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.

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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: 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. 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 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 Rand/kg 87,876 126,763 149,669 222,354 232,692 256,786 264,057 264,345 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 /China (20) (140) 20 87 India 807 739 862 720 Italy 225 178 187 136 Japan 73 68 54 50 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. OI= Open Interest on the exchange ~ = data not available yet, italics = estimates

4 Metal Matters January 2010

Silver pulls back and consolidates, along profits, the funds did cut their position by with Gold as the dollar rebounds 15% in December, but given the more Silver prices peaked on 3rd December at speculative nature of funds this is not $19.47/oz matching the lower of two peaks surprising. Whereas the net fund long seen in 2008; the higher peak being at position in Gold has reached record highs, $21.36/oz from March 2008. The pull back the net long fund position on Silver stands took prices down to $16.75/oz, which was a at less than two-thirds of its former peak, drop of 14%, just 2% more than Gold’s seen in 2005. This suggests there is still move. So although Silver tends to considerable room for further accumulation outperform Gold in both directions, it should the market turn bullish again. would seem that Silver’s industrial attributes cushioned the fall to some extent, which is quite possibly considering base metals generally held up well. The pull back also measured just under 39%, thus prices underwent near-enough a 38.2% Fibonacci retracement of the July to December rally.

Signs of recovery in industrial activity Economic data across the globe seems to be steadily improving and that in turn should help underpin a recovery in industrial demand for Silver. Forecasts suggest global Technical – The July to December rally industrial production will rise 7% in 2010, ran for $7/oz, so a $2.7/oz pull back was after falling around 8% in 2009, which not too excessive. Prices then consolidated should open the way for some industrial between $16.76 and $17.79/oz, but have restocking, or at least stronger hand to recently moved above $18/oz which has mouth buying. This outlook does not seem made the chart look bullish again. A pull to have been missed by investors. back to retest the quality of support would not be surprising, but generally we expect Investors’ demand remains all important dips to remain well supported. Stochastics Despite an expected recovery in industrial are rebounding at present, but once the demand for Silver this year, the market is stochastics cross lower again we would be still expected to be in a supply / demand looking for downside jobbing surplus and as such the ongoing interest of opportunities, with the idea of then getting investors is going to remain all important. long into the next rebound off support. In 2009, ETF investors added 3,824 tonnes of Silver to their holdings, compared to Summary – Silver prices seem to have 2,327 tonnes in 2008 and 2,161 tonnes in found a base below $17/oz and if that level 2007. Even during the December sell-off holds, it will be a good springboard for redemptions only amounted to 21 tonnes, further gains. However, we still expect the so there has been no real let-up in interest. broader markets to undergo a downside However, with some 12,080 tonnes of correction and for the dollar to rebound Silver held in ETFs, there is considerable further, so would not be in a hurry to chase room for liquidation, once the investment prices here, but would prefer to wait to see climate changes. a further test of support. We would then look to buy into another rebound once an Funds cut the net long position by 15% underlying base has been confirmed. Even though ETF investors have not taken

5 Metal Matters January 2010

Silver Statistics 2005 2006 2007 2008 3Q 2009 4Q 2009 Nov-09 Dec-09 London Prices (US$/oz) Daily Fix 7.31083 11.55 13.39 15.02 14.70 17.58 17.82 17.67

Parity (London) prices Japan (Y/g) 25 41.68 48.88 48.47 42.63 48.75 48.76 49.19 India (Rupee/oz) 323 524.76 553.86 646.87 716.75 829.79 850.76 827.35

COMEX – futures contracts Stocks (Moz)* 109.6 112.4 129.2 134.1 116.6 112.6 111.9 112.5 Vol (million contracts) 5.5 5.4 7.6 8.31 1.99 3.05 1.59 0.68 OI (‘000 contracts)* 117.9 112.9 120.9 124.12 100.3 128.3 130.8 124.0

CFTC (Futures Only Data) non-commercial Net Positions * 39,986 34,830 30,780 33,672 32,622 42,687 45,199 38,721

TOCOM Stocks (Moz)* 0.6 0.36 0.43 0.37 0.24 0.23 0.25 0.22 Futures Vol (‘000 contracts) 818 859 536 301 15.5 29.2 9.7 ~ Futures OI (‘000 contracts)* 17.8 16.5 14.0 7.93 1.7 2.7 2.4 3.3

Other Indicators Gold/Silver ratio* 60.6 60.60 52.29 60.89 62.98 62.6 62.8 62.5

Silver Bullion Imports (tonnes) USA 4545 4681 4985 4676 UK 1250 5720 2943 2809 Japan 1141 1748 1389 1909 India 3343 535 1958 5048 Italy 1458 1329 1235 926 Hong Kong ** 2576 4384 3972 3082 China (exports) (3558) (4000) (4500) (4043)

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

6 Metal Matters January 2010

PGMs corrected along with Gold, but Palladium’s position climbed 356 have already set new 16-month highs contracts to 13,986 contracts. This The rebound in the dollar in December suggests the buying since the ETF prompted profit-taking across the precious announcement has been more physical metals. Palladium fell 12% in line with the orientated and probably done by financial pull back in Gold, while Platinum suffered institutions rather than by investors the least with an 8.5% decline. However, trading exchange traded products. the mood in the PGM’s soon turned bullish again on 23rd December once it emerged that the US Securities and Exchange Commission (SEC) had taken an important step towards allowing PGM ETFs to be listed on US exchanges, although final approval has not yet been given. In turn, this has attracted some up front buying in anticipation of a launch in the US.

