Metal Matters December 2015

Transcription

1 ScotiaMocatta Metal Matters December 2015 With the Fed thought likely to increase interest rates on 16 th December this could be a pivotal time for the Gold market. The key question is has the change in Fed direction already been fully discounted? In October and November Gold prices swung between being bullish when the Fed was dovish and being bearish when hawkish this changed in December as good US data and a hawkish Fed led to a rally in Gold when logic would suggest price weakness. This implies a US rate rise is now discounted and that may lead to an unwinding of bearish trades anticipating the rate rise. The net fund long position on Gold is at a multi-year low, lower than it was during the financial crisis sell-off in Gold. Low prices have also seen some pick-up in physical buying and China has stepped up the amount of Gold it now holds. Silver prices are following Gold s lead; prices appear to have good support just below $14/oz. Silver s fundamentals should tighten in 2016, as production cuts and mine closures at lead-zinc mines take effect. Platinum and Palladium prices have become more synchronized; after correcting October s rally, bases appear to have been built. Fund short positions have built since early November, so there is risk of short-covering should precious metals rally.

2 Gold - time to tell whether the first US interest rise is already in the price? Gold prices were under pressure throughout the whole of November as the Fed s stance became more hawkish in late October and as that was confirmed by a solid US employment report in early November. FOMC members and the Fed Chair Janet Yellen became more supportive of an interest rate rise as November progressed, all of which boosted the dollar and provided a strong headwind for Gold. The result was that prices fell to a low of $1, on 3 rd December the day before the release of the US employment report for November. The report showed another strong performance but instead of pushing Gold prices down further, that led to a powerful rebound to $1,089.20/oz on Friday 4 th December. For some time now we have thought that the Fed s first rate rise would have been discounted and we expected the opposite of a buy the rumour, sell the fact situation for Gold, with the dollar correcting too. It now appears that, with the Fed all but getting the green light to raise rates at its 16 th December meeting, some shorts are getting nervous. Given how large the fund short position had become, it is not surprising that the emergence of some buying prompted short covering. It is, however, difficult to expect anything more than a short-covering rally, as equity markets are still robust and longer term, the dollar is likely to rise further once the market starts to focus on when the Fed will raise rates for the second time. But in the short term, a short-covering rally could well run further. Net fund long position at record low Bullish sentiment in Gold has become so low that the net long fund position (NLFP) has dropped to a multi-year low at 9,750 contracts. The low in the NLFP around the time of the low price in 2008 was 63,959 contracts. Then there were 116,351 longs and 52,392 shorts, compared with the latest data showing 158,792 longs and 149,042 shorts. This suggests with less fear-factor around now, there are more funds prepared to be short Gold given the projected interest rate differential between the dollar and other currencies. Interestingly it is the combination of a relatively low gross long position and high gross short position that has led to the record low in the NLFP. The last occurrence of this was around July 2013 see blue circle on chart. In June 2013, Gold set a low at $1,180/oz; over the next two months it rallied to $1,434/oz, a 21.5 percent rise. Although the gross short position is now high, it is not at its peak, which was seen at 159,441 contracts in late July that was followed by a $100/oz rally, but during that time the gross short position dropped to 68,389 contracts. This suggests that even if we do get a shortcovering rally, the price impact may not be as great as it was in ETF holdings still falling Despite a strong run up in prices on Friday 4 th December, the ETFs have continued to see redemptions. Holdings stand at 1,486 tonnes, which is the lowest they have been since peaking. ETFs saw redemptions of 44 tonnes of Gold in November and 20 tonnes have been cut in the first four days of 2

