Annual Metals Market Outlook – 2016

All the precious metals, with the exception of palladium and copper, seem to have had almost similar price action during the year 2016 which is only to be expected as the commodities get affected by the same factors that affect one another. So, we saw that gold, silver and platinum started the year low but they made strong progress towards the highs of the year as we moved towards the middle of the year due to increasing demand and also due to weak data from the US which pointed to a delay in the hiking of interest rates by the Fed as the year wore on. Technically also, it was a correction of the large move down that we had seen in the prices of these commodities towards the end of 2015.

But as we moved towards the middle of 2016, the data from the US kept getting better and the demand for some of the commodities also began to slowly come down as the economic downturn gripped Asia. A large part of the demand for gold, silver and platinum comes from the fact that these are luxury commodities and not essential ones. So, when there is economic downturn, there is a high likelihood that their demand begins to dry up and that’s what we saw as their prices started falling down. Also, there were increasing indications of an impending rate hike from the Fed in December and this also affected the demand for the precious commodities as a hike in the rates in the US would mean that the funds would get diverted into the US and the dollar in the hope of better returns from assets that give interest rather than from assets like gold, silver and platinum which do not give any interest.

This led to a downturn in the prices of these luxury commodities and they all basically ended the year where they had begun, with gold up 7% for the year and silver and platinum also giving similar kind of returns after having a wild ride through the year.

The exception to this have been the prices of copper and palladium and they have managed to skip the downfall due to the fact that they are more of essential commodities rather than luxury ones. Copper has performed excellently with 25% returns from the beginning of the year while palladium has managed to give slightly more returns than that. Palladium is used in gasoline engines and with two of the biggest countries in USA and China using more of gasoline vehicles rather than diesel ones, the demand for palladium continues to be high. Copper, as is known, is used for a variety of items and hence its demand is always likely to be quite high. This demand has somewhat managed to keep the push under their prices so far though their prices have also been correcting towards the end of the year, mainly due to the fact that the Fed has hiked rates in December and has confirmed that it will do more such hikes in 2017. This will mean a move of funds away from these commodities as well.

Looking ahead to 2017, we believe that copper prices will continue to be buoyant with the emphasis of the new Trump administration being focussed on infrastructure development and this will help to keep the demand high for copper. We may be coming towards the end of the correction in copper prices and this would provide an opportunity for buyers to go long on this commodity. On the other hand, gold, silver and platinum are likely to continue to suffer due to the strength of the US dollar and also due to the continuing rate hikes in the US and this may mark a landmark year where such commodities are no longer viewed as safe investments. Traders and investors would be wary of investing any more funds into these commodities and would be on a wait and watch mode. Palladium is the one which seems to be caught between the trends and its trend is as yet unclear as the demand continues to exist but is counterbalanced by the moving away of the funds from palladium as the Fed hikes rates. Traders would be well advised to be on a wait and watch mode on this metal in the coming year.

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