Metal Matters October 2012Gold prices continue to make headway as the rally has once again beenfuelled by broad based quantitative easing (QE). In addition to QE, the Fed said that it would not be in any hurry to tighten monetary policy at the first signs of growth… … this means that the Fed may not stamp out inflation if it is seen when growth starts to emerge. The fact further QE has been announced in the EU, US, Japan and China in September, highlights the trouble the financial markets are in. Funds’ interest in Gold has returned with vigour and ETF buying by investors has accelerated. The dollar may well weaken as the US election campaign focuses on the US deficit and the ‘fiscal cliff’. We feel Gold has embarked on another major up leg.Silver followed Gold’s lead, but true to form it has outperformed Goldon a percentage basis. Prices have encountered selling above $35/oz - supply in this region may take some time to be absorbed.PGM prices shot higher on the back of QE and as strikes in South Africadisrupted mine output. For now, we expect supply issues to be the main driver for PGM prices, as demand from the auto industry is likely to be subdued.
Metal Matte rs October 2012 Gold’s rally continues to climb and the interesting is that the NLFP is still well outlook remains bullish overall below the highs seen in 2011, 2010 and In last month’s Metal Matters we thought the peak of 262,331 contracts seen in the likelihood of more quantitative easing 2009. This means the NLFP is 22% (QE) would drive prices higher and this has below the 2009 high. now unfolded with various types of QE announced in Europe, the US and Japan, during September. Monetary easing has also been seen in Australia and further stimulus spending has been announced in China. All in all, these events highlight the trouble the global economy is in. More QE also runs the risk of debasing the value of paper money and the legacy of all this debt creation remains a big unknown risk that could still undermine the financial system down the road. ETF investors accelerate purchases QE fuels another rally Longer term investment buying also After the QE fuelled rally out of the 2008 started to gather pace in August. In July, financial crisis that led to Gold rallying from holding dropped 14.5 tonnes, in August $682/oz to the highs at $1,921/oz, a move of they climbed 63.5 tonnes and rose a 180%, the market had become overbought. further 73.6 tonnes in September. This Having consolidated between September buying has taken ETF holdings to a 2011 and September this year, the market record level of 2,558.6 tonnes. The was well placed to move higher again. The reacceleration in ETF buying and the trigger for the break out from the downward turn round in fund buying in recent wedge on the chart was the prospect of more weeks imply sentiment has indeed broad based QE. Having broken out of the turned bullish. Given the momentum, wedge on 21st August, prices have moved further buying may well follow. higher in four steps, with each round of QE, or stimulus, further fueling the rally. Prices have now challenged and breached the February high at $1,790.80/oz, leaving the November peak at $1,803/oz as the main barrier to overcome before prices can focus on the $1,921/oz high again. Funds increase exposure The latest CFTC data shows the net long fund position (NLFP) climbed steadily during September to reach 203,896 China – going for Gold contracts, up from 158,491 contacts at the As well as being an important Gold end of August and up from a recent low of consumer, China has become the 112,977 contacts in late July. As the chart world’s largest producer and is likely to shows, the rebound in fund interest has been be the largest importer of Gold in 2012. extremely strong and interestingly the NLFP It is also buying Gold mining companies has now moved above the previous peak around the world. China is, therefore, seen at the end of February, when prices building up its Gold reserves and that were around the $1,790/oz level. What is may well be in an effort to diversify 2
Metal Matte rs October 2012 their holdings of what used to be hard high and above there to the uncharted currencies. It could also be in preparation for waters that lead to $2,000/oz and eventually making the yuan freely beyond. The stochastics are holding up convertible. China last published its Gold in the strong zone and overall pressure reserves in 2009 - they had doubled to 1,054 seems to be building below key tonnes. If they republish, the market should resistance at $1,803/oz. be braced for another significant increase. Central banks continue to buy In the first half of the year, central banks bought 254.2 tonnes of Gold, according to the World Gold Council (WGC). This was up from 203.2 tonnes in the same period last year. The buying has tended to come from central banks in developing countries, which suggest they are putting a proportion of the proceeds from their trade surpluses into Gold, rather than have too much exposure to hard currency. Considering what lies ahead Summary - We have been