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 Shanghai 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Friday before the sell- which is 32 percent higher than the off, China released data on its official Gold 1,062 tonnes withdrawn in the same reserves, which had climbed 604 tonnes in period in 2014 and it is even above the six years – the market seemed disappointed 1,301 tonnes withdrawn in the same with the news.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 central bank 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 $890/oz. With will be in the next chapter? investors showing little buying interest we now feel supply and demand factors Potential bullish events – Given the current will determine prices more, so prices outlook and lack of investor interest, we feel may need to fall to levels that prompt the most likely event that could step in to production cuts. 3 Metal Matters August 2015 Gold Statistics 2011 2012 2013 2014 Q1 2015 Q2 2015 Jun-15 Jul-15 London Prices (US$/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$/oz 1,526 1,582 1,454 1,403 1,557.4 1,535 1,534 1,523 South Africa Rand/kg 368,623 440,575 433,964 440,562 462,002 463,140 467,180 451,590 Japan Y/g 3,868 4,127 4,252 4,146 4,521 4,485 4,535 4,320 India Rupee/oz 73,266 89,126 81,973 77,077 76,241 75,488 75,306 71,714 COMEX - futures contracts Stocks ('000oz) 10,938 11,138 8,103 8,203 8,074 7,919 8,043 7,571 Vol (million contracts) 47.75 43.88 46.27 40.52 11.39 9.63 2.86 4.55 OI ('000 contracts) 482 432 398 380 405 415 442 434 CFTC (futures only data) Net Spec position Long (Short) 169,667 156,655 68,381 98,265 131,705 100,355 95,114 24,465 TOCOM Stocks ('000oz) 120 136 120 146 124 123 123 124 Volume ('000 contracts) 16,073 10,772 12,223 8,744 2,298 1,823 631 700 OI ('000 contracts) 123 138 111 88 96 98 96 85 Other Indicators FT Au Mines Index 3,716 3,051 1,789 1,409 1,265 1,173 1,087 830 Dow Jones Index 12,085 13,005 15,090 16,837 17,833 17,827 17,620 17,712 US$ 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 Hong Kong /China** 431 892 2192 2,192 India 1211 1071 961 961 Italy 87 109 107 107 Japan (126) (84) 28 28 Singapore 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.