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1 : Daily 29 November 2010 Focus: QE fully priced in, but euro gold still a buy on dips Walter de Wet, CFA* Walter.DeWet@standardbank.com Leon Westgate* Leon.Westgate@standardbank.com Focus: QE fully priced in, but euro-gold still a buy on dips Our preferred strategy, as we head into December, is to buy gold on dips. We also believe gold in euro-terms should outperform gold in dollar-terms. As far as PGM is concerned, despite monetary tightening in China, we expect auto sales at an aggregate level to remain robust and outpace auto sales numbers seen in 2008 and Seasonally December, February and March are consistently good months for auto sales. Temperatures in Northwest Europe are forecasted to be 3-7 degrees Celsius lower than seasonal average for this week. This should increase heating demand. The latest gasoil inventories in the ARA region have climbed two weeks in a row and now stand at above 2.7mt (or 20mbbl). This is 5% higher y/y and around 50% above the 5-year average. We expect the market will be well supplied. Following Friday s non-event, with the base metals closing the week virtually unchanged from Thursday, the base metals have sprung back to life during Tuesday morning, with a weaker dollar helping kickstart a rally during the pre-market. The Euro has since broken down however, which has taken the edge off the base metals complex heading into the afternoon. With little else for the market to get its teeth into, fluctuations in the dollar are continuing to lend direction to the complex, though interestingly, copper and nickel are so-far resisting the latest bout of dollar strength. Commodity price data (26 November 2010) Base metals LME 3-month Open Close High Low Daily change Change (%) Cash Settle Change in cash settle Cash 3m Aluminium 2,269 2,270 2,279 2, % 2, Copper 8,235 8,240 8,253 8, % 8, Lead 2,289 2,281 2,296 2, % 2, Nickel 22,550 22,575 22,675 22, % 22, Tin 23,850 24,300 24,353 24, % 24, Zinc 2,125 2,105 2,130 2, % 2, Open Close High Low day/day Change (%) ICE Brent % NYMEX WTI % ICE Gasoil % API2 Q1' % EUA Dec % AM Fix PM Fix High bid Low offer Closing bid Change (d/d) EFPs Gold 1, , , , , /-0.5 Silver /-1.0 Platinum 1, , , , , /2.0 Palladium /1.0 Sources: Standard Bank; LME; BBG Please refer to the disclaimer at the end of this document.

2 Daily 29 November 2010 Focus: QE fully priced in, but euro-gold still a buy on dips Gold vs. global liquidity We revisit the relationship between gold and global liquidity. With gold around the $1,360, we estimate US Fed action over the next 6 months is fully priced already. Empirically, we find the long-term causal drivers of gold are global liquidity and real interest rates. We define global liquidity as the Fed s balance sheet plus global foreign reserve holdings (excluding gold). Gold trades around the long-term trend these two variables provide. Other factors, such as FX moves, we view are short-term drivers Index Given our view that gold is pricing QEII already, we cannot use the QE argument to justify a higher gold price. However, the same argument would suggest that any sell-off in gold from here would indicate the metal is under valued relative to gold s causal drivers. As a result we believe gold remains a buy on dips. This view is supported by 3 developments: Firstly, independent from the Fed s QEII program, we believe global liquidity should continue to rise in 2011 providing support to gold. The rise in liquidity should be driven by further accumulation of foreign reserves by EM. Secondly, we have seen strong physical selling and scrap gold coming to market during the first two weeks of November as the gold price pushed above $1,400. However, the latest decline in the gold price to below $1,350 two week ago has spurred renewed physical buying interest. This is supporting gold on dips Jan-04 Dec-04 Nov-05 Source: Standard Bank Oct-06 Global liquidity Sep-07 Aug-08 Jul-09 Jun-10 Spot gold Lastly, we believe sovereign credit risk in Europe would provide investment demand for gold. As a result, our preferred strategy, as we head into December, is to buy gold on dips. We also believe gold in euro-terms should outperform gold in dollar-terms. By