Gold Market Update June 2015

Transcription

1 Gold Market Update June 215 NAB Group Economics Key Points: A low-volatility global environment for equity and commodity markets in April and May to date have helped to keep gold prices largely range bound between US$117 and US$123 per ounce over the period. In May, gold prices averaged at around US$1199 per ounce, largely unchanged compared to April. This reduction in volatility has largely been associated with contained macroeconomic volatility, as most major economies continue to be on a path of gradual recovery, notwithstanding a stall in US growth in Q1, while deflationary risks in the euro zone have somewhat receded from their peak at the start of the year. Policy stimulus from European Central Bank s quantitative easing program helped shore up inflation expectations from an 11-year low in April. Since the start of this year, investors bearish sentiments on gold appear to have bottomed out, with the net flows into Exchange Traded Funds recording the first positive quarterly reading in the March quarter since the December quarter 212. That said, ETF holdings are still expected to follow a mild downward trajectory as the US dollar appreciates in line with the approaching US Fed tightening cycle, which we expect to commence in September. This trend will be further accentuated by the lack of inflationary pressures globally at present, which reduces demand for gold as an inflation hedge. In Q1, notable falls in jewellery demand were recorded in the US and Europe, corresponding to improving returns from equity markets. Conversely, major jewellery consumers of China and India recorded marginal increases, but the former showed a sharp year-on-year ( Q1 215 vs Q1 214) decline of 1. Central banks have maintained their gold holdings at a strong level in Q1, despite a slight fall from the previous quarter, as the depreciating trend in a number of major currencies against the USD spurred central banks to shore up their asset bases. According to Bloomberg Intelligence s estimate, the gold holdings by the People s Bank of China may have tripled since it last updated them in April 29, to around 3,5 mt, which makes it only second to US holdings of around 8133mt. 1

2 Recent Price Movements: A low-volatility global environment for equity and commodity markets in April and May to date have helped to keep gold prices largely range bound between US$117 and US$123 per ounce over the period. In May, gold prices averaged at around US$1199 per ounce, largely unchanged compared to April. This reduction in volatility has largely been associated with contained macroeconomic volatility, as most major economies continue to be on a path of gradual recovery, notwithstanding a stall in US growth in Q1, while deflationary risks in the euro zone have somewhat receded from their peak at the start of the year. Policy stimulus from European Central Bank s quantitative easing program helped shore up inflation expectations from an 11-year low in April. The stability in gold prices in the past couple of months is despite of a faltering USD index, which appears to have only provided very limited upward impetus to the gold price movements. This in turn a reflection of a largely risk-on global financial environment where an abundance of cheap liquidity is fuelling major equity markets growth, thereby restricting the appetite for gold a safe-haven asset, while a weak global inflationary setting is also unfavourable for the demand for gold as an inflation hedge. However, there is evidence that investors bearish sentiments towards gold have subsided somewhat. The loss of traction in the US dollar in recent months is in turn a reflection of slower-than-expected US growth since the start of the year. Initially the slowdown was attributed to winter lull, but more recent data pointed to underlying weakness in fundamentals such as retail spending, industrial production and consumer confidence. This pushes out our expected time frame for the first rate hike by the US Federal Reserve to September, which delays the expected rise in USD. More recently, however, sturdy US manufacturing and home sales data fuelled optimism of a rebound in US economic performance in Q2. This in turn weighed on gold prices towards the end of the month. Figure 1: Gold Price & US Currencies US$/ ounce 2 Gold Price and the US Dollar Daily 95 Figure 2: Implied gold and market volatility (vix) 35 Figure 3: Gold Price & USD Monthly, 22 average = Gold Price (LHS) US Major Currencies (RHS) Source: Thomson Datastream /1/13 1/3/13 Source: Bloomberg Gold VIX 1/5/13 1/7/13 1/9/13 1/11/13 1/1/14 1/3/14 1/5/14 1/7/14 1/9/14 1/11/14 1/1/15 1/3/15 1/5/15 SPX VIX 6 Gold Price (Turkey) Gold Price (India) 4 Gold Price (US) Gold Price (China) 2 1 Gold Price (Australia) Sources: Datastream; NAB 2

