PRECIOUS METALS OUTLOOK NOVEMBER 2017

Transcription

1 PRECIOUS METALS OUTLOOK NOVEMBER 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 1 November 217 Page 1 Over the next three months gold prices should be expected to move sideways to higher, with support for prices at $1,26 and initial resistance at $1,32. The roll of the December contract at the end of November should provide some initial support to prices. Prices could remain subdued ahead of the December Federal Open Market Committee (FOMC) meeting, while a further decline should not be expected prices may wait until after the meeting to rise. Markets move into a period of strong fabrication demand as we head into the first quarter of the year, which may help push prices higher. Ongoing political risk should prevent prices from declining. After declining sharply during the second half of September, gold prices held their ground during October. The decline during the second half of September was in response to the FOMC meeting at which a reduction in the Fed s bond portfolio was announced and the Fed s forecast for interest rates (dot plot) suggested another increase in interest rates yet this year. The December rate hike is near certain at this point in the mind of the market consensus and the gold price already reflects the potential increase. What is uncertain is what the Fed s actions will look like over the course of 218. The Fed s dot plot suggests three more rate hikes next year and if the U.S. economy continues to grow at its present rate the three rate hikes would be fairly likely. One of the primary thoughts that the Fed had with regards to raising rates was to create a buffer to Gold Prices: 1 December 21 to 9 November 217 $ /Oz 2, 1,9 1,8 1,7 1,6 1, 1,4 1,3 1,2 1,1 1, Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan- Jan-16 Jan-17 Gold Three-Month Gold Price Projection $/Oz Acutal 1,282 1,32 1,32 1,28 Projected 1,3 1,26 1,26 1 M-17 J-17 J-17 A-17 S-17 O-17 N-17 D-17 J-18 adjust monetary policy in the event that the economy turned down. While some argue that the rate hikes themselves could precipitate a U.S. recession, real rates are still near zero and even if real rates rise to 1% or 1.% it should not be expected to derail U.S. growth. Furthermore, when looking at historical data and the relation between gold prices and real rates it can be seen that the negative impact of an increase in real rates is felt most when real rates get to around % to 6%. At % to 1% real rates gold prices have shown a tendency to still be positive. While real rates should be expected to rise in the future they are not expected to rise to the point that they become a meaningful problem for the price of gold. One or a combination of these factors could push real rates higher: an ongoing increase in the Federal funds rate without any increase in inflation, and an increase in yields overseas, which would reduce demand for U.S. debt and push U.S. yields higher. In addition to observing the lack of negative impact on gold prices when real rates are near zero, CPM Group has also studied the relationship between gold prices and interest rates in a couple of scenarios. In one, we tested the relation between gold prices and real rates in response to an interest rate change (after the fact), testing the relationship with no lag as well as up to a three year lags and found a very weak negative correlation. CPM also tested the relation between gold prices and interest rates in anticipation of a rate hike (before the fact) and while here there was a relatively stronger relationship (because mar-

4 217 Precious Metals Market Outlook 1 November 217 Page 2 kets typically tend to move in anticipation of an event) it was still a very weak negative relationship. President Trump nominated Jerome Powell as the next Fed chair. Mr. Powell s thinking on monetary policy is similar to that of Janet Yellen and therefore a continuation of the present low interest rate environment should be expected to continue. However, he is expected to be more lenient toward financial market regulations, which is a departure from Yellen s stance on the matter and more in line with Mr. Trump s thinking. If done correctly, a combination of gradually rising interest rates coupled with deregulation could continue to support present growth in the U.S. economy. However, a misstep could hurt the United States growth trajectory. Any such misstep is more likely to occur on the deregulation front, with excessive deregulation raising risks in the financial markets. Increased vulnerabilities in the financial markets coupled with heightened political risk should work well for gold, with investors adding some gold to their portfolio as a hedge. Gold Outside of interest rates and financial market regulation there are various other issues that could hurt the U.S. economy, such as ongoing global political risks, a tax reform which may seem positive on the surface but could be problematic when viewed in detail, or a tax reform that is short on keeping promises. Any or all these scenarios could weaken the U.S. economy or sink the stock markets. Some of the changes to the tax code that are being discussed as this report is being written could potentially hurt U.S. growth. For example, changes are being discussed to the way in which deductions related to real estate expenses can be applied, which would be particularly toxic to the housing markets in high real estate price and tax states (mostly around the coasts and mostly blue states). This could dampen real estate values in these states and have a negative wealth effect. Among the most expensive real estate states (excluding Washington D.C. and Hawaii) are California, New York, Massachusetts, Changes in Gold Price Changes in Gold Prices in Response to Change in Real Interest Rates in Anticipation of Change in Real Interest Rates Correlation Slope Correlation Slope No Lag No Lag Year Lag Year Lag Year Lag Year Lag Year Lag Year Lag