Walter de Wet Base metals Following Friday s non-event, with the base metals closing the week virtually unchanged from Thursday, the base metals have sprung back to life during Tuesday morning, with a weaker dollar helping kickstart a rally during the pre-market. The Euro has since broken down however - on the back of a poor outlook from the European Commission for Euro-zone growth in which has taken the edge off the base metals complex heading into the afternoon. With little else for the market to get its teeth into, fluctuations in the dollar are continuing to lend direction to the complex, though interestingly, copper and nickel are so-far resisting the latest bout of dollar strength. The Irish bailout deal has helped to calm the markets a little, while China s intervention to try and calm tensions in the Korean peninsular are also a positive development. Nevertheless, confidence still appears to be very fragile, not only for the base metals market, but also for the wider global markets generally. As such, although the metals are looking constructive from a technical point of view, they are likely to remain volatile heading towards year-end. Nickel has seen another large fall in on-warrant stocks, down 1,452 mt this morning, with Asia again seeing the bulk of the activity. Busan accounted for the majority of the cancellations, with Gwangyang and Rotterdam also seeing fresh warrant cancellations. Asian premiums have also started to firm up again after a soft patch, suggesting the market is starting to wake up. Copper continues to be dominated by tightness in the nearby spreads, with the cash-3 month backwardation heard around $50/mt this morning, the tightest level in 2 years. At the same time, LME inventories continue to drift lower. Looking at the spreads against LME inventory levels, the current levels of tightness in the cash-3 month spread is more typically associated with on-warrant inventories of less than 200 kt (and with a solid demand outlook) rather than the current ~325 kt. The nearby tightness in copper, plus the continued presence of a dominant position holder of warrants, is perhaps one factor deterring the market from aggressively shorting the metal. However we note that physical premiums in Europe remain robust, while Asian premiums have also stabilised, which is helping to shore up sentiment. By Leon Westgate 2

3 Daily 29 November 2010 The EMU finalised its assistance package to Ireland over the weekend. The 10y yield on Ireland government bonds is marginally lower this morning suggesting some market fears have been delayed. However, structurally the debt problems in Europe remains and should remain at the forefront of markets for now. Since gold carry no credit risk gold stands to benefit. As pointed out in the focus section, our view is still that gold in euro-terms is set to outperform gold in dollar-terms. Our preferred strategy is to buy gold on dips. Gold support is at $1,351 and $1,,339. Resistance is at $1,375 and $1,387. Despite selling in palladium on Friday, pushing the metal towards $660, we still believe demand remains strong and the metal should push higher towards $780 in Q1:2011. Palladium support is at $657 and $650. Resistance is at $692 and $720. Fundamentally, based on cost-of-production analysis we see good value for platinum below $1,600. As a result we expect buying interest to remain strong as we head towards this level. Platinum support is at $1,630 and $1,610. Resistance is at $1,675. As far as PGM is concerned, despite monetary tightening in China, we expect auto sales at an aggregate level to remain robust and outpace auto sales numbers seen in 2008 and Seasonally December, February and March are consistently good months for auto sales. This seasonal pattern has prevailed even during the downturn in We may see some auto manufacturers re-stock ahead of increased production. Furthermore, we continue to believe a rise in auto sales should support investment interest in platinum and palladium. Already we have seen a strong recovery in ETF holdings of both platinum and palladium. Platinum ETF holdings now stand at 1.074m oz (up from 971K oz at the start of October), while palladium ETF holdings are at 1.905m oz (up from 