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Metal Matters

May 2012

Interest in the precious metals has waned in recent months and as a result prices have been range bound. Although further weakness would not be a surprise, lower prices are expected to attract bargain hunting. • Gold prices have tracked sideways in a $70/oz range either side of $1,650/oz. Downside spikes suggest good underlying buying. • Prices have struggled to get much lift even though the dollar has been weak. • Investor interest in Gold ETFs has weakened slightly and it looks as though some money is rotating out of Gold. • The range bound market is also attracting less fund interest with both the long and the short positions reduced. • Prices are under pressure, but given all the uncertainty in the markets underlying support is expected to be strong.

Silver prices are drifting lower and the market is looking vulnerable as key support levels are being tested. • The drop-off in investor interest is a concern, as the market’s supply surplus needs to be absorbed by investment buying. The outlook for Palladium in the medium term looks stronger than Platinum and prices seem to be reflecting that now. • ETF investors have been increasing their exposure to Palladium, while cutting their holdings of Platinum.

Metal Matters Gold remains range bound - the danger is - is this the calm before the storm? Gold has traded in a range between $1,612/oz and $1,697/oz since mid-March and the sideways oscillations narrowed as March moved into April. This horizontal trading pattern, which is below the JanuaryFebruary highs, may well be a continuation pattern and that might mean prices end-up breaking lower, below the $1,612/oz level. Such a development would also see the long term uptrend line breached – a line that can be traced back to the October 2008 lows around $682/oz. If the uptrend line is broken then we would expect a move down towards the spike lows between $1,532/oz and $1,522/oz seen in September and December last year.

Risky markets should be bullish for Gold Given the rise in uncertainty in global financial markets it seems somewhat odd that investors are not buying safe-havens. The debt situation in Europe is escalating again, this time with the focus on Spain, and the EU economy is shrinking further with manufacturing PMI falling to 45.9. Gold and the dollar have, however, both been on a back footing for most of April. Greater likelihood of quantitative easing (QE) and low interest rates are no doubt weighing on the dollar, but these factors should be bullish for Gold. So far, however, the market has failed to react that way. It may be that strong equity markets are attracting money out of safe-havens and into more risky assets. The Dow has been climbing steadily since last September with the index reaching levels not seen since December 2007. With the Fed

May 2012 keeping QE on the table and with the market getting used to ‘big government’ preventing crises from unfolding, it may be that investors are tired of being out of the equity markets when corporate earnings are generally doing well.

Gold ETF holdings decline ETF investors’ holdings peak at 2,391.5 tonnes on 15th March 2012, but have since slipped to 2,358 tonnes. As the chart shows, the gradual slide in holdings does not suggest any panic, but supports the view that there is some light rotation out of Gold. Given the overall big picture, we would be surprised if this trickle turned into a flood and as such, we do not feel ETF redemptions on their own will be a significant driver of price weakness.

Funds reduce exposure The net long fund position (NLFP) has fallen in recent weeks; it stood at 134,994 contracts down from 147,821 contracts at the end of March. The previous low was 126,978 contracts seen in October last year. Interestingly both the gross long and short positions have declined, which shows funds have cut 2      

Metal Matters both bullish and bearish exposure. Given that prices have been in a sideways range this is not so surprising, but again it suggests other markets have become more interesting to the funds. While this remains the case, activity in Gold is likely to be subdued and that is likely to be a dampener on Gold prices. Physical demand remains weak Judging by weaker premiums in India and China, it appears that physical demand is weak. In India, the market is still struggling in the aftermath of the government’s introduction of excise duties on unbranded jewellery and their doubling of tariffs on imports to four percent. In protest, local jewellery retailers went on strike for 21 days and that hit Gold sales. The Bombay Bullion Association estimates Gold imports fell to 15-20 tonnes in March, from 75 tonnes a year earlier and were 30-35 tonnes in April, down from 90 tonnes in April 2011. The Association is now looking for imports of 700-800 tonnes this year, compared with 969 tonnes in 2011. Premiums in China are also reported to have eased as interest has been quiet. Sales of Gold American Eagle coins totalled 230,500 oz in the first four months of the year, compared with 407,500 oz over the same period in 2011. Central banks continue to buy Gold According to the latest IMF data, the official sector added at least 58 tonnes of Gold in March to its foreign exchange reserves. The purchases show the growing appetite for Gold by the central banks. In the last two years, the official sector has swung from being net sellers of bullion to being active net buyers. Last year, central banks purchased 440 tonnes of Gold and we expect this trend will continue as governments and sovereign wealth funds look to diversify away from fiat money. This should help to underpin confidence in bullion and in turn keep investor interest active, especially into price dips.

May 2012 Technical – The uptrend line on the daily chart puts support at $1,630/oz, whereas on the weekly chart, the long term uptrend line puts key support around $1,614/oz. The recent failed upside break above the resistance line around $1,660/oz suggests prices may well retest underlying support again. The turn down in the stochastics supports this view too. Overall, we would not get too bullish for Gold until prices move back above $1,700/oz, while on the downside we would get increasingly bearish as each support level is breached – these are at $1,630/oz, $1,623/oz, $1,614/oz and $1,612/oz. A drop below the latter is likely to prompt a fall back towards to lower blue horizontal line, which is at $1,522/oz. That said, moves below $1,550/oz may well turn into spikes.

