Bullion Quarterly Report

Transcription

1 An Overview Bullion Quarterly Report Wednesday, April 13, 2016 Prepared by: KCTL Research

2 GOLD THE KING OF UNCERTAIN TIMES

3 INDEX Price Performance & Review Macro Economic Factors Core Fundamentals Technical Scenario Outlook

4 PRICE PERFORMANCE AND REVIEW Gold prices zoomed in the first quarter of 2016, marking the best start of the year since 1974 In the JFM quarter, prices ended up by 15% on COMEX and on MCX posted a gain of 14.51%, replicating a similar performance with its international peers Gold has been in a primary bear market from the year 2011 and has given negative returns for three consecutive years Mar-15 Apr-15 May-15 Jun-15 Sep-15 Aug-15 Aug-15 Jul-15 Jun-15 GOLD Generic MCX Oct-15 Feb-16 Jan-16 Dec-15 Dec-15 Nov-15 Oct-15 Gold Generic COMEX Feb-16 Mar Selloff in the global equities in the initial weeks led to decline in the risk appetite and boosting the safe haven demand for gold

5 PRICE PERFORMANCE AND REVIEW (Contd.) Prices made a fresh six year low of $1040/Ounce in December 2015 after the Fed increased the interest rates for the first time after 2008 in an attempt to normalize the interest rates cycle Selloff in the global equity markets led by fear of slow down in China and turmoil in the European banking sector triggered safe haven buying in gold Fear of slowdown in global economy made the Federal Reserve to reconsider the pace of further rate hikes against previously expected four rate hikes during the year 2016 Exchange Traded Products also marked strong inflows during the quarter after witnessing continuous outflows over past three years

6 INCREASING MONEY SUPPLY - POSITIVE China M2 grew at a 14% rate in January, the highest since June vs. a 6.1% increase in the U.S China has about $21.7 trillion in circulation, the U.S. $12.4 trillion and the euro zone $9.4 trillion Rising M2 could be a leading indicator of inflation Source- Bloomberg, PBOC, ECB, BOJ Federal Reserve Figures in Billion Dollars

7 NEGATIVE REAL INTEREST RATES- POSITIVE Real Interest Rates signifies the return on US government bond less inflation The real interest rates turned negative during the start of the year supporting the gold prices Zero interest rate on gold is still higher than negative interest rates The major economies of Euro nations like France, Sweden, Switzerland and Japan slashed their benchmark rates into negative trajectory, which shows the uncertainty and growth concerns in their economies

8 HEALTH OF GLOBAL ECONOMY Unemployment rates have been inching lower, pointing towards a strong labor market conditions Federal Reserve is closely watching the developments in the labor markets conditions and inflation to decide on further interest rate hikes In order to save the economies from deflation in the wake of low energy prices, central banks continued lowering interest rates and extended stimulus programs Inflation has started to pick up over last few quarters, high inflation is positive for gold as it is a hedge against inflation

9 DOLLAR & GOLD US Dollar and Gold maintained inverse relation historically The index slipped from the highs of 2015 as the further interest rate hikes were seen being deferred The average correlation during the first quarter remained vs long term average Weakness in the index boosts gold because gold is priced in dollar terms and it turns cheaper for the holders outside US whenever dollar corrects The Federal Reserve has iterated that it does not want dollar to strengthen further as it impacts the economic recovery.

10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 CHINA TOP CONSUMER AND 3 RD LARGEST PRODUCER China remains world s largest consumer in Q4 15 with tonnes of consumer demand followed by India where the demand was seen at tonnes Chinese demand is highly seasonal where retailer tend to stock ahead of festivals like Valentine s day, Chinese New Year etc. Apart from seasonality, Financing Deals and Arbitrage opportunities led to high imports in China. Companies infused liquidity by borrowing gold on low interest rates while the premium on SGE remained above $5/ounce for most part of 2015 China World Total Source WGC, Thomson Reuters We expect consumer demand from China at MT in Q1 16 amidst slow down in economy and uncertainty in the currency, whereas portfolio buying and stellar rally can attract fresh buying

11 INDIA THE SECOND LARGET CONSUMER Total demand in India for 2015 remained MT supported by higher investment and jewellery demand as prices slipped near to six year lows. Total Demand in Q4 15 remained at MT, while KCTL Research expects demand to remain weak in Q1 16 at MT, as lesser buying was seen on expectations of import duty cut, protest by the Jewellers in the month of March and higher prices Demand, however, is likely to pick up in second half of the year as LA NINA effect is expected to bring good monsoon this year and about 2/3 rd of the total demand in the country comes from rural areas China India Source- WGC

