160706 precious metals watch

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)

2

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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