5 217 Precious Metals Market Outlook 1 November 217 Page 3 and New Jersey, which collectively accounted for around a third of U.S. GDP in 216. Reduced spending by people living in these states because of a sense of reduced wealth could hurt U.S. GDP for example. The point of this example is not to say that the amendments to the tax code will hurt the U.S. economy but that there are various risks outside of the an increase in interest rates that could hurt U.S. GDP. All tax codes hurt some sectors and benefit others; it is the net impact that matters and at this time it is not clear what that net impact will be. Net Comex long positions meanwhile held by institutional investors declined over the course of October to 19.7 million ounces. This was the lowest level that these holdings had reached since the middle of August this year. The decline during October was primarily the function of a decline in gross long positions, with gross short positions largely flat around 7.7 million ounces. This level of gross short positions already is fairly small. That investors did not care to build more short positions in response to the weakness in prices during the second half of September suggests that they, correctly, did not see significant downside risk. Gross long positions also were down from recent high levels, but nonetheless were still quite high by historical levels. Total open interest in Comex gold declined during the initial few days of October to around 1.3 million ounces, down from 3 million ounces at the end of September. Total open interest did rise slightly over the second half of October, getting back to levels seen at the end of September. Net additions to central bank gold holdings during the first three quarters of the year reached 8.4 million ounces. These net additions are made up of 8.32 million ounces in gross additions less small disposals. Gold Net Long Non-Commercial Positions and Gold Prices Weekly Data, through 31 Oct 217 $/Ounce 2, 1,8 1,6 1,4 1,2 1, Gross Long and Short Positions of Non-Commercial Positions Comex Gold Futures & Options.Weekly,through 31 Oct 217 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 Mint Gold Coin Sales to Dealers Through Oct 217 Thou Oz Net Long Positions Gold Price Apr-9 Apr-99 Apr-3 Apr-7 Apr-11 Apr- Million Ounces Thou Oz