12 BALANCE SHEET Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3'15 Q4'15 Mine production Net producer hedging Total mine supply Recycled gold Total supply , , ,037.1 Sub-total above fabrication Fabrication Jewellery Fabrication Technology Total bar and coin demand ETFs and similar products Central banks and other inst Gold demand , ,080.4 Surplus/Deficit Total demand , , ,037.1 * Source- World Gold Council The total demand in Q 4 remained at MT, against MT in the same quarter a year ago, marking a gain of 4.85 % With fabrication demand remaining almost stable, central banks buying lifted the sentiments. KCTL research expects the total demand to remain at 1081 MT in Q1 16 and 1078 MT in Q2, where fabrication demand is expected to fall on account of low physical demand from India and China, while investment demand can remain steady. The trend in the ETF outflows is seen reversing in Q1 and is likely to be the strongest area of demand with 301 MT of inflows during the period

13 Gold SUPPLY 1,200 1, WORLD TOTAL GOLD SUPPLY Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3'15 Q4'15 Mine production Net producer hedging Recycled gold Total supply slipped by 9% in Q4 Y-O- Y basis. The mine supply remained at MT, the recycled gold supply remained MT and the producers de-hedging was seen at 15 MT constituting the total supply of tonnes. We expect total supply to remain at 1086 MT in Q1 16 where mine supply is expected to fall at 678 MT where as the recycled gold supply is likely to see a huge upside of 408 MT on strong prices * Source- World Gold Council

14 All-in Sustaining Cash Cost for Producers Despite low gold prices miners have been able to continue higher production by bringing the cost down on account of host of cost cutting measures like bringing down head counts, deferring the capital expenditures and improved technology Data here states that as Senior producers have an average all inclusive cost of approx. $892 while Mid tier miners have managed to cut the cost substantially to bring at $896. Note: Average Cash Costs = Mining + Processing Note: All-In Sustained Cost = Mining + Processing + Admin + axes/royalties exp e.t.c. & subtracting By-Product Credits if any With prices hovering around $1225/ounce although the space for more decline remains open but with low margins the miners would cut down on production that would support prices at lower levels and trigger a rebound

15 Gold ETF Holdings Linear Movement Till the year 2012, the exchange traded products were very much in vogue and the holdings were going up exponentially in lines with the prices were also moving up till the year However, holdings fell 33% in 2013 while added further drop of 9.33% in 2014 in line with decline in gold Exchange-traded funds' gold holdings declined by 5.2% in the year 2015, while gold has also fallen around same extent. The pace of withdrawals slowed, pointing towards a possible end to the outflows As it turned out, the ETF outflows in Q1 16 not only ebbed but witnessed huge inflows, overtaking the entire outflows made in the year 2015

16 STREAMING Streaming refers to an arrangement between a company and the miner, where the company will pay the miner upfront in cash and in return will get the metal over the life of the mine as per a pre determined agreement. Low metal prices have created a tough environment for the mining companies where they are facing rating downgrades and cash shortages In such environments the streaming options remain attractive for mining companies, while the investment remain risky for streamer company, however, they are able to mitigate the risk by building a portfolio

17 CENTRAL BANK S LOVE FOR GOLD IS NO LONGER A SECRET!! CENTRAL BANKERS ACTIVITY NET PURCHASES NET SALES For sixth consecutive year central banks have turned to be net buyers of gold, with the total assets reaching equal to post the end of gold standards Diversification in the reserves, rising global uncertainty and massive currency devaluations have been primary reasons for the accumulation by the central banks Russia, China and Kazakhstan were the top buyers in 2015 Central banks are also expected to remain net buyers in the year 2016

18 Fundamental Outlook- CAUTIOUSLY BEARISH Demand: The physical demand is expected to stay slow in the first quarter on the back of slow down in China, protest by Jewellers in India and higher prices. A further drop in the physical demand is expected going forward in Q2 from India and China as the cyclical demand tends to remain low during the period Supply: Mine supply is expected to come lower on closing operations, however, due to strong recovery in the prices the recycled gold is likely to keep the market well supplied US Interest rate normalisation: After the initial rate hike by the Federal Reserve, pace of subsequent hikes will play a major role in the gold s performance. We expect two rate hikes this year given the strong recovery in the labor market and steady inflation conditions in the US, with first hike seen as early as June Central banks monetary policies: Monetary policies of the major central banks like European Central Bank, Bank of Japan, People s Bank of China are likely to impact the currency movements. ECB has mentioned that there is little scope for more negative interest rates

