Metal Matters December 2012

Transcription

1 Gold prices remain range bound as they await developments over the US fiscal crisis. We expect dips to be well supported. The fragility of global growth and the debt crisis in Europe are likely to mean fiscal stimulus remains on the political agenda. But, better economic news out of the US and China could lead to less demand for safe-havens in the near term. The combination of ongoing quantitative easing and better regional growth could, however, stoke inflationary fears. ETF investors continue to build up their exposure to Gold we feel they do so as a hedge against currency debasement. Central banks also remain keen buyers, which suggests they feel the need to diversify away from owning fiat government paper. We still feel Gold has not peaked yet. Silver has held up better than Gold and the market seems to think there is potential for a short squeeze. The commercial short position has climbed to multi-year highs. PGM prices have trended higher again, they are encountering some scale up selling, but the outlook is more bullish now. We expect supply issues, especially in South Africa, to be the main driver for PGM prices.

2 Gold prices remain range bound and are nervous ahead of US fiscal decisions Gold spent most of October consolidating after the August to early October rally that saw prices gain 13% to $1,796/oz, from $1,590/oz. In November, prices started to edge higher again, but lacked the energy to hold above the $1,750/oz level, let alone rechallenge key resistance around $1,800/oz. By early December, Gold prices were once again under pressure as they looked for a support level, so far the $1,680/oz level has held, but it is too early to say whether this will remain the case. The overall performance suggests Gold is struggling to attract sufficient fresh interest to drive the bull market. What has been surprising is the weakness in Gold has happened at a time when the dollar has been under pressure too. Does this mean demand for safe-havens has waned given steadier base metal prices and some encouraging economic data in the US and China, this may well be the case to some extent. However, we feel the underlying bullish arguments for Gold remain firmly in place and are unlikely to disappear any time soon. As such, we remain cautiously bullish for bullion. Gold prices pull back sub-$1,700/oz Having climbed to $1,754/oz by 23 rd November and having cleared resistance around $1,739/oz in the process, it looked as though Gold was on its way to rechallenge resistance either side of $1,800/oz, but that was not to be. Prices dropped 2% on 28 th November to around $1,705/oz, consolidated for a few days before dropping to around $1,685/oz in early December. This suggests that the market had been expecting more from Gold and when it did not get it, it prompted long liquidation from some institutional investors ahead of their yearend, many of which are spread out in the months leading up to the calendar year-end. But ETF investors are still bullish While there may have been selling in some quarters, there was still steady buying interest across the ETFs, indeed the dip in prices recently has coincided with the ETF position setting a fresh record high at 2,638 tonnes, up around 37 tonnes from the end of October. What is more, is that during the pull back from $1,754/oz there has been little evidence of any redemptions. So far this year, ETF holdings have increased 268 tonnes. Although the steady increase in the size of the ETF position is bullish for now, it is a double-edged sword in the making, as when confidence in the global market returns and there is less need for safe-havens, then redemptions could be made at a fast pace. Given our macro view on debt, QE and currency debasement, we do not feel investment demand for Gold will end any time soon. That said, there is no harm in being reminded that at some stage down the road the large ETF position will switch from being a bullish factor to a bearish one. Funds had been getting longer Up to 27 th November, the latest data available, the net long fund position (NLFP) had been growing it reached 200,407 contracts, up from 160,173 contracts in early November. However, this latest reading was taken before prices started to correct it will be interesting to see how much the NLFP has dropped and to what extent the gross short position has increased. If the NLFP holds above 160,000 contracts then we would not be too concerned about the recent level of long liquidation. 2

3 Legacy of massive debt Overall, we remain bullish for bullion because we fear too many large governments have lost control of their finances. As this becomes more obvious, creditors are likely to further diversify away from assets backed by fiat money in favour of assets that have intrinsic value and that are easily monetarised, such as Gold. Budget deficits, the accumulation of massive debt and ongoing QE, all threaten the credibility of the financial system and when more debt is created to make debt repayments and buy time, while solutions remain elusive, it suggests the model is broken. Indeed so big are the numbers, that it is difficult to see how the debt will be repaid its seems more likely that governments will either default, or will strive to reduce the value of the debt by debasing the currency the debt is denominated in. As currencies are debased, prices of real assets are likely to rise relative to the currency being debased, which is another form of inflation. This is neither demand-pull inflation, nor cost-push inflation, but more like hyper-inflation as the purchasing power of money erodes as more fiat money is created out of thin air. Central banks get the message, will others As the traditional hard currencies are being debased, it would appear that creditor central banks are buying Gold as a means to diversify their portfolio of foreign exchange reserves. In November, South Korea bought 14 tonnes of Gold, increasing its holdings by 20%, to 84 tonnes. Other central banks that have bought Gold over the past two years include: Russia, Kazakhstan, Ukraine, Mexico, Bolivia, Thailand and the Philippines. Given the volumes of Gold traded between Hong Kong and China, it seems likely that China is also increasing its Gold reserves. The fact central banks are turning to Gold suggests the concerns about currency debasement are very real. If central banks and ETF investors continue to see the value in holding Gold, then this raises the question whether a retail/herd-mentality bull phase lies ahead. It would be somewhat ironic if the run up in Gold prices in recent years has encouraged the public to part with their old Gold through cash for scrap schemes, only to buy it back in the form of investment bars/coins, which they are then left holding when the bull market finally ends. Technical Gold prices are consolidating above the long term up trend line that is around $1,650/oz and below key resistance at $1,803/oz. The stochastic indicators are negative, which suggests a rebound to rechallenge resistance is unlikely in the near term. However, with prices only $100/oz below the $1,803/oz resistance level, it would not take much to make the chart look considerably more bullish than it does now. In the short term, prices may well have to do more work on the downside to confirm support is in place, but we would get more bullish once the stochastics cross higher again and on a move back above $1,755/oz. Summary On balance we remain bullish for Gold as we see no end in sight for QE, the debt crisis and currency debasement, plus there is the possibility of an escalation in geopolitical risk in the Middle East. Gold prices could sell-off further if there is a correction in say Western equities, but if that were seen we would expect any price weakness in Gold to be short-lived as we feel dips will attract bargain hunting and prompt further central bank buying. 3