6 217 Precious Metals Market Outlook 1 November 217 The central bank of Russia made a strong net purchase in September, adding 1.11 million ounces of gold to its holdings during the month. This net purchase alone accounts for 13% of gross purchases during the first three quarters of this year. The central bank of Russia is planning on buying some of its gold on the Moscow exchange to boost turnover on the exchange. In addition to the central bank of Russia, the central bank of Turkey has added 1.6 million ounces of gold to its holdings between May 217 and September 217. Gold Changes in Central Bank Gold Reserves in 216 Million Troy Ounces 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 Dec Philippines Dec France Dec Subtotal Gross Increases 1.96 Page 4 Year- End 2 Countries Increasing Reserves 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 7.42 Changes in Central Bank Gold Reserves in 217 Million Troy Ounces YTD 217 Net Change Month of Reporting To IFS Annual Reported Central Bank Changes in Gold Holdings 217 Through Sept M Million Oz. 3 Net Additions/Reductions 3 Gross Additions Gross Reductions Million Oz. Russia Sept. Turkey Sept. Kazakhstan Sept. Argentina Sept. Indonesia Aug. Kyrgyz Republic..2. Sept. Mongolia Jul. Serbia, Republic of Aug. Venezuela Jun. Egypt Aug. Belarus Sept. Pakistan Sept. Bangladesh Sept. Subtotal Gross Increases Year- End 216 Countries Increasing Reserves Year- End 216 Countries Decreasing Reserves YTD 217 Net Change Month of Reporting To IFS Germany Aug. Tajikistan Mar Jordan Mar Malaysia Sept. Czech Republic Sept. Sri Lanka Jul. Suriname Sept. Ukraine S ept. Subtotal Gross Decreases -.28 Subtotal Net Changes 8.42 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 1 November 217 Page Silver prices could rally later this month toward $18 and perhaps even $18.. Prices have held firmly above $16. since early August. Seasonal strength in fabrication demand, the roll of the Comex December futures contract, and the political environment all make for an upward leaning prices environment. If there is a prices move lower, it will likely be short lived and should be considered a buying opportunity. The Comex December futures contract will become deliverable later this month and market participants will have to roll their positions into later months. This might cause some congestion, as it sometimes does during this time of the year, suggesting a brief price spike in late November into early December. Options expiry at the end of November also might cause increased volatility for a couple of days. Seasonal strength in precious metals prices during the fourth quarter and into the early part of the year may likely support prices. This fabrication demand is typical in the gold and silver markets. Jewelry demand picks up as the holiday season approaches in the Northern Hemisphere. Technically, prices also appear to be in an uptrend since bottoming out in early July, when prices tested $.2 on an intraday basis. This uptrend remains intact despite the surge and drop in silver prices from early September to early October. Prices may have risen too fast too quickly then and are now building support or a base from which Silver Silver Prices and Open Interest Daily, Prices thourgh 1 Nov. 217OI thourgh 9 Nov. 217 $/Ounces Three-Month Silver Price Projections $/Oz Acutal 14 M-17 J-17 J-17 A-17 S-17 O-17 N-17 D-17 J-18 Total Open Interest Projected Prices (Left Scale) Million Ounces 1,2 1,1 1, Silver Price Volatility Monthly DataThrough, Oct % 9% 8% 7% 6% % 4% 3% 2% 1% Oct ' % Sep ' % Oct ' % % Comex Silver Inventories & Total Open Interest Daily, OI Through 9 Nov. 217 Stocks Through 1 Nov. 217 Mln Ozs 1,2 1, Total Open Interest Registered Stocks 2 Eligible Stocks Mln Ozs 1,4 1,2 1,

8 217 Precious Metals Market Outlook 1 November 217 Page 6 to move higher. (Some of that upward move and then decline may have reflected the roll out of September Comex silver positions into December ones, the same mechanism expected to support prices during the roll out of December.) Silver could near $19 over the next three months if there is another strong rally as was seen in the third quarter. The net long position held by non-commercial market participants on the Comex was million ounces as of 31 October, little changed from million ounces held on 3 October. While the net long positions held relatively steady, the underlying gross short and long positions changed more substantively. The gross short position increased to 176. million ounces as of 31 October, up from 7.3 million ounces on 3 October. During the same time the gross long position rose to million ounces from 4.2 million ounces. While market participants remain biased toward the long side of the silver market, there has been an increased number of investors, or at least the gross short positions show, who either expect prices may head lower or are hedging their long positions to protect against or profit from temporary down-drafts in prices. This data typically tend to follow price trends, but the increase in both the gross long and gross short positions suggests either strongly conflicting investor views or advanced strategies involving both long and short positions such as butterfly straddles or strangles. Silver Non-Commercial Gross Long and Short Silver Positions Comex Futures & Options. Weekly Data, Through31 Oct. 217 Mln Ozs Mln Ozs 7 7 Long Net Fund Position in Comex Short -4-4 Jan-14 Jul-14 Jan- Jul- Jan-16 Jul-16 Jan-17 Jul-17 Non-Commercial Gross Long and Short Silver Positions Comex Futures & Options. Weekly Data, Through 31 Oct. 217 Mln Ozs Mln Ozs Long 4 Net Fund Position in Comex Short Disaggregated Non-Commercial Silver Positions Comex Futures and Options. Weekly Data, Through Mln Ozs Short Other Traders Money Managers Net Position Long Oct. 217 Mln Ozs

