160929 precious metals watch positioning

Group Economics

Precious Metals Watch

Macro & Financial Markets Research

29 September 2016

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Georgette Boele Co-ordinator FX & Precious Metals Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com

 Gold prices and 10y US Treasury yields moved lower…  …which is an unusual combination  A modest rise in the US dollar…  …disappointment on the monetary policy front…  …and impatient investors are the main reasons for this

Gold prices react in an unexpected manner…

Recently, gold prices reacted in an unexpected manner. US Treasury yields moved lower, while gold prices also moved lower. In general, gold prices rise if US Treasury yields decline. This is because lower US Treasury yields in a risk averse environment result in higher demand for assets with safe haven characteristics (gold is among those assets).

Moreover, lower US Treasury yields make gold as an asset more attractive to invest in, as it does not have a yield.

Negative relationship between gold and 10y UST yield 90-day rolling correlation

1.0 0.5 0.0 -0.5 -1.0 10

11

12

13

14

15

16

Gold vs 10y US Source: Bloomberg, ABN AMRO Group Economics

Why did gold price behave like this? We think that there are three forces at play. First, the US dollar rose modestly. Gold has a strong negative relationship with the US dollar. This is a dominant driver for gold prices (see graph below).

Insights.abnamro.nl/en

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Precious M Metals Watc ch - Relation nship broken n? - 29 Septtember 2016 6

US do ollar dominan nt driver for gold g prices 90-day rolling correlation

1.0 0.5 0.0 -0.5 -1.0 04 05 06 07 08 09 10 11 12 13 14 1 15 16 Gold vs USD Source: Bloomberg, ABN N AMRO Group Ec conomics

Second, the ECB, Bo oJ and the Norrges Bank have e been less dovvish in their ac ctions and communications com mpared to mark ket expectations. As a result, this has made the case for gold and silver less sstrong. eady positioned for higher priices (see graph hs below).

Last but not least, invvestors are alre

Sp peculative go old positions remain large‌

‌ and investors hesitate to build d up ETF pos sitions

Nu umber of contract

In mln ounces

5 500,000

Gold G price

100

2,200

80

1,800

60

1,400

4 400,000 3 300,000 2 200,000 100,000

40

0 10

11 12 Long g contracts

13 14 S Short contracts

Sou urce: Bloomberg, A ABN AMRO Group Economics

15

16 Net positions

1,000 0 10

12

14

Total ETF possitions gold (lhs)

16 Gold price (rhs)

Source: Bloomberg, B ABN AMRO A Group Econnomics

old price action n over the recent months has disappointed iinvestors. As a result, they The go have been b starting to o think that the rise in gold prices is over. It aappears that some impatie ent investors h have started to sell gold positions when pricees approach USD 1,350 per ounce. The failurre of gold price es to stay above e USD 1,340 pper ounce could d have resulte ed in investors lowering their offers. It is likely that gold pricces will first rev visit the lower border b of the ra ange at around d USD 1,300 pe er ounce. If thiss level remains s in place, gold prices could mo ove back toward ds USD 1,335--1,340 before tthe move is los sing momentum again. Th his process of the t market testting both sidess of the range could c continu ue for a while. But both borde ers will probably converge unntil there is finally a breako out. If the lowerr border is brok ken, prices cou uld quickly fall ttowards USD 1,250 1 per ounce where the 200 0-day moving average a comes s in.

3

Precious M Metals Watc ch - Relation nship broken n? - 29 Septtember 2016 6

Our ba ase scenario re emains for gold d prices to stay in a USD 1,3000-1,350 per ou unce for now. Over O time (H2 2 2017) we expect gold prices to t break out onn the upside for the following reasons: 1.

er than growth US inflation will likely be highe

2.

US real interest rates are forec cast to remain negative (less negative thoug gh)

3.

The longer-term m US dollar tren nd has turned negative n

Altern native scenarrios This ra ange will likely be broken earlier if Trump be ecomes Presideent and/or if investor sentim ment deteriorate es sharply. This s would result in sharply highher gold prices. Another scenarrio is that US e economic growth picks up stro ongly triggeringg the Fed to hik ke rates aggres ssively in an en nvironment of constructive c inv vestor sentime nt. This would be a bull case fo or the US dolla ar as US real ra ates would also o rise substantiially. In this sce enario the US dollar uptrend wo ould have another leg while gold prices coulld drop below their t 200day mo oving average of USD 1,250 per ounce sign nalling that the uptrend is ove er.

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

End period p Gold Silver Platinum Palladdium Averaage Gold Silver Platinum Palladdium

29-Seep 1,321 199.1 1,031 712

Dec-15 1,061 13.9 894 562

Maar-16 1,233 15.38 976 563

Q1 16 1,181 144.9 975 527

Q2 16 1,258 16.8 1,004 568

Q3 16 Q 1,324 19.0 1,084 649

Jun-16 Seep-16 1,322 1,325 18.48 19.50 1,018 1,150 700 597 Q4 16 1,325 19.5 1,100 675

Dec-16 1,325 19.50 1,050 650

Marr-17 1,3325 199.50 1,0000 6 625

Jun-17 Sep--17 Dec-17 1,350 1,4400 1,450 20.00 22.00 24.00 1,200 1,3300 1,400 650 7 700 725

2016 Q1 17 Q22 17 Q3 17 1,272 1,325 1,3338 1,375 17.5 19.5 19.8 1 21.0 1,041 1,025 1,100 1,250 605 638 6 638 675

Q4 17 1,4425 233.0 1,3350 7 713

2017 1,366 20.8 1,181 666

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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