3 Gold Demand Conditions: Since the start of this year, investors bearish sentiments on gold appear to have bottomed out, with the net flows into Exchange Traded Funds recording the first positive quarterly reading since Q4 212 in the March quarter, according to the Q1 Gold Demand Trends Report by the World Gold Council. In terms of quarterly average, there was a small net inflow into ETFs of around 13 metric tonnes in Q1. The lack of financial market surprises given that the US rate hike this year has been largely priced in; while the risks of major disruptions to the financial market from a potential Greece exit from the euro zone seem unlikely result in a largely balanced risk outlook in investors assessment. Figure 4: Exchange Traded Fund Holdings US Exchange Traded Funds G ld H ldi Sources: Bloomberg; NAB Figure 6: Other Gold Demand Factors Figure 5: US Bond Yields and Monthly Gold Price US 1 year government bond yield (reversed; LHS) Monthly Gold Price (RHS) Sources: Bloomberg; Thomson Datastream; NAB Figure 7: US Gold Net long Open Positions US$/ ounce That said, ETF holdings are still expected to follow a mild downward trajectory as the US dollar appreciates in line with the approaching US Fed tightening cycle, which we expect to commence in September. This trend will be further accentuated by the lack of inflationary pressures globally at present, which reduces demand for gold as an inflation hedge. The dramatic rise in major equity markets around the world, especially in China, also serves to reduce the appetite for gold by investors as a store of value. Per cent; index MSCI Global Equities (rhs) Inflation Expectations (Implied, lhs) MSCI EM Equities (rhs) Source: Datastream, NAB ' US Net Long Open Positions in Futures and Derivatives Weekly Gold Price (RHS) US Net Long Open Positions in Futures and Derivatives (LHS) Sources: Bloomberg; NAB US$/ ounce

4 Gold Demand Conditions (Cont.): According to the World Gold Council (WGC), identifiable gold demand rose in the March quarter (to tonnes), but remains slightly below the level same time last year (189.9 tonnes). The rise in the quarter largely reflected a rebound in investor demand due to a positive net flow into ETFs and other products, and to a lesser extent, physical bar demand, despite a fall in jewellery sales and central bank holdings. In the quarter, notable falls in jewellery demand were recorded in the US and Europe, corresponding to improving returns from equity markets. Conversely, major jewellery consumers of China and India recorded marginal increases, but the former showed a sharp year-on-year ( Q1 215 vs Q1 214) decline of 1. The dramatic rallying trend in Chinese equity markets since the beginning of this year has diluted the attractiveness of gold as a store of wealth to some extent, but the Q1 level was still around 27 above the 5-year quarterly average. Overall gold demand is easing back to pre- GFC levels, largely influenced by the normalisation of US economic and monetary settings and indicative of a return of investors appetite for riskier assets Figure 8: Identifiable Gold Demand Contribution to quarterly demand growth 3 3 Net Retail Investment ETFs Jewellery Official sector sales Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Sources: World Gold Council; NAB Figure 1: Growth in Gold Price & World Jewellery Demand Year-ended percentage change Sources: World Gold Council; NAB Nominal Gold Price (USD) World Jewellery Demand Figure 9: Share of Global Jewellery Demand* By region, tonnes India China Middle East USA * 21 numbers are annualised from first half data. Sources: World Gold Council; NAB Figure 11: Share of Global Consumer Demand by Component Net Retail Investment Jewellery

5 Central Bank Gold Purchases: Central banks have maintained their gold holdings at a strong level in Q1, despite a slight fall from the previous quarter, as a depreciating trend in a number of major currencies against the USD spurred central banks to shore up their asset bases and diversify portfolio risks. Russia continued to maintain its momentum in gold purchases in Q1, as the value of rouble slid swiftly against major currencies on the back of sharp declines in oil prices and western sanctions. By bolstering its currency with more gold, Russian authorities hope that it will to some extent assuage investors concerns of the inconvertibility of the rouble and stem further capital outflows, even if it limits the country s available currency. As a result, Russia s gold reserves increased by 3 metric tonnes (mt) in Q1 to reach 1238 (mt). Some other countries of which currencies are highly correlated with the rouble, such as Kazakhstan and Tajikistan, also increased their gold holdings; while Malaysia and Mauritius resorted to gold to slow the depreciation of their domestic currencies. Russian central bank gold holdings still represents a relatively small percentage of its total reserves compared with other major economies, therefore it is likely that its gold accumulation phase could persist for some time to come. According to Bloomberg Business Intelligence data, the gold holdings by the People s Bank of China may have tripled since it last updated them in April 29, to around 3,5 mt, which makes it only second to US holdings of around 8133mt. This estimate was derived based on trade, domestic output and China Gold Association figures, prompting speculation that the China is beefing up its central bank s asset base to preserve the value of yuan as a means to lower the risks due to capital outflows; and gradually establish the yuan s credibility as a global reserve currency. Despite yuan being the fifth most-traded currency globally, it remains a insignificant global reserve currency due to government-imposed restrictions on its free flow and convertibility. A return to gold standard is likely to improve investors confidence in the yuan as a reserve currency over the longer term, but this has to be accompanied by further liberalisation of China s capital markets for it to be successful. Figure 12: Central Bank Holdings by Country Central Bank Holdings China 1 1 Russia India 6 4 Turkey 4 Mexico 2 2 Australia Source: World Gold Council Figure 13: China Central Bank Gold Reserves (Reported vs. Estimated) mt 8, 7, 6, 5, 4, 3, 2, 1, Sources: Bloomberg; NAB Est. Central Bank & Private Gold Holdings (mt) Reported China Central Bank Gold Reserves (mt) Consumption Adj. China Central Bank Gold Reserves (mt)