3 December. Year to date holdings are down 114 tonnes. Low prices prompt physical buying As prices fell to fresh multi-year lows in recent weeks, it does look as though physical demand has picked up. Physical premiums in Asia have firmed recently, which suggests bargain hunting, although with prices generally downward trending some potential buyers seem to be waiting for lower prices. This suggests there is pent-up demand in the market, which could lead to buyers having to play catch-up should prices move higher. The combination of this and the potential for short-covering could lead to a fast-moving rally before too long, but potential buyers/short-coverers may well be trying to delay making a move until after the likely US interest rate rise that is expected on December 16. Again, any dip in Gold prices after an interest rate rise may well be short-lived if there is potentially a lot of buying waiting for such an event. China s Gold reserves continue to rise In July, China became more open about the amount of Gold it holds in its reserves. Data since then shows it is a regular buyer, buying 19 tonnes in July, 16 tonnes in August, 15 tonnes in September, 14 tonnes in October and estimates point to 21 tonnes in November a total of 85 tonnes in five months. Although the increased reserves are probably coming straight from local producers rather than being bought on the open market, the fact that such an important central bank is buying should provide investors with some confidence. It will be key whether the buying continues now that the IMF has approved the yuan s inclusion in its basket of reserve currencies. We think it will, as China s Gold reserves as a percentage of its total reserves are still very low at 1.6 percent, compared with Russia s 13 percent and an average of 67 percent in US, Germany, Italy and France. The current set up remains bearish There are many reasons to remain bearish on Gold, including a likely US interest rate rise, low oil prices and buoyant equity markets. These factors may well keep prices under pressure for some time to come, but generally in markets when everything points one way, it is time to prepare for a change in direction, even if you do not anticipate it. Given how far prices have fallen, there will be plenty of room on the upside to take advantage of a change in trend when one gets going. Technical Having broken lower below the support line in early November prices sunk to fresh multi-year lows. The recent rebound did manage to clear resistance levels seen in the second half of November, which was constructive and prices are now consolidating either side of the 20 day moving average. The stochastics are also trending higher. It would now take a move above recent highs at $1,089.20/oz and $1,098.20/oz to signal that a more meaningful recovery is likely. Summary As the general set-up is not bullish and higher US interest rates are likely to increase the opportunity cost of holding Gold, we should expect further price weakness and a possible test of $1,000/oz. But perhaps too many traders are now expecting that so we need to be prepared for a counter trend move. We think this could happen and our main reason is because we expect the market has already discounted the rate rise and the large gross short fund position supports that view. 3

4 Gold Statistics Q Q Oct-15 Nov-15 London Prices (US$/oz) AM fix Pm fix Average Parity prices Australian - A$/oz 1,526 1,582 1,454 1,403 1, , ,607 1,521 South Africa Rand/kg 368, , , , , , , ,028 Japan Y/g 3,868 4,127 4,252 4,146 4,485 4, ,312 4,129 India Rupee/oz 73,266 89,126 81,973 77,077 75,488 72,897 75,167 71,767 COMEX - futures contracts Stocks ('000oz) 10,938 11,138 8,103 8,203 7,919 7, ,697 6,449 Vol (million contracts) OI ('000 contracts) CFTC (futures only data) Net Spec position Long (Short) 169, ,655 68,381 98, ,355 57, ,434 9,750 TOCOM Stocks ('000oz) Volume ('000 contracts) 16,073 10,772 12,223 8,744 1,823 2, OI ('000 contracts) Other Indicators FT Au Mines Index 3,716 3,051 1,789 1,409 1, Dow Jones Index 12,085 13,005 15,090 16,837 17,827 16,809 17,680 17,792 US$ Index Gold Bullion Imports, tonnes (exports) Dubai Hong Kong /China** ,192 India Italy Japan (126) (84) 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 - it seems likely that a lot of the bearishness is already in the price Silver prices reversed all the gains seen between late-august and late-october, with prices falling back to set a low at $13.84/oz on 3 rd December, a level not seen since August 2009, when prices were recovering from the financial crisis. Like Gold, Silver prices have been pulled and pushed by the Fed s changing stance, but more recently the market now seems to have come to terms with the likelihood that US interest rates will be increased at the FOMC meeting in mid-december. Prices rallied sharply after the better than expected employment report on 4 th December, when generally you would have expected that to have prompted a sell-off. This supports our view that the rate rise is now all but fully discounted. A post Fed rate hike rally Assuming that the markets have discounted a US rate rise then we would expect some profit-taking in trades that were set up in anticipation of the rate rise. The dollar index has climbed steadily since June 2014, rising to a high of from around 80 and during that time Silver prices have fallen to $13.84/oz from around $21/oz; needless to say they had already fallen a long way before that. The dollar longs and Silver shorts may now start to unwind their positions, which in turn is likely to prompt counter trend moves, that is, a pullback in the dollar and a rebound in Silver. Although a US interest rate rise is actually bullish for the dollar and consequently bearish for Silver, the greater force in the short term is probably going to be the profit-taking. This fits in with the buy the rumour, sell the fact set-up that we believe has built up over the past year or so. Funds have been on a roller coaster The funds have been very active since the summer. The net long fund position (NLFP) dropped from 51,280 contracts in May to 4,245 contracts in mid-july, climbed to 62,445 contracts in late October and has since fallen to 21,890 contracts (see chart). As of early December, the long and short positions are fairly high again, although the gross short positions could still grow the last time it was this high was in August when prices were around $15.30/oz, a dollar higher than where they are now. ETF Silver holdings have been edging higher in recent weeks; they stand at 18,935 tonnes in early December, up from a low of 18,756 tonnes in early November. Technical & Summary Prices appear to have found support again just below $14/oz with the recent base quite elongated. The recent attempt to rebound has run into resistance, but support is evident, this time around the 20 day moving average. Overall, we think a lot of the bearishness over a US interest rate rise and stronger dollar are already in the price so there could be a counter trend move as profitable short positions are unwound. Silver s fundamentals are also expected to improve with cheap prices attracting restocking and bargain hunting, while on the supply side, production cuts and mine closures at lead and zinc mines are likely to reduce Silver supply. We expect any further dips to attract buying and are more bullish than bearish at these levels. 5

