160322 precious metals weekly

Insights.abnamro.nl/en

Precious Metals Weekly

22 March 2016

More bullish on gold

Gold as risk asset

Gold is often referred to as a safe-haven asset. However, in the current environment gold

prices behave as a risky asset. Gold is not even coming close in behaving as safe-haven

asset. Based on the 90-day rolling correlation gold prices have a positive relationship with

copper prices, with US equity markets (Dow Jones), 10y US Treasury yields but a

negative relationship with equity volatility (VIX, see below). So all these relationships are

opposite of what you would expect from a safe-haven asset. This behaviour does not

come as a surprise to us as we argued in numerous publications that gold has

substantially lost its safe-haven characteristics.

Correlation Gold prices with VIX and 10y US yield

Correlation, 90-day rolling

Source: Bloomberg, ABN AMRO Group Economics

Change in US dollar view makes us more positive on precious metals…

Recently, we revised our overall US dollar outlook. We now believe that the multi-year US

dollar rally has peaked and that it will turn lower. We have laid out our arguments in the

publication FX Watch – The dollar rally is over. What consequences does this change in

view have for our outlook for precious metals? In short, it is positive. Over the recent

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Jan 15 Apr 15 Jul 15 Oct 15 Jan 16

Gold vs VIX Gold vs US 10-year

Group Economics Macro & Financial Markets

Research

Georgette Boele

Co-ordinator FX & Precious Metals

Strategy

Tel: +31 20 629 7789

[email protected]

Gold behaves like a risky asset…

…and the underlying sentiment remains strong

Change in our US dollar view makes us more positive on precious

metals

Cyclical precious metals to outperform gold

Our new year-end gold price forecast is USD 1,370 per ounce

https://insights.abnamro.nl/en/2016/03/fx-watch-the-dollar-rally-is-over/

mailto:[email protected]

2 Precious Metals Weekly - More bullish on gold - 22 March 2016

years, the most dominant driver for gold prices has been the direction of the US dollar. As

we are now expecting a lower dollar over the coming years, a crucial headwind is taken

away.

Correlation Gold prices with US dollar

Correlation, 90-day rolling

Source: Bloomberg, ABN AMRO Group Economics

…next to the downward pressure real US yields

From 2012 to November 2015, US real yields (2y yield- CPI) have been on an upward

trend (becoming less negative). This has been a support for the US dollar and a negative

driver for gold prices. However, since November 2015, they have turned into negative

territory again. In general, negative real yields are supportive for gold and other

commodity prices because they don’t pay a coupon or dividend.

We think it is unlikely that the Fed will surprise financial markets by becoming more

hawkish than expected in the future because the Fed will not be happy with too much US

dollar strength. We expect the Fed to remain on hold this year which will likely put a

downward pressure on real yields. Financial markets have priced in a high probability of

one rate hike this year. When this is priced out, the US dollar will likely move lower and

precious metal prices will rise. In short, gold prices will be supported if financial markets

price out Fed rate hikes this year and because of the downward pressure on US real

yields.

Gold price and 2y US real yields

Gold price 2y US real yields (inverse scale)

Source: Bloomberg

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Gold vs TWI US

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1,400

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Gold price (lhs) 2y US real yields (rhs)


Even if the Fed were to hike more aggressively than expected this may not be dollar

positive. For instance, in a situation where inflation or inflation expectations were to rise

more substantially than expected, this would likely weigh on the US dollar. In such a

situation, financial markets would believe that the Fed is behind the curve, which is

negative for a currency. This should be positive for gold prices as investors will likely buy

gold because of lower US real yields and as some may see gold as a possible inflation

hedge. Therefore, gold prices will unlikely suffer next year when we expect gradual Fed

rate hikes.

Cyclical precious metals to outperform gold…

Between June 2015 and March 2016, gold prices outperformed platinum, palladium and

silver prices. Last year, the floor under platinum prices was removed at the time of the

emission scandal. As a result, investors aggressively liquidated positions in platinum and

palladium. Prices of these precious metals dropped at a faster pace than gold prices. This

year the gold/platinum ratio moved above the 1.33 level several times (very extreme); also

on 3 March. The U-turn came earlier this month. When platinum prices broke above the

200-day moving average, the technical sentiment improved substantially; signaling that

the downtrend may be over. This was an important signal for investors who considered

that prices had already been at unrealistically low levels.

…also because of an improvement in demand outlook

The US employment report in March has played an important role in a further

improvement in investor sentiment towards cyclical precious metals. This report has

fueled optimism that the US economy and also the world economy may not be as weak as

feared. As a result, expectations on the demand outlook have been adjusted upwards.

Gold and silver prices are less sensitive to changes in outlook of cyclical demand than

platinum and palladium. Therefore, platinum and palladium prices mainly profited from this

improvement in sentiment. This is surprising as industrial demand is also very important

for silver. This might be because silver often trades in tandem with gold as a currency.

Further outperformance of cyclical precious metals

Going forward we expect higher precious metal prices during the course of this year. More

monetary stimulus by central banks should support investor sentiment and the overall

cyclical demand and jewellery demand outlook, resulting in a further outperformance of

the cyclical precious metals compared to gold this year and next year.


ABN AMRO precious metals forecasts

Changes in red/bold

Source: ABN AMRO Group Economics

New

End period 22-Mar Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17

Gold 1,251 1,061 1,250 1,300 1,350 1,370 1,370 1,400 1,425 1,450

Silver 15.9 13.9 16.00 16.50 17.00 17.50 17.50 18.00 18.50 19.00

Platinum 982 894 980 1,000 1,050 1,100 1,125 1,150 1,200 1,250

Palladium 600 562 600 620 640 660 680 700 720 740

Average Q1 16 Q2 16 Q3 16 Q4 16 2016 Q1 17 Q2 17 Q3 17 Q4 17 2017

Gold 1,156 1,275 1,325 1,360 1,279 1,370 1,385 1,413 1,438 1,401

Silver 14.9 16.3 16.8 17.3 16.3 17.5 17.8 18.3 18.8 18.1

Platinum 937 990 1,025 1,075 1,007 1,113 1,138 1,175 1,225 1,163

Palladium 581 610 630 650 618 670 690 710 730 700

Old

End period 22-Mar Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17

Gold 1,251 1,061 1,200 1,225 1,250 1,300 1,300 1,300 1,300 1,300

Silver 15.9 13.9 15.0 15.5 16.0 16.5 17.0 17.5 18.0 18.5

Platinum 982 894 950 975 1,000 1,050 1,075 1,075 1,100 1,200

Palladium 600 562 525 550 575 600 625 650 675 700

Average Q1 16 Q2 16 Q3 16 Q4 16 2016 Q1 17 Q2 17 Q3 17 Q4 17 2017

Gold 1,131 1,213 1,238 1,275 1,214 1,300 1,300 1,300 1,300 1,300

Silver 14.4 15.3 15.8 16.3 15.4 16.8 17.3 17.8 18.3 17.5

Platinum 922 963 988 1,025 974 1,063 1,075 1,088 1,150 1,094

Palladium 543 538 563 588 558 613 638 663 688 650


Find out more about Group Economics at: https://insights.abnamro.nl/en/

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