David Wilson: Gold And Palladium Most Compelling

May 05, 2011


Roy: Where do you see silver going beyond the short term?

Wilson: We still take the view that when the U.S. in particular begins to signal that there's going to be a definite winding-in of quantitative easing, the end of cheap money might remove one of the sources of support for gold. So, we're not necessarily seeing a significant correction, but a loss of upward momentum.

There was talk that we were likely to see an ending of quantitative easing in June. But to a certain extent, it's a wait-and-see. That's the signal we're looking for: When we see an end of quantitative easing, we think the upward moves in gold and, off the back of that, silver, are likely to stop.

Roy: But what about the upside risks?

Wilson: There's definitely a risk if the other rating agencies joining S&P in downgrading the credit outlook of the U.S.—which they haven't as of yet. That will obviously bring a new source of nervousness to the general marketplace, which would be supportive for gold. Further upside risks would be if we see more disruption in the Middle East. If we saw more disruptions, in Saudi Arabia for example—and consequently got significantly higher oil prices—that would be, I think, very supportive to gold also.

Roy: Why do you think platinum and palladium haven't shared in the same interest we've seen investors give gold and silver?

Wilson: Platinum and palladium, for all intents and purposes, are more industrial metals. Why did we see palladium performing so well through last year? It's essentially an emerging markets play. In particular, its exposure to China was the big driver of palladium through last year, and if you look at the huge growth in China's auto production numbers in 2009 and 2010, it's easy to understand that.

With this, there's been greater nervousness over the issue of rate hikes in China and the potential for a hard landing in China. We've seen investors become less interested in holding significant positions in either palladium or platinum because of that.

You have to remember that gold, and to a lesser extent silver, are playing the roles of proxy currencies and general risk hedge instruments. That's not the case with platinum and palladium.

But looking at the fundamentals for the palladium market, they're still very strong. Also, auto production—which is the key driver for palladium—is still growing reasonably strongly in China, although we don't see the same rates as the last two years. We're also seeing acceleration in auto production in India, also in Brazil and Latin America.

On the platinum side, we have seen some very strong growth in jewelry market demand. As gold prices have edged up closer and closer to platinum prices, you see a luxury trade-off at the top end in jewelry markets. That's been very much the case in China, where they tend to favor the lightly colored metals for jewelry usage anyway.

But it boils down to the fact that gold and silver are essentially used as these multipurpose risk hedges that platinum and palladium aren't used for. So that's the key differentiator in why we've seen an underperformance of those two more-industry-focused precious metals.

Roy: Do you think investors can get into platinum and palladium because they're relatively cheap, ahead of the curve right now?

Wilson: We've seen investors moving out of palladium and platinum because of this concern over China. But we think now palladium, in particular, is looking like a relatively good value. Through last year, we had a significant interest in the long palladium/short platinum trade, which has been very successful for a lot of funds. I think we've seen an unwinding of that, which is why you're seeing platinum performing slightly better than palladium.

But I do think we're beginning to get to that point where palladium looks like an interesting metal to get back into because the fundamentals look very good. There's a lack of supply coming out of Russia, the biggest producer. It's becoming more and more apparent that the Russian government stockpiles are close to running out. And the demand side is very positive. So I think we are getting to that point where palladium is looking like a good value to buy into.


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