Another challenging year ahead for precious metals?

2021 proved to be a hard year for the precious metals complex. Prices of each of the four major precious metals dropped during the year. Gold struggled from reduced demand for capital safe-havens and an increasingly hawkish U.S. Federal Reserve. Meanwhile, the more industrial silver, palladium and platinum were hit hard by various supply chain constraints ranging from the severe semiconductor chip shortages to shortage of shipping capacity. After a challenging 2021, shall we expect the prices to stage a rebound in 2022? The short answer is, “Probably not.”

Gold

During the fourth quarter of 2021, gold managed to claw back some of the ground it lost earlier in the year as rising concerns over the impact of new omicron variant of the coronavirus on global economic growth provided a boost to safe-haven demand. Offtake also benefited from the seasonally strong retail demand in key regional markets.

As a result, gold posted a 4.4 percent gain over the period, ending 2021 at $1,820 per ounce.

Despite its strong performance during the final quarter of the year, gold still finished 2021 in the red, losing 6.3 percent of its value.  

After a very strong 2019 and 2020, gold’s underperformance during 2021 was largely a result of its failure to capitalize on renewed inflationary worries at the time when its safe-haven appeal began to tarnish.

First, the rebound in the vaccine-driven economic recovery gave a boost to the U.S. dollar and sparked a powerful stock market rally, reducing demand for safe havens.

Second, the Fed’s hawkish rhetoric/actions during the second half of 2021 inhibited gold’s ability to rally in response to growing inflationary pressures, forcing it to trade sideways instead.

As worries about the omicron variant are gradually diminishing, the U.S. Fed’s monetary policy once again will become a key factor to determine gold price trends in the coming months.

Concerned about the stubbornly high inflation rates, the Fed decided to double the speed at which it reduces asset purchases at its December 2021 meeting. The target range for the federal funds rate was kept at zero to one-quarter of a percent.

At this increased pace, asset purchases will now conclude in March 2022 instead of June. More importantly, it clears the road for earlier increases in interest rates. Fed officials now expect three rate increases in 2022.

One way or another, the path now seems set for 2022 to be the beginning of a tightening cycle in the U.S. This, together with expectations of a peak in inflation over the next few months, creates a challenging macroeconomic environment for gold in the short to mid-term. 

During the upcoming tightening cycle, gold is expected to remain on a downward trend, with annual prices dropping to $1,775 per ounce in 2022.

Silver

Similar to gold, silver ended the fourth quarter of 2021 in the black but showed a much stronger quarterly performance, adding 7.2 percent to its value versus the 4.4 percent gain in gold.

Despite a strong end to last year, both metals suffered annual losses. However, gold held its value better, falling by only 6.3 percent versus a 15.3 percent decline in silver prices.

Silver’s underperformance relative to gold mostly was related to its solid industrial core. (Pure industrial demand accounts for more than 60 percent of physical consumption, which technically makes silver an industrial metal rather than a precious one. In comparison, only 10 percent of gold is used in genuine industrial applications). Last year’s much-anticipated recovery in global manufacturing activity, and by extension industrial demand for silver, was hindered by various bottlenecks, meaning that the pace of recovery in supply outpaced that in demand, resulting in better metal availability.

At the same time, concerns that the U.S. Federal Reserve could raise interest rates sooner than previously expected weighed heavily on investor appetite for this precious metal during the second half of 2021.

Investor sentiment will continue to be driven by the anticipation of the start of a new tightening cycle by the U.S. Fed.

Meanwhile, rising uncertainty about the strength of the postpandemic global economic recovery will keep reining in growth in industrial demand. This, combined with a robust recovery in metal supply, will reduce the fundamental deficit, leading to a more balanced silver market in 2022.

Cru does not expect to see a sustainable return in buying interest toward this precious metal until mid-2022, with the real annual average silver price sliding from $25.14 per ounce in 2021 to $23.31 per ounce in 2022.

Platinum

In 2021, the platinum market not only remained in fundamental surplus for the sixth year in a row, but the size of the supply overhang nearly quadrupled year over year. The main drivers included a softer than anticipated recovery in demand and a strong rebound in platinum mine supply, further aided by the release of in-process inventory. In contrast to 2020 and 2019, investors remained largely hesitant buying into platinum’s story for the most part of the year. As a result, platinum finished 2021 at $962 an ounce, losing 14 percent of its value.

The surplus is expected to expand modestly in 2022 as the same driving forces are likely to remain firmly in place during the first half of 2022, or possibly even longer, before starting to dissipate.

We see investors as the only power capable of restoring balance to the market where fabricators, despite their growing appetite for metal, are unable to keep up with the pace at which miners and scrap recyclers are supplying platinum to the market. However, this group of market participants will not maintain or build its positions unless it feels that doing so offers some financial benefit, either in the form of capital gains or capital protection. A chronically oversupplied platinum market is therefore unlikely to generate much physical buying from investors in the short to mid-term but could instead become an attractive target for short sellers adding bearish bets. Platinum prices are forecast to slip further in 2022, averaging $1,086 per pound.

Palladium

The key reason behind palladium’s washout in 2021—its prices slumped by 21.4 percent during 2021—was a sharp drop in demand from car producers in response to chip shortages. Autocatalyst manufacturing accounts for approximately three-quarters of global fabrication demand for palladium. On the supply side, the dip in refined output from Russia caused by flooding at the two of Norilsk Nickel’s mines in early 2021 was resolved toward the end of the year, thus removing a degree of price support. Improved supply and faltering demand led to better metal availability, and the market promptly readjusted its short-term views on palladium, which was reflected in its price weakness during the last few months of 2021.

The chip shortage for the auto sector is now beginning to ease, and the auto sector is expected to get into gear for recovery in 2022. With finished inventories low, but significant numbers of “almost finished” vehicles missing only chips, the industry has the potential to ramp up production rapidly. But the speed of recovery will depend on how quickly demand moderates for other products requiring chips and whether further disruptions, for instance from Covid-19 outbreaks, are avoided. We expect the situation to improve through the first and second quarters before the second half of 2022 sees some above-trend production as car makers catch up with pent-up demand. We forecast that 2022 will see growth of 13.9 percent in global light vehicle production.

As for Cru’s outlook for palladium prices in 2022, they already could have reached their short-term bottom, so we are likely to see an increase in bargain hunting activity in the near future, which should help stabilize the price. Industrial users and investors are expected to start returning to this market soon, and we envision prices grinding up higher from their current sub-$1,900 per ounce levels as chip availability continues to improve. For a longer planning horizon, it is also worth bearing in mind that emissions legislation will be tightened again in China and India in 2023, so we are expecting car companies to begin restocking in advance, probably toward the end of this year, which should provide an additional bullish impetus to palladium prices. However, this may not be enough to help this precious metal to go through this year unscathed as its price is expected to average $2,091 per ounce, or 13 percent lower than in 2021. 

Kirill Kirilenko joined London-based Cru in 2010. He primarily covers precious metals and is an editor of Precious Metals Market Outlook. He can be contacted at kirill.kirilenko@crugroup.com.