Precious Metals Watch
Group Economics Macro & Financial Markets Research
31 May 2016
Has the trend changed? Georgette Boele Co-ordinator FX & Precious Metals Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com
 The repricing of Fed rate hikes this year has resulted in an aggressive sell-off in precious metal prices  Despite the recent moves we expect a restart of the rally in precious metal prices
Aggressive sell-off After the strong performance of precious metal prices until the end of April, there was a dramatic sell-off in May. Prices dropped by 6 to 14%. Yesterday, gold prices even dipped below USD 1,200 per ounce. Since Mid-February we have been bullish on precious metal prices. At the time we released our report, gold prices were at USD 1,202 per ounce, silver at 15.2, platinum at 937 and palladium at 512 per ounce. Currently, we are above those price levels but they are still far away from our end of June price targets. We were aware that the heavy speculative positioning in especially gold and silver would pose downside risks to prices, but it is always difficult to call the exact timing. The prospect of earlier and/or more Fed rate hikes than expected before is a negative driver for precious metal prices. Higher US rates (also corrected for inflation) makes zero to low yielding assets less attractive and have a positive impact on the US dollar. To conclude, financial markets started pricing in a Fed rate hike earlier than we thought.
Has the trend changed? The main question is: Has the trend in precious metal prices changed? We don’t think so. First, as long as prices remain above their 200-day moving averages, the upward trend remains in place in our view. For gold prices the 200-day moving average comes in at USD 1,163 per ounce, for silver at 15.19 and for platinum at 942 per ounce. So any bottom in prices above these levels is an indication that the upward trend remains in place. Only palladium prices are currently below the 200-day moving average which is a negative sign. Second, financial markets have re-priced the odds for a rate hike this year. They now see a 30% probability of a rate hike in June, a 54% probability of a rate hike in July, while one rate increase before the end of this year is now fully priced in by financial markets. The possibility of a second rate hike has also risen. Despite the hawkish remarks by Fed officials, the Fed remains on a data-watch-mode so a rate hike is not a done deal. If US economic data fail to match expectations, expectations of a rate hike in June or July will also fade.
Insights.abnamro.nl/en
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Precious Metals Watc ch - Has the trend chang ged? - 31 Ma ay 2016
Third, since the end o of April the US S dollar has rallied between 3--6% versus ma ajor currencies. We think the upside in the t US dollar frrom here is lim mited unless US S economic growth h starts to surp rise substantia ally to the upsid de, inducing Thhe Fed to hike rates r more aggres ssively (not ourr base case). We W continue to believe that U S real interest rate develo opments will we eigh on the US S dollar and sup pport gold and other precious s metal prices..
Speculative positiioning Numberr of contracts
400,0 000 300,0 000 200,0 000 100,0 000 0 14 Long co ontracts
15 Short contracts
16 Net positions
Source: Bloomberg, ABN N AMRO Group Ec conomics
Last but not least, the e aggressive sell-off s in precio ous metal pricees over the lastt weeks has resulte ed in a clean-up p of speculative excessive ne et long positionns. This is alrea ady to some extent visible in the la atest data. The ey show a decrrease in long po positions and an n increase in short positions. p Thesse data had las st Tuesday as cut-off c date, soo we expect a substantial s reduction in net long--positions in the report that will w be released on Friday. Lighter positio ons could attracct new buyers. In addition, po ositions in exchhange-traded products remain ned resilient, w which is a signa al that longer-te erm investors aare willing to bu uy and hold precious metal positi ons. If we take e all above into account we reemain positive on precious metal prices.
Total known gold E ETF positions and gold prrice In million ounces
Gold price
100
2,200
80
1,800
60
1,400
40
1,000
20
600
0
200 96
98
00
0 02
04
06
0 08
10
Total ETF positions gold (lh hs) Source: Bloomberg, ABN N AMRO Group Ec conomic
12
14 4
16
Gold price (rhs)
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Precious M Metals Watc ch - Has the trend chang ged? - 31 Ma ay 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
31-May y 1,212 2 16.1 1 977 7 544 4
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 J M Jun-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 00 1,350 1,400 1,100 1,150 1,200 1,250 1,30 740 620 6 640 660 680 70 00 720 Q4 16 1,360 19.5 1,175 650
20 016 Q1 17 Q2 17 Q3 17 1,2 283 1,370 1,385 1,413 21.5 22 17 7.4 20.5 2.5 1,0 078 1,225 1,275 1,32 25 6 600 670 690 710
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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