Vehicle sales improve, but will it last Demand for vehicles has picked up in recent months and that is boosting sentiment for PGMs, but whether it lasts is a different matter. US December vehicle sales reached an annual rate of 11.3 million units, up from 10.9 million in November. Chinese sales reached 12 million units in the January to November period and in Europe sales are likely to have reached 13.6 million in 2009, with yoy gains in November of 27%. However, views within the industry are not that optimistic looking Technical & Summary– These weekly forward. The rebound in sales looks set to PGM charts look very similar, albeit fade and the industry is braced for a tough Palladium is outpacing Platinum, with the year (outside of China), especially as the former retracing to the 61.8% Fibonacci scrappage schemes may well have brought level, while Platinum is still $145/oz forward purchases to 2009 from 2010. below the 61.8% level. The up trends look robust with both metals now Investors and funds hold steady clearing former resistance levels from ETF investors have added 21,904 oz of 2006 and 2007. Platinum’s rally looks Platinum to their holdings since the end steady, while Palladium’s has of November, an increase of 3.3%, while accelerated, which suggests prices are Palladium investors added 27,836 oz, an becoming overbought and may need to increase of 2.4%. Interestingly, the consolidate. Both metals could easily pull prospects for PGM ETFs to be launched back to their uptrend lines and as a result in the US has not seen a noticeable surge we would lookout for range trading in ETF buying as since late December the opportunities. Given the strong gains holdings have been relatively stable. A already seen we would look for down mixed picture has been seen in the turns in the stochastic indicators to futures; in Platinum the net fund long provide short signals. Expect dips to be positions dropped 3,221 contracts in well supported. December to 19,259 contracts, whereas

7 Metal Matters January 2010

PGM Statistics 2005 2006 2007 2008 3Q 2009 4Q 2009 Nov-09 Dec-09 London Prices (US$/oz) Platinum 897 1,144 1,308 1,583 1,237 1,397 1,406 1,450 Palladium 200 323 357 355 274 351 354 375 Rhodium 2,039 4,555 6,198 6,549 1,603 2,186 2,361 2,422

Japanese Parity Prices (Y/g) Platinum 3,060 4,118 4,772 5,123 3,589 3,875 3,848 4,036 Palladium 684 1,162 1,305 1,147 796 977 979 1,045

South African Parity Prices (Rand/kg) Platinum 177,105 240,309 286,900 395,276 299,661 325,715 329,624 337,710

NYMEX Stocks ('000oz) Platinum 22.0 27.2 38 56 144 140.6 144.4 139.5 Palladium 710 1,037 508 425 466 650 668 661

CFTC Futures Only Data Long / (short) non-commercial Platinum 5,931 3,653 7,294 6,797 14,039 20,389 22,480 19,259 Palladium 5,271.1 4,875 8,243 7,062 11,009 13,507 13,630 13,986

Tocom - Platinum Stocks ('000oz) 15.7 14.0 10.7 14.1 19.8 19.6 20.3 18.7 Vol (Million contracts) 8.6 11.0 9.2 6.9 0.53 0.30 0.30 ~ OI ( '000 contracts) 136.9 105.8 95.2 52.3 34.5 40.6 40.8 42.2

Tocom - Palladium Stocks ('000oz) 22.6 25.8 17.8 25.7 19.2 14.9 14.4 14.0 Vol ('000 contracts) 323 361 208 684 18.3 23.4 7.8 ~ OI ( '000 contracts) 18.2 14.6 10.9 14.8 3.4 3.5 3.3 3.7

Other Indicators (US$/oz) Pt-Au spread 457 457 611 689 289 329 284 422 Pt-Pd spread 701 701 963 1,200 981 1,078 1,070 1,128

Platinum Bullion imports (kg) USA 85,300 114,000 161,380 150,066 127,058 Jan- Sep Japan 60,523 65,023 63,652 73,785 56,372 Jan-Nov

PalladiumBullion imports (kg) USA 112,000 119,000 112,600 120,810 40,450 Jan-Sep Japan 77,046 79,689 82,108 75,363 59,626 Jan-Nov

~ = data not available yet, italics = estimates

8 Metal Matters January 2010

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9 Metal Matters January 2010

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