PRECIOUS METALS OUTLOOK JUNE 2017

Transcription

1 PRECIOUS METALS OUTLOOK JUNE 217

2 Copyright CPM Group LLC 217. These reports are produced by CPM Group for distribution by Monex Deposit Company. The rights to distribution, reproduction, and redistribution rights are ceded to Monex Deposit Company by CPM Group for these reports. These reports are not for reproduction or retransmission without written consent of Monex Deposit Company. The intellectual content and property of these reports remain the property of CPM Group, and they are not for reproduction or retransmission without written consent of CPM Group. The views expressed within are solely those of CPM Group. Such information has not been verified, nor does CPM make any representation as to its accuracy or completeness. Any statements nonfactual in nature constitute only current opinions, which are subject to change. While every effort has been made to ensure that the accuracy of the material contained in the reports is correct, CPM Group cannot be held liable for errors or omissions. CPM Group is not soliciting any action based on it. Information contained here should not be relied on as specific investment or market timing advice. At times the principals and associates of CPM Group may have long or short positions in some of the markets mentioned here.

3 217 Precious Metals Market Outlook 9 June 217 Gold prices are expected to remain firm over the course of the next three months, for the most part moving between $1,22 and $1,32. Prices could come under pressure if various risks that are presently factored into prices do not materialize and also from the onset of a seasonally weaker period for prices. That said, prices should not be expected to decline sharply as there are several medium and long term political and economic risks that remain unresolved. If prices are able to settle over $1,3 the next resistance level is $1,32. Any number of political and economic factors can drive gold prices to these levels and possibly push them higher. Gold Three-Month Gold Price Projection $/Oz ,271 Page 1 1,3 1,3 1,22 1,2 1,18 1,18 The precious metals markets typically head into a seasonally weak period starting around June and extending through August, with both fabrication demand as well as investment demand slowing over the next several months. While seasonal trends hold true in most years there are certain years during which these trends are broken, over-ridden by specific events and developments. This year maybe one of those years. There is a lot of political uncertainty in the world at this time, which has the ability to negatively affect financial markets and increase demand for safe haven assets like gold. There is also an expectation that the Fed may slow its pace of monetary tightening beyond its June meeting. Gold Prices: 1 December 2 to 8 June 217 $ /Oz 1,9 1,8 1,7 1,6 1, 1,4 1,3 1,2 1, Jan- Jan-11 Jan-12 Jan-13 Jan-14 Jan- Jan-16 Jan-17 1 N-16 D-16 J-17 F-17 M-17 A-17 M-17 J-17 J-17 If these events do not negatively affect economic growth, some of the upward pressure on prices could come off and seasonal trends may have a stronger effect. Any softness in prices should be treated as a buying opportunity as there are several unresolved political issues that could erupt at any given time and still disrupt economic growth be it Syria, North Korea, Russia s role in the 216 U.S. election, or the German elections later this year and the Italian elections next year. Some of these issues may deteriorate over the course of this summer, which should continue to underpin investor demand and counter the seasonal weakness preventing prices from declining sharply. While these factors may keep gold prices high for a while, there are countervailing forces. Also, the run up in gold prices from the middle of May into June should be compared to the run up in prices from the middle of March into April. April and June are active Comex delivery months. In both March and May the roll of short positions out of the approaching actively traded months pushed prices higher. As this technical move emerged, traders and investors who follow price chart patterns and momentum indicators joined the buying, sustaining the upward momentum into April and pushing prices up to $1,297.4, before it dissipated. The same pattern is in effect now in June. Gold prices fell back after the March- April rally, but stayed above $1,22 for the most part. They should be expected to follow a similar pattern now in June, which could lead to the summer period of weaker demand and prices.

