ScotiaMocatta
Metal Matters
November 2014
Precious metals consolidated in October but not for long as Gold and
Silver prices have since set fresh multi-year lows. The precious metals
complex as a whole looks oversold.
 The Gold price broke below key support from a triple bottom
around the $1,180/oz level – this opened up the path to the
downside, with $1,000/oz now in focus.
 A more hawkish FOMC statement in late October hit Gold hard
as it brought forward the likelihood of monetary tightening.
 Japan’s move to increase stimulus has given global equity
markets a boost sending many to new highs, further increasing
the opportunity cost of holding Gold.
 Once the current wash-out in Gold finishes, we expect prices
will be set more by changes in physical demand. With that in
mind we note that China’s imports have picked-up markedly.
 Lower Gold prices should also prompt restocking, but first the
sell-off will likely have to run its course.
Silver prices continue to accelerate to the downside; the Gold / Silver
ratio has climbed to 1:75. Prices look increasingly oversold.
 The fund position is polarised again. We wait to see whether
shorts start to cover, or whether longs ‘throw in the towel’.
PGM prices continue to be dragged lower by the weakness in Gold – we
feel the fundamentals will lead to rebounds before too long.
 On our radar are the possibility of power shortages in South
Africa and developments over Norilsk’s interest in buying
Palladium from the Russian central bank.
Metal Matters
November 2014
Gold’s break below triple bottom at
$1,180/oz opens a new chapter for prices
The relentless downward pressure on Gold
prices continued in late October, with prices
breaking down through support at $1,180/oz
to set a fresh low at $1,137.80/oz – a level
not seen since July 2010. Having tested
support with a low of $1,183.30/oz in early
October, prices managed to rebound to
$1,255.40/oz on a mixture of short-covering
and bargain hunting, but then a more
hawkish than expected FOMC statement led
to another sell-off that saw prices set fresh
multi-year lows. Given that the $1,180/oz
level had become a significant support level,
its breaking does open up the path to the
downside and that in turn will no doubt
increase the market’s focus on the $1,000/oz
level. It is possible that the break of
$1,180/oz was an overshoot, as the end of
quantitative easing (QE) and move towards
tighter monetary policy were hardly a
surprise, but the longer prices do not climb
back above $1,180/oz the more likely it is
that prices will head lower.
the net long fund position (NLFP)
recovering to 107,984 contracts on 21st
October from a low of 63,884 contracts
on 23rd September. In the second half of
the month, the NLFP has dipped to
100,739 contracts on the back of 11,244
contracts of long liquidation and 3,999
contracts of short-covering. As the chart
shows, the gross long and gross short
positions are still near recent highs so
there is the possibility that, given the
low price, longs bail out while shorts
might be tempted to take profits.
Whichever group makes the first move
is likely to set the next price direction.
Stronger dollar erodes confidence in Gold
Gold prices were already struggling with the
high opportunity cost of holding Gold and
the relentless rise in the dollar has now
added to its woes. The dollar received a
boost from the late-October FOMC
statement and more recently from Japan’s
extra stimulus measures that weakened the
yen to 114 from around 108. The dollar
index has climbed to 87 from around 85 in
October. With diverging monetary policies
(tighter policy expected in the US and UK
and weaker policy in Japan and Europe) the
fundamentals for the dollar are likely to
remain bullish, although it could be argued
that it is overbought in the short term. Any
pullback would likely prompt a rebound in
Gold and that in turn could trigger shortcovering.
ETF redemptions continue
Investors continue to cut their exposure
to Gold ETFs with the combined
holdings we follow dropping to 1,646
tonnes, down from 1,676 tonnes at the
end of September and 1,758 tonnes at
the start of the year. As a barometer to
how bullish investor sentiment is, this is
a big dampener. Should investors turn
buyers again then we would expect any
upturn in ETF holdings would quite
quickly instill confidence in the market.
Funds, fresh buying and short-covering
The funds trading on Comex were initially
adding to both their gross long and short
positions in the first half of October, with
2
Metal Matters
Physical demand likely to drive prices
For now, investors seem to be losing interest
in Gold as their confidence in the financial
system has been restored and as other asset
classes offer better prospects. Indeed, with
some banks moving out of the commodities
arena and with some hedge funds exiting
commodities given disappointing returns
and muted inflation, the Gold market is
having to adjust to fewer players being
involved and that might well be what is
driving redemptions in the ETFs. As interest
from the financial side of the market is
reduced, then the physical side of the market
is likely to gain in influence. Here we are
talking about demand for Gold for jewellery
and retail physical demand for coins and
bars.