9 217 Precious Metals Market Outlook 1 November 217 Page 7 Silver Monthly U.S. Eagle Silver Coin Sales by the U.S. Mint Month January,3,,94,,127, Fe bruary 3,22, 4,782, 1,2, March 3,19, 4,16, 1,6, April 2,81, 4,72, 83, May 2,23, 4,498, 2,4, June 4,84, 2,837, 986, July,29, 1,37, 2,32, August 4,93, 1,28, 1,2, September 3,84, 1,67, 32, October 3,788, 3,82, 1,4, November 4,824, 3,61, December 2,333, 24, Total YTD 36,4, 34,4, 16,938, % Change YOY 11.% -4.6% -.8% Annual Total 47,, 37,71, % Change YOY 6.8% -19.8% Annual U.S. Mint Silver Coin Sales to Dealers Through October 217 Million Ounces Monthly U.S. Mint Coins Through October 217 Mln Oz Dealer Premia on U.S. Mint Silver Coins Daily Data through 31 Oct % 3% 2% 2% % 1% % Silver American Eagle Silver 1 Oz. bar % Jan-12 Jan-13 Jan-14 Jan- Jan-16 Jan-17 Note: Red bar is net addition during 216 for corresponding period in 217

10 217 Precious Metals Market Outlook 1 November 217 Page 8 Chinese Market Activity Chinese net imports declined in September, after rising for four consecutive months. Net imports reached 4.1 million ounces in September, down 12% over the corresponding period in 216. Gross imports and exports rose in September, however, gross exports rose more strongly resulting in the net export of metal. Gross imports reached 11.3 million ounces, up 7.8% from the same period in 216. Gross exports meanwhile reached 7.2 million ounces, up 24% year-on-year. Silver inventories held at SHFE-approved warehouses were largely flat in October at 42.7 million ounces, down.4% over September. Inventories are down around 17% over the past year and are down around 33% from the beginning of this year. Combined open interest for silver futures on SHFE continued to decline in October to million ounces, down.% from million ounces at the end of September. During September the volume of silver futures transactions on the SHFE slipped lower to 1.22 million ounces, down 39.2% from August. Silver SHFE Silver Stocks Weekly, Through 2 November 217 Mln Oz Aug-12 Aug-13 Aug-14 Aug- Aug-16 Aug-17 SHFE Silver Trading Volume Monthly, Through 31 October 217 Million Oz 2, 2,, 1,, M-12 F-13 N-13 A-14 M- F-16 N-16 A-17 Chinese Silver Imports and Exports Monthly, Through September 217 Moz Moz Gross Imports Gross Exports Net Trade -2 F- A-6 F-8 A-9 F-11 A-12 F-14 A- F-17 SHFE Silver Open Interest Monthly, Through 31 October 217 Million Oz 2 1 May-12 May-13 May-14 May- May-16 May-17

11 217 Precious Metals Market Outlook 1 November 217 Page 9 Platinum In the near term platinum prices may be temporarily pushed up to $1, as some investors buy on dips under current low price environment. Despite decent growth in commercial vehicle sales in key auto markets prices are likely to be capped below $1,3, however, due to a lack of fresh positive catalysts on the demand side. However, prices should get strong support, possibly at $88, from a possible decline in mine supply from South Africa and a synchronized global growth environment. After experiencing a sharp decline during September, Nymex platinum rebounded in the first half of October, rising to a high of $9.9 on 16 October before giving up some of the gains in the second half of the month. Much of the decline in platinum prices did not seem to come from any near-term demand outlook for the metal, as recent data showed key auto markets continued to record decent growth and that global industrial and manufacturing activities held up well in a synchronized global growth environment. To be sure, a gradual decline in the diesel market has already been priced in current platinum prices. It seemed that the strength in the U.S. dollar played a part in dragging down prices in the second half of October. Also, profit taking by short-term investors after the earlier run up in prices seemed to be at work in the price decline. In the first few trading days of November platinum prices rebounded again, rising to a high of $939.3 on 8 November, the highest level since the October peak. Investors appeared to have built some fresh long positions in the metal over this period as total open interest in Nymex platinum futures contracts rose while prices increased. Platinum Prices: 1 January 21 to9 November 217 $ /Oz The Gold/Platinum Price Ratio Monthly, Through October Three-Month Platinum Price Projections $/Oz 1,1 1, 1, Acutal 926 1, Projected 1, M-17 J-17 J-17 A-17 S-17 O-17 N-17 D-17 J-18 Investors probably took cues from a downgrade in Anglo 1.3 American s 217 platinum production which was announced in late October. This means platinum mine sup- 1.1 plies from South Africa could come under pressure going.9 forward. In its third quarter trading update, Anglo American lowered its production guidance for platinum to million ounces this year, from its previous guidance of million ounces of the precious metal. The. downgrade came after Atlatsa Resources put the Bokoni mine in the Bushveld on care and maintenance, although