4 217 Precious Metals Market Outlook 9 June 217 Page 2 The Fed is expected to raise interest rates at its June meeting. However, the pace of further monetary tightening is being questioned following the ongoing weakness in U.S. wage growth and inflation. The weakness in May s job figures has further added to this concern. While the jobs figure fell short of market expectations the number of new jobs on average is healthy given the stage of the U.S. economic cycle. A lack of inflation is expected to reduce the need for the Fed to raise rates rapidly. The markets will be looking for clues following the meeting, regarding the Fed s future course of action, with an expectation that the Fed will suggest a slowing in the pace of monetary tightening. If this expectation is not met, it could result in taking off some of the upward pressure on prices. The loss of majority seats by Theresa May will now force her to form government by coalition. This would complicate Britain s exit from the EU further and would result in a toned down version of Mrs. May s hard Brexit. This outcome may be less supportive of gold than a clear win by May would have meant. A clear win by May would have meant that she would be able to push forward with her plans for a hard Brexit which would have had at least some negative consequences for the nascent economic growth in Europe. India Goods and Services Tax Gold Chinese Gold Trends in 217 The Chinese language version of CPM Group s 217 Gold Yearbook was released on 13 May in Guangzhou, China. This is the fourth year in which CPM s Gold and Platinum Group Metals Yearbooks have been translated, published, and distributed in Chinese by the Chinese Gold Association, China National Gold Corporation, and Jingyi Gold. During the release Mr. Zhang Yongtao, the Vice Chairman of the China Gold Association, spoke about trends and conditions in the Chinese gold market. He said gold mine production totaled around 1.2 metric tonnes (3.3 million troy ounces) in the first quarter, and seemed likely to decline around -9.3% for all of 217. This would put full year mine output around mt (13.2 million ounces), compared to 43. mt (14.6 million ounces) in 216. Total demand for gold, from both investment demand and fabricated jewelry and other products, is projected to be off sharply this year, running around 33 mt (9.7 million ounces). The decline appears to be across all sectors of demand, including investor demand for bullion bars and coins, as well as gold jewelry and gold for use in electronics and other fabricated products. Starting July 1 India will be implementing its new 3% nationwide goods and services tax (GST) on gold and gold jewelry. This will push the tax paid by consumers to 13% on gold in total, up from around 12.% paid at present. The level of increase was lower than the % GST that some had anticipated. The presently suggested tax is not likely to hurt consumer demand since it is only slightly higher than what consumers are paying at this time, but it is also likely to result in a slowing down of demand from jewelers that were aggressively restocking ahead of the uncertainty related to the level of GST on gold. This slowdown in demand from jewelers over the next several months is likely to enhance the seasonal weakness in prices. Investor interest globally should help to counter this weakness, however. Auspicious Days For Marriage In India No. of Days Busier First Half For Marriages in India

5 217 Precious Metals Market Outlook 9 June 217 Page 3 Institutional Investors Gold Net long positions held by institutional investors declined during the first half of May, slipping to 12.3 million ounces on 16 May, down from million ounces at the end of April. Net long positions rose during the second half of May, finishing the month at million ounces. This increase was driven primarily by an increase in gross long positions, which reached.36 million ounces at the end of May up from 21.7 million ounces in the middle of the month. The level of gross long positions was still lower than the 28.2 million ounces in gross long positions at the end of April. Gross short positions meanwhile ended May lower than the level seen at the end of April as well as in the middle of May. Total open interest on the Comex rose during the first couple of days of June alongside the increase in gold prices, which suggests an ongoing buildup in long positions. Net Long Non-Commercial Positions and Gold Prices Weekly Data, through 3 May 217 $/Ounce 1,8 1,6 1,4 1, Net Long Positions Gold Price Gross Long and Short Positions of Non-Commercial Positions Comex Gold Futures & Options.Weekly,through 3 May 217 Million Ounces Apr-9 Apr-99 Apr-3 Apr-7 Apr-11 Apr- Million Oz. 4 4 Net Fund Position in Comex Short -2 Million Oz. 4 4 Long Jan-96 Jan- Jan-4 Jan-8 Jan-12 Jan-16 Monthly U.S. Eagle and Buffalo Gold Coin Sales by the U.S. Mint Month January 1, 8, 149, February 3, 2, 42, March 6, 4, 29, April 39, 1, 9, May 3 9, 19, June 97, 88, July 2 48, August 121, 67, September 147, 111, October 44, 144, November 13, 177, December 41, Total YTD 272,, 149, % Change YOY -12.9% 92.8% -71.6% Annual Total 1,2 1,24, 149, % Change Previous Year 4.6% 17.8% -87.6% Monthly Mint Gold Coin Sales to Dealers Through May 217 Thou Oz. Thou Oz

