Group Economics
Precious Metals Watch
Macro & Financial Markets Research
06 July 2016
New precious metal forecasts • Sharp rally in prices since the Brexit referendum…
Georgette Boele Co-ordinator FX & Precious Metals Strategy Tel: +31 20 629 7789
• …and we expect higher prices in Q3 2016 • But profit taking in Q4 2016 and Q1 2017 because of anticipation of Fed rate hikes in 2017
georgette.boele@nl.abnamro.com
• We expect such a sell-off in prices to be temporary … • …and to be an opportunity to position for higher prices afterwards… • …as the overall longer-term outlook remains bullish
Sharp price rally since the Brexit referendum We have been asked three questions lately. Why have gold and silver prices rallied sharply? Why has silver outperformed gold? Do we expect further upside in prices? Gold and silver prices have rallied substantially since the Brexit referendum and silver has considerably outperformed gold prices. Safe haven demand, the market pricing out of Fed rate hikes this year and next year and more BoE and ECB monetary policy easing are the main reasons behind the price rally. In addition, silver’s outperformance is mainly a catchup to gold in thinner market conditions as silver prices were relatively more attractive. Our forecasts for the end of September (USD 1,350 per ounce gold) and end of December (USD 20 per ounce silver) have been reached. This has resulted in a sharp drop the gold/silver ratio (in line with our view). What is more, speculative net long positions in both gold and silver are excessive and make prices vulnerable to an abrupt change in sentiment. Though the overall outlook is positive.
Net long speculative positions excessive in gold… Number of contract in gold
…and silver Number of contracts in silver
400,000
120,000
300,000
80,000
200,000 40,000
100,000 0
0 10
11 12 Long contracts
13 14 Short contracts
Source: Bloomberg, ABN AMRO Group Economics
10
15 16 Net positions
11 Long contracts
12
13
14
Short contracts
Source: Bloomberg, ABN AMRO Group Economics
Insights.abnamro.nl/en
15
16
Net positions (lhs)
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Precious Metals Watch - New precious metal forecasts - 06 July 2016
Replay of April-May? There are some concerns that we may see a replay of the end of April’s price action. The month of May brought sharply falls in both gold and silver prices because financial markets started to anticipate for Fed rate hikes this year. Will this also happen in July, August or September? We don’t think so. We don’t expect Fed rate hikes this year (in line with market consensus) and the anticipation of possible Fed rate hikes in 2017 is still 3 to six months away. There is a risk that stronger-than-expected US data and/or surprisingly hawkish Fed commentary would start this process earlier. But this is not our base case. In addition, the environment remains very supportive gold and silver. For a start, we don’t expect a strong rally of the US dollar (only versus sterling) and this will help gold and silver prices as they are proxy currencies. Moreover, demand for safe haven assets will likely be alive in the short-term.
Any sell-off to be temporary as longer-term outlook remains positive The overall bullish outlook for precious metal prices will not change in our view. The reason behind the Fed rate hikes is crucial for its effect on the US dollar. We expect moderate US growth and some pick-up in inflation expectations triggering the Fed to hike rates. This is not a major bull-case for the US dollar as US real rates will unlikely move higher. This will remain a supportive driver for gold and other precious metal prices.
US real yields likely to remain supportive for gold… Gold price
10y US real yields (reverse scale)
2,000
-4
…and silver Gold price
10y US real yields (reverse scale)
50
-4
-3
1,800
-2
1,600
-1
1,400
0 1
1,200
2
1,000
3 10
11
12
13
Gold price (lhs)
14
15
16
-3 40
-2 -1
30
0 1
20
2 10
3 10
10y US real yields (rhs)
Source: Bloomberg, ABN AMRO Group Economics
11 12 13 Silver price (lhs)
14 15 16 10y US real yields (rhs)
Source: Bloomberg, ABN AMRO Group Economics
Gold is not expensive…
…neither is silver
Index
Index
700
1,000 800
500
600 400
300
200 100
0 00
02
04
06
Gold/EUR index Gold/USD index
08
10
12
14
Gold/GBP index Gold/JPY index
Source: Bloomberg, ABN AMRO Group Economics
16
00
02
04
06
Silver/EUR index Silver/USD index
08
10
12
14
Silver/GBP index Silver/JPY index
Source: Bloomberg, ABN AMRO Group Economics
16
3
Precious Metals Watch - New precious metal forecasts - 06 July 2016
In addition, as the graphs above show gold and silver prices are still at relatively attractive levels despite the rally so far this year. They should continue to attract investors as central banks globally (such as the BoE and the ECB) continue to have accommodative policies and prices of other assets with some safe haven characteristics are more expensive. Netlong speculative positions in gold and silver may be extreme, but total positions in gold ETFs are far from extreme and still have room to increase (see graph below).
Total known ETF positions vs gold price In million troy ounces
Gold price USD/ounce
100
2,200
80
1,800
60
1,400
40
1,000
20
600
0
200 96 98 00 02 04 06 08 10 12 14 16 Total ETF positions gold (lhs)
Gold price (rhs)
Source: Bloomberg, ABN AMRO Group Economics
Moreover, slowly but surely we expect global growth to improve modestly over time and this should result a some upward adjustment in cyclical demand expectations for silver, platinum and palladium. This and the relatively attractive price levels of cyclical precious metals compared to gold should result in an outperformance of silver, platinum and palladium compared to gold.
Silver outperformance to gold is underway… Gold/silver ratio
…while platinum’s outperformance has not started yet Gold/platinum ratio
1.4
100
1.2
80
1.0
60 0.8
40
0.6
20
0.4
90 92 94 96 98 00 02 04 06 08 10 12 14 16 Gold/silver ratio Source: Bloomberg, ABN AMRO Group Economics
90 92 94 96 98 00 02 04 06 08 10 12 14 16 Gold/Platinum ratio Source: Bloomberg, ABN AMRO Group Economics
New forecasts To reflect all the dynamics above we have adjusted our precious metals forecasts. We now expect more strength in gold and silver prices in Q3. We have adjusted Q4 2016 and Q1 2017 forecasts to reflect the temporary impact of expectations of Fed rate hikes in 2017. This would be an opportunity to buy precious metals as the long-term trend remains positive.
4
Precious Metals Watch - New precious metal forecasts - 06 July 2016
ABN AMRO precious metals forecasts Changes in red/bold
New
End period Gold Silver Platinum Palladium
06-Jul 1,366 20.2 1,071 601
Dec-15 1,061 13.9 894 562
Mar-16 1,233 15.38 976 563
Average Gold Silver Platinum Palladium
Q1 16 1,181 14.9 975 527
Q2 16 1,258 16.8 1,004 568
Q3 16 1,374 20.0 1,084 609
End period Gold Silver Platinum Palladium
06-Jul 0 0.0 0 0
Dec-15 1,061 13.9 894 562
Mar-16 1,233 15.38 976 563
Average Gold Silver Platinum Palladium
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
Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 1,322 1,425 1,450 1,425 1,350 1,300 1,400 18.48 21.50 19.00 18.00 20.00 22.00 24.00 1,018 1,150 1,050 1,000 1,200 1,300 1,400 597 620 600 580 625 650 700 Q4 16 1,388 20.3 1,100 610
2016 Q1 17 Q2 17 Q3 17 1,300 1,325 1,350 1,413 18.0 18.5 19.0 21.0 1,041 1,025 1,100 1,250 578 590 603 638
Q4 17 1,438 23.0 1,350 675
2017 1,381 20.4 1,181 626
Old
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
Source: ABN AMRO Group Economics
Find out more about Group Economics at: https://insights.abnamro.nl/en/
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