160906 precious metals watch new gold and silver forecasts

Group Economics

Precious Metals Watch

Macro & Financial Markets Research

06 September 2016

New gold & silver forecasts  The rally in gold and silver prices is running out of steam…

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

 …as Fed rate hike expectations have resurfaced  We now expect a period of consolidation…  …as long as Fed rate hikes for 2016 and 2017 are not fully priced in…  …followed by higher gold and silver prices afterwards

The gold rally is running out steam…

So far in Q3, gold prices have rallied by just 0.8% which is rather disappointing. We had expected a stronger rally for several reasons. First, we had expected a larger Brexit fallout on financial markets reflected in negative investor sentiment. As a result, investors would move into gold (and to a lesser extent silver) for safe haven reasons. In fact, this did not materialise as investor sentiment on financial markets improved also helped by the recent stronger-than-expected UK data. Second, our main scenario was that the Fed would remain on hold in 2016. However, recently we moved to a 25bp rate hike in December 2016. Comments from Fed officials and stronger-than-expected US data have triggered expectations that the Fed will hike this year. This has supported the US dollar as US real rates have moved slightly higher (less negative). The rise in the US dollar and US real rates and lower safe have demand have weighed on gold prices in Q3. This is reflected in lower investor demand in the futures markets and for gold ETFs.

Some cutback in net long positions…

…and slightly lower demand for gold ETFs

Number of contract

In mln ounces

500,000

Gold price

100

2,200

80

1,800

60

1,400

400,000 300,000 200,000 100,000

1,000

40

0 10

11 12 Long contracts

13 14 Short contracts

Source: Bloomberg, ABN AMRO Group Economics

15

16 Net positions

10

12

14

Total ETF positions gold (lhs) Source: Bloomberg, ABN AMRO Group Economics

Insights.abnamro.nl/en

16 Gold price (rhs)

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Precious Metals Watc ch - New gold & silver fo orecasts - 06 Septembe er 2016

‌but no change in n trend Expectations of a Fe ed rate hike this s year came 3 months earlierr than we had fo oreseen.

Thereffore, gold price es did not rally as we had exp pected. Fed ratee hike expecta ations will likely remain r a theme e for the comin ng time.

Expectations of F ed rate hikes s has weighed d on gold Gold priice

Fed funds futures (inverse scalee)

0.3

1,400

0.5

1,300

0.8 1,200

1.0 1,100

1.3

1,000 J 16 Jan

1.5 Ma ar 16

May 16 1

Jul 16

Fed Funds Decc 2016

Gold price

Sep 16

Fed Funds F Dec 2017

Source: Bloomberg, ABN N AMRO Group Ec conomics

Our vie ew is for the Fe ed to hike the policy p by 25bp at each of the December, June 2017 and De ecember 2017 meetings. Currrently, a 25bp rate hike in Deecember is for 60% priced in by fiinancial marke ets. For 2017 fin nancial markets have barely ppriced in rate hikes. h Financ cial markets willl likely anticipa ate Fed rate hik kes for 2017 ass well this yearr and/or the start of next year. Th his will likely continue to weigh h on gold and ssilver prices. However, we don’t expect e a brutal sell-off. Our base b scenario suggests s that U US economic growth g will remain n moderate, im mproving only sllightly in 2017. Such a resultt will be supporrtive for gold and sillver prices for tthe following re easons 1.

In nflation will like ly be higher tha an growth

2.

Real R interest rattes are forecas st to remain neg gative (less neg egative though)

3.