6 217 Precious Metals Market Outlook 9 June 217 Page 4 Central Banks Reported net additions to central bank gold holdings during the first four months of 217 reached 2.2 million ounces. The gross additions were significantly higher than the gross reductions by central banks, at 2.92 million ounces and 4, ounces, respectively. Argentina joined Russia and Kazakhstan as a major buyer of gold during the first four months of 217. The central bank of Argentina was a net seller of gold during the first quarter of this year, but its purchase of 22, ounces in April changed it into a net buyer for the year and propelled it to third position after Russia and Kazakhstan, which have been consistent buyers of the metal. Furthermore, Mexico which was a net seller of gold during the first quarter of 217, bought back all the metal it sold in April, restoring its holdings to the same levels as at the end of 216. Monthly Changes to Central Bank Gold Holdings Excl.China,India,Turkey and IMF Transactions,Through Apr. 217 Million Oz. Million Oz Gold Changes in Central Bank Gold Reserves in 216 Million Troy Ounces Year-End 2 Countries Increasing Reserves YTD 216 Net Change Month of Reporting To IFS Russia Dec. China Dec Kazakhstan Dec Qatar Dec Belarus Dec Mauritius Dec Colombia Dec Tajikistan Dec Serbia Dec Greece Dec Bulgaria Dec Kyrgyz Republic.14.. Dec Philippines Dec France Dec Subtotal Gross Increases.96 Year-End 2 YTD 216 Net Change Month of Reporting To IFS Countries Decreasing Reserves Venezuela Nov. Czech Republic Dec Azerbaijan Dec Argentina Dec Germany Dec Ukraine Dec Brunei Darussalam Dec Mexico Dec Mozambique Dec Mongolia Dec Suriname Dec Subtotal Gross Decreases Subtotal Net Changes Feb- Feb-11 Feb-12 Feb-13 Feb-14 Feb- Feb-16 Feb-17 Annual Reported Central Bank Changes in Gold Holdings 217 Through April M Million Oz. 3 Net Additions/Reductions 3 Gross Additions Gross Reductions Million Oz. Gross Additions Gross Reductions Net Additions/Reductions Changes in Central Bank Gold Reserves in 217 Million Troy Ounces Year-End 216 Countries Increasing Reserves YTD 217 Net Change Month of Reporting To IFS Russia Apr Kazakhstan Apr Kyrgyz Republic..16. Apr Argentina Apr Malaysia Apr Bangladesh Apr Subtotal Gross Increases Countries Decreasing Reserves Year-End 216 YTD 217 Net Change Month of Reporting To IFS Germany Apr Belarus Mar Tajikistan Mar Qatar Mar Jordan Feb Sri Lanka Jan Mozambique Feb Mongolia Jan Subtotal Gross Decreases -.4 Subtotal Net Changes 2.17 *Turkey is excluded because additions to monetary gold reserves were made through the reserve option mechanism, a tool used to encourage commercial banks to satisfy their Turkish lira reserve requirements with gold. Note: Subtotals may not match with gross figures due to rounding

7 217 Precious Metals Market Outlook 9 June 217 Page Silver prices are forecast to remain firm over the next three months, supported primarily by political uncertainty. In the absence of any major political surprise, prices could drift lower during this period; the downside should be limited, however. Prices could find initial support at $16., which if broken prices could slip to $16. On the upside, prices are likely to rise toward $18.6, if they are able to settle above $18. If the $18.6 level is broken prices could head above $19. A seasonal slowdown in prices during the summer months could weigh on prices to some extent over the next few months. Safe haven investor demand is expected to provide support to silver prices. The various political concerns that are expected to drive gold prices higher should also help push silver prices above near-term resistance levels. Silver Three-Month Silver Price Projections $/Oz Acutal Projected D-16 J-17 F-17 M-17 A-17 M-17 J-17 J-17 A-17 In addition to the various political concerns around the world, there also are renewed doubts about the pace at which the U.S. Fed will be able to tighten monetary policy. The expectation so far has been for three interest rate hikes this year and a start to the unwinding of the Fed balance sheet. The inability of inflation to rise and weak wage growth, which makes it harder to drive inflation up, have raised new concerns about the pace of Fed tightening. Furthermore, the outcome of some of the political issues, like the result of the U.K. election, will be known soon, while other issues such as Syria and North Korea will continue to bubble under the surface, which should provide support to silver prices. The median gold/silver price ratio remains skewed in favor of higher silver prices. In May, this ratio stood at 73, above the long-term median ratio of 6. Investment demand for silver has been a mixed bag in the recent past, with some portions showing strength while others displayed weakness. Institutional investors on the Comex have generally displayed a negative sentiment toward the metal in recent weeks, which if reversed in light of growing political and economic concerns could help to propel prices higher. The net long positions of institutional investors in recent weeks was near the low levels seen in the recent past. The approach of the July Comex contract delivery period also may help silver prices in late June. Silver Prices and Open Interest Daily, Prices Through 9 Jun. 217 OI Through 8 Jun. 217 $/Ounces Million Ounces 1,2 4 1, 4 Total Open Interest Prices (Left Scale) The Gold/Silver Price Ratio Monthly, Through May 217 Ratio Ratio

