ScotiaMocatta Metal Matters August 2015

Sentiment across the precious metals is extremely weak with prices working lower almost on a daily basis. The most bullish aspect of the market is that the funds are holding extremely large short positions.

 Gold has for now lost its status as a safe-haven, which highlights investors’ confidence in the global financial system.

 With investors now not buying, indeed they are adding to supply by redeeming their ETF holdings, supply might need to be reined in…

 …for this to happen prices are likely to have to fall further.

 In the short term, we expect a better monsoon and low Gold prices to prompt a pick-up in Indian demand.

 Chinese demand may not be as bad as the import data suggests. Withdrawals from SGE vaults are running at a high level.

 The path of least resistance is to the downside, but we would not be surprised to see strong short-covering rallies along the way.

Silver prices look increasingly oversold but with prices back at pre- financial crisis levels industrial users may look to restock.

 The funds’ gross short position has climbed 290 percent since the end of May – there is now a greater risk of a short-covering rally if buying returns.

PGM prices have slumped on the back of aggressive fund shorting, but the fundamentals are far from bearish.

 There is danger of sharp short-covering rallies in the PGMs.

Metal Matters August 2015

Gold prices break support at $1,131.60/oz would-be Chinese buyers have and drop to five year lows at $1,077.50/oz reportedly been focused on the stock In early trading on Monday July 20th, the market and not on Gold as imports have Gold price dropped sharply during been lower this year. But looking at the trading with prices falling 4.3 percent and level of withdrawals from the Shanghai below $1,100/oz, which pushed prices down Gold Exchange vaults tells a possibly to levels not seen since February 2010. different story. Withdrawals have Prices went on to set a low at $1,077.50/oz totalled 1,410 tonnes up to 24th July, on 24th July. On the Friday before the sell- which is 32 percent higher than the off, released data on its official Gold 1,062 tonnes withdrawn in the same reserves, which had climbed 604 tonnes in period in 2014 and it is even above the six years – the market seemed disappointed 1,301 tonnes withdrawn in the same with the news. Whether that was the catalyst period in 2013. So although imports into for the sell-off or just a coincidence remains China have been lower this year, it does unclear. Having broken below the look as though demand is strong but that November 2014 lows at $1,131.60/oz, prices it is being fed from stocks, not imports. may well have embarked on another While stocks are being run down, local downward leg, which could point to a fall premiums remain low, but in time we into the $900-1,000/oz area. would expect premiums to pick-up and that is then likely to encourage a pick-up Supply and demand to a main driver in imports again. With so little investor interest in Gold, the market is now dependent on physical buying Indian monsoon set to be normal from fabricators and central banks. This Earlier in summer there were concerns means that supply and demand have become that a light Indian monsoon would more influential and, with physical demand dampen demand for Gold, but more weak, it may be that supply and demand recently monsoon rains have picked up now need to be brought back into balance by and a more normal monsoon seems production cutbacks. As prices have fallen, likely, albeit that the monsoon rains have producers have tightened their belts and not been evenly distributed. A profitable production costs have fallen to around the harvest would help boost demand for $850/oz level. This means that there is Gold, especially at these low prices. unlikely to be much of a supply response until prices fall closer to that level. One benefit for the Gold market is that there has not been much producer hedging, as shareholders tend to want exposure to the Gold price, so this should mean supply responds quite quickly to lower prices. It will be interesting to see if the level of producer hedging picks-up if it does look as though prices threaten to fall back below Fund shorts get shorter $1,000/oz. If this happens it could add to The net fund long position has dropped downward pressure on prices. to 24,465 contracts, down from 67,155 contracts at the end of June and a recent Physical demand – a mixed picture peak of 122,621 contracts in mid-May. With investors showing little interest in The gross long position is now at Gold, physical buying has now become the 182,977 contracts, which is down from a main feature on the demand side. Generally, 2015 peak of 238,407 contracts, but the demand growth appears to be subdued; gross short position is high at 158,512

