Precious Metals - Headwinds

One of the most well-defined relationships between the gold price and other financial products have broken down over the last 24 months. Since around the year 2000, gold has exhibited a relatively strong inverse relationship with yields on the 10-year US Treasury note. This is to be expected as the non-yielding nature of bullion means that as the coupon paid on very low-risk US government debt rises, the opportunity cost of holding gold also rises, and the interest in buying falls. Thus far in 2024, bond yields have risen as a reaction to pared back expectations for interest rate cuts owing to stronger than expected US labour and inflation data. Meanwhile, gold has made successive all-time highs, with strength shown in the last month prior to the recent correction.

Price driving power is shifting from the West to the East. The fundamental
drivers of the gold price change over time, and for now the dollar and US yields have taken a back seat. Strong physical demand from Chinese investors and the People’s Bank of China are contributing to the froth in the gold market. China is the largest market for retail gold demand, and struggles in the property sector along with a long drawdown in the Chinese stock market may have pushed more investors into gold. This is evidenced by a sharp jump in gold trading volumes on the Shanghai Gold Exchange and its sister, the Shanghai Futures Exchange.

Correlation does not equal causation. Higher gold prices coinciding with higher US Treasury yields does not necessarily mean higher yields are now driving the gold price. For now, other factors appear to be outweighing the yields’ influence
on the gold price. Reserve asset diversification and global geopolitical instability are boosting gold’s appeal as a hard asset, particularly as US government debt obligations rise over the next few years.

Cooling Middle East tensions take some momentum from the gold price.
Gold had retreated to $2,337/oz by Friday, after experiencing the largest
one-day drop in two years earlier in the week. Two failed attempts to gain a foothold above $2,400/oz signalled the start of the correction, though there are upside factors that could push prices higher again. Last Thursday’s US GDP Q1’24 release surprised to the downside – coming in at 1.6% quarter-on-quarter, versus expectations of 2.5%, thereby impacting the dollar and helping gold gain some ground above $2,310/oz. Theoretically, weaker economic growth should prompt the Fed to act faster, though hotter inflation, and a firm jobs market overshadowed weaker growth, and in reaction, the options market reduced its rate cut expectations late last week. The Fed is expected to hold rates this week, with a cut now only priced in for December. Traders see just 33bp of interest rate cuts by year- end (source: Bloomberg), down significantly from the more than six 25bp cuts expected at the beginning of 2024.

Chinese investors played a key role in the price rally in April. A weaker
yuan, a volatile stock market and lower deposit rates compared to other
advanced economies motivated investors to find alternatives for their
savings. Customs data shows China imported 565.9 tonnes of gold in
Q1’24, a 34.2% year-on-year increase. The surge in physical demand
corroborates reports that mini gold bullions are becoming popular among
young retail investors.

Silver supply is forecast to drop despite Mexico’s production rebound.
Global silver supply is forecast to fall by ~1% this year to 824 moz, from
831 moz last year (source: The Silver Institute), marking the second
year of decline. Newmont reported that it expects silver production to
bounce back to 34 moz this year, an increase of 16 moz versus last year
when the Mexican Peñasquito mine suffered a quarter of lost production
owing to industrial action. Additionally, Fresnillo’s Juanicipio mine, also
in Mexico, is now fully ramped up, producing 2.5 moz in Q1’24 after
having been in pre-production this time last year. However, offsetting
improvements in Mexican supply is a potential decline in production from
Peru, the third-largest silver producer. Several of Peru’s largest mines
are struggling with permitting issues and this is expected to negatively
impact the country’s production.

Silver trailed gold’s retreat this week. On Friday, silver closed at
$27.25/oz, nearly 5% below last week’s close. US Mint sales reached
8.3 moz in Q1’24, a 44% year-on-year increase. However, it is partially
offset by the Perth Mint’s lower sales of 2.6 moz in Q1’24 (a 41.9%
year-on-year decrease)

Anglo American Platinum’s production falls more than usual in Q1. Anglo
American Platinum’s mined production from its own assets declined by
14% year-on-year in Q1’24 to 504 koz in 6E terms (Pt, Pd, Rh, Ru, Ir
+ Au), including a 13% drop in mined platinum production to 229 koz
in the quarter. Output tends to be lowest in the first quarter owing to
annual stock counts and a return to operations following the Christmas
holidays. This drop is larger than usual owing to lower production rates at
Amandelbult and Mototolo mines. Both mines suffered from operational
difficulties in the first three months of the year, including the impact
of restructuring at Amandelbult. Based on Q1’24 production, Anglo
American Platinum is on track to hit the bottom of its guidance range for
the year, including the assumption that quarterly production rates usually
pick up later in the year. Therefore, South African platinum production is
set to remain flat, assuming limited external disruptions.
PGMs to be excluded from Anglo-American-BHP critical minerals mega-
merger. BHP’s takeover bid for Anglo American Platinum’s largest
shareholder and parent company would require the spin-out of the latter’s
South African PGM business. Potential effects on PGM production are
currently unknown. However, BHP has until 22 May to launch an official
bid for Anglo American, at which point more information may become
available. As of last Friday, Anglo American had rejected the initial
proposal. Anglo American Platinum is the largest platinum producer in the
world and is expected to produce ~20% of global primary supply in 2024.

The platinum price is returning to the $900/oz region, having briefly
peaked above $1,000/oz a couple of weeks ago. In nominal terms,
platinum and palladium have fallen by a similar amount in the last
fortnight, but palladium has outperformed in relative terms. By the end of
last week, the platinum price stood at $914/oz.

There are signs that Russian primary supply could outperform this year.
In the first quarter, Nornickel produced 745 koz of palladium,
representing a modest 3% increase year-on-year. This level of quarterly
production is higher than expected. On an annualised basis, this level
of output is equal to 2.98 moz, almost 26% more than the mid-point of
the production guidance for 2024 provided at the beginning of the year.
While Nornickel has a track record of underestimating its performance
in guidance figures, this would be a significant surprise to the upside.
However, given that Nornickel carried out smelter maintenance in Q1’24,
refined palladium production is likely to fall on a quarterly basis as the
effect of this works its way through the refinery. Russia is forecast to
produce 2,451 koz of palladium this year, equal to a 9% decline year-
on-year. However, if Nornickel does outperform its guidance, production
could be more in line with that in 2023.

The palladium price fell for a second consecutive week to 26 April,
breaking through support at $1,000/oz which has been a key level since
the previous high of $1,127/oz at the beginning of March.

Europe’s fuel cell truck pilot fleet is expected to expand. Daimler Truck
intends to launch a test fleet of fuel cell trucks onto Europe’s roads later
this year, with INEOS now confirmed as a participant alongside Amazon
and others. Development of commercially available versions are expected to enter production in the next few years, though the expectation is that initial numbers will be a fraction of the 280,000 unit European market.The test truck covered 1,000 km in road trials last year, proving the viability of hydrogen-powered freight solutions. It also demonstrated the potential for future rollout to directly support ruthenium and platinum demand in fuel cells, and iridium demand in electrolytic green hydrogen production.
However, development is still in the early stages and there is also the threat of battery electric alternatives that offer a similar performance.

Last week the rhodium price dropped by $25/oz to $5,250/oz, though
the price remains near its highest point year-to-date. The iridium and
ruthenium prices again remained stable week-on-week, but are both
lower year-to-date.