4 Gold Statistics Q Q Oct-12 Nov-12 London Prices (US$/oz) AM fix Pm fix Average Parity prices Australian - A$/oz 1,033 1,225 1,332 1, ,592 1,697 1,657 South Africa Rand/kg 222, , , , ,646 15,101 15,145 Japan Y/g 2,802 2,810 3,327 3, ,032 4,273 4,318 India Rupee/oz 38,052 47,272 56,264 73, ,821 92,326 94,215 Lease Rates 1 Month * Month * Month * Month * COMEX - futures contracts Stocks ('000oz) 8,068 8,983 10,748 10,938 10,944 10,941 11,231 11,411 Vol (million contracts) OI ('000 contracts) CFTC (futures only data) Net Spec position Long (Short) 149, , , , , , , ,407 TOCOM Stocks ('000oz) Volume ('000 contracts) 15,164 11,913 11,003 16, OI ('000 contracts) Other Indicators FT Au Mines Index 2,658 2,647 3,340 3, ,955 3,210 2,919 Dow Jones Index 11,221 8,934 10,635 12,085 12,829 13,178 13,096 13,025 US$ Index Gold Bullion Imports, tonnes (exports) Dubai Hong Kong /China** India Italy Japan Singapore South Korea Taiwan Turkey Data: Financial Times; Bombay Bullion Association; LBMA; TOCOM; COMEX; CFTC, REUTERS Figures are period averages unless marked by *, indicating the period end. OI= Open Interest on the exchange ~ = data not available yet, italics = estimates, ** China only 2009, 2010 &

5 Silver outperformed Gold in November Silver prices found support at $30.66/oz in early November and went on to rally to $34.42/oz, a rise of 12.3%. This compared to Gold s 4.9% rise over the same period. The reason for Silver s outperformance is not clear, it may be that the improved economic outlook in China and the US has meant Silver is seen by investors as having two bullish strings to its bow, a safe-haven one and an industrial one, so that is giving it the upper hand over Gold. Another suggested reason is that commercial shorts are collectively holding such a large short position that the market is anticipating that they may struggle to roll forward, or close it out without driving prices higher in the process, see chart below. only really heard about producer hedge selling (part of the commercial short position) on moves above $34/oz, so we would be surprised if a squeeze was in the making. In 2011, prices averaged $35.12/oz and in the first 11 months of 2012, they have averaged $31.07/oz, the combined average is $33.10/oz, which is around where prices have been recently and therefore we would not expect margin issues to be pertinent yet - although that could change if prices start to run up above $38 to $40/oz. In addition, the forwards are liquid and Comex stocks have climbed, which does not suggest there is any tightness around. Investment interest remains strong The net long fund position has rebounded in November to reach 41,275 contracts, up from 34,119 contracts in early November. The combined ETF position has oscillated sideways at a high overall level, it was last at 18,863 tonnes, slightly off from the peak of 19,000 tonnes seen in mid-november. Commercials hold large short positions The gross short commercial position has climbed to 101,878 contracts and that is the highest it has been for many years. Offsetting this short position are the gross long fund position of 51,084 contracts and the gross long non-reportable position of 30,361 contracts, which together equal 81,445 contracts, so in order for the commercial shorts to cover, they would also have to rely on some of the commercial longs to liquidate. Commercial longs (fabricators and processors) tend to be long as a hedge against an order book, as such, these longs are considered to be held in tight hands. However, we would only expect shorts to feel a squeeze if prices started to move up well above the level where the shorts were put on to the extent that the shorts then struggled to make margin payments. So far this year, we have Technical & Summary The chart shows prices are consolidating after the recent rebound ran out of steam ahead of the down trend line. While the stochastics are still falling we would look for further consolidation as prices search out a support level that holds. On balance, we feel Silver prices will follow Gold s lead and as we remain generally bullish for Gold, we do for Silver too. The large short commercial position warrants monitoring, as do the forward spreads, as the size of the position does suggest some vulnerability. 5

