160722 precious metals watch

Precious Metals Watch

Group Economics Macro & Financial Markets Research

22 July 2016

Trump would be bullish for gold  Inflation has been an important driver for gold prices…

Georgette Boele Co-ordinator FX & Precious Metals

 …as well as the growth/inflation mix, real rates, the US dollar and safe

Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com

haven demand  A Democratic victory in November’s presidential elections…  … will unlikely substantially change the US economic outlook  Therefore, the growth/inflation mix and negative real yields will remain supportive for gold prices…  …as well as a negative longer-term USD trend  A Trump victory would be bullish for gold prices

Introduction In this Precious Metals Watch we investigate the possible impact of US elections on gold prices. We first provide an overview on how gold behaved during previous Presidencies and why. Then we focus on the upcoming US elections and what this could mean for gold prices.

How did the gold prices behave during previous Presidencies?

In general gold prices perform well in the following environments: 1.

High US inflation

2.

Financial crisis/uncertainty

3.

Growth/inflation ratio below one

4.

Decreasing or negative real yields

5.

A lower US dollar

During the 1980’s and 1990’s, gold prices were very sensitive to changes in inflation (expectations). During the Presidencies of Ford, Carter, Reagan I, Reagan II, George Bush and Clinton I (see table below), consumer price inflation and gold prices moved in the same direction. This means that gold was seen as a hedge against inflation.

Since the Presidency of Clinton II the behaviour of gold prices has changed. More factors started to have an impact on gold prices such as growth/inflation mix, US economic growth compared out potential growth, US real rates and the US dollar. There are several reasons for this. First, during Clinton II, Fed monetary policy tightening quelled inflation fears and resulted in a considerable rise in US real yields. In addition, the US also had a

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Precious Metals Watc ch - Trump would w be bu llish for gold - 22 July 2016 2

fiscal surplus. s This co ombination was negative for gold prices as well as the stro ong rally in the US S dollar during the EM crisis. Despite severa al international crises during the t Presidency of Clinton n II (Asia, Braz zil, Russia, LTC CM, DotCom Buubble, Argentin na) the US o g gold. dollar outperformed

Gold d’s performan nce during different Presid dencies Data un ntil the end of 20115, ** G/I = Growth h/Inflation

Presidency Ford Carterr Reagaan I Reagaan II G Bussh Clintoon I Clintoon II GW Bush B I GW Bush B II Obam ma I Obam ma II*

Years 1974 - 1977 1977 - 1981 1981 - 1985 1985 - 1989 1989 - 1993 1993 - 1997 1997 - 2001 2001 - 2005 2005 - 2009 2009 - 2013 2013 - 2017

Change in % Change in % Changes in leve ls US SD Gold Inflation G ** Real ratess Output gap G/I 2 2.0 -11.4 -5.5 0.7 2.1 6.1 -0.7 6.00 -133.0 338.5 -8.6 688.0 -47.6 1.4 -1.22 1.3 0.5 -399.0 32.8 -0.6 0.00 1.7 -1.5 -00.2 -18.5 0.6 -4.33 -2.8 0.4 -44.2 9.9 -0.1 1.99 1.8 0.1 211.4 -26.0 -0.5 1.22 3.7 -0.1 -288.7 61.0 0.1 -4.22 -2.0 -3.2 0 0.5 101.2 -28.9 1.22 -1.7 1.6 -11.5 89.9 28.8 -1.66 -2.4 -1.0 166.4 -36.6 2.1 1.33 1.1

Source: Bloomberg data, ABN AMRO Grou up Economics, ou utput gap = IMF

Second, with inflation n fears recedin ng other factors s have becomee more important. During the Pre esidencies of G GW Bush I, GW W Bush II and Obama O I econoomic growth co ompared to potential (the US outtput gap) deteriorated. During g these periodss gold prices moved higher.

What gave g extra sup pport to gold prices during GW W Bush I and O Obama I was th he drop in real yie elds (official ra tes minus infla ation) to negativ ve territory.

Third, the introductio on of ETFs in th he gold market in 2003 has oppenend the gold market to a wide er public. As a rresult, investorrs could take more m easily pos itions in gold in n anticip pation of develo opments in fina ancial markets. Gold prices haave increasingly become more sensitive s to the e US dollar.

During g the Presidenccy of Obama II, the output gap and US real yields improve ed. This together with a sharp p rally in the US S dollar resulte ed in a substanttial drop in gold d prices en 2013 and 20 015. However,, since the start of 2016 gold prices have rallied betwee substa antially (+24% vversus the US dollar), becaus se of a deteriorration in US real yields and safe ha aven demand.