8 217 Precious Metals Market Outlook 9 June 217 Page 6 Net long positions held by institutional investors on the Comex declined during May. Net long positions reached a low for the month of 2.4 million ounces on 16 May, down from million ounces at the end of April. This decline was driven primarily by a run up in short positions, gross long positions rose that week, however the increase in gross shorts overshadowed the increase in gross longs. Gross short positions had reached 283. million ounces that week, which was the highest level of gross short positions since July 2. The increase in prices over the remainder of the month resulted in some short liquidation, which pushed gross short positions down to 17 million ounces at the end of May. While gross long positions had risen in the week of May 16 they were flat during the last two weeks of May around 478 million ounces, which was lower than levels seen in recent months and highlighted the lack of confidence among these investors regarding the strength in silver prices during the second half of May. During the first few trading days of June total open interest on the Comex has been rising alongside the price of silver, which suggests that market participants are building long positions. Comex Silver Futures & Options Market Participant Positions Million Troy Ounces Large Non-Commercial Market Participants Month Ago Year Ago 3-May Volume % Volume % Silver Non-Commercial Gross Long and Short Silver Positions Comex Futures & Options. Weekly Data, Through Mln Ozs 3 May. 217 Mln Ozs 7 7 Long Net Fund Position in Comex Short -3 J-14 J-14 N-14 A- S- F-16 J-16 D-16 M-17 Non-Commercial Gross Long and Short Silver Positions Comex Futures & Options. Weekly Data, Through Mln Ozs 3 May. 217 Mln Ozs Long Net Fund Position in Comex Short Gross Longs % % Money Managers % % Other traders % % Gross Shorts % % Money Managers % % Other traders % % Net Position % % Money Managers % % Other traders % % Large Commercial Market Participants Gross Longs % % Gross Shorts % % Net Position % % Note: Negative numbers indicate short positions. Source: CFTC Disaggregated Non-Commercial Silver Positions Comex Futures and Options. Weekly Data, Through Mln Ozs 3 May. 217 Mln Ozs Long Other Traders Money Managers Net Position - -3 Short

9 217 Precious Metals Market Outlook 9 June 217 Page 7 U.S Mint silver coin sales rose in May to 2. million ounces from the low levels seen in April of 83, ounces. While demand for these coins rose on a month-on-month basis they were down from the corresponding period in 216 when they stood at 4. million ounces. Silver Premia on silver coins have remained relatively stable at around 12%, and while this is at the lower end of the range of premia seen over the past five and a half years, it is not the sort of sharp decline that has been observed with the U.S. Mint gold coins. Monthly U.S. Eagle Silver Coin Sales by the U.S. Mint Month January,3,,94,,127, February 3,2 4,78 1,2, March 3,19, 4,6, 1,6, April 2,81, 4,7 83, May 2,23, 4,498, 2,4, June 4,84, 2,837, July,29, 1,37, August 4,93, 1,28, September 3,84, 1,67, October 3,788, 3,8, November 4,824, 3,6 December 2,333, 24, Total YTD 16,946, 23,413, 11,247, % Change YOY 4.9% 38.2% -2.% Annual Total 47,, 37,71, % Change YOY 6.8% -19.8% Annual U.S. Mint Silver Coin Sales to Dealers Through May 217 Monthly U.S. Mint Coins Through May 217 Mln Oz Dealer Premia on U.S. Mint Silver Coins Daily Data through Jun % 3% % Silver American Eagle Silver Oz. bar 2% % % % % Note: Red bar is net addition during 216 for corresponding period in 217