bullish for for the US in the fourth quarter, we are Gold in recent months and given the unsurprised dollar holders may be nervous. latest round of QE, much of which now seems to be unlimited is scope, we feel Potential for dollar weakness there is still considerable room on the Up until the recent move higher in Gold, the upside for Gold prices. Guardians of popular safe havens seem to have been the financial assets, whether they be US dollar, the yen, US treasuries and investors, creditor central banks, or German bunds. We have viewed all these as sovereign wealth funds, are likely to be being overbought in recent months and it is nervous about holding to much of their interesting that the dollar has shown some reserves in former hard currencies. Even weakness recently. With the US election on the government bonds denominated in 6th November rapidly approaching and the hard currencies, although no doubt safe, budget deficit, deficit ceiling and the fiscal will still lose value if the underlying cliff all likely to become issues before and currency is debased. Down the road, after the election, we feel there is a once the tools to fix the financial crisis significant risk that the dollar could come have been found, when QE is being under further downward pressure. With the pulled-in and inflation is contained, then other safe-havens mentioned above still the bull market in Gold may end - but looking overbought and being fiat-products such a set-up seems a long way off from too, we feel there is potential for Gold to where we stand now. For now, the regain market share as a safe-haven. financial system is being kept afloat as central banks pump endless amounts of Technical – Gold prices have embarked on money into the system, but the fact another up leg, we feel. Having broken out money is being created at will, implies of the falling wedge pattern that governed the value of money is being debased and prices during the pull back and consolidation as that dawns on more people, then more that followed the September 2011 peak, savings are likely to be used to buy prices are now challenging resistance assets with intrinsic value. There will no between $1,790/oz and the November 2011 doubt be corrections along the way, but peak at $1,803/oz. Clearance of the latter, overall we see Gold rising as money would open up the path to the $1,921/oz loses its value. 3
Metal Matte rs October 2012 Gold Statistics 2008 2009 2010 2011 Q2 2012 Q3 2012 Aug-12 Sep-12 London Prices (US$/oz) AM fix 872.54 970.19 1225.46 1573.16 1609.76 1653.46 1625.68 1741.93 Pm fix 871.71 970.14 1224.76 1571.52 1610.76 1654.80 1626.03 1744.45 Average 872.12 970.17 1225.11 1572.34 1610.26 1654.13 1625.86 1743.19 Parity prices Australian - A$/oz 1,033 1,225 1,332 1,526 1594 1,592 1,551 1,676 South Africa Rand/kg 222,354 250,148 278,299 284,314 13040 13,646 13,408 14,419 Japan Y/g 2,802 2,810 3,327 3,868 4000 4,032 3,966 4,225 India Rupee/oz 38,052 47,272 56,264 73,266 87180 90,821 90,001 94,533 Lease Rates 1 Month * 0.41 -0.04 -0.08 -0.14 -0.11 -0.13 -0.09 -0.22 3 Month * 0.65 0.15 -0.06 -0.06 0.04 -0.02 0.04 -0.13 6 Month * 0.81 0.47 0.04 0.11 0.23 0.19 0.23 0.11 12 Month * 0.80 0.80 0.32 0.35 0.50 0.49 0.51 0.43 COMEX - futures contracts Stocks (000oz) 8,068 8,983 10,748 10,938 10,944 10,941 10,924 10,955 Vol (million contracts) 39.54 32.55 43.91 47.75 11.2 10.0 2.79 3.46 OI (000 contracts) 393 401 554 482 418 434 438 467 CFTC (futures only data) Net Spec position Long (Short) 149,279 185,095 213,602 169,667 122,775 162,820 158,491 203,905 TOCOM Stocks (000oz) 244 171 141 120 149 128 127 125 Volume (000 contracts) 15,164 11,913 11,003 16,073 2,729 2,655 796 1,107 OI (000 contracts) 140 93 109 123 136 141 149 142 Other Indicators FT Au Mines Index 2,658 2,647 3,340 3,716 2824 2,955 2,855 3,310 Dow Jones Index 11,221 8,934 10,635 12,085 12,829 13,178 13,090 13,437 US$ Index 77.1 80.5 81.3 76.3 81.1 81.3 81.2 80.0 Gold Bullion Imports, tonnes (exports) Dubai 229 173 250 250 Hong Kong /China** 222 45 228 431 India 880 779 1123 1023 Italy 136 103 109 93 Japan 35 18 19 12 Singapore 38 27 112 150 South Korea 32 23 27 24 Taiwan 13 10 12 16 Turkey 166 38 42 125 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 & 2011 4
Metal Matte rs October 2012 Silver’s rally pauses, after climbing 35% ETF investors increase holdings too above the June low The combined holdings in the Silver ETFs Silver prices have raced higher since we follow climbed 319 tonnes in hammering out base over the summer that September, this was after a 258 tonne reconfirmed support was in place just increase in August and an 89 tonne increase above the $26/oz level. Prices started to in July. Year to date, ETF investors have climb higher in mid-August and that bought 1,110 tonnes, which averages 123 continued until mid-September, after which tpm – this highlights the step up in interest time upward momentum waned and prices in recent months. started to consolidate. The high in September was at $35.19/oz, prices then pulled back to $33.34/oz on 26th September as the market consolidated. Since