Metal Matters August 2018

Transcription

1 ScotiaMocatta Metal Matters August 2018 Precious metals prices have remained under pressure, as have industrial metals prices, as risk-off has dominated the metals markets. Uncertainty as to where US trade wars will lead is undermining business and investor confidence. Risk off implies a pick-up in safe-haven demand, but it appears this has been channeled into US treasuries, not Gold. With Gold prices $160/oz below the top of the 2016/2017 range, Gold may once again appear to be a relatively cheap safe-haven. Large and growing fund short positions in Gold, Silver and Platinum raise the risk of short-covering rallies. Silver prices are following the lead of Gold and the industrial metals. Previous price drops below $16/oz have tended to be short-lived. The fund position is polarised, but ETF investors are buying into the price weakness. Platinum s demand profile is suffering on most counts, but low prices and a $400/oz discount to Gold may well lead to a recovery in demand from the jewellery industry. Given the price weakness, the PGMs look well placed to rebound once the trade disputes are resolved.

2 Gold prices fall to levels last seen in March $1,200/oz holds for now Gold prices have dropped below the low at $1,204.90/oz seen in July 2017, extending down to $1,204.55/oz. This is the lowest spot prices have been since March The price weakness has been persistent, with only two weeks of week-on-week gains seen since the early-april high at $1,365.25/oz. Since the lows in late 2015, at $1,046.40/oz, prices have rallied 31.4%; any move over 20 percent is deemed to be a bull market, while it takes a 20 percent drop in prices to suggest prices are in a bear market. Since the April high, gold prices have fallen 11.8 percent it would take a drop to $1,092/oz to signal Gold was in a bear market. Gold just not in favour There are many cross currents flowing through the financial markets and the geopolitical scene at present, and for now this has led to widespread risk-off across many asset classes. Concerted global growth started to lose steam in December, when the JP Morgan Global Manufacturing PMI peaked at 54.5; it had fallen to 52.7 in July, and Dow Jones Industrial Average peaked in late-january at 26,616. Gold prices have been caught in the general sell-off and although investor nervousness has increased, US treasuries that are now paying a higher yield have become the safe-haven of choice. Alternative safe-havens like Gold and the yen are out of favour, the latter as 10-year Japanese Government Bonds (JGB) only have a yield of around 0.1 percent, while 10- year US treasury yields are around 3 percent. Gold has also lost its safe-haven appeal, as while in 2017 it was generally trending higher, the upside has been shown to be capped in the $1,365-$1,375/oz region. With Gold prices now some $160/oz below that ceiling, it maybe that Gold starts to look attractive again as a safe-haven. Potential for geopolitical tensions to rise There are more than a few potential developments that could unfold in the weeks ahead that could boost demand for safehavens. Firstly, the first round of US sanctions against Iran is due to be imposed on 6 th August, followed by a second round on 4 th November. As sanctions will impact financial transactions denominated in the Iranian rial, it may be that Iran accepts Gold as a means of payment for its oil exports, which could put a positive spin on Gold. In line with this, if oil exports fall oil prices could be lifted, thereby adding to inflationary pressures just as US tariffs against other trading partners could also be inflationary. Likewise, the whole US trade war, combined with possibly sharply higher oil prices, could lead to more fall-out in other financial markets, prompting a pick-up in risk-off and more demand for safe-havens. Some bright spots in Chinese demand China s Gold consumption was reportedly all but flat in the first half of the year, with China s Gold Association (CGA) putting consumption at tonnes, just 0.31 percent higher than in the same period in Encouragingly, demand for jewellery climbed 6.37% to tonnes and industrial demand was 13.84% higher at tonnes, but that was offset by less demand for bars (-15.65% at tonnes) and coins (- 18% at 4.10 tonnes). A recovery in jewellery demand after a considerable time of subdued demand is encouraging. Investment interest has been under pressure as the price performance has been poor (see red line on chart above), which is understandable. But perhaps less understandable is why investors have not wanted to hold Gold bars while the Chinese RMB has been weakening 2