12 217 Precious Metals Market Outlook 1 November 217 Page 1 Platinum problems with a concentrator also contributed to the lower production guidance. A potential decline in South African platinum mine supply should provide underlying support to platinum prices. In the near term platinum prices are expected to trade between $88 and $1,3. On the downside prices should get strong support from a positive macroeconomic backdrop and a possible decline in mine supply from the world s largest producing country, South Africa. On the upside currently low prices could attract some bargain buying, although without signs of stronger demand growth prices are likely to be capped at $1,3. With the exception of Brazil, most key auto markets recorded strong growth in commercial vehicle sales. The European market continued to report robust growth in the first nine months of the year, with commercial vehicle sales up 3.3% year-on-year to 1.8 million units. During that period, Spain continued to drive growth (+14.4%), followed by France (+6.%), Germany (+2.2%), and Italy (+1.6%). However, commercial vehicle registrations in the United Kingdom declined 3.3% year-on-year over the same period. Monthly Commercial Vehicle Sales Thous Units 2, 2, 1, 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 September 217 2% % 1% % % 2% % 1% % % -% -% -1% China U.S. Europe Japan Brazil -1% Monthly Commercial Vehicle Sales in Europe Data Through September 217 Thou. Units

13 217 Precious Metals Market Outlook 1 November 217 Page 11 Platinum Institutional investors continued to build a lot of fresh short positions in Nymex platinum during October. While they were doing so, they also built some fresh long positions in the metal. As a result, their net longs in platinum fell 22.8% to 97,9 ounces on 31 October. Over the course of October institutional investors gross shorts rose 7.% to nearly 1. million ounces, while their gross longs rose 11.7% to nearly 2. million ounces. Non-Commercial Gross Long and Short Platinum Positions Nymex Futures & Options. Weekly Data, Through 31 Oct. 217 ' Ozs ' Ozs 3,8 3,8 Long 2,9 2,9 2, Net Fund Position in Nymex 2, 1,1 1,1 2 2 Total open interest in Nymex platinum rose 9.3% to nearly 3.9 million ounces on 31 October from the end of September. This was accompanied by a 1.% month-on-month increase in platinum prices at the end of October. -7-1,6 Short -2, ,6-2, Disaggregated Nymex Non-Commercial Platinum Positions Nymex Futures and Options. Weekly Data, Through 31 Oct. 217 Thousand Ounces 3,6 3, 2,4 1,8 1, ,2 Other Traders Money Managers Net Position Long -1,8 Short -2, Thousand Ounces 3,6 3, 2,4 1,8 1, ,2-1,8-2,4 Platinum Prices, Total Open Interest, and Nymex Inventories Daily, Prices & Stocks Through 9 Nov., OI Through 8 Nov. $ / Oz Mln Ozs 3, 4. 2, 2, 1, 1, Prices (Left scale) Nymex Stocks Open Interest Nymex Platinum Commercial Positions Nymex Futures & Options. Weekly Data, Through ' Ozs 1, ,2-1,6-2, -2,4-2,8-3,2-3,6-4, Net Position in Nymex Long Short Oct. 217 ' Ozs 1, ,2-1,6-2, -2,4-2,8-3,2-3,6-4,

