2022: Another year to disappoint irrational expectations

While 2020 and 2021 have been brutal overall, the reality is that they have been very good for gold and silver. The first part of 2021 was good for platinum, but that fizzled out. More on platinum and palladium later. The bad news is that 2022 promises to be at least as harsh on us all, and maybe even worse.

Gold and Silver

Consider reality:

• Gold prices averaged US$1,799.50 per oz. through December 3 2021, up 1.4% from their record 2020 average.
• Gold prices are on pace to set a new record in 2021.
• Gold prices through December 3 were 29.2% higher than their average 2019 price of US$1,396.47 per oz. and 7.8% higher than their previous annual average record of US$1,668.82 per oz. in 2012.

• Silver prices averaged US$25.39 per oz. through October 2021.

• Up 22.8% from the annual average of US$20.67 per oz. in 2020.
  • Up 56.4% from 2019’s annual average of US$16.23 per oz., and
  • Up 50.8% from their average price of US$16.84 per oz. from 2014 through 2019.
  • Ah, the bulls will point out: US$25.39 per oz. is off -27.9% from the annual average record price of US$35.22 per oz. in 2011.

• Despite these sharply higher prices there is a constant chorus of dissatisfaction from vocal segments of the precious metals markets decrying ‘low’ prices and wondering aloud what sort of nefarious cabal is ‘keeping prices suppressed.’

It must be noted immediately that there are many rational precious metals investors and other market participants who are fully cognizant that gold and silver prices have risen sharply over the past two years, peaking in August 2020, and remain at historically high levels. This majority of investors represent the market’s collective awareness of the cacophony of economic, financial, and political problems plaguing the world. It is just that this majority of investors (estimated at 85%-90% of the precious metals investing public) do not see any reason to wail in public about an imaginary world in which gold and silver prices are low.

CPM expects 2022 to continue to present the world with bad circumstances and bad choices. Economic conditions in some countries may continue to improve as they have through much of 2021. Domestic political issues in the United States and some other major countries, as well as international political conflicts, are likely to deteriorate.

These trends are expected to keep gold and silver prices high, around current levels, throughout 2022. They offer the potential to worsen dramatically in ways that threaten economic recovery and expansion, which could lead investors to increase their gold and silver purchases even further, driving prices higher. CPM does not expect that until 2023–2024, but the storms on the horizon might overhang the world sooner than our firm anticipates.

So, the irrational but vocal minority in precious metals should expect to have their unrealistic expectations for gold over US$10,000 per oz. and silver over US$100 per oz. dashed once more.

Rational investors meanwhile will:

• Look at the state of the world.
• Appreciate the hard work the U.S. and other government leaders are putting into providing ample reasons to hold more and more of your wealth in gold and silver, and
• Continue to add to their holdings in the expectation that while gold and silver prices may tread water and rise only modestly in 2022 the likelihood of exogenous problems coming home to roost at some point in the next several years warrants keeping your guard up and your wealth diversified.

Platinum and Palladium

Platinum and palladium are industrial metals. Gold and silver are commodities, importantly, but they also are financial assets (investments) and monetary assets. Accordingly, platinum and palladium markets operate differently than those of gold and silver. Gold and silver prices are driven primarily by investor demand levels and trends.

Investors play important roles in the platinum and palladium markets, but their interests are more driven by perceptions of supply and demand for these metals instead of those exogenous economic, financial, and political developments that drive investor into, or out of, gold and silver.

One of the key factors for platinum and palladium is the health of the auto industry, which accounts for around 48% of platinum fabrication demand and 66% of palladium fabrication demand. The auto industry has been struggling over the past three years, and is projected to continue to face headwinds in 2022.

In 2022 global auto production and sales will continue to struggle with the shorter term effects of the economic recession, chip shortages, declining global trade and other factors. Things are likely to improve, but slowly and more in the second half of 2022 than in the first half.

Longer term the use of PGMs in auto catalysts used to clean the exhaust of petroleum-product fuelled vehicles faces the uncertainties tied to moves toward electric vehicles. There is a strain of thinking that EVs will displace petroleum-burning gasoline and diesel ICE engines much more rapidly than is realistic. There are many obstacles to a rapid move to EVs, including a lack of capital for material and component manufacturers. The outlook is that petroleum will still power the vast majority of cars and trucks in 2030 and even 2040, despite overly optimistic pronouncements by politicians.

The reality that EVs are not a panacea for global warming and climate change, and that EVs will be a longer time coming than has been commonly thought, may become more prominently known in 2022. When this does, it will benefit platinum and palladium.

In the meantime, the reality of the shift toward more platinum intense and less palladium intense auto catalytic converters should help move platinum prices up slowly in 2022 while keeping palladium prices under pressure.

—About the authors: Jeffrey Christian is managing partner of New York-based commodities consultant CPM Group. Rohit Savant is CPM’s vice president research and Carlos Sanchez is a director.