3 (see black line on chart above). The yuan has fallen 9.6 percent since peaking in April, while Gold priced in RMB has held most of its value. If the US applies more tariffs, then the RMB may fall further and that could prompt a pick-up in interest in Gold as a currency hedge. the year, but buying started to return as July got underway. With the gross long position relatively low compared with recent years and the gross short position already at a high, there is heightened risk of a short-covering rally that could then be fueled by fresh buying. Investor interest continues to wane ETF investors continue to redeem holdings in the ETFs we follow, with holdings falling to 2,086 tonnes, down from 2,120 tonnes at the end of June and a peak of 2,201 tonnes seen in late April. While holdings in Silver ETFs are climbing as lower prices attract bargain hunting, sentiment towards Gold has not changed yet. Gross fund short position at record level While the net long fund position, NLFP, is falling at a fast pace, throughout July the longs and the shorts were increasing exposure, implying a more polarised market. The NLFP has fallen to 48,597 contracts from a peak of 120,240 contracts in mid- June. What is noticeable on the chart is how bearish the shorts have become, with the gross short position at 172,023 contracts the highest we have on record. The gross long position had been trending lower for most of Technical Gold prices have fallen through numerous support levels, including major trend lines, but are now finding some support above $1,200/oz. The 50% Fibonacci retracement line from the rally is around $1,210/oz, so that has now been breached. The stochastics are also holding in low ground, implying selling pressure still dominates. It would take a move and hold above $1,236/oz to reduce the market s current vulnerable position. Summary Sentiment in Gold feels bearish as prices repeatedly struggle to hold on to any rebound gains. The market is facing significant headwinds in the form of a strong dollar and relatively high bond yields. While there is nervousness around in the broader markets, Gold has so far failed to attract much safe-haven demand, but that may change now that Gold prices have corrected. They are $160/oz below the recent highs and there is a large gross short position that may need to be covered if it looks likely that geopolitical tension over oil and inflationary pressures will rise on the back of tariffs. 3

4 Gold Statistics Q Q Jun-18 Jul-18 London Prices (US$/oz) AM fix Pm fix Average Parity prices Australian - A$/oz 1,403 1, , ,710 1,672 South Africa Rand/kg 440, , , , , , , ,283 Japan Y/g 4,146 4,355 4,203 4,370 4,464 4,418 4,372 4,276 India Rupee/oz 77,077 74,310 83,721 81,767 85,492 87,374 86,737 84,847 COMEX - futures contracts Stocks ('000oz) 8,203 7,422 8,962 8,860 9,151 8,877 8,565 8,646 Vol (million contracts) OI ('000 contracts) CFTC (futures only data) Net Spec position Long (Short) 98,265 88, , , , ,425 76,672 48,597 TOCOM Stocks ('000oz) Volume ('000 contracts) 8,744 7,928 8,540 5,750 1,544 1, OI ('000 contracts) Other Indicators FT Au Mines Index 1,409 1,061 1,579 1,521 1,470 1,441 1,448 1,335 Dow Jones Index 16,837 17,524 18,062 21,990 25,094 24,309 24,332 25,417 US$ Index Gold Bullion Imports, tonnes (exports) Dubai China ,316 1,091 India Italy 103 ~ ~ ~ Japan ~ ~ Singapore 284 ~ ~ ~ South Korea 24 ~ ~ ~ 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 4

5 Silver prices shadow Gold s movement, but market now looking oversold After a volatile first half of the year, when Silver prices held above $16/oz, prices have become more directional on the downside, falling to a low of $15.178/oz on 19 th July from the recent peak in mid-june at $17.32/oz. This equates to a 12.4 percent price fall that has taken prices down to levels last seen in July last year. During the 2015 to 2016 rally, spot Silver prices climbed 54.9 percent to a peak of $21.13/oz; at the end of July this year, they had given back 75 percent of the price gains. Following industrial metals performance In the second quarter, the Gold/Silver ratio began to climb and managed to get close to 1:75 from 1:82 and this showed that Silver was outperforming Gold prices as Silver followed the base metals. But, once the prospect of US trade wars picked up, Silver prices were dragged lower by the industrial metals and as a result the Gold/Silver ratio has climbed back to 1:78. Less concerted and slower global growth combined with the market s anxiety about the contagion from trade tariffs is keeping industrial metals under pressure and that is expected to remain the case until new trade deals are arranged. Silver may therefore continue to underperform Gold indeed we are more bullish for Gold than we are for Silver as we enter August. ETF investors are buying the price dip Holdings in the ETFs we follow stood at 20,270 tonnes at the end of July, up from a recent low of 20,021 tonnes in late-may, so investors have been scale down buying into the price fall below $16/oz. This is opposite to Gold investors, who have been liquidating into the price weakness see chart in Gold section. Fund shorts at record lows The funds who are short Comex Silver hold record levels of short positions. As of 24th July, the gross short position stood at 84,487 contracts, the previous high being 82,934 contracts in April and the one before that being 81,200 contracts in July Large gross short positions tend not to be held on to for long, as shown by the upward spikes in the red line on the chart above. At 88,025 contracts, the gross long position is slightly below mid-ground having ranged between around 60,000 and 130,000 over the past 18-months. Technical & Summary Silver prices broke below the $16/oz level which had provided support earlier in 2018 and have gone on to breach the long term up trend line that runs off the 2015 low. Dips below the $16/oz level have tended to be shortlived and have been followed by sharp rebounds. Given the record level of gross short positions, we expect a short-covering rally to follow before too long. Any shift to a more dovish Fed, in the face of trade wars and higher oil prices, could prompt such a development. 5