China’s imports rebound
The latest export data from Hong Kong
showed a net 68.6 tonnes of Gold were
shipped to China in September, up from
27.5 tonnes in August. There has been
considerable concern about the lower level
of Chinese imports this year, but after record
levels last year, it stands to reason that there
has been some destocking – September’s
rebound may mean the destocking has run
its course. Our general view is that the
upwardly mobile Chinese population will
prompt considerable organic growth in retail
demand for Gold. In India, premiums have
picked up again and we would not be
surprised if pent-up demand has taken
advantage of the fresh lows in price.
Swiss referendum
The Swiss Gold referendum will be held on
30th November; if passed it will mean the
Swiss National Bank would be required to
hold at least 20 percent of its reserves in
Gold, which would require some 1,500
tonnes to be bought over a five year period.
On its own this would be a supportive
factor, but much would depend on whether
other countries follow suit. The latest poll
suggests 38 percent of voters would support
the measure, while 47 percent are opposed
to it.
November 2014
Technical – The break below $1,180/oz
opens the path to the downside and puts
the $1,000/oz psychological level in
focus. The break also triggered a
descending triangle formation /
continuation pattern that has a count of
some $250/oz that would take prices
back below the $1,000/oz level. It would
take a move back above $1,180$1,200/oz to suggest the break of
$1,180/oz was the result of an overshoot
on the downside, and a move back above
the down trend line at $1,260/oz to
negate the bearish chart outlook.
Summary – The break below $1,180/oz
will probably turn out to be a gamechanger in that it may well see the
downward trend extend towards the
$1,000/oz level as the market adjusts to
the changing financial environment that
the end of QE and tighter US monetary
policy brings. Longer term, we would
not give up on Gold as we feel there are
many issues that have still not been
resolved; governments’ reactions to the
financial crises have bought time, but in
doing so have created a lot of debt that
could still cause considerable concern
about the value of paper money in which
the debt is denominated. Should the
ECB go down the route of QE then we
would imagine European investors may
well increase their holdings of physical
bullion as there is a historical stigma of
money printing, especially in Germany.
In the short term, the path of least
resistance is to the downside, but lower
Gold prices are likely to prompt physical
buying and that on its own might be
enough to trigger short-covering.
3
Metal Matters
Gold Statistics
London Prices (US$/oz)
AM fix
Pm fix
Average
November 2014
2010
2011
1225.46
1224.76
1225.11
Parity prices
Australian - A$/oz
1,332
South Africa Rand/kg
278,299
Japan Y/g
3,327
India Rupee/oz
56,264
Lease Rates
1 Month *
-0.08
3 Month *
-0.06
6 Month *
0.04
12 Month *
0.32
COMEX - futures contracts
Stocks ('000oz)
10,748
Vol (million contracts)
43.91
OI ('000 contracts)
554
CFTC (futures only data)
Net Spec position Long (Short)
213,602
TOCOM
Stocks ('000oz)
141
Volume ('000 contracts)
11,003
OI ('000 contracts)
109
Other Indicators
FT Au Mines Index
3,340
Dow Jones Index
10,635
US$ Index
81.3
Gold Bullion Imports, tonnes (exports)
Dubai
65
Hong Kong /China**
228
India
1123
Italy
109
Japan
19
Singapore
112
South Korea
27
Taiwan
12
Turkey
42
2012
2013
Q2 2014
1573.16
1571.52
1572.34
1668.50
1668.82
1668.66
1410.80
1411.03
1410.92
1288.65
1288.54
1288.60
1283.78
1281.93
1282.85
1241.33
1238.82
1240.08
1223.57
1222.49
1223.03
1,526
284,314
3,868
73,266
1,582
13,679
4,127
89,126
1,454
13,516
4,252
81,973
1,381
13,570
4,079
76,893
1,386
13,791
4,129
77,573
1,367
13,581
4,120
75,347
1,396
13,559
4,093
74,930
-0.14
-0.06
0.11
0.35
-0.15
-0.03
0.16
0.45
0.10
0.15
0.23
0.44
0.18
0.22
0.28
0.44
0.08
0.07
0.10
0.18
0.07
-0.10
-0.14
-0.23
0.20
-0.02
-0.09
-0.18
10,938
47.75
482
11,138
43.88
432
8,103
46.27
398
8,150
8.83
386
9,335
9.44
371
9,147
3.21
378
8,101
3.70
417
169,667
156,655
68,381
120
16,073
123
136
10,772
138
120
12,223
111
144
1,707
92
137
1,975
96
137
792
97
137
1,000
90
3,716
12,085
76.3
3,051
13,005
80.3
1,789
15,090
81.3
1,488
16,677
80.0
1,516
16,898
83.4
1,345
17,022
85.9
1,113
17,366
86.9
65
431
1211
87
(126)
150
24
16
125
240
892
1071
109
(84)
140
22
14
147
92,028
Q3 2014
105,731
Sep-14
Oct-14
64,870
100,739
350
2,192
961
107
28
225
24
20
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
November 2014
Silver prices extend lower to $15.15/oz to
levels not seen since February 2010
The sell-off in Silver has been relentless,
with prices falling 30 percent from the July
high at $21.60/oz. Prices have now retraced
84 percent of the gains that were seen
between 2008 and 2011. The low in 2008
during the financial crisis was $8.49/oz.
