Potential for a rally in June as commodities sizzle: UBS

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  • Precious metals have come to the fore over the past month as tension in Ukraine escalated into war.
  • The market is dominated by gold, but silver also comes to the fore in the minds of investors.
  • UBS strategists Dominic Schnider and Wayne Gordon updated their silver predictions this week.

The precious metals market has come to the fore over the past month as Russia’s military buildup on the Ukrainian border has turned into a war.

The asset class has long been considered the hedge of choice against geopolitical turmoil and it’s no different this time around.

While the market is of course dominated by gold, silver also comes to the fore in the minds of investors, both at the retail and institutional level.

On the institutional side, they don’t come much bigger than Swiss banking giant UBS, and the company made a notable call on the silver this week.

The bank has updated its price forecast for the world’s second-largest precious metal amid huge


volatility

in war-torn markets in Ukraine. He now sees silver at $23 an ounce at the end of June, down from $22, and $20 at the end of 2022, down from $19 an ounce now.

UBS strategists Dominic Schnider and Wayne Gordon explained in a research note that silver is expected to “follow gold” imminently.

“We recently updated our gold forecast for the rest of the year to reflect the uncertainties surrounding the war in Ukraine and the upside risks to near-term inflation. Gold – and by association , silver – has played its role as a safe-haven asset well, and it should continue to do so until the conflict in Ukraine is resolved.”

Silver tends to follow where gold leads and generally does so with greater strength. Silver has gained almost 10% since the start of the year, against 7.5% for gold.

Investors will need to be quick if they want to take advantage of this rise, however, with the second half of 2022 likely to see things turn against precious metals.

“Having said that, we think the main drivers of investment demand for gold and silver should move against the metal in 2H. Silver exchange-traded funds saw inflows in February to the tune of ‘about 20 million ounces.’

The UBS pair also noted that silver is not solely dependent on investors for its market value. According to the Silver Institute, about half of total silver demand is industrial, while investment accounts for about a quarter.

“Apart from investment demand, the Silver Institute’s outlook points to strong industrial demand growth of around 5% in 2022. The institute highlights increased use of silver in traditional applications and green technologies such as photovoltaics, vehicle electrification and 5G. Demand for jewelry and silverware is also expected to grow by 11% and 21%, respectively,” UBS said.

“Indeed, trade flows this year have been strong; for example, India’s silver imports in January were more than double the long-term average and 25% higher than its imports for the same period before the pandemic,” they continued. Mining production is also expected to increase by 7% in 2022. We recommend investors use short-term price spikes to sell silver higher. In a portfolio context, we prefer gold to silver as a hedge against uncertainty,” they added.

Commodities were already rising before the start of the war in Ukraine, thanks to a strong rebound in economic activity after the pandemic and supply chain bottlenecks that encountered either weather unfavorable in the case of agriculture, or chronic underinvestment in new extraction facilities, in the case of energy and metals.

“February was another strong month for commodities, with the UBS Bloomberg CMCI Broad Commodities Index (total return) up 6.4%, taking its year-to-date performance to 12.7 %,” the bank said.

“All sectors were in positive territory in February. Rising commodity prices should be seen in the context of rising interest rates, weakening equity markets and rising geopolitical risks. Supply chain challenges amid low inventory and La Niña-related weather risks – particularly in South America – also contributed to higher commodity prices,” UBS said.

Holding commodities when stocks fall can serve as a source of portfolio diversification, the bank said.

“Being long in commodities provides exposure to structural trends such as demand resulting from decarbonization efforts and years of underinvestment in upstream capacity. But the asset class can also act as a risk hedge. unforeseen supply related to geopolitics, pandemic or weather developments. And like a real asset, commodities also exhibit inflation-hedging qualities over time,” the team said.

The recovery in the asset class has plenty of room to continue in the near term, given that spare capacity is low, most markets are in deficit, which will force a faster drawdown of existing inventory and support metal and energy prices, the UBS team mentioned.

“On the other hand, precious metals are torn between higher U.S. real interest rates and greater geopolitical risks. In agriculture, elevated weather risks continue to threaten yields in key producing regions. We we expect episodes of higher price volatility in the second quarter,” they said. noted.


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