6 Silver Statistics Q Q Jun-18 Jul-18 London Prices (US$/oz) Daily Fix Parity (London) prices Japan (Y/g) India (Rupee/oz) 1, , , , , , , ,076.4 COMEX futures contracts Stocks (Moz)* Vol (million contracts) OI ( 000 contracts)* CFTC (Futures Only Data) non-commercial Net Positions * 19,307 31,269 69,366 56,301 4,639 20,471 34,221 3,538 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) * figures are period averages unless marked; ~ not available yet, italics = estimate. 6

7 Pd and Pt prices are stuck in down trends, but dip buying is evident in Palladium Palladium s price retreat continued in July with spot prices setting a low of $861/oz, meaning prices had corrected 24.5 percent from their mid-january high of $1,140/oz. Compared with their 2016 lows, Palladium prices are still up a hefty 103 percent. While Platinum prices appear to have found support in July at $973/oz, prices are down 23 percent from their January high, but have fallen below the 2016 low to levels not seen since December investors have since liquidated into both rising and falling price moves. Holdings stood at 0.96 million ounces at the end of July. Conversely, holdings in Platinum ETFs stood at 2.33 million ounces at the end of July and have averaged 2.39 million ounces so far this year. Platinum s weakness may be overdone Platinum has faced many strong headwinds, initially from dieselgate, then from a falloff in jewellery and investment demand and by the switch to a supply surplus in 2017, having been in a supply deficit between 2014 and In July, despite a weakening rand, Platinum prices denominated in rand did drop to levels not seen since Given the hardship producers face, we expect more consolidation amongst South Africa s producers which in turn is likely to see output fall. Any improvement in the fundamentals may well then prompt fund short-covering. The net fund position in Platinum has fallen from being long 43,000 contracts at the end of January to being short 9,600 contracts in mid-july; see chart above. For Palladium, the net long fund position has fallen sharply to 3,267 contracts from a high of 27,614 contracts in early-january, this on significant long liquidation as well as a pickup in short-selling since early June, which was when concerns about US trade wars started to bite. Investors reduce exposure to Pd ETFs Holdings in Palladium ETFs peaked in August 2014 at 3.09 million ounces - Technical & Summary - Platinum prices look oversold; back in the the mid-2000 s prices below $850/oz tended to prompt a pick-up in jewellery demand and with Platinum prices also $400/oz below Gold prices, a recovery in jewellery demand may not be far away. In addition, these low prices are expected to prompt supply responses and there is a risk of short-covering by funds too. Palladium prices have corrected from overbought conditions and ETF redemptions are adding to supply, but the underlying fundamentals point to a supply deficit. As such, we expect sentiment across the PGMs to rebound once trade disputes are settled. 7

8 PGM Statistics Q Q Jun-18 Jul-18 London Prices (US$/oz) Platinum 1,390 1, Palladium , Rhodium 1, ,101 1,826 2,154 2,255 2,296 Japanese Parity Prices (Y/g) Platinum 4,519 3,965 3,278 3,298 3,283 3,058 3,018 2,869 Palladium 2,636 2,587 2,050 3,020 3,478 3,307 3,362 3,215 South African Parity Prices (Rand/kg) Platinum 466, , , , , , , ,318 NYMEX Stocks ('000oz) Platinum Palladium CFTC Futures Only Data Long / (short) non-commercial Platinum 35,840 24,585 31,817 24,302 37,569 4,393-6,115-8,116 Palladium 22,276 12,080 8,765 20,660 18,564 10,089 8,591 3,267 Tocom - Platinum Stocks ('000oz) Vol (Million contracts) OI ( '000 contracts) Tocom - Palladium Stocks ('000oz) Vol ('000 contracts) OI ( '000 contracts) Other Indicators (US$/oz) Pt-Au spread Pt-Pd spread Platinum Bullion imports (kg) USA 141, , , ,277 43,335 (Jan-May) Japan 32,684 47,283 44,786 42,986 21,122 (Jan-Jun) PalladiumBullion imports (kg) USA 92,400 82,500 88,800 86,000 35,820 (Jan-May) Japan 58,429 57,223 58,860 59,492 31,392 (Jan-Jun) ~ = data not available yet, italics = estimates 8

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