161012 precious metals watch downward revision gold

Group Economics

Precious Metals Watch

Macro & Financial Markets Research

12 October 2016

Downward revision gold forecast • Gold prices have fallen…

Georgette Boele

• …and broken below the 200-day moving average

Co-ordinator FX & Precious Metals Strategy

• This means that this year’s uptrend is over

Tel: +31 20 629 7789

• We have revised downwards our gold price forecasts…

georgette.boele@nl.abnamro.com

• …because we think that investors will continue to liquidate • Our year-end forecasts for 2016 and 2017 are USD 1,200 and 1,150 What happened?

Since 17 February 2016 we have been positive on gold prices because they broke above the 200-day moving average and overall drivers were more positive with a Fed rate hike being a distant prospect and other central banks easing. Gold prices mainly rallied because speculative investors turned positive also on the back of these expectations. This is despite weak jewellery and industrial demand. Gold prices peaked on 6 July 2016 at USD 1,375 per ounce. Since 27 September gold prices have fallen considerably by 6% and prices broke below the 200-day moving signalling the end of the uptrend this year.

Hawkish Fed comments, disappointment on the action by the BoJ, expectations of ECB tapering, some better-than-expected US economic data releases and constructive sentiment on equity markets all weighed on gold prices.

Structural decline in quarterly industrial demand…

…and weak jewellery demand

In metric tons

In metric tons

130

1,000

120

800

110 600 100 400

90 80

200 00

02

04

06

08

10

12

14

16

00

Industrial fabrication Source: GFMS Thomson Reuters Datastream

02

04

06

08

10

12

14

16

Jewellery fabrication Source: GFMS Thomson Reuters Datastream

Investor demand is the swing factor Over the recent years, gold investor demand has been the swing factor determining the direction in gold prices. This is because investors can quickly have a change of heart and

Insights.abnamro.nl/en

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Precious Metals Watch - Downward revision gold forecast - 12 October 2016

decide to close or to open positions. This results in flows exceeding the change in jewellery demand. Therefore, gold prices have been at the mercy of investor behaviour.

We differentiate between demand for gold coins and bars (retail investment demand) on the one hand and futures and ETF gold demand on the other hand.

Demand for gold bars and gold coins In metric tons

700 600 500 400 300 200 100 0 00

02

04

06

08

Bar investment

10

12

14

16

Coins

Source: GFMS Thomson Reuters Datastream

Decline in gold bar demand overshadows gold coin demand…

Overall, the sum of gold bars and gold coins traded has declined substantially since the peak in June 2013 (see graph above). This can mainly by attributed to the sharp decline in demand for gold bars. Demand for gold bars in the world has clearly declined driven by India and China (see graphs below). This has more than overshadowed the positive trend in demand for gold coins. Investors buy these bars to store value as they are concerned about the long-term impact of loose monetary policy and systemic risks. Gold bars are, obviously, a more efficient way to store wealth than a large amount of coins. At the same time it is more costly to do so. We don’t expect a substantial pickup in the demand for gold bars this year or next year.

Demand for gold bars has slowed… sum of 4 quarters, in metric ton

… including lower demand from India and China sum of 4 quarters, in metric ton

1,600 1,400 1,200 1,000 800 600 400 200 0

500 400 300 200 100 0 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 World

Source: GFMS Thomson Reuters Datastream

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 India

China

Source: GFMS Thomson Reuters Datastream

However, demand for gold coins has risen substantially. In the current environment some investors and consumers are concerned about the actions of central banks, concerns about the banking sector and the impact of Brexit. These investors will likely buy gold coins. In addition, a declining trend in the Chinese yuan will likely also support demand for

3

Precious Metals Watch - Downward revision gold forecast - 12 October 2016

gold coins. As we expect a relatively constructive investor sentiment and the absence of a sharp Chinese yuan devaluation, the interest in gold coins could ease.

Coin demand has been on a rising trend…

…but this could falter somewhat

sum of 4 quarters, in metric ton

sum of 4 quarters, in metric ton

300

70

250

60 50

200

40

150

30

100

20

50

10

0

0 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

South Africa

US

Source: Thomson Reuters Datastream, national mint

UK

China

Canada

Austria

Source: Thomson Reuters Datastream, national mint

…and positioning in gold futures and gold ETFs are enormous Investors who buy gold via the futures or ETFs can make up their mind relatively quickly, especially the professional investors who operate via the futures market. They evaluate gold as an investment asset compared to other assets. If they think it is relatively cheap or expect an improvement in the overall price outlook they buy. That is exactly what they did in the period January up to September. Gold was seen as a relatively cheap as asset with safe haven characteristics and attractive as monetary policy easing was set to continue and real yields were expected to move lower. In addition, the overall technical outlook also turned bullish. As a result, the total net-long gold positions in the futures market and total ETF positions increased strongly pushing gold prices higher (see graphs below).