19 Fundamental Outlook- CAUTIOUSLY BEARISH Equity markets performance: Weakness in the equity markets in the first quarter has been a primary reason for the rally in gold prices in first quarter, going ahead in the Q 2,a sustained recovery in equities can take some lure away from gold CFTC Positions: The commitment of traders report by the Commodity Futures Trading Commission has been showing good amount of non- commercial long positions built up since the beginning of the year. In the second quarter the liquidation of the net long positions can put pressure on the prices Institutional/ETF holdings: Institutional investors and the ETF s inflows have been spectacular during the first quarter, however the pace of inflows is likely to come down after a decent recovery in prices Central Banks Buying: The central bank of China and Russia have been primarily accumulating gold, however the pace of buying is expected to come lower given the decline in the foreign reserves amidst slow down and low oil prices

20 Technical Outlook- Sell Expected trend: - Bearish Prices moving in a wave pattern, impulse wave 1-5 and corrective wave A completed, currently wave B is in progress Wave B expected targets are $ and $ (Fibonacci resistance of 61.8% and 78.2% respectively in wave A) Wave C expected target is $1169 which is 50% level of Fibonacci support from wave 1 to wave 5. It is also matching with 123.6%. Fibonacci projection levels of wave A to wave B Exchange Action Entry Target Stop Loss Comex Sell / MCX Sell / RSI-14 approached over bought zone in monthly chart, Weekly chart RSI-14 reading at turned down from over bought zone of 79.85, which supports bear for coming weeks.

21 SILVER INVESTORS PATIENCE BEING TESTED!

22 PRICE PERFORMANCE SILVER COMEX Prices rallied 12% in the first quarter at COMEX from $13.83/ounce to end the quarter at $15.46/ounce. During the period, the prices marked a high of $ 15.81/ounce At MCX prices gained a little more than 10%, owing to strength in the Rupee. Prices tested a new intermediate high of Rs.39151/Kg during the quarter, before settling at Rs 36751/Kg. Prices failed to hold ground at higher levels and underperformed gold prices as the pressure was seen building in the base metals complex

23 BALANCE SHEET Supply (f) Mine Production Other Total Supply Demand Jewellery & Silverware Coins & Bars Industrial Fabrication Physical Demand Physical Surplus/Deficit ETF inventory Build Exchange Inventory Build Net Balance * Thomson Reuters Interim Silver Market Review, KCTL Research

24 All-in Cash Cost and Silver Output by Source Global Silver Mining Producers Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Silver Production ( 000 Oz) Silver Sales ( 000 Oz) Avg Silver Realized Price ($/oz) Avg Silver Cash Costs ($/oz) Avg Silver Cash Margin ($/oz) Note: Average Cash Costs = Mining + Processing Source: GFMS, Thomson Reuters Likewise we talked about Gold Average Cash Costs, data for Silver too depicts more downside potential for the commodity in near term. Table here portrays that average cash costs for producers is coming $6.1, substantially lower from previous quarter Problem lies with the fact that silver outflow is heavily dependent on secondary production along with other metals like Au, Pb, Zn, and Cu amongst others. As per the data from The Silver Institute, Primary silver miner s Total Cash Costs fell heavily during 2014 to $7.74 as against $9.27/Ounce in 2013 thus also aiding the producers in continuing their output and adding to the negative scenario for the metal.

25 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 Millions ETF Holdings Remain Robust TOTAL KNOWN ETF HOLDINGS The total known ETF holdings continue to be robust, showing optimism amongst the investors Holdings at the world's largest silverbacked exchange-traded fund ishares Silver Trust, which accounts for more than 60 percent of the physical metal in global silver (ETFs), rose to a record high Net ETF holdings have edged up to a fresh 2016 high on further demand from institutional investors

26 China s Import of Silver CHINA IMPORTS OF SILVER (MT) Silver imports in China peaked in January as the prices were lower. Huge buying was coming from the world s largest manufacturing economy. China s silver imports in January also surged as currency weakened, leading to higher domestic prices Imports, however, tumbled drastically in February as the growth concerns resurfaced in the world s second largest economy.