6 Gold Supply Conditions According to the WGC, the supply of gold fell by 51 tonnes in Q1 215 to around 189 tonnes to be at broadly similar to the levels the same time last year. Relative to Q1 214, a higher mine production was counterbalanced by lower recycled gold supply in the March quarter this year, the latter a result of shrinking western markets offset only partly by a rise in Turkish recycled volumes on the back of strong domestic prices. Gold producers average cash margins have taken a dive (see Figure 15) since peaking around 212Q4, with large, mid-tier and small gold producers margins slashed by between 4 to 5 since then. Despite this, most producers have increased production over 214 and contributing to resilient mine supplies despite the lower gold prices. At their current levels, gold prices are still around X above its decade average. Producers continue to engage in hedging activity at very low levels, despite a rising USD exerting downward pressure on gold prices. Net producer hedging only increased slightly by 47 and 5 tonnes for the December and March quarter respectively, which points to their lack of concerns that gold prices might fall sharply anytime soon, notwithstanding an improving global economic landscape with low inflationary risks mean less appetite for gold as a store of wealth and inflationary hedge. Figure 14: World Gold Supply World Gold Supply Total supply Scrap supply Mine supply Official sector sales Source: World Gold Council Figure 15: Gold Producers Average Cash Margin Figure 16: Global Hedge Book US$/Oz 12 US$/Oz 12 US$/ ounce 18 Producer Dehedging 36 1 Large producers Mid-tier producers Small producers Global Hedge Book (RHS) Nominal Gold Price (LHS) Q3 213 Q1 Source: Bloomberg Industries; 213 Q3 214 Q1 214 Q3 215 Q Sources: World Gold Council; Societe Generale; Thomson Reuters; NAB 6

7 Gold Price Forecasts (Quarterly Average) Spot Actual Forecasts U Price Mar 15 Jun 15 Sep 15 Dec 16 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Gold US$ Gold AU$ Source: Datastream, NAB Economics Figure 17: Gold Price Forecast (USD and AUD) $/ounce 2 16 Nominal Gold Price AUD Price $/ounce 2 Forecasts USD Price Sources: Thomson Datastream; NAB Contacts: Vyanne.Lai@nab.com.au 7

8 Group Economics Alan Oster Group Chief Economist International Economics Tom Taylor Head of Economics, International Global Markets Research Peter Jolly Global Head of Research New Zealand Stephen Toplis Head of Research, NZ Jacqui Brand Personal Assistant Australian Economics and Commodities James Glenn Senior Economist Australia +(61 3) Vyanne Lai Economist Australia +(61 3) Amy Li Economist Australia +(61 3) Phin Ziebell Economist Agribusiness +(61 4) Industry Analysis Dean Pearson Head of Industry Analysis +(61 3) Robert De Iure Senior Economist Industry Analysis +(61 3) Brien McDonald Senior Economist Industry Analysis +(61 3) Karla Bulauan Economist Industry Analysis +(61 3) Tony Kelly Senior Economist International +(61 3) Gerard Burg Senior Economist Asia +(61 3) John Sharma Economist Sovereign Risk +(61 3) Australia Economics Ivan Colhoun Chief Economist, Markets David de Garis Senior Economist Tapas Strickland Economist FX Strategy Ray Attrill Global Co-Head of FX Strategy Emma Lawson Senior Currency Strategist Interest Rate Strategy Skye Masters Head of Interest Rate Strategy Rodrigo Catril Interest Rate Strategist Credit Research Michael Bush Head of Credit Research Simon Fletcher Senior Credit Analyst FI Craig Ebert Senior Economist Doug Steel Markets Economist Kymberly Martin Senior Market Strategist Raiko Shareef Currency Strategist Yvonne Liew Publications & Web Administrator Asia Christy Tan Head of Markets Strategy/Research, Asia, UK/Europe Nick Parsons Head of Research, UK/Europe, and Global Co-Head of FX Strategy Gavin Friend Senior Markets Strategist Derek Allassani Research Production Manager Distribution Barbara Leong Research Production Manager Important Notice This document has been prepared by National Australia Bank Limited ABN AFSL ("NAB"). Any advice contained in this document has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice in this document, NAB recommends that you consider whether the advice is appropriate for your circumstances. NAB recommends that you obtain and consider the relevant Product Disclosure Statement or other disclosure document, before making any decision about a product including whether to acquire or to continue to hold it. Please click here to view our disclaimer and terms of use. 8