160420 precious metals watch

Group Economics

Precious Metals Watch

Macro & Financial Markets Research

20 April 2016

Silver’s revenge Georgette Boele Co-ordinator FX & Precious Metals Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com

 Silver is back in favour…  …because of an improvement in the industrial demand outlook…  …and demand from investors  Silver prices have rallied sharply …  …and there was a sharp drop in the gold/silver ratio  We think that it is far from over …  …and our silver forecasts are under review

Silver is back in favour…

Silver has been the strongest performing precious metal year-to-date rallying by more than 23% versus the US dollar. Initially silver prices profited from the rally in gold prices at times that market sentiment deteriorated. More recently the behaviour of silver prices has changed. Whereas the rally in gold prices hit a ceiling of around USD 1,280 per ounce in March, silver prices have continued to rally. The overall outlook for silver has improved resulting in a sharp surge of investor positioning into silver. Why is silver back in favour?

Year-to-date performance %, with USD as basis

25 20 15 10 5 0 Silver

Gold

Platinum

Palladium

Source: Bloomberg, ABN AMRO Group Economics

…because of an improvement in industrial demand outlook…

The main difference between gold and silver is that silver has substantially more industrial applications than gold. When the overall outlook on China became less negative as Chinese data stabilised, the industrial demand outlook for platinum, palladium and silver improved. Also a stabilisation in the global PMI has helped. As a result, the negative

Insights.abnamro.nl/en

2

Precious Metals Watc ch - Silver’s revenge - 20 0 April 2016 6

sentim ment towards th hese cyclical prrecious metals eased and theey have started d to outperrform gold price es. as played a role in our view is er factor that ha s the announceement on 29 February of Anothe the Ind dian governme ent to levy a 1% % tax on gold je ewellery. The ggovernment has s as aim to reduce e the current acccount deficit; gold g and oil imports are mainnly responsible for this deficit.. It continues to o take measure es that aim to reduce r gold impports. This cou uld have supported Indian silvver imports. If th his proves to be correct the ddivergence betw ween gold and sillver imports sh hould continue (see graph below).

Gold and silver im mports India in mln US dolllars Gold imports

Silver importss

8,000 0

80 00

6,000 0

60 00

4,000 0

40 00

2,000 0

00 20

0

0 13

14

15

India gold imports (lhs)

16

India silver imports (rhs)

Source: Bloomberg,

‌and d demand from m investors In the period 2011 to o 2015 silver prrices fell by more than 55% orr 71% from its peak set 28 April 2011. No other precious metal has lost so much of its valuee up to now. Th his made silver a relatively che eap precious metal m at the starrt of this year. T This could have been an important reason for consumers an nd investors to buy silver. Silvver prices are supported s in a risk averse a environ nment as it mov ves in tandem with gold pricees while it also profits from a lowe er US dollar and d improvementt in the industrial demand outtlook. As a resu ult, investors have piled p into silverr positions. Spe eculative long positions in silvver have risen to a new alltime high, while net-p positions (longs s minus shorts) are at excesssive levels not seen since 2005 (graph ( below). Total ETF positions have also risen again.

Silverr speculative long and sho ort positionin ng Numbe er of contracts

Silver price

80,00 00

50

60,00 00

40

40,00 00

30

20,00 00

20

0

10 11

12

13

Net positions p (lhs)

14

15

Silver price (rhs)

Source: Bloomberg, ABN N AMRO Group Ec conomics

16

3

Precious Metals Watc ch - Silver’s revenge - 20 0 April 2016 6

More upside in silv ver prices fro om here?

There is one remarka able feature ab bout silver price e behaviour. Inn the period 201 12 to mid2013, behaviour of sp peculative inve estors dominate ed the directionn in silver price es. Since then sw wings in net-po ositioning have e been more su ubstantial than absolute price movements (see first graph abovve). What is mo ore, changes in total ETF pos itions seem no ot to have s since 2011 (th his in sharp coontrast to gold prices p that been a crucial driver of silver prices has a strong s positive e relationship with w total ETF positions). In facct these positio ons have modes stly increased w while silver pric ces fell sharply (see graph beelow). Thereforre, we are more cautious c in con ncluding that the silver rally is over because speculative long positions are at all-time high.