6 Silver Statistics Q Q Oct-12 Nov-12 London Prices (US$/oz) Daily Fix Parity (London) prices Japan (Y/g) India (Rupee/oz) , , , ,792.2 COMEX futures contracts Stocks (Moz)* Vol (million contracts) OI ( 000 contracts)* CFTC (Futures Only Data) non-commercial Net Positions * 33,672 30,407 36,412 21,783 10,417 25,228 34,119 41,275 TOCOM Stocks (Moz)* Futures Vol ( 000 contracts) Futures OI ( 000 contracts)* Other Indicators Gold/Silver ratio* Silver Bullion Imports (tonnes) USA Japan India Italy Hong Kong China (exports) (4043) * figures are period averages unless marked; ~ not available yet, italics = estimate. 6

7 PGM prices have edged higher in November as supply concerns linger Having worked lower in October after the strong rallies in August and September, PGM prices turned higher again in November. Palladium has been relatively stronger than Platinum - since the October low it has climbed 18.2%, compared with a 6.4% rise in Platinum. Palladium has been eyeing its September high at $705/oz, while Platinum is $142/oz, or some 8%, below the September high of $1,730.75/oz. Given that we feel one of the more bullish factors for the PGMs is the potential for supply disruptions in South Africa, we are surprised that Platinum has underperformed. PGM mines in South Africa are between a rock and a hard place With Platinum prices already below the marginal cost curve of some of the higher cost South African mines, parts of the industry are likely to restructure and that might lead to further cutbacks being made. However, even if it makes economic sense to close capacity, the act of closing any could escalate labour unrest, making the situation even worse. Already nine shafts have reportedly been closed since June and further closure decisions are expected in the New Year. Given the pick-up in competition between mining unions, it seems likely that there will be further loss of production through strike action in the months ahead. South Africa supplies 75% of the world s Platinum, 34% of its Palladium and 83% of the Rhodium, so the situation in the country will need careful monitoring. Investor interest mixed During November, Platinum and Palladium ETF investors have been fairly inactive. Holdings dipped in the early November, but the loss in holdings were rebuilt in the second half of the month. Fund interest has been mixed, the Platinum net long fund position (NLFP) fell to 36,861 contracts, from 37,675 contracts in early November, while Palladium s NLFP climbed to 13,104 contracts from 9,857 contracts. The fact interest in Palladium and Platinum diverged helps to explain why Palladium prices outperformed Platinum. But, what was behind this divergence remains less clear it could be the market expecting Palladium based auto catalysts to be in more demand than Platinum based catalysts - given the structure of the global auto industry, or it could be the market is getting more worried about whether Russian Palladium sales from stockpile are set to dry up. Technical & Summary Platinum prices pulled back from highs around $1,730/oz, but seem to have found a base around $1,530/oz and are in the upper half of the triangle pattern. Stochastics have crossed higher, but lack upward momentum, all of which suggests prices are consolidating ahead of resistance above $1,700/oz. Palladium prices have been trading in abroad sideways pattern for over a year, but prices are now attempting to challenge the upper levels. Clearance of $ /oz would retarget to highs above $800/oz. We feel the risk of supply disruption in South Africa is likely to underpin firmer prices. 7

8 PGM Statistics Q Q Oct-12 Nov-12 London Prices (US$/oz) Platinum 1,583 1,210 1,616 1,725 1,505 1,554 1,640 1,579 Palladium Rhodium 6,549 1,592 2,456 2,026 1,328 1,162 1,186 1,134 Japanese Parity Prices (Y/g) Platinum 5,123 3,501 4,398 4,268 3,741 3,788 4,013 3,957 Palladium 1, ,432 1,824 1,569 1,481 1,551 1,597 South African Parity Prices (Rand/kg) Platinum 395, , , , , , , ,268 NYMEX Stocks ('000oz) Platinum Palladium CFTC Futures Only Data Long / (short) non-commercial Platinum 6,797 12,685 20,270 23,041 15,936 28,728 37,675 36,861 Palladium 7,062 9,173 13,532 10,950 4,317 8,061 9,857 13,104 Tocom - Platinum Stocks ('000oz) Vol (Million contracts) OI ( '000 contracts) Tocom - Palladium Stocks ('000oz) Vol ('000 contracts) OI ( '000 contracts) Other Indicators (US$/oz) Pt-Au spread Pt-Pd spread 1, , Platinum Bullion imports (kg) USA 112, , , , ,021 (Jan-Aug) Japan 59,634 53,663 53,663 62,230 38,978 (Jan-Oct) PalladiumBullion imports (kg) USA 120,810 50,000 70,710 98,900 53,260 (Jan-Aug) Japan 75,363 64,723 70,241 66,484 44,944 (Jan-Oct) ~ = data not available yet, italics = estimates 8

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