still not ready to accept reality…

Investors realise gold is not all that glitters

By Ellen Kelleher

Published: October 29 2010 18:30 | Last updated: October 29 2010 18:30

The focus of investors scouting about for value in the precious metals market has shifted to palladium, platinum and silver, as gold now trades at record levels.

Investment flows into exchange-traded funds (ETFs) backed by platinum and palladium have about matched or exceeded those wending their way into gold-backed ETFs in the last month, data from ETF Securities shows.

The rise in the metals’ prices is just as impressive. The cost of palladium – used as a catalyst in converters that clean car exhausts – soared 93 per cent to $626 a troy ounce in the past year, hitting a nine-year high thanks to a pick-up in interest from hedge funds. Silver – the poor man’s gold – now costs $23.73 per troy ounce, having risen more than 45 per cent in the same period. And platinum – palladium’s sister metal and a requisite component in diesel car engines – trades at more than $1,680 a troy ounce.

“Much like gold and platinum, palladium has experienced a QE2 sugar rush, not looking back since its $459.25 low of August 12 after the Fed decided to hold its balance-sheet constant,” said Edel Tully, a UBS commodities strategist.

The uptick in interest in the metals stems from the uncertainty surrounding the economy as well as fears about another round of quantitative easing in the US, and concerns about currency depreciation.

But volatility remains a concern. Starting next week, precious metal prices are likely to see sharp swings because of expected announcements from the Bank of England and the Federal Reserve, analysts forecast.

“Between now and the Federal Open Market Committee day, precious metals will likely endure patience-testing and see-saw price action,” wrote Tully in a recent note.

But even if prices swing in the near-term, longer-term forecasts for palladium in particular and platinum as well look compelling.

“Of all the precious metals, we’re most bullish on palladium,” claims Walter De Wet, head of commodities research at Standard Bank in London. “Demand is also strong for platinum but not as strong as it is for palladium.”

Demand for palladium is set to continue to exceed supply in the coming years as ownership of petrol-based cars becomes commonplace in China and other emerging market countries.

At the same time, palladium’s supply looks constrained. Some analysts speculate that the Russian government’s stockpiles of palladium may have dried up. Sales from the Russian government have added about 1m ounces of palladium supply annually in recent years.

UBS’s Tully forecasts that a shortage of supply from Russia could push palladium prices above $1,000 per troy ounce. Platinum prices, meanwhile, which have been rising since late 2008, look more toppy by comparison. Analysts argue that they have been pushed higher by speculators and the flow of money into emerging markets, which tends to boost commodities demand. While some expect platinum – the only metal that can be used as a catalytic converter in diesel engines – to rise higher yet in 2011, they think a correction is likely one day given that the metal has fewer industrial uses than palladium and is more costly.

“We believe that platinum positioning is over-extended; particularly as no ‘new’ fundamental driver has emerged,” says a recent UBS commodities research report.

Prospects for silver, meanwhile, are even less clear. While the metal still trades at record levels, commodities experts claim that it tends to move in line with the gold price. They warn that history suggests silver underperforms gold when markets fall and outperforms it when they rise. “The silver market surplus is quite bloated at the moment,” points out Suki Cooper of Barclays Capital. “If investment demand slows down for silver, we’re likely to see a sharp correction.”

But “silver fever” is still all the rage, with sales of silver coins set to hit a record high this year. Standard Bank’s De Wet concludes that gold and silver prices – which continue to benefit from strong interest from Asia – will see support through the Chinese new year which begins in February.

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