2 Metal Matters August 2015

contracts, up from an average of 92,600 support Gold prices is a weakening of contracts so far this year and 76,286 the dollar. This may happen should contracts in 2014. This highlights how global growth prospects deteriorate – bearish sentiment is, but it also raises a recent Chinese PMI data was weak and warning flag that should prices rally there generally global growth is fragile. At could be a significant sort-covering rally. At present the market expects the first rise the time when the March rally got going, the by the Fed to be made in September; if gross short position peaked at 113,953 data between now and then deteriorates, contracts. the market may start to discount a further delay in Fed tightening and in turn that would likely weaken the dollar. A second possible bullish scenario would be if a rate rise finally spooks equity markets that for the most case remain near record highs. With an already strong dollar and high bond prices, investors looking for somewhere to park their profits might see the ETF redemptions continue washed-out Gold price as an investment ETF investors have cut their Gold holdings that might not have much further to fall. to 1,529 tonnes, down from 1,594 tonnes at The third area that could support Gold the end of June and a peak this year of 1,676 prices is buying. China is tonnes seen in late February. The relentless looking to have the yuan accepted as outflow highlights how investor sentiment part of the IMF reserve currency basket. has changed and how the outflow is The noise from the IMF is that it may be boosting physical supply. ETF holdings are too early for this, so China may well now 58 percent of what they were at their decide to make the yuan more peak of 2,647 tonnes in January 2013. With acceptable by backing it with more the trend in ETF outflow continuing, it Gold. Given the dollar’s strength and suggests that investors’ interest has not even Gold’s weakness this could be an been tempted by lower Gold prices. The fact opportune time to do so. this has happened when recent events over Greece meant it was reasonable to expect some kind of flight to safety, suggest investors’ confidence in the global financial system has been fully restored so when they need to reduce risk they can turn to top-tier government bond markets. This suggests the chapter covering investors’ interest in Gold on the back of de-hedging, liquidity injections after the dot-com bubble and the 9-11 terrorist attack, asset diversification Technical & Summary – Gold prices and then safe-haven buying on the back of have broken lower and are around the quantitative easing and market turmoil has 50% Fibonacci retracement line; the now closed. We wonder what the themes 61.8% line is around $890/oz. With will be in the next chapter? investors showing little buying interest we now feel supply and demand factors Potential bullish events – Given the current will determine prices more, so prices outlook and lack of investor interest, we feel may need to fall to levels that prompt the most likely event that could step in to production cuts.

3 Metal Matters August 2015

Gold Statistics 2011 2012 2013 2014 Q1 2015 Q2 2015 Jun-15 Jul-15 Prices (US$/oz) AM fix 1573.16 1668.50 1410.80 1266.34 1227.93 1192.73 1182.25 1131.58 Pm fix 1571.52 1668.82 1411.03 1266.20 1223.98 1192.82 1181.50 1130.04 Average 1572.34 1668.66 1410.92 1266.27 1225.96 1192.77 1181.88 1130.81 Parity prices Australian - A$/oz 1,526 1,582 1,454 1,403 1,557.4 1,535 1,534 1,523 Rand/kg 368,623 440,575 433,964 440,562 462,002 463,140 467,180 451,590 Y/g 3,868 4,127 4,252 4,146 4,521 4,485 4,535 4,320 India Rupee/oz 73,266 89,126 81,973 77,077 76,241 75,488 75,306 71,714 COMEX - futures contracts Stocks ('000oz) 10,938 11,138 8,103 8,203 8,074 7,919 8,043 7,571 Vol (million contracts) 47.75 43.88 46.27 40.52 11.39 9.63 2.86 4.55 OI ('000 contracts) 482 432 398 380 405 415 442 434 CFTC (futures only data) Net Spec position Long (Short) 169,667 156,655 68,381 98,265 131,705 100,355 95,114 24,465 TOCOM Stocks ('000oz) 120 136 120 146 124 123 123 124 Volume ('000 contracts) 16,073 10,772 12,223 8,744 2,298 1,823 631 700 OI ('000 contracts) 123 138 111 88 96 98 96 85 Other Indicators FT Au Mines Index 3,716 3,051 1,789 1,409 1,265 1,173 1,087 830 Dow Jones Index 12,085 13,005 15,090 16,837 17,833 17,827 17,620 17,712 US$ Index 76.3 80.3 81.3 83.0 96.0 95.6 95.6 97.2 Gold Bullion Imports, tonnes (exports) Dubai 65 240 350 350 /China** 431 892 2192 2,192 India 1211 1071 961 961 Italy 87 109 107 107 Japan (126) (84) 28 28 150 140 225 225 South Korea 24 22 24 24 Taiwan 16 14 20 20 Turkey 125 147 294 294 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 Matters August 2015