14 217 Precious Metals Market Outlook 1 November 217 Page 12 Platinum Shanghai Gold Exchange Monthly Platinum Trading Volume Data Through October 217 Troy Ounces Troy Ounces 2, 2, 18, 18, 16, 16, 14, 14, 12, 12, 1, 1, 8, 8, 6, 6, 4, 4, 2, 2, Chinese Net Imports of Platinum Annual, Through September 217 Thousand Ounces 3, 3, 2, 2, 1, 1, Thousand Ounces 3, Note: Orange bar bar refers to to YTD YTD volume in in 213 the previous year 3, 2, 2, 1, 1, Platinum Priced in South African Rand and in U.S. Dollar Daily Data Through 9 November 217 Index: 3 Jan. 2 = 1 4 Platinum (ZAR) Platinum $ Index Monthly Commercial Vehicle Sales in the U.S. Data Through September 217 Thou. Units Indian Commercial Vehicle Sales Monthly, YoY% Change, Through July 217 2% % 1% % % -%

15 217 Precious Metals Market Outlook 1 November 217 Page 13 Palladium prices could be boosted by continued tightness and a deep backwardation on the Nymex palladium futures contracts in the second half of November and into early December. As the metal approaches the December futures delivery period a spike up in prices could occur, along with a widening backwardation. Prices could revisit the recent peak of $1,18, or rise to $1,4 or even $1,8. Once the December Nymex roll is over higher prices are likely to be met with profit-taking. Nymex palladium extended its upward trajectory that started in May into October and early November, with the intraday high hitting $1,17.3 on 8 November, the highest level since $1,4 on 9 February 21. Palladium Three-Month Palladium Price Projections $/Oz 1,1 1, 1, Projected 1, Acutal 7 M-17 J-17 J-17 A-17 S-17 O-17 N-17 D-17 J-18 The strength came from a combination of continued fund buying as institutional investors remained positive on the outlook of palladium and shorter term long positioning based on Nymex open interest. While institutional investors continued to build fresh longs in palladium during October, they also built a substantial amount of fresh shorts at the same time. This was different from what they did in the past few months, when fresh long building was in sync with short covering. The new trading pattern suggests a possible change in investor sentiment toward palladium going forward, with them more cautious about playing the short-term long positions as prices rise toward record levels. Part of the price strength in palladium since May came from new investors that have been attracted to the palladium market because of the sustained increase in prices. It is possible these investors could exit the market quickly when they see prices start to decline in a meaningful way, although current tightness and the deep backwardation both in the spot market and on the Nymex palladium futures contracts indicate that these investors are unlikely to go away for at least the next several months. As of 6 November the nearby December open interest stood at nearly 3. million ounces against 17,3 ounces of registered inventories. The spread between the nearby December contract and the forward March contract remained in a deep backwardation, averaging $8. on a daily basis between 1 November and 6 November and $7.6 on a daily basis between 2 October and 31 October. In early November the backwardation was averaging around 3% at an annualized rate. Palladium Prices: 1 January 21 to 9 November 217 $ /Oz Jan-1 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 31 Oct. ' Oz 3,6 2,8 2, 1,2 4-4 Long Net Position in Nymex -1,2 Short -2, A-9 A-98 A-1 A-4 A-7 A-1 A-13 A-16 ' Oz 3,6 2,8 2, 1, ,2-2,

