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Metal Matters January, 2010

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Metal Matters January, 2010 ScotiaMocatta Metal Matters January 2010 Gold prices underwent a correction in December, driven mainly by a rebound in the dollar and profit-taking ahead of year-end Prices pulled back 12 percent, but are now rallying on fresh investment buying. Traders are waiting to see whether the dollar rally was just year- end book squaring, or the start of a counter trend move Geopolitical issues have also risen to the surface after a quiet 2009, this is likely to add another bullish dimension to the market. Medium-to-long term outlook remains bullish, but short term trading may become erratic, especially if the dollar rebounds again. Silver has moved above the mid-December resistance level, so it is outpacing Gold, which has not yet cleared the $1,142/oz level Better economic data bodes well for industrial demand for Silver, but overall the market will remain dependent on investors’ interest. PGMs reversed their corrections on news that the US were closer to allowing PGM ETFs to be listed on US exchanges Platinum and Palladium have also benefitted from a better than expected pick-up in vehicle sales, but whether this lasts remains to be seen. www.scotiamocatta.com Metal Matters January 2010 Gold prices peaked on 3rd December at likely to hold. In addition, with interest $1,226/oz and are now consolidating rates more likely to be lifted in other The news in early November that the IMF economies first (note: Australia has had sold Gold to India saw prices accelerate already raised rates), interest away from the uptrend line, but in December differentials are likely to keep downward prices started to correct. Prices reached a pressure on the dollar and also keep the high of $1,226/oz on 3rd December, but fell dollar as a prime currency for carry back to $1,075/oz on 22nd December. trades. Although the pull back breached the uptrend line, prices held above the former peak at $1,071/oz, which is now seen as a support level and Gold is now attempting to rebound. Other than profit-taking, the main driver behind the 12% correction was the rebound in the dollar that lasted most of December. As of early January, the dollar’s rebound has run out of steam so the big question is whether the stronger dollar was just a function of the approach of year-end, in which case the down trend in the dollar could now resume, or was it the start of a Investor activity suggests just a pause counter trend move for the dollar? ETF investors have not been panicked out of their holdings. The peak in the Gold trades inversely to the dollar combined ETF holdings was 1,796 Gold, in line with currencies, tends to trade tonnes on 17th November, since then inversely to the dollar and this was certainly holdings dropped to a low of 1,774 the case during the dollar rebound in tonnes, but are already climbing again December. Interestingly base metals did not and were last at 1,779 tonnes. In 2009 as weaken to any significant degree while the a whole, the ETFs grew by 619 tonnes, dollar strengthened, which was surprising. It compared to gains of 281 tonnes in 2008 suggests that base metals are being driven and 255 tonnes in 2007. higher in anticipation of economic recovery and that an economic recovery is likely to be seen as a negative for Gold as it would imply less need for safe-haven investments. This means that the direction of the dollar in the days and weeks ahead is likely to remain all important. Do fundamentals justify dollar strength? The big picture outlook for the dollar remains negative as quantitative easing, high government debt and growing budget Fund longs and shorts take profits deficits, all suggest the dollar is likely to Given the 12% drop in prices it is not weaken further. Although a good degree of surprising that funds have taken profits. the US economic data is improving, until it The net long fund position dropped from points to a real sustainable recovery that is a peak of 262,311 contracts (816 tonnes) likely to be inflationary - to the extent that it in late November to 230,490 contracts prompts the Federal Reserve to raise interest (717 tonnes) by year-end. However, as rates - the overall down trend in the dollar is the chart shows the overall position 2 Metal Matters January 2010 remains high and above the previous peak of tension in the Middle East – note oil 212,259 contracts (660 tonnes) seen in prices have rallied $10/barrel since mid- December 2007. As such, it does appear as December. though investor sentiment remains largely bullish for Gold. However, given the large fund and ETF positions, there is still potential for a deeper pull back should sentiment turn more negative again. Physical buying