1. Commodities Outlook For The Remainder Of 2012: Introduction
  2. Commodities Outlook For The Remainder Of 2012: Different Story In Second Half
  3. Commodities Outlook For The Remainder Of 2012: Energy
  4. Commodities Outlook For The Remainder Of 2012: Natural Gas
  5. Commodities Outlook For The Remainder Of 2012: Coal And Uranium
  6. Commodities Outlook For The Remainder Of 2012: Precious Metals
  7. Commodities Outlook For The Remainder Of 2012: Base Metals
  8. Commodities Outlook For The Remainder Of 2012: Agriculture
  9. Commodities Outlook For The Remainder Of 2012: Conclusion

Metals as a commodity are broken down into two groups: precious metals and second base metals. The difference between these groupings is precious metals have a high resistance to corrosion and oxidation, while base metals do not. Precious metals do have some industrial uses but mostly focus on acting as a store of value. Gold, silver and platinum provide a hedge against inflation. For this reason, investors should have at least a small percentage (usually 5%) invested in gold. Although gold has grown in price from $300 in 2002 to $1,620 today, there is no reason to believe that this commodity will not continue to rise. We will continue to see the weakening of paper currency going forward. Although the U.S. is doing much better than at the beginning of the financial crisis, there are still worries of additional quantitative easing. In Europe, the situation is much worse and could take years to finalize. In an attempt to stave off deflation, there is a very good chance we could see significant inflation which will push the price of gold and other commodity prices higher. A good year for gold was 2011 as demand grew 0.4% to 4067.1 tons. This was valued at $205.5 billion, which was the highest value since 1997. The first quarter of this year, demand decreased 5%. A decline in the purchase of jewelry and technology related gold was offset by investment related buys. Year over year for the first quarter there was still a 16% increase in demand for gold. In the first quarter there was decreased demand from emerging markets. China, Russia and Egypt drove growth, while India and the Middle East had less. Even with the decrease, India still consumes 45 to 50% of the world's gold. Here is the supply and demand data for gold over the past few years:

2009
2010
2011
2011 Q4
2012 Q1
Supply 4109
4352
4486
1130
1070
Demand 3593
4138
4569
1098
1089


Gold is a long-term story as financial problems in developed countries have caused a flight to safety in gold investment. The sovereign debt crisis has created gold investment as a hedge against the euro. There are also fears of inflation in countries like China and India. The high unemployment in the U.S. also helps to support the high price of gold. Given these fundamentals, gold will average $1,750 through the remainder of 2012, and will continue to be a good long-term investment through 2013 and beyond. My estimate for 2013 average gold price is $1,932.

Silver is in gold's shadow as a precious metal investment. The truth is silver is a completely different commodity. The industrial sector is the No.1 consumer of silver. Silver oxide batteries are becoming more popular by replacing lithium. Silver-coated bearings are the strongest and are used in high temperature engines that require the ultimate reliability, like jet engines. It has excellent conductivity, and is used in circuit boards, switches and television screens. Silver is also used as a catalyst in chemical reactions. Silver brazing and soldering is safe, strong and of better quality. The automobile industry uses 36 million ounces of silver annually.

Silver is also used in solar energy, water purification, x-rays, nanotechnology and antibacterial medicine. It seems demand for silver is increasing, as new technologies uncover better uses. In 2011, demand decreased by 1.5% to 876.6 million of ounces (Moz.). This was still the second highest level since 2000. The first three quarters of 2011 were quite good for silver, but the eurozone crisis decreased demand significantly in the fourth quarter. Although world demand decreased, China still posted a 5% gain in industrial demand. Over the last three years there has been a growing demand for silver investment. Silver coins have also been more popular.

Silver mine production rose to a record 761.6 Moz. This was the ninth consecutive year of production growth. The largest mines produced less, but new mines are ramping up production. Silver production also increased as a byproduct of gold mining. In 2011, the U.S. was the ninth leading producer of silver. Here are the top five producers:

Top Silver Producers
Silver in Millions of Ounces
Mexico
152.8
Peru
109.8
China
103.9
Australia
55.2
Chile
42.1
The increased cost of labor drove up cash costs by $7.25/oz. The increased selling cost of silver more than covered this expense. Margins increased 89% to $27.87. The price of silver is down significantly since April of 2011. Over the past few months the price has moderated somewhat, but I am not as bullish on silver as I am gold. Look for silver to see a slight appreciation through year end with an average 2012 price of $32.60. Next year, in 2013, could provide a nice rebound as the world economy improves along with demand. My estimate for silver's price next year is $35.50.

Platinum has several distinct qualities that make it useful. It is wear and tarnish resistant, is also resistant to chemicals and high temperatures and has stable electrical properties. It is used as a catalyst in the production of fertilizers, explosives and nitric acid. Platinum is also used in automotive catalytic converters.

Platinum is located in South Africa, North America and Russia but the metal is scarce. South Africa has the largest deposits, and is estimated to have up to 90% of the world's reserves. An interesting year for platinum was 2011 as it hit a multiyear high in August. In September, negativity about the world economy caused commodity prices to tank. The earthquake and tsunami in Japan decreased automobile demand. However, in 2011 the demand for autos in China and India helped to offset this.

World mine production of platinum is centered in a few countries. Below are those statistics for 2010 and 2011.

Country
2010 Production
2011 Production
South Africa
148,000
139,000
Russia
25,100
26,000
Zimbabwe
8,800
9,400
Canada
3,900
10,000
United States
3,450
3,700
Other Countries
2,300
2,500
Colombia
998
1,000
Totals
192,000
192,000

It is obvious that South Africa is the sweet spot for platinum. Most of the production in the U.S. is in mines located in Montana. Given the number of vehicles produced, and other industrial applications, the U.S. is a significant importer of the metal. Prices are much higher than in 2007, when platinum was $1,308.44/troy ounce. The price increased to $1,578.26 due to appreciation in 2008. Prices pulled back in 2009, as many commodities did. The average price was $1,207.55. In 2011, platinum saw increased demand pushing its price to $1,720.

Platinum has seen limited investment demand, and I do not believe we will see catalysts from the automotive industry. Slowing GDP could continue to weigh on demand. Look for a 2012 average price of $1,574. I do believe 2013 will be much better and that we will see an average full year price of $1,784.

Precious metals get the headlines, but base metals are the building blocks of industry. The build out of emerging markets such as China are pushing demand for these commodities. Even with the Euro crisis, China still looks to produce at least a 7% growth. These countries are having a new version of the industrial revolution, which should last for years to come. Businesses are added, which create jobs for employees. Those workers need homes, automobiles and televisions. Other workers build the homes and automobiles, and those workers have stuff to buy as well. Commodities Outlook For The Remainder Of 2012: Base Metals

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