The sell-off in Silver has been more severe
than the pull-back in Gold, which has seen
the Gold/Silver ratio climb to 1:75, the
highest it has been since the early days of
the financial crisis. All in all, this does
make Silver look particularly oversold, but
that is not to say that it cannot become
more oversold, which could happen if ETF
holders, or the fund longs decided to ‘throw
in the towel’.
in pain, while the shorts are sitting on large
profits that could be reduced if prices start
to rally, we would not be surprised to see
some short-covering ahead of the expiry of
the December contract.
The funds’ remain extremely polarised
The net long fund position (NLFP) dropped
to 5,932 contracts at the end of October,
having peaked at 49,278 contracts on 15th
July after a low of 766 contracts in early
March. The gross long and short positions
are large, meaning the market is becoming
polarised again as it was in June. With the
funds holding 57,469 longs and 51,537
shorts, it is likely that there will either be
long liquidation or short-covering before
too long. With Silver prices continuing to
fall the longs must be suffering, but the
shorts, who will be sitting on large
unrealized profits, may also be getting
worried about becoming too greedy. If long
liquidation or short-covering get going then
we would expect that to lead to some fast
price moves. Given that the longs have not
flinched during the sell-off and are already
Technical & Summary – The break of
support around $19/oz and the June lows
around $18.67/oz opened the path to the
downside and the market is now looking
for a support level that holds. The two
horizontal lines on the chart are at
$14.66/oz and $11.80/oz. The chart clearly
shows the downtrend dominates; the daily
chart (not shown) shows an oversold
market, but prices can always get more
oversold as has been shown in recent
weeks. So for now it is one of those
occasions where we need this sell-off to run
its course. Given how oversold prices are,
as seen by the price and the Gold/Silver
ratio, we expect a significant rebound at
some stage (especially given the large gross
short position) but there is no point trying
to bottom-pick.
ETF investors generally hold firm
Holdings in the ETF we follow dropped
330 tonnes in October to 19,742 tonnes and
are down just 1.6 percent from the 20,073
tonne record level held in early October.
This low level of redemptions, combined
with the limited amount of fund long
liquidation on Comex, implies investors are
prepared to hold Silver for the long term. If
investors have seen prices drop $34/oz
from the 2011 high and $6.60/oz from the
July high, then it suggests their pain
threshold is already high – that said, there
is no room for complacency.
5
Metal Matters
November 2014
Silver Statistics
2010
2011
2012
2013 Q2 2014
London Prices (US$/oz)
Daily Fix
20.16
35.12
31.15
23.83
19.62
Parity (London) prices
Japan (Y/g)
India (Rupee/oz)
54.53
925.1
86.78
1641.7
77.06
1658.6
71.66
1,380.7
COMEX – futures contracts
Stocks (Moz)*
Vol (million contracts)
OI (‘000 contracts)*
108.6
12.5
129.6
96.4
19.4
117.1
135.4
13.5
124.2
165.9
14.5
136.0
CFTC (Futures Only Data) non-commercial
Net Positions *
36,412 21,783
23,393
TOCOM
Stocks (Moz)*
Futures Vol (‘000 contracts)
Futures OI (‘000 contracts)*
11,929
Sep-14
Oct-14
19.74
18.49
17.19
62.18
1170.5
96.72
1800.9
61.43
1123.5
57.53
1053.2
178.7
3.7
156.3
179.6
3.1
163.0
183.5
1.0
169.9
179.8
1.0
177.3
16,178
Q3 2014
24,421
6,626
5,932
0.3
235.4
5.6
0.25
375.6
8.1
0.23
110.8
4.9
0.14
96.4
4.1
0.22
20.6
4.7
0.21
15.6
4.37
0.21
5.1
4.8
0.21
9.2
4.8
Other Indicators
Gold/Silver ratio*
60.9
45.89
53.35
59.98
65.1
67.43
71.1
74.0
Silver Bullion Imports (tonnes)
USA
Japan
India
Italy
Hong Kong
China (exports)
3775
2994
3030
701
2671
900
5253
1775
4087
440
1162
4250
4037
1562
1900
426
930
5057
3835
1688
5819
679
948
5186
* figures are period averages unless marked; ~ not available yet, italics = estimate.
