The New Year could become the year of metals, focusing on gold, silver, platinum, copper, and aluminium. In precious metals, the prospect for lower real yields and a reduced cost of holding a non-interest paying position will support demand, primarily through exchange-traded products where investors have been net sellers for the past seven quarters.
Industrial metals stand to benefit from supply disruptions, industry restocking as funding costs come down, and continued demand growth in China offsetting the rest of the world’s weakness. This will, not least, be driven by the green transformation, which will keep gathering momentum, in some cases replacing demand for copper and aluminium from traditional end users, who could suffer from a weakening economic outlook in 2024.
Gold and silver to benefit from lower real yields and funding costs
Following a surprisingly robust performance in 2023, we see further price gains in 2024. Gains driven by a trifecta from momentum-chasing hedge funds, central banks continuing to buy bullion at a record pace, and renewed demand from ETF investors, such as asset managers, have been absent for almost two years amid the rise in real yields and increased carry costs.
With the US Federal Reserve pivoting towards rate cuts, we see the current number of expected rate cuts being justified by a soft landing, while a hard landing or recession would trigger an even bigger need for rate cuts. Record central bank buying in the past two years was the main reason gold rallied despite surging real yields, and silver suffered more during correction periods. It did not enjoy that constant, underlying demand. With ETFs, demand is likely to return, and with central bank demand continuing, potentially supported by a weaker dollar, we could see gold reaching a fresh record high at $2,300. Silver may find additional support from the expected rally in copper and challenge 2021 high at $30, signalling a fall in the gold-silver ratio below the 10-year average of around 78.3.
In platinum, the combination of largely inelastic demand and risks of uneconomic supply being curtailed can exacerbate deficits and tighten market conditions. This would enhance recovery in ETF holdings from a four-year low and, as with silver, create the prospect of platinum doing better than gold next year. It could drive a 250-dollar reduction in its discount towards the five-year average of around $750 an ounce.
Copper and aluminium supported by supply disruptions and green transformation
The industrial metal sector also benefits from the prospect of lower funding costs, driving a long overdue period of industry restocking from China to the rest of the world. Copper remains our favourite industrial metal because there are expectations for robust demand, as seen in China this past year. This has kept exchange-monitored stocks near a multi-year low. Increasingly, there’s also a risk of supply disruptions and production downgrades.
Due to its multiple application usage, we‘ve seen major supply disruptions, specifically for copper, the so-called King of green metals. The government-enforced closure of the First Quantum-operated Cobra Panama mine has led to these disruptions. Other mining companies such as Rio Tinto, Anglo American and Southern Copper have all been making downgrades, primarily due to rising challenges in Peru and Chile. Overall, it paints a picture of a mining industry challenged by rising costs, lower ore grades and increasing government intervention.
Given the broad spectrum of challenges mining companies will face in the coming years, some of which have raised the all-in costs of production and, with that, their profitability, we prefer direct exposure to the underlying metals, primarily through ETFs.