16 217 Precious Metals Market Outlook 1 November 217 Page 14 Palladium Palladium prices are likely to rise sharply again as the metal approaches the December Nymex futures delivery period. December open interest is likely to decline for the rest of November, with only a small part of it being liquidated at the end of the month and a widening backwardation over the course of November. Prices could rise back to the recent peak of $1,17 - $1,18 and possibly rise to $1,4 or even $1,8. Such a move higher in prices would likely occur as the December short positions on Nymex are rolled forward during the second half of November. Once that is past higher prices would be expected to be met with profittaking. If there is a broad-based shift in market sentiment away from precious metals in general there also could be massive long liquidation, possibly coming from those Annual Percentage Change in Auto Sales 6% % 4% 3% 2% 1% % -1% -2% -3% -4% -% -6% Brazil Russia India China USA Source: Bloomberg. Note: 217 data is through August Monthly Vehicle Production in China, Year-on-Year Change Through September % 14% 12% 1% 8% 6% 4% 2% % -2% -4% Jan-7 Jan-9 Jan-11 Jan-13 Jan- Jan-17 Source: Bloomberg U.S. Auto Sales Million Units Source: Bloomberg. Note: 217 data is through October. Red bar is sales in 216 for same period in 217. Ratio of US Cars to Light Truck Sales Passenger Cars Light Trucks 1% 9% 8% 7% 6% % 4% 3% 2% 1% % Annual Vehicle Sales in China Thousand Vehicles 3, 2, 2,, 1,, Source: Bloomberg. Note: 217 data is through September. Red bar is for same period in 216.

17 217 Precious Metals Market Outlook 1 November 217 Page Palladium new palladium investors. In this scenario palladium prices could spike down to $83. After a one-off rebound in September due to hurricanerelated damages, U.S. auto sales resumed their downward trajectory in October, with sales down 1.4% year-on-year to 1.3 million units. During the January-October period, auto sales in the United States fell 1.8% year-on-year to 14.1 million units. In September Chinese auto sales were up.7% year-onyear to 2.7 million units. In the first nine months of the year, auto sales in China rose 4.8% year-on-year to 2.2 million units. The other BRIC countries also recorded strong growth in their auto sales in the first nine months of the year. Brazil and Russia posted strongest growth in auto sales during this period, up 11.7% year-on-year and 1.6% yearon-year, respectively. Global semiconductor sales continued to rebound strongly this year. In September sales were up 22.2% year-on-year to nearly $36. billion. During the January- September period global semiconductor sales rose 2.7% year-on-year to $292. billion. During October institutional investors built both fresh long and fresh short positions in Nymex palladium, resulting in a 4.7% increase in their net longs. Their gross longs stood at 2.6 million ounces on 31 October, after reaching 2.9 million ounces on September 217 (the highest level since 9 September 214 when gross longs stood at nearly 3.1 million ounces). This high level of gross longs held by institutional investors suggested that if there is some bearish catalyst, palladium prices will be vulnerable to massive liquidation. Institutional investors gross shorts stood at 479,6 ounces on 31 October, up 27.% from the end of last year; although the level of their gross shorts was equivalent to only 18.2% of their gross longs in palladium, which were at historically high levels. Total open interest reached 3.4 million ounces at the end of October, up 8.2% from the end of the previous month. Disaggregated Non-Commercial Positions Nymex Palladium Futures & Options. Weekly, Through 31 October Thousand Oz. 4, 3, 3, 2, 2, 1, 1, - -1, -1, Short -2, Monthly Global Semiconductor Sales Data through September Billion USD Money Managers Other Traders Net Position Source: Semiconductor Industry Association,via Bloomberg. Thousand Oz. 4, Long 3, 3, 2, 2, 1, 1, - -1, -1, -2, Nov-9 May-11 Nov-12 May-14 Nov- May-17 Palladium Prices, Total Open Interest, and Nymex Inventories Daily, Prices & Inventories Through 9 Nov., OI Through 8 Nov. $ / Oz Mln Oz Prices (Left scale) Open Interest 2 Nymex Stocks 1 D-2 D-4 D-6 D-8 D-1 D-12 D-14 D-16 Source: Bloomberg Billion USD

18 217 Precious Metals Market Outlook 1 November 217 Page 16 World Palladium Supply and Demand Balance 1, Total Supply 9, 8, 7, Fabrication Demand 6,, 4, , 9, 8, 7, 6,, 4, Annual Palladium Supply Projected Through 217 Million Ounces Other Mine Production Secondary Supply Million Ounces 1 Russian Supply South African Mine Production Palladium Secondary Supply and Price Annual, Projected Through 217 Thousand Oz. 3 Annual Average Price 2 (right scale) 2 1 $/Ounce 1,2 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 31 Brooklyn, NY 112 USA T info@cpmgroup.com

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