Highlights of the Week

Precious Metals

Gold fell back amid a stronger USD and soaring Treasury yields. The sharp moves came after several Fed officials struck a somewhat more
hawkish tone in its monetary policy update, pointing to the possibility of starting taper talks in upcoming meetings. Such comments from the
FOMC April minutes added to general concerns that soaring prices would force the Fed to tight monetary policy sooner and causing bond yields
and the USD to jump.

The potential for higher rates is bearish for the precious metals complex, as they fell across the board. That said, macro concerns surrounding overbought asset prices, inflationary fears, and concern that the Fed may be falling behind the curve should be supportive. Gold ETF holdings are also increasing, with six consecutive days of inflows following months of drawdowns, while the chart picture has brightened as prices trade above the 200-dma.

Platinum gained following a report from Johnson Matthey that pointed to increasing use of platinum by automakers to replace more expensive palladium. The substitution is expected to be driven by Chinese automakers. The World Platinum Investment Council (WPIC) published its Platinum Quarterly for Q121, with a revised forecast for 2021. For the fourth consecutive quarter, platinum posted a small deficit in Q121 (-19koz), as strong industrial, automotive and jewellery demand and sustained
investment demand for platinum outstripped recovering but constrained supply. As the global economy continued to recover, boosted by
widespread stimulus measures, Q121 saw demand for platinum increase by 26% (+405koz) YoY to 1,969koz.

With demand for platinum expected to increase by 5% (+378koz) to 8,041koz, 2021 is set to generate a deficit for the third year running of -158koz (see Chart 2). During Q121, overall investment demand increased 96% (+69koz) YoY to 140koz. ETF holdings grew for the fourth consecutive quarter in Q121, as anticipated substitution gains in autocatalysts and platinum’s use in hydrogen technologies continued to attract investor interest.

The recent interest in commodities, as well as platinum’s linkage to the hydrogen economy, is driving a number of investors to consider platinum, who had not previously considered it. Investors see that platinum’s constrained supply, deep discount to gold and palladium and compelling demand growth potential greatly enhance the likelihood of investment demand growth. Metals Focus forecast a 36% rise in the annual average platinum price in 2021 to a seven-year high of $1,200, due to improving investor sentiment and a firmer gold price. Palladium is expected to strengthen by 37% to a record annual average of $3,000 in 2021, as the physical deficit rises to a five-year high.

Base Metals

Base metals threatened to move significantly higher early this week but have been restrained by macro concerns. Inflation is chief amongst
these worries; China has been particularly vocal about this, with senior figures calling for commodity price rises to be constrained. In copper
and tin’s case, the fundamentals outside of China remain extremely tight, with little suggestion of prices coming off significantly.

So far corrections have been short-lived and shallow. Is this about to change? Arguably, supply-side issues are likely to restrict the downside. Some say the copper price is too high and others say it is not high enough, but if the mantra of “the trend is your friend” is true, then the price trend
is still pointing firmly up. The charts remain bullish with prices holding above both the 100-dma and the 200-dma, and only a confirmed close
below these levels would turn the technical picture bearish.

A union representing workers at BHP’s Escondida and Spence mines
rejected by 97% an offer on a future contract, raising the risk of a strike at these sizeable facilities. Chilean law allows either party to request
a five-day government mediation period, extendable for an additional five days. The current contract expires in August.

Aluminium was supported on further production curbs in China due to power generation and environmental issues.

At a time when demand is rising strongly potential tax hikes in South America and resource nationalism elsewhere could make new mine investment unattractive. Copper and zinc were in the spotlight as tax hikes are being proposed in major producers Chile and Peru, where left-wing politicians are gaining support. Between them, Chile and Peru are home to 7 of the world’s top 10 mines. Chile’s bid to place a tax on sales that could reach as high as 75% on copper sales could potentially curb investment in new mining capacity. BHP’s CEO said that that the world will need more than twice the amount of copper than it used in the past three decades if it is to hit Paris Climate Agreement targets in the next 30 years, he told the Financial Times. “Government stimulus and pro-growth agendas, which are expected to remain in place for an extended period, are expected to lead to robust growth, a lift in inflation and solid demand for mineral resources,” he said. “This is occurring at a time when our industry’s capital discipline and decline in exploration success over a number of years mean there are fewer high-quality growth projects in the pipeline to meet this demand,” he added.

Playing devil’s advocate, do higher metals prices imply that higher demand will be met by a combination of increased recycling and/or primary supply, and is enough attention being paid to the risk of substitution associated with higher prices?

Preliminary data was released by the World Bureau of Metal Statistics (WBMS) on demand, supply, inventories, and global refined market balances for Q121. Aluminium, nickel, and lead were the only metals to register deficits: the aluminium market recorded a deficit of 70kt which follows a surplus of 1,070kt recorded for 2020, while the nickel market recorded a deficit of 18.5kt after a surplus of 95.4Kt last year, and lead was in a deficit of 88kt after a 119kt deficit in 2020. Copper was essentially balanced amid a surplus of 2.2kt. Meta