Precious Metals Watch
Group Economics Macro & Financial Markets Research
24 May 2016
Gold’s temporary setback Georgette Boele Co-ordinator FX & Precious Metals Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com
There are a wide variety of drivers for gold prices We think that the recent set-back in gold prices is temporary… …and drivers will turn more positive again… …leading to higher gold prices later this year and next year
Gold’s diverse character Gold has a diverse character. First, gold has currency attributes and is therefore direct competition with the US dollar. Second, higher interest rates in the US and in other countries are not supportive for gold prices (because gold offers very little to no income). However, investors also take into account inflation developments. Third, gold has safe haven attributes. Moreover, investor sentiment also plays an important role. To define the direction in gold prices, it is important to take all these drivers, which are interlinked, into account.
Gold prices and US VIX and USD 3-month rolling correlation
1.0 0.5 0.0 -0.5 -1.0 04 05 06 07 08 09 10 11 12 13 14 15 16 Gold vs VIX
Gold vs USD
Source: Bloomberg, ABN AMRO Group Economics
Gold’s strong negative relationship with the US dollar… Gold and the US dollar usually have a strong negative relationship. This is because gold has currency attributes and it is used as central bank reserves like other major currencies. Therefore, it is in direct competition with major currencies. Since the introduction of exchange traded funds (end of 2003) in the gold market, this relationship has only become stronger. The graph above shows gold’s relationships with the US dollar and with equity volatility (VIX). Though there have been times that both the dollar and gold moved higher,
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Precious Metals Watc ch - Gold’s te emporary se etback - 24 May 2016
this ma ainly happened d when investo or sentiment turrned sour (refleected by higher equity volatility).However, a at the height of the Global Financial Crisis saafe haven currencies, the yen an nd the US dolla ar, rallied strong gly and they ev ven outperform med gold prices s. The US S dollar weake ened from Febrruary 2016 up to t the end of A April 2016 by more m around 8.5%. It will not come e as a surprise e that gold price es rallied stronggly, by close to o 16%. Since dollar has been n on a recovery y path (+3%) aand gold prices have given the end of April, the d back around a 3% as w well. The upwa ard adjustment in Fed interestt rate expectatiions since 12 May has also sup pported the US dollar and weighed on gold pprices. If investtor ment towards go old were to be more negative e, gold prices w would have falle en more sentim substa antially since th he end of April. What factors have h dampeneed the downside? In short, the sta abilisation in US S real yield exp pectations in an environment of positive investor sentim ment.
‌and d with US reall yield develo opments The un northodox easi ng of major central banks ove er the recent ye years has fuelle ed fears that inflatio on eventually m may sharply rise e. Recently, the ere has been ssome uptick in inflationary pressu ures in the US a and the recove ery in oil prices has also resullted in higher in nflation expecttations. This ha as provided support to gold prices.
Gold prices versu us real yields Gold priice
US real yield d in % (inverse scaale)
2,0 000
-4
1,8 800
-3
1,6 600
-2
1,4 400
-1
1,2 200
0
1,0 000
1 11
12 2 Gold pricee (lhs)
13
14
15
16
US real yield (rhs), in nverse scale
Source: Bloomberg, ABN N AMRO Group Ec conomics
s an asset thatt virtually pays no income. Such an asset beecomes relative ely attractive Gold is if rates s on other asse ets move to zerro or to even negative. Over tthe years, this has been the cas se for a wide vvariety of goverrnment bonds in Japan, the eeurozone, Switz zerland, Swede en and Denma rk. In addition, some major cu urrencies also have low to ne egative official rates. This ma akes an asset like gold more attractive. Whaat is crucial forr the outlook for gold prices is thatt rates, especia ally real rates, will w not rise shaarply. Just afte er the gold price peaked p in 2011 1, US real yield ds started to mo ove higher andd this continued d until May 2015. In this period, g gold prices dro opped by more than 37%. Sinnce then, the ris se in US real yie elds has lost m momentum and these yields moved m into neggative territory again a (see graph above). This hhas supported gold g prices. Firrst the downwaard pressure on n gold prices eased (in 2015) and this was follow wed by an impre essive price reecovery this yea ar.
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Precious Metals Watc ch - Gold’s te emporary se etback - 24 May 2016
Going forward, we exxpect the Fed to t remain on ho old this year wh while inflation prressures could pick p up somew what because of o higher comm modity prices. Iff the Fed were to hike interes st rates this yea ar (not our bas se case), it will likely be graduual and it will un nlikely hike more than t the rise in inflation expec ctations. There efore, it is unlikeely that US rea al yields will rise further. At best th hey will remain n neutral, but th he odds are forr lower US real yields. This will we eigh on the US dollar. Therefo ore, we think th hat the near-terrm downside fo or gold prices will likely be lim mited.
We re emain positive e on gold All in all, a we continue e to be positive e on the outlook k for gold pricees. For a start, we w think that the mu ulti-year US do ollar rally has co ome to an end and the recentt recovery is just temporary in our view w. Moreover, we w expect US re eal yields (takinng into accoun nt inflation active. In expecttations) to peakk and to move lower. This will make gold ass an asset attra additio on, gold’s price e is relatively atttractive compa ared to other asssets with safe e haven attributes.
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Precious M Metals Watc ch - Gold’s te emporary se etback - 24 May 2016
AB BN AMRO pre ecious metals s forecasts Changes in red/bold
End period E G Gold S Silver P Platinum P Palladium Average A G Gold S Silver P Platinum P Palladium
23-May y 1,247 7 16.4 4 1,011 1 552 2
Dec-15 1,061 13.9 894 562
Mar-16 1,233 15.38 976 563
Q1 16 6 1,181 1 14.9 9 975 5 527 7
Q2 16 1,266 16.7 1,038 592
Q3 16 1,325 18.5 1,125 630
Jun-16 Sep--16 Dec-16 Mar-17 M Jun-1 17 Sep-17 Dec-17 1,300 1,3 350 1,370 1,370 1,40 00 1,425 1,450 18.00 19. 00 20.00 21.00 22.0 00 23.00 24.00 1,100 1,150 1,200 1,250 1,30 00 1,350 1,400 620 740 6 640 660 680 70 00 720 Q4 16 1,360 19.5 1,175 650
20 016 Q1 17 Q2 17 Q3 17 1 1,2 283 1,370 1,385 1,41 13 17 7.4 20.5 21.5 22 2.5 1,0 078 1,225 1,275 1,32 25 6 600 670 690 71 10
Q4 17 1,438 23.5 1,375 730
2017 1,401 22.0 1,300 700
Sou urce: ABN AMRO Group Economicss
nd out more abo out Group Eco onomics at: http ps://insights.a abnamro.nl/en n/ Fin
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