6
Metal Matters
November 2014
PGMs rebounded aggressively, but
lacked conviction, now testing support
From the summer peaks to the October
lows Platinum prices fell 21.8 percent and
Palladium dropped 20 percent. Both metals
have since rebounded, with Palladium
climbing 10.4 percent to $808.50/oz and
Platinum rising 8.8 percent to $1,293/oz,
but a lack of follow through buying
pressure has seen the rallies stall and prices
drop back. The October low in Platinum
was $1,188/oz, prices are last at $1,197/oz,
and the low in Palladium was $729 and
prices are last at $755/oz. The relentless
weakness in Gold and the strong dollar
seem to be dragging the PGM prices lower
at a time when the metals’ fundamentals
seem bullish. As such, we feel these
weaker prices will lead to some medium
term buying opportunities.
Other issues – There are two other issues
that warrant watching. Firstly, the South
African power utility, Eskom, seems to be
struggling to produce enough electricity
which could impact PGM production if the
situation deteriorates. Secondly, reports
that Norilsk is looking to buy Palladium
from the Russian central bank has raised
concern that Russian stockpiles might not
be as depleted as the market thought. If the
stockpiles switch to a commercial
enterprise then they may be made more
readily available to the market which could
offset the forecast for a supply deficit.
Fund activity weighs on prices
The net long fund positions (NLFP) on
Platinum and Palladium have both been
falling in recent weeks on the combination
of long liquidation in both metals, while
Platinum has also seen fresh short selling,
although Palladium has experienced light
short-covering. At the end of October the
NLFP on Platinum stood at 20,950
contracts, down from 40,547 contracts in
early September, and the Palladium
position fell to 20,584 contracts from
28,582 contracts over the same period, but
as the chart above shows, Platinum has
been hit the most since the summer.
Investors’ ETF activity was mixed in
October with holding in Platinum falling
1.5 percent, while Palladium holdings
increased 2.3 percent.
Technical – The weakness in both PGMs
continues; they experienced counter-trend
moves in October, but are once again
looking weak as prices retest earlier
support levels. Once support is found to be
in place we would expect rallies to unfold
as we view the PGMs as being oversold,
but it may be some time before confidence
returns.
Summary – With Gold prices under severe
pressure it is perhaps not surprising that
confidence is lacking in the precious
metals complex. We do feel the
fundamentals are bullish for the PGMs and
therefore see these lower prices as
providing a medium term buying
opportunity – we expect rebounds will be
aggressive when they get going.
7
Metal Matters
November 2014
PGM Statistics
2010
London Prices (US$/oz)
Platinum
1,616
Palladium
529
Rhodium
2,456
1,725
737
2,026
1,569
645
1,272
1,491
727
1,061
1,453
826
1,110
Japanese Parity Prices (Y/g)
Platinum
4,398
Palladium
1,432
4,268
1,824
3,881
1,596
4,501
2,198
South African Parity Prices (Rand/kg)
Platinum
367,518 385,179
398,403
195.8
566
NYMEX Stocks ('000oz)
Platinum
126.2
Palladium
619
2011
137.4
542
2012
CFTC Futures Only Data Long / (short) non-commercial
Platinum
20,270
23,041
26,929
Palladium
13,532
10,950
8,809
2013
Q2 2014
Q3 2014
Sep-14
Oct-14
1,441
871
1,291
1,370
849
1,314
1,267
783
1,231
4,599
2,614
4,635
2,803
4,550
2,822
4,241
2,620
443,938
474,327
480,359
465,006
435,491
276
657
244.9
384
154.8
288
145.9
269
137.0
238
30,680
22,369
43,824
22,986
37,277
25,059
23,667
20,922
20,950
20,584
Tocom - Platinum
Stocks ('000oz)
Vol (Million contracts)
OI ( '000 contracts)
20.1
3.9
52.6
26.6
3.4
49.8
35.9
3.4
50.2
38
4.3
55.7
37.4
1.1
69.3
46.0
1.1
88.0
53.7
0.39
83.1
53.6
0.55
84.6
Tocom - Palladium
Stocks ('000oz)
Vol ('000 contracts)
OI ( '000 contracts)
12.7
137
3.9
10.8
110
2.9
6.0
60
2.3
4.4
79
2.0
2.7
15.1
2.3
2.8
24.6
2.3
2.2
9.9
2.2
2.2
9.1
1.9
Other Indicators (US$/oz)
Pt-Au spread
392
Pt-Pd spread
1,079
145
977
-110
911
97
754
172
621
117
539
60
479
56
443
Platinum Bullion imports (kg)
2010
USA
Japan
151,830
53,663
PalladiumBullion imports (kg)
2010
USA
70,710
Japan
70,241
2011
129,090
62,230
2011
98,900
66,484
2012
171,724
48,359
2012
80,000
53,836
2013
115,765
48,336
2013
83,200
58,571
2014
59,516
21,808
(Jan-July)
(Jan -Sep)
2014
57,350 (Jan-July)
44,915 (Jan -Sep)
~ = data not available yet, italics = estimates
8
Metal Matters
November 2014
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9
Metal Matters
November 2014
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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.
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