10 217 Precious Metals Market Outlook 9 June 217 Page 8 Chinese Market Activity Silver trade activity in China remained at elevated levels during April, with gross silver imports into the country reaching 9.6 million ounces, up 24.3% yearon-year and gross silver exports totaling 7.1 million ounces, up 47% over the corresponding period in 216. The elevated trade activity is the result of increased processing of silver containing materials in China and less the outcome of domestic demand, which is confirmed by both the sharp increase in exports and by the decline in net imports. During April, net imports of silver into China stood at 2.4 million ounces, down 14.6% from the same period in 216. Silver SHFE Silver Stocks Weekly, Through 1 June 217 Mln Oz Aug-12 May-13 Feb-14 Nov-14 Aug- May-16 Feb-17 Silver inventories held at SHFE-approved warehouses continued to decline in May, slipping to 47.2 million ounces, down 18% from April. This was the third consecutive month that warehouse inventories declined and was the lowest level of inventories since February 216 when they stood at 3.2 million ounces. Combined open interest for silver futures on SHFE continued to slip, falling to million ounces at the end of May, down.% from million ounces at the end of April. During May the volume of silver futures transactions also fell on SHFE, down by around 1.6% from the previous month. SHFE Silver Trading Volume Monthly, Through 31 May 217 Million Oz, 2,,,, M-12 F-13 N-13 A-14 M- F-16 N-16 Chinese Silver Imports and Exports Monthly, Through April 217 Moz Moz Gross Imports Gross Exports Net Trade - F- A-6 F-8 A-9 F-11 A-12 F-14 A- F-17 SHFE Silver Open Interest Monthly, Through 31 May 217 Million Oz 2 May-12 Feb-13 Nov-13 Aug-14 May- Feb-16 Nov-16

11 217 Precious Metals Market Outlook 9 June 217 Page 9 Platinum Investors could build more fresh short positions or exit their long positions if they do not think the future of the global economy will unfold well in the near term. Prices may slip to $89 in this scenario. If this level is breached, a further decline to $8 is possible. Lower prices could attract some bargain buying, temporarily pushing up prices to $98. If the prospects over the global economy brighten or there are potential supply disruptions in South Africa, investors may start to cover their previously-built short positions, sending prices higher to $1,3 near February 217 high level. After a big selloff from late April through early May, Nymex platinum rebounded for the most part of May and into early June. Still prices were far from their 217 settlement high of $1,22.2 on 9 February. The weakness in platinum prices largely came from a rapid buildup in institutional investors gross short positions since late February. Between 28 February and 23 May, gross shorts in Nymex platinum held by institutional investors rose more than five-fold to nearly 1. million ounces from just 231, ounces on 28 February. Over the same period, institutional investors gross longs also fell by.%. This repositioning by institutional investors suggested a clear deterioration in investor sentiment toward platinum. While part of this bearish sentiment was a dollar story in that the U.S. dollar was mostly stronger against other currencies after an initial dip earlier in the year (before and after Trump s inauguration), most of it had more to do with investor uncertainty over future economic trends. Investors are expected to continue to focus on macrorelated issues in the near and medium term. Various elections in Europe will be important to the economic developments in the region. Brexit talks will now be more complicated as Theresa May was unable to secure the majority. The French Parliamentary elections (which will be critical in telling the world more about the composition of French political thinking), and a general election in Germany in September and Italian elections next year will also be important to the future economic developments in Europe. Outcomes of these elections can easily change the course of the region s economic recovery, which has been gathering steam recently. Recent manufacturing readings out of Europe have been quite decent, $/Oz 1, 1, 1, Three-Month Platinum Price Projections Projected 1,3 9 8 Acutal D-16 J-17 F-17 M-17 A-17 M-17 J-17 J-17 A-17 Platinum Prices: 1 January 2 to 8 June 217 $ /Oz The Gold/Platinum Price Ratio Monthly, Through May

