September/October 1992
Changing market performance factors for platinum, gold, and silver may finally restore luster to an industry tarnished by weak world fundamentals, depressed precious metal values, and slim profit margins.
By Robert J. Garino
Robert J. Garino is director of commodities for the Institute of Scrap Recycling Industries (Washington, D.C.)
A twist of fate may be in store for platinum, gold, and silver. Having recently visited price lows last seen six, five, and 18 years ago, respectively, these precious metals could be embarking on a market turnaround. Glimmers of renewed investor interest and forecasts calling for improved supply/demand fundamentals this year have pointed precious metal industry expectations up.
Should these market features hold up, bullion dealers and precious metal recyclers could see their metal values rise and profit margins widen.
The upswing won't be easy, however. Although investors warmed up a bit to the metals this summer, platinum, gold, and silver have generated little enthusiasm among the investment community in recent years. One factor that seems to have discouraged precious metal holdings is the comparative returns yielded by alternative investment opportunities. Financial assets, such as stocks and bonds, outperformed precious metals and other tangible assets for the 12 months ended May 31. In addition, reduced industrial demand, coupled with ample precious metal stocks further magnified in the past 18 months by large-scale exports from the former Soviet republics, have apparently kept investors away from platinum, gold, and silver.
The result? Despite a brief price spike credited to last year's bombing of the near-term price trend for precious metals in general has been down.
Platinum, for example, which has seen weak Asian jewelry markets compounding depressed industrial demand and an estimated 1.1 million troy ounces (t.o.) of refined metal sold by former Soviet republics last year, closed at $333 per t.o. in January—a six-year low. Furthermore, that drop followed a year of deflated prices: The London Metal Exchange (LME) averaged $376 per t.o. in 1991, down 20 percent from the $472 recorded in 1990.
In the case of gold, meanwhile, whatever speculative price gains were made in 1991 were quickly lost as investors sold off their holdings in favor of paper assets. Emphasizing the situation, gold prices in the second quarter of this year hit a five-year low, testing the $335-to-$336-per-t.o. support level.
Silver, too, has not been spared price weakness, falling last year to $3.51 per t.o.—its lowest level in 18 years. (And this past July, a bout of selling brought the somewhat recovered price down to $3.87. Such price drops came despite some seemingly positive factors on the precious metal's side: The added weight of last year's large-scale exports of refined silver from Russia was said to be having minimal effect on the market and the metal's overall fundamentals were being termed "constructive," with 1991 demand greater than new silver supply. Holding silver prices at bay are large—266.8 million t.o. at midyear—above-ground supplies tucked away in Commodity Exchange (COMEX) (New York City)
Silver: Hinting at Recovery?
There's reason to believe silver prices will rise, according to George Milling-Stanley of Lehman Brothers (New York City), who predicts an average 1992 price of $4.25 per t.o. Given that silver averaged a little more than $4.00 per t.o. for the first six months of 1992, that forecast requires a second-half average of nearly $4.50. "The economic realities easily justify $4.25," says Milling-Stanley. Hitting higher levels "can be done," he adds, "but it will probably be short lived."
Another positive sign for silver is its supply/demand balance, which is helping to attract some renewed attention among investors and speculators. The Silver Institute (Washington, D.C.) reports that 1990's fabrication consumption—defined as total industrial use plus consumption in coins—totaled 525 million t.o. Matched against new supplies of approximately 500 million t.o., the organization's world silver survey reveals a statistical deficit of approximately 25 million t.o. A recent forecast prepared by CPM Group (New York City) places this year's deficit at 23 million t.o.
As potentially positive as the silver deficit is, however, many market watchers quickly point out, high stocks of silver remain, and, in general, investor interest is still lacking. In fact, at the end of 1990, total world silver stocks held were estimated to be close to 1.5 billion t.o., nearly 60 million t.o. higher than inventory levels in the mid-1980s.
Even conceding that not all inventories are liquid, most industry experts forecast that the silver bullion overhang will likely inhibit any price rally. Thus, they point to positive investor and speculator interest as essential to making the most of silver's supply/demand picture.
Gold: Getting Healthier?
Gold, because of its link as a hedge against risk, may yield a far different result when analyzed solely on supply/demand fundamentals rather than when geopolitical and economic turmoil are factored in. Nevertheless, most gold participants view gold simply as another commodity whose price is ultimately subject to total world demand matched against total available supply. Under that assumption, gold looks to be on the verge of improvement.
A report recently published by the Gold Institute (Washington, D.C.) forecasts that gold mine production in the market economies will grow at a 1.3-percent annual increase over the next four years, compared with the 8-percent average annual increase recorded over the past 10 years. North America and Australia posted positive growth in new mine production last year, together accounting for 34 percent of the total world production. South Africa, however, remains the largest producer—at 19.2 million t.o.—though its share of world gold production has dropped from 70 percent in the mid-1960s to less than 30 percent in 1991.