Total ETF position ns silver Million troy ounces

Silver price

70 00

60

60 00

50

50 00

40

40 00

30

30 00

20

20 00

10

10 00 0

0 0 08 09 10 11 12 13 14 4 15 16 04 05 06 07 Total ETF po ositions gold (lhs))

Silver prrice (rhs)

Source: Bloomberg, ABN N AMRO Group Ec conomics

ave also looked d at various oth her silver ratios. For a start, B Brent oil/silver ratio is on We ha very lo ow levels and w we expect a pic ck-up because of Brent oil pricces outpacing silver prices before the end of thiss year. The cop pper/silver, platinum/silver annd palladium/silver ratios are relatively low and d we expect so ome higher leve els going forwaard. Last not bu ut least, the gold/siilver ratio has d dropped by aro ound 12% overr the recent weeeks. This may be a consid derable move, b but in historical context it is ju ust a start (see graph below).

Gold//silver ratio Numbe er of contracts

110 100 90 80 70 60 50 40 30 20 90 92 94 96 98 00 02 04 06 08 10 12 14 16 Gold/silver raatio Source: Bloomberg, ABN N AMRO Group Ec conomics

4

Precious M Metals Watc ch - Silver’s revenge - 20 0 April 2016 6

The long-term averag ge in the gold/s silver ratio is around 57 (sincce 1970s). We think that a move back to 60 in th he gold/silver ratio r is quite likely. However, tthis means tha at silver prices will have to rallly far beyond our o current silv ver price forecaasts while gold prices will then only rise modesstly.

China’s support mea asures are supp portive for car sales s and fearss that China’s commodity c deman nd is plunging a are receding. In addition, we expect econom mic data from the US and the eurozone to imprrove during the e course of this year and nextt year. Hence, the t demand outlook for platinum, palladium and d silver will likely improve resuulting in furtherr upside in prices.. Overall it lookks like that our forecasts for cyclical preciouss metals and especially e silver are a too conservvative.

ABN AMRO precio ous metals fo orecasts Change es in red/bold End pe riod Gold Silver Platinum m Palladiuum

20-Apr De c-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-177 Jun-17 Sep-17 Dec-117 1,253 1,,061 1,233 1,300 1,350 1,370 1,3700 1,400 1,425 1,4550 13.9 15.38 16.50 17.00 17.50 17.500 18.00 18.50 19.000 17.1 894 976 1,000 1,050 1,100 1,1255 1,150 1,200 1,2550 1,021 562 563 620 593 640 660 6800 700 720 7440

Average Gold Silver Platinum m Palladiuum

Q1 16 1,181 14.9 975 527

Q2 16 1,266 15.9 988 592

Q3 16 1,325 16.8 1,025 630

Q4 16 1,360 17.3 1,075 650

2016 Q1 17 Q2 177 Q3 17 Q4 17 20117 1,283 1,370 1,3855 1,413 1,438 1,4001 16.2 17.5 17.88 18.3 18.8 188.1 1,016 1,113 1,1388 1,175 1,225 1,1663 600 670 6900 710 730 7000

Source: ABN AMRO Grouup Economics

nd out more abo out Group Eco onomics at: http ps://insights.a abnamro.nl/en n/ Fin

SCLAIMER DIS This document has been prepared by ABN AMRO O. It is solely intended to provide financial annd general information on economics. The infformation in this docum ment is strictly proprieta ary and is being supp plied to you solely for yyour information. It mayy not (in whole or in parrt) be reproduced, distr tributed or passed to a third party or used for any other purposes thhan stated above. This document is inform mative in nature and d does not constitute an offer o of securities to the e public, nor a solicitatition to make such an offer.

No re eliance may be placed d for any purposes wha atsoever on the informa ation, opinions, forecassts and assumptions co ontained in the docume ent or on its completenness, accuracy or fairness. No repre esentation or warranty,, express or implied, iss given by or on behalf of ABN AMRO, or anyy of its directors, officerrs, agents, affiliates, grroup companies, or em mployees as to the accu uracy or comp pleteness of the inform mation contained in thiss document and no liab bility is accepted for any ny loss, arising, directly y or indirectly, from any y use of such informatioon. The views and opin nions expressed herein may be subject to ch hange at any given tim me and ABN AMRO is under u no obligation to uupdate the information n contained in this docu ument after the date the hereof. oduct of ABN AMRO Ba ank N.V., you should obtain o information on va various financial and oth her risks and any poss sible restrictions that yoou and your investmen nts activities may Before investing in any pro enco ounter under applicable e laws and regulations.. If, after reading this document, d you consideer investing in a produc ct, you are advised to discuss d such an investm ment with your relation nship manager or perso onal advisor and checkk whether the relevant product –considering the risks involved- is aappropriate within your investment activities. The value of your invesstments may fluctuate.. Past performance is no o guarantee for future rreturns. ABN AMRO re eserves the right to mak ke amendments to thiss material. © Co opyright 2016 ABN AM MRO Bank N.V. and affi filiated companies ("AB BN AMRO").