picks up as prices drop, but remains subdued overall The price drop in December did attract some pick-up in physical buying with India importing 32 tonnes in December compared to 16 tonnes in November. However over the whole of 2009, imports totalled an estimated 300 tonnes, down from the 439 Technical – Gold prices have pulled tonnes imported in 2008. In Turkey, imports back to the uptrend line, which was remain extremely depressed with 0.03 breached on a number of occasions, but tonnes imported in December and just 37.6 with the October peak and former tonnes imported in 2009, compared to 165.9 resistance at $1,071/oz holding and now tonnes in 2008 and an average of 180 tpy acting as support, Gold may have found since 2000. China now seems to have a base. There is still a risk this could be a overtaken India as the world’s largest half-way resting point and that prices are consumer with provisional estimates putting forming a bearish flag before heading Chinese demand at around 430 tonnes in lower again - in which case the 38.2% 2009, compared to 420 tonnes in India. This Fibonacci retracement level at means that China has now become the $1,018/tonne could be visited. However, number one producer and the number one in the short-to-medium term, we would consumer. Given how subdued imports of look for prices to consolidate in the Gold have been in India and Turkey in 2009, $1,090-$1,142/oz range. It would take a you could expect considerable pent-up move above $1,142/oz and for prices to demand, but this may not be the case as high hold above that level to suggest the prices have flooded local markets with scrap longer term up trend is about to resume. Gold. It may therefore take the combination of better prospects for economic confidence Summary – Gold prices had become and lower Gold prices before physical overbought and that condition has now demand recovers significantly. been corrected. The longer term picture remains bullish and there is still Geopolitical risks step forward considerable risk and uncertainty as to The failed bombing of a US plane on how the economic malaise will be sorted Christmas day may well lead to a pick-up in out. In addition, geopolitical issues have the perception of geopolitical risk as resurfaced, which could provide another attention turns to Yemen. In addition, Iran is fresh bullish aspect to the market. back in focus on two counts: firstly, the However, should a second rebound in the year-end deadline set by the US for serious dollar get underway, then Gold prices progress towards a solution to Iran’s nuclear could pull back again. Overall investors’ stance has now passed and, secondly, confidence seems robust so any price dips political unrest in Iran has picked-up again are likely to prompt scale down buying in recent weeks, which may led to further and restocking. 3 Metal Matters January 2010 Gold Statistics 2005 2006 2007 2008 3Q 2009 4Q 2009 Nov-09 Dec-09 London Prices (US$/oz) AM fix 444.87 604.34 682.34 872.54 960.07 1101.55 1126.12 1135.01 Pm fix 444.88 603.77 682.21 871.71 960.07 1101.64 1127.04 1134.72 Average 444.87 604.06 682.28 872.12 960.07 1101.59 1126.58 1134.87 Parity prices Australian - A$/oz 583 801 820 1,033 1,153 1213 1,226 1,258 South Africa Rand/kg 87,876 126,763 149,669 222,354 232,692 256,786 264,057 264,345 Japan Y/g 1,519 2,175 2,497 2,802 2,786 3,055 3,082 3,159 India Rupee/oz 19,642 27,387 28,454 38,052 46,813 52,006 53,785 53,137 Lease Rates 1 Month * 0.10 0.09 0.16 0.41 - 0.08 -0.03 -0.04 -0.04 3 Month * 0.11 0.12 0.20 0.65 - 0.02 -0.04 -0.05 -0.05 6 Month * 0.14 0.12 0.25 0.81 0.29 0.10 0.08 0.06 12 Month * 0.19 0.12 0.25 0.80 0.70 0.52 0.51 0.47 COMEX - futures contracts Stocks ('000oz) 6,178 7,655 7,354 8,068 9,204 9,596 9,692 9,822 Vol (million contracts) 15.89 15.92 21.30 39.54 5.98 11.73 4.56 4.08 OI ('000 contracts) 302 323 393 393 373 500 530 490 CFTC (futures only data) Net Spec position Long (Short) 109,798 96,930 121,423 149,279 195,713 243,777 259,064 230,490 TOCOM Stocks ('000oz) 193 356 346 244 178 166 171 157 Volume ('000 contracts) 17,958 22,228 18,203 15,164 1,589 2,151 1,318 ~ OI ('000 contracts) 315 305 226 140 91 115 119 128 Other Indicators FT Au Mines Index 1,696 2,421 2,476 2,658 2,768 2,932 2,862 3,073 Dow Jones Index 10,528 11,457 13,153 11,221 9,460 10,162 10,344 10,428 US$ Index 88 86 81 77 78 76.5 74.9 78.2 Gold Bullion Imports, tonnes (exports) Dubai 240 190 201 229 Hong Kong /China (20) (140) 20 87 India 807 739 862 720 Italy 225 178 187 136 Japan 73 68 54 50 Singapore 38 46 48 85 South Korea 40 24 41 32 Taiwan 22 9 11 13 Turkey 269 193 231 166 Data: Financial Times; Bombay Bullion Association; LBMA; TOCOM; COMEX; CFTC, REUTERS Figures are period averages unless marked by *, indicating the period end.
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