worries of the break-up of a currency union have driven speculative flows into gold.”

Cooper says gold’s safe-haven status is in question, with disappointed investors suffering fatigue about it.

Other pressures on the price of gold include weaker demand from China and India. In China, the anti-corruption clampdown has dampened appetite while India has brought in restrictions to reduce the amount of gold being imported. Demand for gold dropped 1% in the first quarter, according to the World Gold Council.

The expected interest-rate move from the US Federal Reserve is also making gold less attractive. “Gold is a Fed policy-sensitive asset as it has no yield, and is thus subject to rates moving higher eroding its store of value. This dynamic could continue like it has over the last month,” says Yadava.

Central banks, which last year were net buyers of gold, are another source of demand that could dry up. One gold trader says the monetization of central banks due to oil prices and stimulus could hit gold demand.

Silver is a better bet right now, says Yadava. “Gold is a tough play in dollar terms at the moment, and in our view is likely to underperform silver (an industrial metal so cyclically-sensitive) over the next year.”

Inflows have ticked upwards in silver ETFs since the end of the first quarter, while gold ETF inflows year-to-date are muted. Returns for silver are just in the positive over the last six months – the Ishares Silver Trust is up 0.78% at $15.11 at the end of June but down $5 compared to the same period last year.

Mu Li, director of base and speciality metal research at commodities consultant CPM Group, says silver looks more interesting in the short term, however. “Demand is still healthy, thanks to silver’s use in solar panels, LED lighting and nanotechnology. It also has been more speculative in nature and silver ETFs have witnessed a lot of retail investor demand taking advantage of the volatility that results from it being a less liquid market than other precious metals.

Platinum has perhaps been the biggest disappointment for investors. Li says supply side constraints could boost platinum – most capacity is not slated to come until 2017. “But then we have heard bullish forecasts about platinum due to supply side constraints in the last twelve months that just did not come to fruition,” she says.

At Barclays, Cooper says: “There were some big platinum stories over the last two years such as the South African five-month strike that removed more than 15% of annual supply – but prices did not increase as the market expected.”

Li says her firm expects a bounce back in platinum prices towards the end of the year and the same with gold. “For longer term investors both are attractive investments.”

Cooper says the third quarter for gold could present an opportunity to investors. “The current lows present a good buying opportunity for the long-term.” Both Cooper and Li, however, say that an increase in the price of precious metals is likely to only be slow and steady.

Overall, precious metals have been the least popular of all commodities over the last 12 months. According to Barclays, latest commodities research report precious metals have seen net outflows – around $2 billion in cumulative net outflows the nine months up to end of April this year, while energy was the most popular within the commodities sector having experienced cumulative net inflows to the tune of $8 billion by the end of April.