27 Gold - Silver Nearly Linear Relationship Gold and silver prices largely follow a similar trajectory Silver being a high beta, its movement in either direction is more with broader directional trend set by Gold commodity Gold Silver Spot /Futures prices maintain a long term weekly and monthly correlation of over 80% at Comex whereas at MCX too it stands healthy over 75%

28 SILVER UNDERPERFORMANCE CONTINUES GOLD/SILVER RATIO Both gold and silver prices witnessed a sown trend over past three years The gold/silver ratio, a simple measure of the metals relative prices calculated by dividing the price of an ounce of gold by the corresponding price of silver, has averaged 58 since Underperformance in silver pressed the Gold/Silver ratio above 2009 highs with the ratio moving above 81 We expect Gold/Silver Ratio to continue hovering around historic highs as the silver may continue to lag behind on lower industrial demand

29 Silver Regression Analysis Regression analysis with Silver a dependent variable on Gold, LMEX Index, Silver I-share Holdings, Dollar Index and MSCI Equity Index Silver remains highly regressed to Gold with R Squared of 67%. Data taken for daily closing since March 2015 up to March 2016 Silver has high weightage from Gold post which movement in LME Metals index too having moderate impact as Silver consumption remains heavy in industrial segment. Monthly data over long-term depicting high correlation with ETF holdings

30 Fundamental Outlook- Cautiously Bearish Given the fact that the white metal takes cues from both Gold and Industrial metal space owing to its consumption pattern therefore the future course of action for silver relies majorly on the trend of both precious and base metals. Silver remains highly regressed to Gold with R Squared of 67% backed by the daily inputs taken since the March 2015 up to March Silver has high weight-age from Gold while moderate linearity reflected from the LME Metals index and ETF holdings as well. The key for the coming quarter remains the Fed stance on the rate hike. The pace of recovery in the European and Chinese economies will also play a pivotal role Silver supply is also likely to be tightening the production cuts and closures at zinc and lead mines will have hit by-product production of silver, however the latest figures show mine production in Mexico increased 3.6 percent year-on-year in January. The looming oversupply situation and persisting lower demand concerns have been putting pressure on the base metals complex, which is likely to have a spilling adverse effect on silver We expect that prices can consolidate for some more time, while the counter is expected to broadly follow the trend in the precious metals segment but the decline in the industrial demand is likely to offset the improving investment and ETF demand

31 Technical Outlook- Sell Monthly SIc1 COMEX Silver 9/30/2013-6/30/2016 (NYC) Price USD Ozs Expected Trend: - Bearish Prices are moving with lower highs and lower lows forming a falling wedge pattern in monthly chart Auto Trend line resistance is at $15.95 as long as prices hold below trend line, trend remains bearish. Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Value USD Ozs Moving averages (20 and 50 periods) supporting for bearish trend. Exchange Action Entry Target Stop Loss COMEX Sell MCX Sell RSI-14 reading in monthly price chart, there is lower side potential till 30 mark. Trend line support is at $13.50, which may act as a crucial support for coming months.

32 Prepared by:- Function Analyst Head of Research-Commodity Sr. Market Strategist Technical Analyst Veeresh Hiremath Himanshu Gupta Prabhakar Reddy Note: All charts and tables are sourced from Bloomberg, unless otherwise indicated Reach us at Disclaimer The report contains the opinions of the author, which are not to be construed as investment advices. The author, directors and other employees of Karvy and its affiliates cannot be held responsible for the accuracy of the information presented herein or for the results of the positions taken based on the opinions expressed above. The above mentioned opinions are based on the information which is believed to be accurate and no assurance can be given for the accuracy of this information. There is risk of loss in derivatives. The author, directors and other employees of Karvy and its affiliates cannot be held responsible for any losses in trading. Commodity derivatives involve substantial risk. The valuation of underlying assets may fluctuate, and as a result, clients may lose entire value of their original investment. In no event should the content of this research report be construed as an express or an implied promise, guarantee or implication by or from Karvy Comtrade that the reader/client will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Information provided in this report is intended solely for informative purposes and is obtained from sources believed to be reliable. The Information contained in this report is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. We do not offer any sort of portfolio advisory, portfolio management or investment advisory services. The reports are only for information purpose and not to be construed as investment advices. Disclaimer