On the other side of the gold equation, Gold Fields Mineral Services (London) reports that overall gold demand dropped 3.4 percent in 1991 from the previous year. Nevertheless, according to Gold Fields, consumption of the precious metal for jewelry, which accounts for about three-quarters of the total gold market, rose 4 percent—to a record 2.1 metric tons (67,517 t.o.). Restocking in the Middle East following the Gulf War helped to increase this market segment, as did relatively robust economic growth in China, where high-carat gold fabrication rose by 8 percent, explains a Gold Fields report.
China is also affecting the market as a gold producer. In fact, 1991 Chinese output exceeded 100 metric tons (X.X million t.o.) and has grown more than 10 percent per year for the past several years.
Thus, several bullion dealers agree, overall gold fundamentals look healthier today than in recent memory, but, until a fuller force of investors return to gold, prices will likely fall within a narrow band. One dealer further forecasts that gold prices will "falter" as the 1992 progresses, with gold mining companies aggressively selling their output in the futures markets.
On a more positive note, several bullion dealers attribute higher gold prices recorded in July to a return of speculator and investment interest. Gold, they suggest, is becoming more attractive as investors grow nervous over falling stock markets and volatility in currencies.
Platinum: Living up to Potential?
Although platinum demand reached record levels in 1991, according to Johnson Matthey (New York City), supplies also hit new highs and again far exceeded demand. The result, note the firm's annual review of the platinum market, was a 120,000-t.o. surplus and, consequently, weak platinum prices.
The report calls the record level of Russian sales the most remarkable feature of the 1991 market. That country's "desperate need for foreign currency," sought in an effort to prop up its ailing domestic economy, led the exports, Johnson Matthey reports. With reserves of gold depleted, the former Soviet republic is said to have turned to platinum and other commodities such as aluminum, nickel, and uranium to meet its hard currency needs.
World demand, meanwhile, is anticipated to rise, as it did last year. Leading 1991 growth in demand were traditional platinum applications, including autocatalyst, dental, electrical and jewelry uses. In fact, although North American and Japanese demand for platinum in autocatalyst applications shrank, Johnson Matthey states that, overall, worldwide platinum catalyst consumption grew by 35,000 t.o.
At the same time, quantities of platinum recovered from spent catalysts, at 215,000 t.o., remained unchanged. The 165,000 t.o. credited to North American recyclers was a drop from the previous year, the report notes, but was offset by recovery increases posted in Western Europe.
This year, the Johnson Matthey report predicts, the former Soviet republics should reduce platinum sales as their export controls become more orderly and centralized. South Africa, which accounts for more than 65 percent of the world's new mine supplies, is also expected to reduce its contributions to world supply in 1992. "Technical delays" resulting from planned expansions at the mines and labor problems will likely reduce that's country's output, the report points out.
The Johnson Matthey report concludes that the price of platinum will remain vulnerable to "eruptions of bearish sentiment" for some time, but that, with improving supply/demand fundamentals, a gradual price strengthening may be seen by the third quarter of this year.
Other forecasts are less certain. Speaking at the International Precious Metals Institute (Allentown, Pa.) conference held in June in Arizona, Rhona O'Connell of Williams deBroe Plc. (London), predicted that platinum's surplus may increase further in 1992, to between 300,000 and 320,000 t.o. Furthermore, she said, a 400,000-t.o. surplus is "possible" in 1993.
Following the Leader?
Despite these differences of opinion about platinum's outlook, most observers concede that the metal heated up as the second half of 1992 got under way, particularly in comparison to gold and silver. Between mid-April and July 1, platinum values increased by $42.50 per t.o.—a 12.4-percent rise. During the same period, gold went from $336.00 to $344.30 per t.o., for an increase of 2.5 percent; silver, essentially stayed the same, rising only 2 cents.
Improving economic indicators are said to be responsible for this platinum gain, thus boding well for both physical demand and investment interest. This combination, some believe, may well spill over to the gold and silver markets in 1992.
Furthermore, as July 1992 began, news that the Congress of South African Trade Unions would stage a general strike in August caused a wave of speculative interest in platinum futures, pushing spot prices on the New York Mercantile Exchange to $400 per t.o.—a mark that hadn't been seen since May 1991. Gold and, to a lesser extent, silver were driven higher in sympathy.
Will potential South African mine disruptions actually offset the world platinum surplus forecast for 1992 and beyond? Can these prices be sustained? The answers are anyone's guess. CPM Group (New York City), for one, believes that, despite the July run-up, platinum should return to a range of $350 to $370 per t.o. for the balance of 1992. Perhaps so, but as the second half of this year progresses, many point out that world market fundamentals are such that gold, silver, and platinum prices may be especially vulnerable to periods of volatility—and, hence, new enthusiasm—on the world precious metals trading exchanges, pointing the precious metals in a positive direction.
Changing market performance factors for platinum, gold, and silver may finally restore luster to an industry tarnished by weak world fundamentals, depressed precious metal values, and slim profit margins.