Possible scenarios s for US gove ernment set-u up (US analysst Maritza Ca abezas, see also our o US Watch h Clinton vs Trump) T Our ba ase case is tha at the Democrrats will win the Presidential Elections. We e think that a divided d government will be the most likely outcom me. We sketchh two more like ely scenarios and a low probabilityy scenario. In th he first two sce enarios, Hillary Clinton is Pres sident and in st Donald Trum mp is President. The variants in the first and second scena arios relate to the las the ma ajority in the Ho ouse and in the e Senate.

mocrat Preside ent, Republica an majority in House, H Democcratic majority y in Senate I. Dem Under this constella ation there will be policy grid dlock. We exppect that the economy e will continu ue to grow at moderate leve els and inflation will be moviing towards the 2% target.

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Under this scenario d debt/GDP will likely increase somewhat sin ce the econom my will not be able to o reach the deb bt targets simply by growing.

mocrat Preside ent, Republica an majority in House, Repubblican majority y in Senate II. Dem Under this scenario ((next to most likely), Republicans have thee majority in the e House and e. The potenti al for policy shifts s is even more limited. We expect that economic Senate growth h will be weake er, but it is diffic cult to quantify the extent giveen vague policy y details.

epublican Pre esident, Repu ublican majoriity in House,, Republican majority in III. Re Senatte This is s a low probabi lity scenario. We W think that th he proposals m made by Mr. Tru ump will be toned down once he is in office. Ho owever, we thin nk that the polittical risks resulting from gh under this scenario. s The US U economy w would be more isolated and uncertainty will be hig trade growth g would b be weaker than n otherwise. Me eanwhile foreiggn direct investtment would likely be b hurt. In this scenario econo omic growth would be softer. The debt/GDP P ratio would increas se significantlyy. The policy sh hifts proposed would w cause siignificant uncertainty, which would also we igh on the economy.

Gold prices will re emain supporrted if Democ crats win…

Our forecast horizon does not cove er the four yearrs of the upcom ming Presidenc cy. Our forecasts cover up to o the end of 2017. Our base scenario s (with D Democrats win ning the electio ons) suggests tthat US econom mic growth will remain below trend, improvin ng only slightly y in 2017. Succh a result will be b supportive for f gold prices ffor the followin ng reasons 1.

In nflation will like ly be higher tha an growth

2.

Real R interest rattes are forecas st to remain neg gative (less neg egative though)

3.

The longer-term m US dollar has s turned negativ ve.

These are all supporrtive factors for gold prices. However, despitte uncertainty on o financial markets we don’t exp pect a new majjor crisis in the making. As a result, safe haven flows toward ds gold will like ely be muted. All-in-all, A gold prices will likely rise a moderate pace toward ds USD 1,650 p per ounce overr the coming ye ears.

…while a Trump viictory could result in even n higher pricees If Trum mp were to beccome Presidentt (low probability in our view),, gold prices will likely perform m well, becausse we expect th hat his policies will be inward looking and will weaken the fun ndamentals of tthe US econom my. In addition,, his rhetoric annd possibly pollicy actions could create c domestiic and internatiional uncertainty at beast, andd upheaval at worst. w Our US S economist exxpects that eco onomic growth would be wea ker. This will lik kely result in a more e substantial risse in gold price es towards USD 1,850 per ouunce over the coming c years.

However there is a major risk fo or gold prices Howev ver, there is on ne major risk to gold prices. Gold G prices will aggressively sell s of if US real yie elds rise and g growth/inflation mix and the ou utput gap improove dramatically. This would be an environm ment in which the t Fed hikes aggressively a innterest rates (m more than on pick-up) beccause of strong g (above trend) US growth. W We think this is unlikely u inflatio during our forecast h horizon.

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ABN AMRO A precio ous metals fo orecasts Change es in red/bold

End period p Gold Silver Platinnum Palladdium

22-JJul 1,3324 199.7 1,0096 6 682

Averaage Gold Silver Platinnum Palladdium

Q1 16 1,1181 144.9 9 975 5 527

Dec-15 Mar-16 M Jun-16 S Sep-16 Dec-16 Mar-17 Jun-17 Seep-17 Dec-17 1 1,450 1,233 1,322 1,425 1,350 1,300 1,400 1,425 1,061 2 24.00 15.38 18.48 21.50 19.00 18.00 20.00 22.00 13.9 1 1,400 976 1,018 1,150 1,050 1,000 1,200 1,300 894 620 600 650 700 580 625 563 597 562 Q2 16 1,258 16.8 1,004 568

Q3 16 Q 1,374 20.0 1,084 609

Q4 16 1,388 20.3 1,100 610

2016 Q1 17 Q Q2 17 Q3 17 Q4 Q 17 1,300 1,325 1,350 1,413 1,438 1 18.0 18.5 19.0 21.0 23.0 1,041 1,025 1,100 1,250 1,350 1 578 590 675 603 638

2017 1,381 20.4 1,181 626

Source: ABN AMRO Grouup Economics

nd out more abo out Group Eco onomics at: http ps://insights.a abnamro.nl/en n/ Fin

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