Metals Commentary: Silver and PGMs give investors hope

Gold grabs most of the mining headlines, especially since its recent comeback, but other precious metals such as silver and palladium are also performing well in today’s market, giving miners new hope after a prolonged commodities slump.

The price of silver — seen as both a haven for investors and an industrial commodity — hit a three-year high above US$19 per oz. in early September, while palladium surpassed US$1,700 per oz. due to tightening supply for the auto-catalyst metal.

While both metals have pulled back since then, as has the price of gold from a recent six-year high of US$1,550 per oz., growing macroeconomic uncertainty is expected to send the price of silver and gold higher, while palladium will be supported by an ongoing supply deficit.

Rohit Savant, vice president of research at CPM Group in New York, said the silver price is rising due in part to market uncertainty related to the ongoing U.S.-China trade war and other factors such as Brexit and funding pressure in U.S. money markets.

“[This], coupled with declining yields and the increased demand for portfolio diversifiers at a time of increased stock market volatility, [is] expected to help drive silver prices up during the quarter,” Savant said in an email.

Bart Melek, head of commodity strategy at TD Securities in Toronto, has a “fairly positive” outlook for silver. He forecasts the silver price will reach an average of US$19.50 per oz. in 2020, up from his forecast of US$16.43 per oz. for 2019. Silver started 2019 at about $15.44 per oz. and is currently trading at US$17.57 per oz.

“We [also] think there will be a whole lot more investment,” in the silver space Melek said in an interview, citing an uptick so far this year.

Global silver investment has “increased appreciably” in 2019, according to a new report from the Washington-based Silver Institute. It cites “fresh all-time highs” for silver in exchange-traded products, where 746 million ounces of silver are currently allocated, and says global mint bullion coin sales have risen 30% year-over-year through July.

In the futures market, net long positioning on Comex at the end of July rose to its highest since November 2017, the report states, while high silver prices have helped boost related mining equities. The Solactive Global Silver Miners Equity Index, which includes international silver mining exploration and refining companies, is up about 14% year-to-date and 19% year-over-year.

While silver is strengthening, it’s believed to be held back by its industrial side, particularly as concerns mount about a global recession. One negative signal for the economy came on Oct. 2, when the closely watched ISM manufacturing index, a measure of U.S. manufacturing, fell to its lowest level since June 2009.

Despite the volatility, most mining companies are feeling optimistic that the worst of the commodities slump is behind them, and that precious metals in particular are poised to benefit.

“I think hard assets like silver, like gold, like PGMs, [will go] higher,” Randy Smallwood, CEO of Wheaton Precious Metals (TSX: WPM; NYSE: WPM), said in an interview.

He sees it in the market, but also in boardrooms where more fund managers are showing up at mining investment meetings.

“We are seeing a bit of a wake-up,” Smallwood said, suggesting investors are looking for alternatives to “safe” investments such as the U.S. dollar. “I get a sense that what we’re seeing is an increased appetite for precious metals.”

Silver accounts for about 40% of revenues at Wheaton Precious Metals, but the company has also entered the promising palladium market with its July 2018 acquisition of the gold and palladium stream from Sibanye Gold’s (NYSE:SBGL) Stillwater mine.

“We felt good with [our investment in] palladium in the sense that we expect demand will increase,” he says.

Palladium prices are up by more than 30% this year to US$1,636 per oz., due to supply constraints and Savant of CPM Group expects the price to remain at elevated levels in the coming months amid strong demand from fabricators. The high price of palladium will also help provide support to platinum prices, Savant says, which have climbed to about US$900 per oz., but are still below levels above US$1,000 in recent years. At press time, platinum was US$888 per ounce.

Savant says the biggest risk to platinum group metals such as platinum and palladium is a further slowdown in the auto sector.

RBC Dominion Securities recently initiated coverage of Toronto-based North American Palladium (TSX: PDL; US-OTC: PALDF), which is behind the Lac des Iles mine near Thunder Bay, Ont., with an outperform rating and $26 target, well ahead of its current price around $19. In a note, analyst Mark Mihaljevic cited the company’s “positive financial outlook, demonstrated capital returns through regular and special dividends, and unique exposure to palladium” at a time when prices are trading near record highs.

Mihaljevic also cited the current deficit in the palladium market — driven by growing demand from automakers and a large supply shortfall — that’s pushing up prices, saying he expects the current market deficit to continue through 2021.

According to Reuters, palladium has almost doubled in value from a low in August last year due to tighter environmental regulations that are forcing carmakers to buy more of the metal used in vehicle exhausts to reduce harmful emissions.

Mitsubishi analyst Jonathan Butler said manufacturers, which account for about 80% of palladium consumption, have been ramping up orders in recent weeks, which is expected to send prices even higher.

“Over the next 12-18 months we are probably going to see $2,000 in range,” Butler told Reuters.

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