Outlook 2011, Precious Metals: Group to Advance 28%, but Watch Volatility

Gold, silver, platinum and palladium have their own unique trading characteristics, says ETF Securities

Analysts following precious metals, mining and commodities are generally bullish for the group in 2011, but they note that metals are prone to swings.

Volatility for spot gold, for instance, has been about 18% over the past 10 years, while that of palladium is roughly 31%, explains ETF Securities in its report “The Fundamentals of Precious Metals,” published in late November.

Since 2000, the group notes, the cumulative performance of gold has been 332% vs. negative returns of 30% for palladium.

Also, precious metals in the past decade have not been highly correlated with the movement of the S&P 500. The spot price of gold, for example, has had a correlation of -0.05 with the S&P over the past 10 years, says ETF Securities.

Metals’ March

Gold prices could average $1,500 per ounce  next year and $1,600 by year-end in 2011, says Thomas Winmill, president of Midas Funds. And UBS raised its 2011 gold forecast last week from $1,400 to $1,550 an ounce.

He also anticipates that silver will jump from $35 an ounce from $20, while platinum could move up to $2,000 from $1,500 and palladium to $900 from $600.

Goldman Sachs predicts that precious metals are poised to give investors the best returns among commodities in 2011, with a 28% gain expected in the group next year, due to strengthening U.S. demand, according to a Bloomberg report.

The investment bank also expects gold to reach $1,690 an ounce in 12 months, from about $1,390 today, and it could peak in 2012.

“Absolute faith in fiat currencies remains shaky, [and] gold is currently behaving as a currency rather than a commodity,” wrote U.S. Global Investors analysts in their weekly investor alert of Dec. 17.

Volatility & More

ETF Securities, which markets exchange-traded products that are physically backed by bullion, suggests that advisors and investors appreciate the unique characteristics of the precious-metals markets before jumping into the group.

Historically, large-scale “printing” of money has led to currency debasement, with gold often viewed as a hedge against these risks, the group says.

Silver, it notes, is much more volatile than gold. It is also much more sensitive to industrial cycle flows, as industrial applications account for over half of all global silver demand (compared with 12% for gold).

In the past, when the price of gold is rising, silver tends to outperform. And the opposite is also true: when the gold price falls, silver falls more sharply. The variance in their performance, reflected in the gold/silver ratio, has averaged 50/50 over the past five decades.

As for other metals, “Historically flows into ETFS’ physically-backed platinum and palladium exchange-traded commodities have tended to be more cyclical and price sensitive than gold or silver flows,” the group shared in its November report.

Growth in the BRIC countries (Brazil, Russia, India and China) is closely tracked by platinum and palladium prices, as emerging market industrial demand and growing automobile use have driven demand for the metals.

“Because of their industrial applications platinum and palladium tend to trade more like industrial than precious metals both in terms of returns and volatility,” explained ETFS Securities. And longer-term structural factors in these countries are expected to lend further support to platinum and palladium demand in the coming years.

While palladium prices rallied strongly through 2009 and 2010, platinum has been looking cheap relative to palladium relative to its average over the past seven years, concludes the ETF marketer.

Bubbles to Burst?

A variety of analysts and fund managers alike believe that weakness in the U.S. dollar and related factors, such as growth in China, will boost precious metals handsomely in 2011.

There is, of course, talk that commodities are at dangerously high levels. But gold bugs like U.S. Global Investors dismiss this concern.

“While record futures positions appear to imply prices are at extremes, it should be remembered that for every buyer there is a seller with the opposite view,” the group noted in its latest report. Chinese gold buying still appears to be robust, inflation fears are driving retail demand to hedge, and higher prices apparently don’t appear to be acting as a deterrent.

See AdvisorOne's Outlook 2011 calendar to find the publishing dates for, and links to, other categories in the Outlook series.

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