12 217 Precious Metals Market Outlook 9 June 217 Page Platinum with the IHS Markit index jumping to a six year high of 7. in May from 6.7 in April. The region s unemployment rate fell from 9.% to a post-crisis low of 9.3% in April, the lowest level since March 29, suggesting that economic recovery in the currency bloc is gathering steam, even though economic growth in the region is uneven and inflation remains weak. Combined commercial vehicle sales were up 6.% yearon-year in the first four months of the year. With the exception of Brazil, which posted a year-on-year decline in commercial vehicle sales during the January-April period, most key markets registered strong growth. The European market continued to report robust sales growth in the first four months of this year, up 3.9% from a year earlier. Monthly Commercial Vehicle Sales Thous Units 2, 1, J F M A M J J A S O N D Notes: Countries/regions included in this data series are China, US, Europe, Japan, India, and Brazil. These countries/regions account for 7% of global annual sales. Sources: national auto associations, OICA, Bloomberg YTD Commercial Vehicle Sales Growth by Region Data for April 217 2% % 2% % Monthly Commercial Vehicle Sales in Europe Data Through April 217 Thou. Units Indian Commercial Vehicle Sales Monthly, YoY% Change, Through April 217 2% % % % % -% Monthly Commercial Vehicle Sales in the U.S. Data Through April 217 Thou. Units 12 % % % % 8 % % 6 -% -% China U.S. Europe Japan India Brazil -% -%

13 217 Precious Metals Market Outlook 9 June 217 Page 11 Platinum Between April and 23 May net long positions held by institutional investors on Nymex platinum futures and options fell sharply by 4.9% to 81, ounces. A 79.4% increase in these investors gross short positions in Nymex platinum was largely responsible for this sharp decline in their net longs over the same period. Institutional investors gross shorts rose to nearly 1. million ounces on 23 May from April, while their gross longs rose 4.3% to 2.3 million ounces during the same period. This development to some extent extended a trend that occurred during March and April, when institutional investors sharply increased their gross shorts in platinum. The only difference was that during May these investors also increased their gross longs, although not by much. These developments suggested that investor sentiment toward platinum remained on the bearish side. It is worth noting that with the current level of gross shorts in platinum, platinum prices could be prone to some upward price correction if institutional investors start to cover their gross shorts on some positive factors in the commodities space. Total open interest in Nymex platinum rose 1.8% to 3.4 million ounces on 31 May from the end of April. This increase in platinum total open interest was accompanied by a.2% month-on-month increase in platinum prices at the end of May. Non-Commercial Gross Long and Short Platinum Positions Nymex Futures & Options. Weekly Data, Through 3 May. 217 ' Ozs ' Ozs 3,8 3,8 2,9 1, ,6 Net Fund Position in Nymex Long Short 2,9 1, -7-1,6-2, -2, Disaggregated Nymex Non-Commercial Platinum Positions Nymex Futures and Options. Weekly Data, Through 3 May. 217 Thousand Ounces Thousand Ounces 3,6 3,6 Other Traders Long 3, Money Managers 3, 2,4 Net Position 2,4 1,8 1,8 1,2 1, ,2-1,2-1,8 Short -1,8-2,4-2, Platinum Prices, Total Open Interest, and Nymex Inventories Daily, Prices & Stocks Through 8 Jun.217, OI Through 7 Jun. 217 $ / Oz Mln Ozs 3, 4. 2, 1, Prices (Left scale) Nymex Stocks Open Interest Nymex Platinum Commercial Positions Nymex Futures & Options. Weekly Data, Through ' Ozs 1, ,2-1,6 - -2,4-2,8-3,2-3,6 Net Position in Nymex Long Short 3 May , ' Ozs 1, ,2-1,6 - -2,4-2,8-3,2-3,6-4,

14 217 Precious Metals Market Outlook 9 June 217 Page 12 Platinum Chinese Net Imports of Platinum Monthly Volume, Through April 217 ' oz Shanghai Gold Exchange Monthly Platinum Trading Volume Data Through May 217 Troy Ounces 2, 18, 16, 14, 12,, J-14 M-14 S-14 J- M- S- J-16 M-16 S-16 J-17 8, 6, 4, 2, Troy Ounces 2, 18, 16, 14, 12,, 8, 6, 4, 2, Chinese Net Imports of Platinum Annual, Through April 217 Thousand Ounces 3, 3, 2, 1, Platinum Priced in South African Rand and in U.S. Dollar Daily Data Through 2 June 217 Index: 3 Jan. = 4 Platinum (ZAR) 3 Platinum $ Thousand Ounces 3, Note: Orange bar bar refers to to YTD YTD volume in in 213 the previous year , 2, 1, Index

