150722 precious metals watch

Precious Metals Watch Downward revisions in forecasts

Group Economics Macro & Financial Markets Research Georgette Boele, tel,+31 20 6297789

22 July 2015 • • • •

General weakness in precious metal prices and more weakness ahead Gold prices broke below crucial support of USD 1,130 per ounce Gold to be the worst performing precious metal over the coming year Recovery in cyclical precious metal prices to come later

Rout in precious metals

demand have been adjusted downwards. This has affected all

Since our latest Precious Metals Watch of 1 July 2015,

precious metal prices.

precious metal prices have weakened substantially. They have lost between 5.5% to 12%. Palladium prices have lost the

In addition, the improvement in investor sentiment following a

most, while silver prices have weakened the least.

deal between Greece and its creditors on 13 July, has weighed on safe haven assets. Gold is still considered to be one of

Investors have pushed palladium prices lower…

these assets (something we question). This improvement in

Number of contracts

investor sentiment has also sent the US dollar higher, which is

Palladium price

40,000

1000

30,000

900

generally negative for precious metal prices.

Higher US dollar negative for precious metal prices 90-day rolling correlation

20,000

800

10,000

700

0.5

600

0.0

0 Jan 14

Jul 14 Net positions (lhs)

Jan 15

1.0

Jul 15

-0.5

Palladium prices (rhs)

Source: Bloomberg, ABN AMRO Group Economics

-1.0 10

11

12

13

Palladium vs USD Platinum vs USD

…and also platinum prices Number of contracts

14

15

Gold vs USD Silver vs USD

Platinum price

60,000

1,700

Source: Bloomberg, ABN AMRO Group Economics

50,000 1,500 40,000

hiking this year have made precious metals that yield zero to

30,000

1,300

almost nothing very unattractive. Last but not least, the technical outlook of precious metal prices has deteriorated

20,000 1,100 10,000 0 Jan 14

Moreover, the adjustment in expectations that the Fed will start

900 Jul 14 Net positions (lhs)

Jan 15

Jul 15

Platinum prices (rhs)

Source: Bloomberg, ABN AMRO Group Economics

sharply. Gold prices were the last precious metal price, which broke out on the downside, making the overall precious metals outlook very negative.

More gold price weakness ahead…

On 20 July, gold prices broke below the crucial support level of USD 1,130 per ounce and as a result prices have resumed

Why have precious metal prices fallen considerably? For a

their downtrend that started in 2011. This price action is in line

start, the weakness in Chinese equities has added to concerns

with our expectations. We remain negative going forward with

about the strength of Chinese economy. As a result, demand

a year-end target of USD 1,000 per ounce and USD 800 per

expectations for Chinese industrial demand and jewellery

ounce for the end of 2016. We do have revised down our

2

Precious Metals Watch - Downward revisions in forecasts

September 2015 forecast from USD 1,100 per ounce to USD

Gold/platinum levels at extreme

1,050.

ratio

1.2

Investors will likely liquidate gold positions when US dollar and US rates go up in an environment where inflation expectations

1.0

remain muted and investor sentiment is constructive.

Moreover, as gold has a relatively low share of industrial

0.8

demand, this will unlikely come to the rescue when industrial demand picks up. Although, we expect Chinese gold demand,

0.6

especially jewellery demand, to improve, this should not be 0.4

able to offset the negative trend in gold.

90

95

05

10

15

Gold/Platinum ratio

…and the recovery in cyclical precious metals to arrive later

00

Source: Bloomberg, ABN AMRO Group Economics

The negative spillover effect of lower gold prices on other precious metal prices signals that investor liquidation has further to go. This is despite the fact that net speculative

Our Precious Metals forecasts Adjustments in bold/red

positions are relatively low and speculative short positions are substantial. The risk has risen that investors will also liquidate positions in exchange traded products and funds. These positions are substantial (see graph below).

Total outstanding ETF positions In mln troy ounces

4.0

End period Gold Silver Platinum Palladium

22-Jul Close 14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 1,095 1,185 1,184 1,172 1,050 1,000 950 900 850 800 14.8 15.7 16.6 15.7 14.5 15.0 15.5 16.0 16.5 17.0 968 1,216 1,141 1,081 950 1,000 1,050 1,100 1,150 1,200 621 798 736 674 600 600 625 625 650 650

Average Gold Silver Platinum Palladium

Q1 15 1,218 16.7 1,194 786

Q2 15 1,193 16.4 1,129 759

Q3 15 1,111 15.1 1,015 637

Q4 15 1,025 14.8 975 600

Source: ABN AMRO Group Economics

3.0 2.0 1.0 0.0 07

08

09

10

11

Palladium

12

13

14

15

Platinum

Source: Bloomberg, ABN AMRO Group Economics

This implies that cyclical precious metal price weakness has further to go as well. As a result, we have revised our forecasts downwards. We were too quick to turn positive on platinum prices. We still expect platinum prices to outperform gold prices going forward. However, it is unlikely that platinum prices will rally when gold prices drop considerably in the coming weeks and months, despite the improving fundamentals. We expect the improving fundamentals to result in some recovery in silver, platinum and palladium later in the year, when investor position liquidation has come to an end.

2015 Q1 16 Q2 16 Q3 16 Q4 16 975 925 875 825 1,137 16.0 15.3 15.8 16.3 16.8 1,078 1,025 1,075 1,125 1,175 700 613 625 638 650

2016 900 16.0 1,100 631

3

Precious Metals Watch - Downward revisions in forecasts

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