Precious metals prices could see cyclical peaks this year

UBS securities analyst John Reade is forecasting higher average prices for all five precious metals in 2007. In fact, he expects new cyclical highs—and in some cases all-time highs—for all five. In his scenario, he sees gold averaging $700/troy ounce, silver at $14, platinum at $1,225, palladium at $350 and rhodium at $5,500.

Reade says precious metals tend to move higher collectively, driven by investment liquidity and physical scarcity, but also by the rate of global economic growth, the value of the dollar and the cost of crude oil. "Institutional investment into commodities—what we have called the Wall of Money—has been a key factor in lifting metal prices to the highs seen in 2006," says Reade. "Although it is hard to quantify, we suspect there will be less net new money entering commodities in 2007." Still, chief economist Larry Hatheway at UBS Investment Bank doesn't expect a wholesale exit from commodities in general, or precious metals in particular.

One of the characteristics of the strong metal performance between the third quarter of 2005 and the second quarter of 2006 was heavy participation from such leveraged investors as the hedge funds. "In contrast, these investors were much less involved in the precious metals market since May 2006," says Reade, "and even less so after September when the slump in oil triggered weakness in gold and the other precious metals." He suggests that the extent to which these investors return to precious metals this year will be an important determinant as to whether these markets will be exciting or dull (for traders and investors).

Global economic growth is clearly slowing, Reade suggests in his outlook report, with the main contributors to the slowdown being decelerating U.S. economic activity and a slight softening of the rampant Chinese economy. UBS Securities has lower than consensus forecasts for global growth and sees end-2007 growth at below-trend before recovering, he says. Importantly, however, growth in basic materials and commodity intensive economies should remain strong and supportive of metals demand.

"Growth is important for the outlook for precious metals in 2007 although mostly indirectly as these metals are driven more by investment flows than by fundamental demand," says Reade. And where fundamental demand is more important, precious metals will be supported by strong growth in important jewelry markets such as India, China and other developing markets in Asia and the Middle East. "Environmental demand will help platinum group metals demand, as ever-tightening auto emission standards will require greater platinum usage."

<>

Precious metals are expected to increase in 2007

<>

(annual, spot market average $/troy ounce)

	Gold	Silver	Platinum	Palladium	Rhodium
2005	604	11.55	1142	320	2026
2006	604	11.09	1145	317	4498
2007/F*	700	14.00	1225	350	5500
Source: Purchasingdata.com; *Forecast: UBS Securities