6 Silver Statistics Q Q Oct-15 Nov-15 London Prices (US$/oz) Daily Fix Parity (London) prices Japan (Y/g) India (Rupee/oz) 1, , , , , , COMEX futures contracts Stocks (Moz)* Vol (million contracts) OI ( 000 contracts)* CFTC (Futures Only Data) non-commercial Net Positions * 21,783 23,393 11,929 19,307 29,823 15,624 62,445 21,890 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 PGM prices continue to follow Gold, but bases may have formed Platinum and Palladium prices have mapped out similar paths since the October rebound highs failed, with prices selling off relentlessly before trading sideways. Platinum fell 19.6 percent to $824.50/oz and Palladium fell 27.6 percent to $524/oz. The lows were establish on 3 rd December. Since then prices have rebounded 7.6 and 9.4 percent respectively, but both metals have once again run into resistance. The question now is whether the bases built in the second half of November hold. Like Gold, prices reacted positively to the strong US employment report released in early December, which was in many ways counter intuitive, but we think reflects the likelihood that the market is already short and the good US data of late means a rate rise has been discounted so is fully priced in. For Palladium, we would expect prices to benefit from continuing good US auto sales that for the past three months have been running at an annualised rate of 18.3 million units. China s auto sales have also rebounded sharply with sales for passenger vehicles rising 18 percent in November compared with a year earlier, according to the China Passenger Car Association. This followed a 11.3 percent rise in October, with sales boosted by the government stimulus in the form of a halving of the tax on car purchases. Funds cut net long exposure The funds trading on Nymex have cut exposure to both PGMs, with the net long fund position (NLFP) on Platinum falling to 18,745 contracts and Palladium falling to 6,574 contracts, from recent peaks of 35,263 contracts and 13,288 contracts respectively in late October, early November. The bulk of the decrease in the NLFP has come about on the back of fresh short selling, with the gross short position in Platinum near the peak seen in August, while the gross short position in Palladium is around 60 percent of what it was at this year s August peak. The gross long position on Platinum is relatively high, while the gross long position on Palladium is the near to the lowest it has been since November As such, Palladium looks susceptible to fresh buying, but less so to short-covering, while Platinum is at risk from short-covering, or possibly more long liquidation should prices weaken further. With regards to ETFs, holdings in Platinum have dropped 4.3 percent since the end of October, and Palladium holdings have dropped 7.6 percent. Technical & Summary The charts are starting to look similar now that the two metals have adjusted for the VW issue that boosted Palladium while weakening Platinum. Indeed Palladium prices fell more than Platinum in the recent sell-off, but compared to the start of the year, both metals are down a similar amount with Platinum off 32 percent while Palladium is off 34 percent. In recent weeks, bases have been formed on the charts and prices have started to trade in line with Gold s movements, which suggests they are trading more as a complex rather than as individual metals. Generally, we feel the PGMs have become oversold, but feel the low prices have led to destocking. If there are any signs of an improvement in the economic outlook, or if PGM prices pick-up, or demand for vehicles or jewellery recovers, then we would expect demand for the PGMs would benefit from both restocking and bargain hunting at the industrial and investment levels. 7

8 PGM Statistics Q Q Oct-15 Nov-15 London Prices (US$/oz) Platinum 1,725 1,569 1,491 1,390 1, Palladium Rhodium 2,026 1,272 1,061 1,180 1, Japanese Parity Prices (Y/g) Platinum 4,268 3,881 4,501 4,519 4,267 3,776 3,634 3,379 Palladium 1,824 1,596 2,198 2,636 2,880 2,348 2,570 2,193 South African Parity Prices (Rand/kg) Platinum 385, , , , , , , ,782 NYMEX Stocks ('000oz) Platinum Palladium CFTC Futures Only Data Long / (short) non-commercial Platinum 23,041 26,929 30,680 35,840 24,631 21,187 33,516 18,745 Palladium 10,950 8,809 22,369 22,276 15,236 6,920 13,288 6,574 Tocom - Platinum Stocks ('000oz) Vol (Million contracts) OI ( '000 contracts) Tocom - Palladium Stocks ('000oz) Vol ('000 contracts) OI ( '000 contracts) Other Indicators (US$/oz) Pt-Au spread Pt-Pd spread Platinum Bullion imports (kg) USA 129, , , ,413 ~ (Jan-Sep) Japan 62,230 48,359 48,336 32,684 34,492 (Jan-Oct) PalladiumBullion imports (kg) USA 98,900 80,000 83,200 92,400 62,920 (Jan-Sep) Japan 66,484 53,836 58,571 58,429 46,500 (Jan-Oct) ~ = data not available yet, italics = estimates 8

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