1,683m oz at the start of October). By Walter de Wet Although oil weakened marginally on Friday, front-month WTI had support from a power failure at the Enbridge pipeline, which transport Canadian crude to the US. Furthermore, due to the Thanksgiving holiday in the US, trading volume on Friday was a quarter lower than YTD average for NYMEX WTI. Net for the week, front-month WTI gained $2.02/bbl. The entire gain took place on Wednesday on the back of positive US macro-economic data. Product cracks and refinery margin stayed flat for the week, so did time spreads. The physical differential for West African crude strengthened as a result of Shell s force-majeure on Bonny Light. Temperatures in Northwest Europe are forecasted to be 3-7 degrees Celsius lower than seasonal average for this week. This should increase heating demand. The latest gasoil inventories in the ARA region have climbed two weeks in a row and now stand at above 2.7mt (or 20mbbl). This is 5% higher y/y and around 50% above the 5-year average. We expect the market will be well supplied. On Sunday, a plan to bail out Ireland was formally announced. The market s response so far has been lukewarm. The yields of the ten-year government bonds of Ireland, Greece and Portugal dipped by around 0.05%. In contrast, the yield of 10-year Greek government bond dropped by 4.7% in one day after Greece was bailed out. Perhaps more important to the oil market is recent development on the geopolitical front. The release of the US diplomatic cable lays bare the tension among the Gulf countries regarding Iranian nuclear programme. Although this is unlikely to cause any immediate supply disruption, the media reports once again push to the forefront the constant geopolitical risk supply of oil is exposed to. Looking ahead for the week, we have the November consumer confidence and ISM survey report from both US and Eurozone. Our focus is on upside risk of US economy recovery. For now, our view stays that the oil market will be anchored by high inventory and abundant supply. Coal market edged higher on Friday as China s domestic coal price rose to two year high and stockpile decreased. This partly reflects a seasonal demand increase. On the emission market, EU proposed to restrict credits from reducing certain industrial gas last Thursday. Although the proposal is subject to final approval, the spread between EU permits and Certified Emission Reductions (CER) has extended to its widest in 18 months. By James Zhang 3

4 Daily 29 November 2010 Base metals Daily LME stock movement (mt) Metal Today Yesterday In Out One day change YTD change (mt) Contract turnover Aluminium 4,284,125 4,287, ,350-3, , , ,168 Copper 357, ,550 1, ,325 31, ,576 Lead 203, , ,425 5, ,675 Nickel 131, ,518 1, ,538 4, ,631 Tin 14,830 14, , ,771 Zinc 632, , ,125 33, ,371 Shanghai 3-month forward prices COMEX active month future prices ZAR metal prices (26 November 2010) Aluminium Copper Lead Nickel Tin Zinc ZAR/USD fix Cash 15,981 59,052 16, , ,428 15, month 16,392 59,501 16, , ,470 15, futures pricing Price Change Price Change Price Change Price Change Price Change 1-month forward 2-month forward 3-month forward 6-month forward 1-year forward Sing Gasoil ($/bbbl) Gasoil 0.1% Rdam ($/mt) NWE CIF jet ($/mt) Singapore Kero ($/bbl) % Rdam barges ($/mt) % Fuel Oil FOB ($/mt) Sing FO 380 Cargo ($/mt) Sing FO180 Cargo ($/mt) Thermal coal Q1-11 Q2-11 Q3-11 Cal 11 Cal 12 API2 (CIF ARA) API4 (FOB RBCT) Forwards (%) 1-month 2-month 3-month 6-month 12-month Gold Silver USD Libor Technical Indicators 30-day RSI 10-day MA 20-day MA 100-day MA 200-day MA Support Resistance Gold , , , , , , Silver Platinum , , , , , , Palladium Active Month Future COMEX GLD COMEX SLV NYMEX PAL NYMEX PLAT DGCX GLD TOCOM GLD CBOT GLD Dec'10 Dec 10 Jan'11 Jan'11 Dec'10 Oct'11 Dec'10 Settlement 1, , , , , Open Interest 607, ,944 23,212 34,498 1, ,658 2,580 Change in Open Interest 15,048 9,741 1, ,081 0 Date: 26 November 2010 Sources: Standard Bank; LME; Bloomberg Cancelled warrants (mt) Cancelled warrants (%) Metal Open Last 1d Change Open Close Change Change (%) Aluminium 16,170 16, Ali Dec' Copper 61,110 61, Cu Dec' % Zinc 17,140 17,

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