The longer-term m US dollar tren nd has turned negative n

Expectations of F ed rate hikes s has weighed d on gold Gold priice

US real yield ds (inverse scale)

2,0 000

-4

1,8 800

-3

1,6 600

-2

1,4 400

-1

1,2 200

0

1,0 000

1 11

12 Gold pricee (lhs)

13

14

15

16

US real yield (rhs), in nverse scale

Source: Bloomberg, ABN N AMRO Group Ec conomics

Thereffore, we hold o on to our view that the uptrend d in gold and s ilver prices rem mains in place. However, the prospect of Fe ed rate hikes wiill weigh on golld and silver prrices and therefo ore we have ad djusted our fore ecasts. We now w see a consollidation in gold prices for

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Precious Metals Watc ch - New gold & silver fo orecasts - 06 Septembe er 2016

the coming quarters meaning that they t will likely move m in a USD D 1,300 to 1,350 trading range. Silver prices w will likely be mo ore volatile. Therefore the rannge will likely be b USD 18.5 to 20.5 5 per ounce. Ass soon as Fed rate hikes for 2016 2 and 20177 are fully price ed in, we expectt gold and silve er prices to rally y again becaus se of higher deemand from inv vestors.

Altern native scenarrios These ranges will like ely be broken ifi Trump becom mes President aand/or if investtor sentim ment deteriorate es sharply. This s would result in sharply highher gold and silver prices.

Anothe er scenario is tthat US econom mic growth pick ks up strongly ttriggering the Fed F to hike rates aggressively a in an environme ent of constructive investor seentiment. This would w be a bull ca ase for the US d dollar as US re eal rates would also rise subsstantially. In this s scenario the US S dollar uptrend d would have another a leg while gold prices ccould drop belo ow their 200-da ay moving averrage of USD 1,230 per ounce e signalling thaat the uptrend is s over.

ABN AMRO precio ous metals fo orecasts Change es in red/bold

New

End period p Gold Silver Platinum Palladdium Averaage Gold Silver Platinum Palladdium

06-Seep 1,328 199.6 1,077 684 Q1 16 1,1881 144.9 9775 5227

Dec-15 Maar-16 Jun-16 Seep-16 Dec-16 Marr-17 1,061 1,233 1,322 1,325 1,325 1,3325 18.48 19.50 19.50 199.50 13.9 15.38 976 1,018 1,150 1,050 1,0000 894 563 597 562 700 650 6 625 Q2 16 1,258 16.8 1,004 568

Q3 16 Q 1,324 19.0 1,084 649

Q4 16 1,325 19.5 1,100 675

Jun-17 Sep--17 Dec-17 1,350 1,4400 1,450 20.00 22.00 24.00 1,200 1,3300 1,400 650 7 700 725

2016 Q1 17 Q22 17 Q3 17 1,272 1,325 1,3338 1,375 21.0 17.5 19.5 19.8 1 1,041 1,025 1,100 1,250 605 638 6 638 675

Q4 17 1,4425 233.0 1,3350 7 713

2017 1,366 20.8 1,181 666

Old

End period p Gold Silver Platinum Palladdium Averaage Gold Silver Platinum Palladdium

06-Seep 1,328 199.6 1,077 684 Q1 16 1,1881 144.9 9775 5227

Dec-15 Maar-16 Jun-16 Seep-16 Dec-16 Marr-17 1,061 1,233 1,322 1,425 1,350 1,3300 18.48 21.50 13.9 15.38 2 19.00 188.00 894 976 1,018 1,150 1,050 1,0000 562 563 597 700 650 6 625 Q2 16 1,258 16.8 1,004 568

Source: ABN AMRO Grouup Economics

Q3 16 Q 1,374 20.0 1,084 649

Q4 16 1,388 20.3 1,100 675

Jun-17 Sep--17 Dec-17 1,400 1,4425 1,450 20.00 22.00 24.00 1,200 1,3300 1,400 650 7 700 725

2016 Q1 17 Q22 17 Q3 17 1,300 1,325 1,3350 1,413 18.0 18.5 19.0 1 21.0 1,041 1,025 1,100 1,250 605 638 6 638 675

Q4 17 1,4438 233.0 1,3350 7 713

2017 1,381 20.4 1,181 666

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Precious M Metals Watc ch - New gold & silver fo orecasts - 06 Septembe er 2016

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

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