Silver prices fall back to the peaks seen contracts on 26th May. The gross short before the financial crisis position is now just off the recent record Silver prices have dropped to a low of high and that makes the market vulnerable $14.38/oz, breaking last November’s low to a short-covering rally. of $14.65/oz in the process. The downward trend has been relentless since the April rally petered out in May at $17.78/oz. Prices are now trading around the top of the range seen in 2006 and 2007 before the financial crisis got underway. This suggests that perhaps the Silver market has now unwound all the buying done on the back of the extra liquidity that was pumped into the market during and in the aftermath of the financial crisis. The run-up between 2003 Technical - Silver prices have failed to find and 2008 was also driven by excess a support level that holds and prices are liquidity, asset diversification and due to now back at the top of the range seen in the commodity boom from the super-cycle 2006-2007. This area may well provide – most of these issues have now passed and support, but the bottom of the range does indeed it seems likely we are about to see run down to around $9.50/oz, with the 2008 the first step in monetary tightening. As financial crisis low at $8.50/oz. The such, the Silver market has to adjust to Gold/Silver ratio at 74.50 is not too far considerable change. What is interesting from previous peaks so that might be an though is that investors in Silver have not indication that prices are nearing a trough. abandoned ship, although fund shorts are On the daily chart (not shown) there is holding a large short position. already some divergence as prices continue to fall, while the ratio is trending lower. ETF investors remain committed ETF investors collectively hold 19,248 tonnes of Silver and the holding has not changed much in recent months despite the price drop. Indeed, the holding is not down that much from the record high of 20,073 tonnes seen in October last year, as the chart in the Gold section shows. If investors have not bailed out so far then it suggests they are in for the long term. Needless to say, if that changes then it could have a Summary – Investors are not interested in marked impact on prices, but we do not Gold and Gold prices are falling think they will liquidate now. accordingly and that is weighing on sentiment across the precious metals Funds’ short position up 290% complex. With Silver prices back at levels Long term investors may have confidence they were trading before the financial in Silver, but there has been an explosion of crisis, we feel there may be some genuine fund selling interest on Comex. The net consumer interest around, especially as fund position is still long at 6,296 contracts, ETF investors are not selling. If prices do down from 51,280 contracts in mid-May, start to pick-up then we would expect an but the change has come on the back of a aggressive rally as short-covering gets 290 percent increase in the gross short underway. position to 60,829 contracts from 15,611

5 Metal Matters August 2015

Silver Statistics 2011 2012 2013 2014 Q1 2015 Q2 2015 Jun-15 Jul-15 London Prices (US$/oz) Daily Fix 35.12 31.15 23.83 19.08 16.79 16.41 16.10 15.07

Parity (London) prices Japan (Y/g) 86.78 77.06 71.66 70.31 61.99 61.68 61.78 57.57 India (Rupee/oz) 1,641.7 1,658.6 1,380.7 1,312.5 1,043.9 1,038.4 1,025.8 955.7

COMEX – futures contracts Stocks (Moz)* 96.4 135.4 165.9 178.9 177.6 179.7 184.0 174.0 Vol (million contracts) 19.4 13.5 14.5 13.7 3.05 3.8 1.5 1.0 OI (‘000 contracts)* 117.1 124.2 136.0 155.8 167.5 184.2 196.7 185.8

CFTC (Futures Only Data) non-commercial Net Positions * 21,783 23,393 11,929 19,307 44,616 29,823 15,557 6,296

TOCOM Stocks (Moz)* 0.2 0.23 0.14 0.20 0.18 0.17 0.17 0.16 Futures Vol (‘000 contracts) 375.6 110.8 96.4 86.1 19.0 14.81 5.3 7.0 Futures OI (‘000 contracts)* 8.1 4.9 4.1 4.5 3.5 3.2 2.9 2.8

Other Indicators Gold/Silver ratio* 45.9 53.4 60.0 67.6 73.2 72.7 74.7 74.2

Silver Bullion Imports (tonnes) USA 5253 4037 3835 3835 Japan 1775 1562 1688 1688 India 4087 1900 5819 5819 Italy 440 426 679 679 Hong Kong 1162 930 948 948 China (exports) 4250 5057 5186 5186

* figures are period averages unless marked; ~ not available yet, italics = estimate.