15 217 Precious Metals Market Outlook 9 June 217 Page 13 Palladium prices could be vulnerable to a near-term downward price correction. There was a large buildup of gross long positions in Nymex palladium by institutional investors as of late May, with their gross longs more than five times their gross short positions. Palladium prices could be prone to massive liquidation, possibly to $77 or even $72, if bearish factors strike the market, although prices should be well-supported at $67. Downside support is likely to come from a moderating U.S. dollar against other currencies as investors have grown increasingly doubtful over the future path of the Fed s policy rate given recent weak inflation data and signs of weak economic growth in the United States. Nymex palladium prices started a strong surge in late May and into early June, with prices hitting an intraday high of $839.8 on 2 June, the highest level since 17 September 214 when the intraday high reached $ This development was similar to the price pattern during April when prices surged to the then-two-and-a-half-year intraday high of $83.3 on 28 April before starting to decline over the following weeks. The last time prices were this high, which was in September 214, labor unions in South Africa and PGM mining companies there had just reached a deal to end the months-long labor strike and work was only in the process of returning to full production. Higher prices at the time were largely justified by the supply tightness caused by the labor strikes. Current palladium price levels, however, seemed a little overbought amid an absence of major supply disruptions and/or better-than-expected fabrication demand growth. CPM Group still thinks that palladium prices could be vulnerable to a near-term downward price correction. This potential downside risk could come from weakness in the auto markets in the United States and China, two of the largest end-use markets for palladium. Auto sales in the United States fell for the fifth straight month in May, while in China auto sales contracted in April for the first time since February 216. Investor concerns over future economic trends in countries like the United States and China also could cloud the price outlook of palladium going forward. Consumer spending, the key driver of the U.S. economy, also have shown signs of a slowdown recently. The latest Palladium Three-Month Palladium Price Projections $/Oz Acutal D-16 J-17 F-17 M-17 A-17 M-17 J-17 J-17 A-17 Palladium Prices: 1 January 2 to 8 June 217 $ /Oz Jan- Jan-11 Jan-12 Jan-13 Jan-14 Jan- Jan-16 Jan-17 Gross Long and Short Positions of Non-Commercial Positions Nymex Palladium Futures &Options. Weekly Data, Through 3 May ' Oz 3,6 2,8 1,2 4-4 Long 799 Net Position in Nymex Projected ,2 Short - A-9 A-98 A-1 A-4 A-7 A- A-13 A-16 ' Oz 3,6 2,8 1, ,2 -

16 217 Precious Metals Market Outlook 9 June 217 Page 14 Palladium Fed Beige Book showed that consumer spending softened from early April to late May, with many of its monitored districts noting little or no change in non-auto retail sales, while auto sales have edged down from last year s record highs in several districts. In fact U.S. auto sales fell 2.4% year-on-year in the first four months of this year. Beijing s efforts since the beginning of the year to rein in credit growth and crack down on shadow banking will lead to a further slowdown in the country s economic growth. Tightening measures on the property market, not only at the central government level, but also at provincial level, also will hurt demand for a range of commodities. That said, palladium prices are unlikely to experience a freefall if these bearish factors are indeed reflected in the upcoming economic data. Downside support is likely to come from a moderating U.S. dollar against other currencies as investors have grown increasingly doubtful over the future path of the Fed s policy rate given recent weak inflation data and signs of weak economic growth in the United States. Fabrication Demand U.S. auto sales fell on a year-on-year basis for the fifth straight month in May, down.6% to 1. million units from a year ago. In the first five months of the year auto sales reached nearly seven million units, a decline of 2.% from a year earlier. Light trucks and SUVs still were favored by U.S. consumers, with light truck sales accounting for 63% of total light duty vehicle sales in the United States during the January-May period. In April, Chinese auto sales contracted -1.% to 2.1 million units, the first time since February 216 when auto sales fell.8% year-on-year. In the first four months of the year, auto sales in China rose.1% year-on-year to 9.1 million units, compared to a 6.1% year-on-year increase in 216. Chinese auto production also contracted in April, down -1.% year-on-year to 2.1 million units, the first time since February 216 when auto production fell 1.2% year-on-year. Auto production in China U.S. Auto Sales Million Units Source: Bloomberg. Note: 217 data is through May. Red bar is sales in Ratio of US Cars to Light Truck Sales Passenger Cars Light Trucks % 9% 8% 7% 6% % 4% 3% 2% % % Annual Vehicle Sales in China Thousand Vehicles 3,, 2,,,, Source: Bloomberg. Note: 217 data is through April. Red bar is for same period in 216.

