Precious Metals Weekly
Group Economics Macro & Financial Markets Research
22 March 2016
More bullish on gold Georgette Boele Co-ordinator FX & Precious Metals Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com
Gold behaves like a risky asset… …and the underlying sentiment remains strong Change in our US dollar view makes us more positive on precious metals Cyclical precious metals to outperform gold Our new year-end gold price forecast is USD 1,370 per ounce Gold as risk asset Gold is often referred to as a safe-haven asset. However, in the current environment gold prices behave as a risky asset. Gold is not even coming close in behaving as safe-haven asset. Based on the 90-day rolling correlation gold prices have a positive relationship with copper prices, with US equity markets (Dow Jones), 10y US Treasury yields but a negative relationship with equity volatility (VIX, see below). So all these relationships are opposite of what you would expect from a safe-haven asset. This behaviour does not come as a surprise to us as we argued in numerous publications that gold has substantially lost its safe-haven characteristics.
Correlation Gold prices with VIX and 10y US yield Correlation, 90-day rolling
1.0 0.5 0.0 -0.5 -1.0 Jan 15
Apr 15
Jul 15
Gold vs VIX
Oct 15
Jan 16
Gold vs US 10-year
Source: Bloomberg, ABN AMRO Group Economics
Change in US dollar view makes us more positive on precious metals… Recently, we revised our overall US dollar outlook. We now believe that the multi-year US dollar rally has peaked and that it will turn lower. We have laid out our arguments in the publication FX Watch – The dollar rally is over. What consequences does this change in view have for our outlook for precious metals? In short, it is positive. Over the recent
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Precious Metals Weekly - More bullish on gold - 22 March 2016
years, the most dominant driver for gold prices has been the direction of the US dollar. As we are now expecting a lower dollar over the coming years, a crucial headwind is taken away.
Correlation Gold prices with US dollar Correlation, 90-day rolling
1.0 0.5 0.0 -0.5 -1.0 07
08
09
10
11
12
13
14
15
16
Gold vs TWI US Source: Bloomberg, ABN AMRO Group Economics
‌next to the downward pressure real US yields From 2012 to November 2015, US real yields (2y yield- CPI) have been on an upward trend (becoming less negative). This has been a support for the US dollar and a negative driver for gold prices. However, since November 2015, they have turned into negative territory again. In general, negative real yields are supportive for gold and other commodity prices because they don’t pay a coupon or dividend. We think it is unlikely that the Fed will surprise financial markets by becoming more hawkish than expected in the future because the Fed will not be happy with too much US dollar strength. We expect the Fed to remain on hold this year which will likely put a downward pressure on real yields. Financial markets have priced in a high probability of one rate hike this year. When this is priced out, the US dollar will likely move lower and precious metal prices will rise. In short, gold prices will be supported if financial markets price out Fed rate hikes this year and because of the downward pressure on US real yields.
Gold price and 2y US real yields Gold price
2y US real yields (inverse scale)
2,000
-4
1,800
-3
1,600
-2
1,400
-1
1,200
0
1,000
1 10
11
12
Gold price (lhs) Source: Bloomberg
13
14
15
16
2y US real yields (rhs)
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Precious Metals Weekly - More bullish on gold - 22 March 2016
Even if the Fed were to hike more aggressively than expected this may not be dollar positive. For instance, in a situation where inflation or inflation expectations were to rise more substantially than expected, this would likely weigh on the US dollar. In such a situation, financial markets would believe that the Fed is behind the curve, which is negative for a currency. This should be positive for gold prices as investors will likely buy gold because of lower US real yields and as some may see gold as a possible inflation hedge. Therefore, gold prices will unlikely suffer next year when we expect gradual Fed rate hikes.
Cyclical precious metals to outperform gold‌ Between June 2015 and March 2016, gold prices outperformed platinum, palladium and silver prices. Last year, the floor under platinum prices was removed at the time of the emission scandal. As a result, investors aggressively liquidated positions in platinum and palladium. Prices of these precious metals dropped at a faster pace than gold prices. This year the gold/platinum ratio moved above the 1.33 level several times (very extreme); also on 3 March. The U-turn came earlier this month. When platinum prices broke above the 200-day moving average, the technical sentiment improved substantially; signaling that the downtrend may be over. This was an important signal for investors who considered that prices had already been at unrealistically low levels. ‌also because of an improvement in demand outlook The US employment report in March has played an important role in a further improvement in investor sentiment towards cyclical precious metals. This report has fueled optimism that the US economy and also the world economy may not be as weak as feared. As a result, expectations on the demand outlook have been adjusted upwards. Gold and silver prices are less sensitive to changes in outlook of cyclical demand than platinum and palladium. Therefore, platinum and palladium prices mainly profited from this improvement in sentiment. This is surprising as industrial demand is also very important for silver. This might be because silver often trades in tandem with gold as a currency. Further outperformance of cyclical precious metals Going forward we expect higher precious metal prices during the course of this year. More monetary stimulus by central banks should support investor sentiment and the overall cyclical demand and jewellery demand outlook, resulting in a further outperformance of the cyclical precious metals compared to gold this year and next year.
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Precious Metals Weekly - More bullish on gold - 22 March 2016
ABN AMRO precious metals forecasts Changes in red/bold
New
End period Gold Silver Platinum Palladium Average Gold Silver Platinum Palladium
22-Mar 1,251 15.9 982 600
Dec-15 1,061 13.9 894 562
Mar-16 1,250 16.00 980 600
Q1 16 1,156 14.9 937 581
Q2 16 1,275 16.3 990 610
Q3 16 1,325 16.8 1,025 630
22-Mar 1,251 15.9 982 600
Dec-15 1,061 13.9 894 562
Mar-16 1,200 15.0 950 525
Q1 16 1,131 14.4 922 543
Q2 16 1,213 15.3 963 538
Q3 16 1,238 15.8 988 563
Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 1,300 1,350 1,370 1,370 1,400 1,425 1,450 16.50 17.00 17.50 17.50 18.00 18.50 19.00 1,000 1,050 1,100 1,125 1,150 1,200 1,250 620 640 660 680 700 720 740 Q4 16 1,360 17.3 1,075 650
2016 1,279 16.3 1,007 618
Q1 17 1,370 17.5 1,113 670
Q2 17 1,385 17.8 1,138 690
Q3 17 1,413 18.3 1,175 710
Q4 17 1,438 18.8 1,225 730
2017 1,401 18.1 1,163 700
Old
End period Gold Silver Platinum Palladium Average Gold Silver Platinum Palladium
Source: ABN AMRO Group Economics
Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 1,225 1,250 1,300 1,300 1,300 1,300 1,300 15.5 16.0 16.5 17.0 17.5 18.0 18.5 975 1,000 1,050 1,075 1,075 1,100 1,200 550 575 600 625 650 675 700 Q4 16 1,275 16.3 1,025 588
2016 1,214 15.4 974 558
Q1 17 1,300 16.8 1,063 613
Q2 17 1,300 17.3 1,075 638
Q3 17 1,300 17.8 1,088 663
Q4 17 1,300 18.3 1,150 688
2017 1,300 17.5 1,094 650
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Precious Metals Weekly - More bullish on gold - 22 March 2016
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DISCLAIMER This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product 窶田onsidering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. ﾂｩ Copyright 2016 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").
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Precious Metals Weekly - More bullish on gold - 22 March 2016
Find out more about Group Economics at: https://insights.abnamro.nl/en/
DISCLAIMER This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product 窶田onsidering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. ﾂｩ Copyright 2016 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").