6 Metal Matters August 2015

PGM prices get carried lower as Palladium are expected to be in a supply sentiment turns increasingly bearish. deficit this year. The cascading PGM prices seem out of sync with the fundamentals of the market Mixed auto sales and with Platinum prices now below The market is focused on auto sales in $1,000/oz it seems likely that production China that disappointed the market; they will be cut back. If producers cut back due fell in June for the first time in two years to low Platinum prices, it means production and forecasts are for sales growth of only of all the PGMs is affected. The main three percent this year. However, sales in triggers for the weakness in PGM prices Europe remain upbeat as they are in the seem to be tied in to concerns about how US. The downturn in China’s appetite for the slowdown in China’s economy and the cars is unlikely to remain for long and the equity rout will affect vehicle sales and slowdown is likely to increase pent-up production. In turn, this has led to demand. What is more, at these low PGM speculative selling on Nymex that has prices, supply is likely to be reined in, accelerated since the end of May. which should help counter the drop in Interestingly, strong auto sales in Europe demand growth expected from China. In and the US have largely been ignored. We addition, with Platinum prices some feel PGM prices are extemely oversold and $140/oz below Gold, retail demand for expect buying by consumers and investors Platinum jewellery should pick-up. will end up lifting prices, which in turn will lead to an aggressive short-covering rally.

Fund shorts go aggressively shorter Platinum holdings in ETFs have rebounded to 2.685 million ounces (Moz) from 2.575 Moz at the end of May, an increase of 4.3 percent, and Palladium holdings have increased to 3.044 Moz from 2.980 Moz, a rise of 2.1 percent, over the same period. This suggests some scale down investor interest. Conversely, the funds trading on Nymex have been aggressive sellers. In late July they held 37,237 short contracts, up from 24,327 contracts at the end of May. During this period the gross long Technical & Summary – On the charts, position has increased by around only Palladium prices are holding up relatively 2,817 contracts. The picture in Palladium well compared with Platinum, but both has been even more stark with the gross look oversold. The horizontal support line short position rising to 17,367 contracts on Palladium is at $536/oz – we would from 4,791 contracts, while the gross long expect good support before there. Looking position has hardly changed. So, whereas at the data, it does seem as though it has ETFs bought 110,000 oz of Platinium been the aggressive fund short-selling that during this period, the funds sold a net has pushed prices so low. Large gross short 504,650 oz. For Palladium, the ETFs positions in markets that are in a supply bought 64,000 oz and the funds sold a net deficit seems a risky set-up. There appears 1,219,400 oz. This helps explain where the to be no stopping the downward selling pressure has come from. What is momentum for now, but we feel the PGMs interesting is that both Platinum and are oversold and there is risk of short- covering.

7 Metal Matters August 2015

PGM Statistics 2011 2012 2013 2014 Q1 2015 Q2 2015 Jun-15 Jul-15 London Prices (US$/oz) Platinum 1,725 1,569 1,491 1,390 1,202 1,135 1,096 1,021 Palladium 737 645 727 809 792 766 733 649 Rhodium 2,026 1,272 1,061 1,180 1,183 1,081 986 860

Japanese Parity Prices (Y/g) Platinum 4,268 3,881 4,501 4,519 4,437 4,267 4,206 3,902 Palladium 1,824 1,596 2,198 2,636 2,924 2,880 2,811 2,478

South African Parity Prices (Rand/kg) Platinum 385,179 398,403 443,938 466,074 436,609 424,969 417,704 393,238

NYMEX Stocks ('000oz) Platinum 137.4 195.8 276.3 195.8 133.2 128.5 128.5 126.8 Palladium 542.3 566.3 656.9 347.4 184.1 150.4 143.6 136.4

CFTC Futures Only Data Long / (short) non-commercial Platinum 23,041 26,929 30,680 35,840 27,933 24,631 19,482 19,083 Palladium 10,950 8,809 22,369 22,276 18,183 15,236 9,872 5,592