17 217 Precious Metals Market Outlook 9 June 217 Page Palladium held up well during the January-April period. Auto production rose.9% year-on-year to 9.3 million units from a year earlier; this compares to a.7% year-on-year increase in the same period in 216. Institutional Investors Monthly Global Semiconductor Sales Data through March Billion USD Billion USD 3 3 Between late April and late May, institutional investors continued to liquidate their gross long positions in Nymex palladium, and they also covered some of their previously-built short positions over the same period, resulting in an 11.7% decline in their net longs during this time. It is worth noting that these investors gross longs, which reached 2.27 million ounces on 23 May, were still at historically high levels, and were more than five times their gross shorts, which stood at 24,2 ounces on 23 May. With this level of gross longs built in Nymex palladium, palladium prices could be prone to massive long liquidation if bearish factors strike the market. Total open interest reached 3.1 million ounces at the end of May, down 16.2% from the end of April. This was accompanied by a decline in palladium prices over the same period Source: Semiconductor Industry Association,via Bloomberg. Disaggregated Non-Commercial Positions Nymex Palladium Futures & Options. Weekly, Through 3 May Thousand Oz. 4, Money Managers 3, Other Traders 3, Net Position 2, 1, , Short - 2 Thousand Oz. 4, Long 3, 3, 2, 1, , - Nov-9 May-11 Nov-12 May-14 Nov- May-17 Source: CFTC, Bloomberg Annual Percentage Change in Auto Sales 6% % 4% 3% 2% % % -% -2% -3% -4% -% -6% Brazil Russia India China USA Source: Bloomberg. Note: 217 data is through April.

18 217 Precious Metals Market Outlook 9 June 217 Page 16 Annual Palladium Supply Projected Through 217 Million Ounces Other Mine Production Secondary Supply Million Ounces Russian Supply South African Mine Production World Palladium Supply and Demand Balance, Total Supply 9, 8, 7, Fabrication Demand 6,, 4, , 9, 8, 7, 6,, 4, Palladium Secondary Supply and Price Annual, Projected Through 217 Thousand Oz. 3 Annual Average Price (right scale) 2 $/Ounce 1, Secondary Supply Source: CPM Group

19 CPM Group LLC CPM Group is a fundamentally based commodities research shop. We develop our own proprietary estimates of gold, silver, platinum, and palladium supply and demand on a global basis, drawing on every resource we can find, including our own extensive list of contacts involved in precious metals around the world. We have been doing this sort of research and analysis since the 197s, far longer than anyone else in the business. We also undertake research in specialty metals, base metals, energy and agricultural commodities. We are known for our basic fundamental research, a wide range of financially oriented consulting services, and our expertise in using financial derivatives to structure financing for producers, refiners, industrial users, and investors interested in either hedging or investing in commodities. Our investment philosophy is simple: We are value investors who base our decisions on what to buy, sell, hold, or avoid on the fundamentals of each asset, and the macro-economic, financial and political environmental factors that we expect will affect that asset s value. We have concerns, expressed in this report and elsewhere, about long-term imbalances in government deficit spending, public and private debt, and a wide range of other economic and political factors. We don t expect the world s financial system to collapse, however. That is not the way the world tends to work. More likely economic outcomes in the real world lie between the extremes of cataclysmic collapses and nirvana. We advise our clients and practice what we preach to have some of their wealth in gold and silver as an insurance policy against a catastrophic failure, but we also advise them to invest other portions of their money in precious metals and other assets based on the assumption that that sort of failure does not occur. We focus on investing based on likely scenarios, but with an eye always open to outlying events that take the world s markets by surprise. We have watched investors who were so worried about a collapse that they missed some of the largest stock and bond market rallies of all times over the past 3 years, while watching their safe haven assets fluctuate eight-fold in value up and down, and then up and down again. We prefer our clients to buy and sell precious metals and other assets based on cyclical and other developments, while also maintaining that long-term insurance policy in case the levee breaks. CPM Group LLC 168 7th St. Suite 3 Brooklyn, NY 112 USA T info@cpmgroup.com

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