Precious metals weekly 28 october 2015

Group Economics

Precious Metals Weekly

Macro & Financial Markets Research

28 October 2015

Goldilocks for now Georgette Boele Co-ordinator FX & Precious Metals Strategy Tel: +31 20 629 7789

 The usual suspects continue to support gold prices…  …and they are all interrelated  Supportive environment to remain in place for now

georgette.boele@nl.abnamro.com

The usual suspects continue to support gold prices…

Gold and to a lesser extent silver prices have commonly accepted drivers such as the direction in the US dollar, expectations about monetary policy in the US (if prices are denominated in US dollars), overall investor sentiment and jewellery demand. Over the recent years, the first three drivers have played an important role in explaining gold price behaviour. This is mainly because investor demand has taken a more prominent role and this demand is more fluid than jewellery demand.

The behaviour of gold prices this month can mostly be explained by these three factors that drive investment decisions in gold. Since the start of this month expectations of a Fed rate hike have been adjusted downwards, mainly because of weaker US employment report on 2 October and weaker US retail sales on 14 October. The graphs below show that investors scaled back expectations of a rate hike at the 16 December Fed meeting, which has supported gold prices (inverse relationship).

Fed rate hike expectations, gold price Probability

Gold price

40

1200 1180

35

1160 1140

30

1120 25 30-Sep 05-Oct

1100 10-Oct

15-Oct

20-Oct

25-Oct

Probability of 0.25-0.50 Fed Funds range 16 Dec 2015 (lhs) Gold price (rhs) Source: Bloomberg, ABN AMRO Group Economics

Insights.abnamro.nl/en

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Precious Metals Week kly - Goldilo ocks for now w - 28 Octob ber 2015

…and d they are all interrelated It will come c as no surrprise that the other important forces that drrive gold prices s such as the direction in the U US dollar and ov verall investor sentiment are affected by expectations about US monetary p policy. This ma akes it an interrrelated networkk of forces. The e US dollar was ne egatively affectted by lower ex xpectations of a Fed rate hikee this year as the graph below shows. This allso supported gold g prices.

Fed rate r hike expe ectations, US S dollar Probability

Gold pricce

40

9 98

35

9 96

30

9 94

25 3 30-Sep

9 92 05-Octt

10-Oct

15 5-Oct

20-Oct

25-Oct

Probabilityy of 0.25-0.50 Fed Funds F range 16 Dec 2015 (lhs) US Dollar Index (rhs) Source: Bloomberg, ABN N AMRO Group Ec conomics

ehaviour of inve estor sentimen nt is somewhat more complicaated. There are e four The be possib ble scenarios. F For a start, therre are periods that disappointting economic data are consid dered as good n news because the likelihood of more monettary policy easing has increas sed. These pe riods of optimis sm are supporttive for gold priices because monetary m policy easing makes gold as a zero o-to-low income e asset more aattractive (same e for other precious metals). We e have seen this reaction afte er the ECB meeeting last week k where ECB President Draghi sign nalled more mo onetary policy easing to comee even with the e possibility of a de eposit rate cut. As a result, go old prices rallie ed considerablyy versus the eu uro.

Eurib bor, gold pric ce in euro Euribor

Gold G price in euro

0.00 0

108 80 106 60

-0.05 5

104 40 102 20

-0.10 0

100 00 980 0

-0.15 5 3 Sep 05 Octt 30

960 0 10 Oct

3M Eu uribor (lhs)

15 Oct O

20 Oct

2 Oct 25

Gold price in EU UR(rhs)

Source: Bloomberg, ABN N AMRO Group Ec conomics

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Precious Metals Week kly - Goldilo ocks for now w - 28 Octob ber 2015

Moreover, there are a also periods th hat disappointin ng economic daata trigger general growth worries s resulting a m more risk averse e behaviour. Fo or gold prices tthis is also goo od news, becaus se investors ha ave a tendency y to buy gold if investor sentim ment deteriorattes.

There are two scena rios that are no ot supportive fo or gold prices. Periods of bettter-thanexpectted economic d data triggering expectations of o less monetarry policy easing g (ECB, BoJ) and/or a earlier-th han-anticipated d Fed rate hikes. The strong eeconomic data provide confide ence to investo ors so investor sentiment rem mains optimisticc. This is the most m negative scenarrio for gold pricces. We expectt the Fed to raise rates duringg the course off next year, so this s gold price wea akness will like ely to play out in 2016. If expeectations of ratte hikes result in risk aversion n, the downside e in gold prices s will be dampeened.

Possib ble gold price e reaction after the FOMC th his evening Expectations in finan ncial markets about a possible e rate hike by tthe Fed this year are low, but a Fed F rate hike iss not completely priced out ye et. We don’t exxpect the Fed to o signal a rate hike in Decembe er. It will likely continue c to foc cus on the unceertainty. As a re esult, financiial markets willl completely price out the pos ssibility of a ratee hike this year, supporting gold prices and weig hing on the US S dollar in the near-term n

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

End pe riod Gold Silver Platinum m Palladiuum

28-Oct Closee 14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-166 Jun-16 Sep-16 Dec-116 1,174 1,,185 1,184 1,172 1,112 1,100 1,0500 1,000 950 9000 15.7 16.6 15.7 14.5 15.0 14.55 14.0 14.5 155.0 16.1 999 1,,216 1,141 1,081 910 900 8755 850 900 1,0000 798 736 674 681 652 650 6255 600 625 6550

Average Gold Silver Platinum m Palladiuum

Q1 15 1,218 16.7 1,194 786

Q22 15 1,,193 16.4 1,,129 759

Q3 15 Q4 15 1,126 1,106 15.0 14.8 993 905 618 651

Source: ABN AMRO Grouup Economics

2015 Q1 16 Q2 166 Q3 16 Q4 16 20116 1,170 1,075 1,0255 975 925 1,0000 16.0 14.8 14.33 14.3 14.8 144.5 1,075 888 8633 875 950 8994 700 638 6133 613 638 6225

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Precious M Metals Week kly - Goldilo ocks for now w - 28 Octob ber 2015

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

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