Tocom - Platinum Stocks ('000oz) 26.6 35.9 38.1 47 56.4 54 51.2 50.8 Vol (Million contracts) 3.4 3.4 4.3 4.6 1.0 0.3 0.31 0.43 OI ( '000 contracts) 49.8 50.2 55.7 72.6 65.5 75 86.6 79.5

Tocom - Palladium Stocks ('000oz) 10.8 6.0 4.4 3.2 3.0 3.6 4.4 5.4 Vol ('000 contracts) 110 60 79 77 17.0 16.4 6.4 8.7 OI ( '000 contracts) 2.9 2.3 2.0 2.0 2.1 2.1 2.3 1.9

Other Indicators (US$/oz) Pt-Au spread 145 -110 97 115 -19 -66 -75 -138 Pt-Pd spread 977 911 754 568 399 344 344 355

Platinum Bullion imports (kg) 2011 2012 2013 2014 2015 USA 129,090 171,724 115,765 141,413 36,610 (Jan-Apr) Japan 62,230 48,359 48,336 32,684 18,925 (Jan-June)

PalladiumBullion imports (kg) 2011 2012 2013 2014 USA 98,900 80,000 83,200 92,400 27,960 (Jan-Apr) Japan 66,484 53,836 58,571 58,429 26,059 (Jan-June)

~ = data not available yet, italics = estimates

8 Metal Matters August 2015

SCOTIABANK is a global leader in metals trading, brokerage and finance providing clients access to a full range of products and services.

To obtain additional information on products and services, call one of the offices listed below.

CANADA INDIA HONG KONG SAR Toronto 21st Floor, Central Tower Scotia Plaza 91, 3rd North Avenue 28 Queen’s Road Central 40 King Street West Maker Maxity Central Box 4085, Station ‘A’ Bandra Kurla Complex Hong Kong Scotia Plaza Mumbai 400 051 Toronto, Ontario Alice Lam M5W 2X6 Rajan Venkatesh [email protected] [email protected] Tel: 852-2861-4778 Russell Browne Tel: 91-22-6658-6901 (Direct) Fax: 852-2573-7869 [email protected] Fax: 91-22-6658-6911 Tel: 1-416-862-3863 SINGAPORE Fax: 1-416-866-6897 1 Raffles Quay Upper Ground Floor #20-01, North Tower Dr. Gopal Das Bhavan UNITED KINGDOM One Raffles Quay 28 Barakhamba Road London Singapore, 048583 New Delhi 110001 201 Bishopsgate

6th Floor

London Prem Nath Swee Kiang Teo EC2M 3NS [email protected] Tel: 91-11-2335-8789 [email protected] Fax: 91-11-2335-9342 Tel: 65-6536-3683 David Wilkinson Fax: 65-6534-7825 [email protected] Tel: 44-20-7826-5931 25/2 S.N. Towers UNITED ARAB Fax: 44-20-7826-5948 M.G. Road EMIRATES Bangalore 560001 Dubai UNITED STATES 302, Precinct Building 03 New York Dubai International Financial Centre 250 Vesey Street Mahendran Krishnamurthy Dubai New York, N.Y. 10281 [email protected] UAE Tel: 91-80-2532-5325 Fax: 91-80-2558-1435 Bimal Das Pramod Mohan [email protected] [email protected] Tel: 1-212-225-6200 Tel: 971 4 371 1555 Fax: 1-212-225-6248 Fax: 971 4 448 4640

9 Metal Matters August 2015

This report has been prepared on behalf of Scotiabank and is not for the use of private individuals. The Scotiabank trademark represents the precious metals business of The Bank of Nova Scotia. The Bank of Nova Scotia, a Canadian chartered bank, is incorporated in Canada with limited liability.

Opinions, estimates and projections contained herein are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither the Bank of Nova Scotia, its affiliates, employees or agents accepts any liability whatsoever for any loss arising from the use of this report or its contents. The Bank of Nova Scotia, its affiliates, employees or agents may hold a position in the products contained herein. This report is not a direct offer financial promotion, and is not to be construed as, an offer to sell or solicitation of an offer to buy any products whatsoever.

This market commentary is regarded as a marketing communication. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

The Bank of Nova Scotia is authorised and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia and Scotiabank Europe plc are authorised by the UK Prudential Regulation Authority. The Bank of Nova Scotia is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority. Scotiabank Europe plc is authorised by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available from us on request.

10