Massive net-long positions in the futures market…

Number of contracts

… and sizeable positions in ETFs Million ounces

400,000

2,000

300,000

1,500

Gold price

100

2,000

80

1,500

60 200,000

1,000

1,000 40

100,000

500

0

0 04

06

08

Net positions Source: Bloomberg

10

12

14

16

Gold price (rhs)

500

20 0

0 04

06

08

10

12

Total ETF positions gold (lhs)

14

16 Gold price (rhs)

Source: Bloomberg

What is worrying is that this substantial increase in positions “only” resulted in a USD 266 per ounce price increase (31 Dec 2015 – 27 September 2016). This highlights that the bullish stance among investors was fighting the negative trend in jewellery demand, industrial demand and demand for gold bars. This leaves us wondering what would happen if investor give up on gold altogether? The drop in gold prices since 27 September 2016 was the result of a relatively small position liquidation. If the positions in

4

Precious Metals Watch - Downward revision gold forecast - 12 October 2016

the futures market would be liquidated to the long-term average of around 100’000 contracts, prices will likely be back at the level we started this year.

We need to assess the likely actions of the professional investor. We think that it is unlikely that investors will add to their positions in short-term, which means that they will sell on rallies. First of all, net-long positions are already extreme. Second, they have been completely off guard by the pace of the fall in gold prices lately. This makes them very uncomfortable.

In what environment will they keep their positions (this means that prices will stay around current levels) and in which situation will they become net sellers. In the table below we have defined two scenario’s. First, is the ideal gold scenario where gold prices should rise.

The second scenario is our base case scenario.

Ideal gold investment environment vs our base case

Fed ECB BoJ PBoC CB Brazil Other CBs US real yields Government bond yields Inflation expectations Global growth US dollar Chinese yuan Investor sentiment US elections Brexit Technical outlook

Ideal gold environment No hike in 2016 and 2017 More easing More aggressive easing More easing More easing More easing To decline To decline To rise To be weak To decline To decline sharply To deteriorate Trump victory Hard Brexit False break to downside Break above USD 1,300 again

Our base case +25bp in December and 50bp in 2017 No tapering, forward guidance to Sep 17 More easing More easing More easing Unlikely to ease further To stay low Not to rise from current levels To rise modestely Modest upward momentum Modest upside, but no new high Modest decline To be constructive Clinton victory Risk of Hard Brexit This years uptrend is over

Result for Gold Negative Positive Neutral Neutral Neutral Negative Neutral to negative Neutral to negative Negative Negative Negative Negative Negative Negative Positive Negative

Source: ABN AMRO Group Economics

If we compare the ideal investment environment for gold and our base case the risks clearly point to the downside. If we take the huge position overhang and nervousness among gold investors into account, gold prices will likely first drop another USD 100-150 before some price recovery will take place. Therefore, we have revised downwards our gold forecasts. In a coming publication we will focus on silver, platinum and palladium price outlook.

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Precious Metals Watch - Downward revision gold forecast - 12 October 2016

ABN AMRO precious metals forecasts Changes in red/bold New

End period Gold Silver Platinum Palladium

11-Oct 1,255 17.5 959 661

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 1,335 19.6 1,086 678

End period Gold Silver Platinum Palladium

11-Oct 1,255 17.5 959 661

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 1,335 19.6 1,086 678

Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 1,322 1,316 1,200 1,150 1,100 1,125 1,150 18.48 19.17 19.50 19.50 20.00 22.00 24.00 1,018 1,027 1,050 1,000 1,200 1,300 1,400 597 721 650 625 650 700 725 Q4 16 1,258 19.3 1,039 685

2016 Q1 17 Q2 17 Q3 17 1,258 1,175 1,125 1,113 17.6 19.5 19.8 21.0 1,026 1,025 1,100 1,250 615 638 638 675

Q4 17 1,138 23.0 1,350 713

2017 1,138 20.8 1,181 666

Old

Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 1,322 1,316 1,325 1,325 1,350 1,400 1,450 18.48 19.17 19.50 19.50 20.00 22.00 24.00 1,018 1,027 1,050 1,000 1,200 1,300 1,400 597 721 650 625 650 700 725 Q4 16 1,320 19.3 1,039 685

2016 Q1 17 Q2 17 Q3 17 1,274 1,325 1,338 1,375 17.6 19.5 19.8 21.0 1,026 1,025 1,100 1,250 615 638 638 675

Q4 17 1,425 23.0 1,350 713

2017 1,366 20.8 1,181 666

Source: ABN AMRO Group Economics

Find out more about Group Economics at: https://insights.abnamro.nl/en/

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