Precious Metals Watch
Group Economics Macro & Financial Markets Research
14 June 2016
Battle of safe havens assets Georgette Boele Co-ordinator FX & Precious Metals Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com
• Ahead of the Brexit referendum sentiment has deteriorated • When the pound fell out of ERM in 1992 gold prices rose • But gold prices peaked before the climax of Global Financial Crisis… • …and eurozone crisis reflecting a flight to more liquid assets • We expect gold prices to rally in case of a Brexit… • …and the rally will be more substantial if there is contagion • But gold prices will likely peak again before the climax
Sentiment deterioration in financial markets ahead of Brexit referendum Markets have - rightly in our view - become more nervous about Brexit as can be seen by higher risk premiums. The stress in the FX options market has increased further with even higher demand for downside protection and an increase in volatility. Since the end of May, sterling has fallen by more than 3.5% versus a basket of currencies. In addition, currencies with safe haven attributes, such as the yen and the dollar and gold, have done well. Market sentiment is closely following developments in the opinion polls. As long as the polls remain close, uncertainty will likely trigger further risk aversion in financial markets ahead of the 23 June referendum. In this Watch we focus on how gold prices would possibly react in case of a Brexit. We do this on how gold behaved during previous crises.
Behaviour of gold and VIX in 1992
Behaviour of gold and yen in 1992
Gold price
VIX
Source: Bloomberg, ABN AMRO Group Economics
Gold price
Source: Bloomberg, ABN AMRO Group Economics
Insights.abnamro.nl/en
Yen
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Precious Metals Watch - Battle of safe havens assets - 14 June 2016
Gold and other safe haven assets rose during EMS crisis of 1992… On 17 September 1992 the pound dropped out of the ERM. Between September 1992 and November 1992, GBP/USD dropped by more than 21%. It weakened by another 7% up to March 1993. In that period, the US dollar rallied sharply by 19% (until March 2013). Gold prices, the yen and equity volatility (VIX) all rose as well (see graphs above).
…but some divergence during the global financial crisis… In 2007, troubles in the US sub-prime market slowly started to evolve in a crisis that would become known of the Global Financial Crisis (GFC), which had its climax on 10 October 2008 when interbank market liquidity almost completely evaporated. At the early phase of crisis, equity volatility, gold prices and the yen all rose moderately. However, when panic ruled financial markets, resulting in a liquidity shortage and systemic break-down fears, gold prices were already on the way down. The graphs below clearly show that at the height of the Global Financial Crisis gold prices moved lower instead of higher, while the US dollar and the yen rallied (against a basket of currencies).
Behaviour of gold during GFC
Behaviour of gold during GFC
Gold price
3m Ted spread
Source: Bloomberg, ABN AMRO Group Economics
Gold price
VIX
Source: Bloomberg, ABN AMRO Group Economics
Behaviour of gold during GFC
Behaviour of gold during GFC
Gold price
USD
Source: Bloomberg, ABN AMRO Group Economics
Gold price
Yen
Source: Bloomberg, ABN AMRO Group Economics
… and gold prices peaked before the height of the eurozone crisis During the eurozone crisis (2011-2012) gold prices also peaked before financial stress peaked. At the moment that financial markets were in panic state, gold prices moved
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Precious Metals Watch - Battle of safe havens assets - 14 June 2016
lower while the yen and US dollar rose. Why do gold prices peak before the climax and fall even during the climax? With the opening of the gold market to the wider public since 2004, investors can already anticipate a possible crisis. When risk sentiment deteriorates further, at some point in time, liquidity is valued the most. Therefore, the US dollar and the yen rise during a climax as they are the most liquid financial markets.
How will gold behave in case of a Brexit result? Despite our base case for no Brexit, the odds for a possible Brexit have clearly increased. This has resulted in some deterioration on financial markets. Gold prices have risen because of this uncertainty and will likely continue to do so ahead of the Brexit referendum (23 June). How will gold react to a Brexit outcome? We think that the first reaction will be higher gold prices. In the days and weeks following the Brexit result, gold prices could rally to USD 1,350 per ounce. The question is if financial markets will start to anticipate contagion to the eurozone and a revival of the eurozone crisis. If there is contagion, gold prices will likely continue to rally and could move above USD 1,400 per ounce. However, if eurozone break up fears were truly to mount, leading to a risk off mode that affects liquidity, gold prices are likely to peak again before the climax of the crisis. Then the yen and the US dollar could strongly outperform gold.
Behaviour of gold eurozone crisis Gold price
Behaviour of gold eurozone crisis and now 3M EUR LOIS spread
Source: Bloomberg, ABN AMRO Group Economics
Gold price
Yen
Source: Bloomberg, ABN AMRO Group Economics
ABN AMRO precious metals forecasts Changes in red/bold
End period Gold Silver Platinum Palladium Average Gold Silver Platinum Palladium
14-Jun 1,285 17.4 988 542
Dec-15 1,061 13.9 894 562
Mar-16 1,233 15.38 976 563
Q1 16 1,181 14.9 975 527
Q2 16 1,266 16.7 1,038 592
Q3 16 1,325 18.5 1,125 630
Source: ABN AMRO Group Economics
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 18.00 19.00 20.00 21.00 22.00 23.00 24.00 1,100 1,150 1,200 1,250 1,300 1,350 1,400 620 640 660 680 700 720 740 Q4 16 1,360 19.5 1,175 650
2016 Q1 17 Q2 17 Q3 17 1,283 1,370 1,385 1,413 17.4 20.5 21.5 22.5 1,078 1,225 1,275 1,325 600 670 690 710
Q4 17 1,438 23.5 1,375 730
2017 1,401 22.0 1,300 700
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Precious Metals Watch - Battle of safe havens assets - 14 June 2016
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