then prices have tried higher again, reaching $35.39/oz on 1st October. Although this was a fresh high, there does seem to be considerable overhead supply above $35/oz, as so far prices have not managed to close above that level. Supply above $35/oz This is not so surprising as earlier on in the Technical – This weekly chart shows the year, during the first quarter, traders were rapid gains in Silver and with prices reporting considerable producer selling approaching the peak seen in November interest around the $35/oz to $37/oz area. It 2011, and most of the body of trading seen therefore seems reasonable to assume that in February this year (ignoring the short- there is still selling interest in this region lived spike up to $37.51), it is not and until it is absorbed, the uptrend will surprising that the rally has encountered struggle to make headway. selling. The stochastic indicators are holding up in the strong zone, so while they do so the buying may remain strong enough to absorb the selling. This means that if the selling dries up, prices should then be able to extend to the upside again. Overall, considering the speed of the rebound we feel prices may need to consolidate for longer. Given the robustness of the rally off the base, we would not be surprised to see the rally head higher again once it has had time to consolidate. Funds have returned as strong buyers As the chart above shows, the net long fund Summary – Silver has put in a strong position (NLFP) has rebounded sharply to rebound and the pick-up in fund and 34,010 contracts, up from a recent low of investor interest shows sentiment has 6,222 contracts at the end of June. Like turned bullish again. We expect Silver to Gold, the run up in the NLFP has overcome follow Gold’s lead and as we remain two previous peaks, but there is still plenty bullish for the latter, we are bullish for the of room for the fund position to grow former. Above $35.70/oz, trading may further, judging by earlier peaks that lie become quite thin again, especially if between 50,000 and 66,000 contracts. current trading is absorbing forward selling. 5
Metal Matte rs October 2012 Platinum and Palladium rise an average positions growing 35% and 53% of 26%, compared with Gold’s 13% rise respectively, with both metals seeing PGM prices have rallied sharply on two considerable short-covering too. ETF counts in recent months. Like the rest of investors seem to have followed the the metals complex, prices are up on the headlines more, which have focused on the back of QE and stimulus spending, but disruption to Platinum supply, with South PGM prices have also rallied on the back Africa’s Palladium supply not mentioned of unrest at South African mines. Given much. From the start of August to the South Africa supplies 75% of the world’s recent peaks, Platinum holdings jumped Platinum, 34% of its Palladium and 83% of 13%, while Palladium holdings climbed the Rhodium, it is not surprising that prices just 0.6%. Given this, it is surprising reacted the way they did. Neither is it Palladium prices climbed as much as they surprising that prices pulled back once the did, but that now seems to have been news stopped being headline news. Going corrected as Palladium prices have pulled forward, we feel the Marikana mine back more than Platinum prices. episode will turn out to be wake-up call for the market in that it highlights the social and political problems facing the precious metals industry in the region. Global auto industry is weak Had the disruption to South Africa’s supply happened when the auto industry was in full swing, then the reaction would likely have been more severe. However, given the political wrangling in South Africa, we feel supply disrupts are likely to become more frequent. This is likely to underpin prices going forward, albeit possibly at lower levels as prices consolidate after the recent strong gains and the market contends with weak auto sales in Europe. ACEA, the European Automobile Manufacturers Association, predicts that European car sales may reach a 17-year low this year and may not recover next year. Moody’s lowered its forecast for global light vehicle sales Technical & Summary – Both PGM growth to 2.9% in 2013, its January charts show strong rallies and both have forecast had been for 4.5% growth. It undergone a period of consolidation, which expects Western European demand to for Palladium was considerably deeper contract 3% in 2013, having earlier than for Platinum. Given the extent of the expected 3% growth. Sales in China are gains, it seems likely that further also running below par, which means the consolidation will be seen, which for US is the main growth market and the one Platinum may be seen at lower levels, bright spot. possibly around the $1,550/oz area. All in all, we expect weak global auto sales Investor and fund buying fuel the rally growth to dampen demand for PGMs - so Funds were active buyers of Platinum and all eyes will remain on supply. Palladium in September, with the NLFP 7
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