Conclusion – Given the deterioration in the EU economy and the US labour market, plus an escalation in the EU debt crisis, we would not be surprised to see another risk-off correction across markets and that may well push Gold prices lower. However, the secondary reaction to such a sell-off may prove bullish for Gold because as money comes out of risky assets it may well look for a safe-haven while the correction is underway. In addition, another sell-off would increase the likelihood of the Fed doing, or hinting at, more QE and in turn that would likely weigh on the dollar and be bullish for Gold.


Metal Matters

Gold Statistics

May 2012



872.54 871.71 872.12

970.19 970.14 970.17

1225.46 1224.76 1225.11

1573.16 1571.52 1572.34

1685.53 1685.50 1685.52

1,033 222,354 2,802 38,052

1,225 250,148 2,810 47,272

1,332 278,299 3,327 56,264

1,526 284,314 3,868 73,266

0.41 0.65 0.81

-0.04 0.15 0.47

-0.08 -0.06 0.04

12 Month * 0.80 COMEX - futures contracts Stocks ('000oz) 8,068 Vol (million contracts) 39.54 OI ('000 contracts) 393 CFTC (futures only data) Net Spec position Long (Short) 149,279 TOCOM Stocks ('000oz) 244 Volume ('000 contracts) 15,164 OI ('000 contracts) 140 Other Indicators FT Au Mines Index 2,658 Dow Jones Index 11,221 US$ Index 77.1 Gold Bullion Imports, tonnes (exports) Dubai 229 Hong Kong /China** 222 India 760 Italy 136 Japan 50 Singapore 38 South Korea 32 Taiwan 13 Turkey 166


London Prices (US$/oz) AM fix Pm fix Average Parity prices Australian - A$/oz South Africa Rand/kg Japan Y/g India Rupee/oz Lease Rates 1 Month * 3 Month * 6 Month *



4Q 2011

1Q 2012



1691.42 1690.84 1691.13

1675.06 1673.77 1674.42

1648.54 1650.06 1649.30

1,672 145,896 4,036 84,241

1602 13087 4154 85624

1,586 12,683 4,278 84,893

1,593 12,877 4,162 86,060

-0.14 -0.06 0.11

-0.33 -0.13 0.07

-0.23 -0.04 0.18

-0.14 0.04 0.25

-0.12 0.05 0.24







8,983 32.55 401

10,748 43.91 554

10,938 47.75 482

11,335 10.4 430

11,419 12.5 433

11,407 4.86 404

10,998 2.83 408







171 11,913 93

141 11,003 109

120 16,073 123

121 3,618 126

155 3,209 125

166 1,156 128

163 818 138

2,647 8,934 80.5

3,340 10,635 81.3

3,716 12,085 76.3

3,655 12,072 77.9

3458 12,940 79.0

3,148 13,212 79.0

2,922 13,213 78.8

173 45 715 103 20 27 23 10 38

250 228 960 109 18.9 60 27 14 42


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


Metal Matters Silver prices have drifted lower, the market looks vulnerable Silver prices have continued to drift sideways-to-lower in recent months with the latest low at $29.98/oz posted on 25th April. The series of lower highs also highlights ongoing overhead selling and that ties in with reports that there is producer selling/pricing into rebounds. Considering the recent waning of interest in Gold, it is not surprising that Silver prices have also struggled. This is highlighted by the rise in the Gold / Silver ratio that was around 1:54 in early May, compared with 1:50 a month earlier and a low of 1:47.5 at the end of February. A falling ratio suggests that the more speculative elements in the market are buying Silver to ride on Gold's coat tails; when the opposite is happening, we conclude that interest in bullion is fading and this seem to be the situation in early May. With prices breaching support around $30.50/oz, the late April low around $30/oz will come into focus and any move below there could then lead to a faster sell-off that could see the target from the head and shoulder pattern at $27.40/oz reached. ETF investor interest is lacklustre Silver ETF holdings peaked in April last year at 18,908 tonnes and dropped to a low of 16,856 tonnes in June. They recovered to 18,082 tonnes in early March, but have since started to slip - dropping to 17,825 tonnes by early May. Although redemptions are being made, there seems to be no rush for the exits.

Funds also cut exposure The net long fund position (NLFP) in Silver has eased in recent weeks to 16,471

May 2012 contracts from 20,055 contracts in early April. The change in the NLFP has, however, come about as more shorts have entered the market, while the gross long position has held relatively steady. The gross short position has increased to 12,442 contracts from 8,242 contracts at the end of March. Silver remains in a supply surplus The Silver Institute’s World Silver Survey reported a surplus of 5,000 tonnes in 2011, with mine supply reaching a record high as did scrap supply. Total supply, however, fell on the back of lower official sales and producer hedging. Supply is expected to rise again in 2012. Total demand fell last year as the slowdown in the EU in the fourth quarter undermined industrial demand and led to destocking. The Survey expects the market surplus to shrink to 3,400 tonnes in 2012, but that will still mean investor interest will have to remain strong if prices are to remain elevated.

Technical & Summary – Silver prices continue to work lower, with support at $31/oz and $30.50/oz now breached. The focus is now on the recent lows at $29.98/oz – a move below that level would target $29.45/oz and $28.60/oz, although the head and shoulder target is at $27.40/oz. In the short term, the combination of the supply surplus, subdued fabrication demand and less investor interest, all suggest prices can weaken further. However, we feel demand for Gold as a safe-haven will return before too long and that should be bullish for Silver too. 5      

Metal Matters

May 2012 Silver Statistics 2008



London Prices (US$/oz) Daily Fix






Parity (London) prices Japan (Y/g) India (Rupee/oz)

48.47 646.9

42.36 714.9

54.53 925.1

86.78 1641.7

COMEX – futures contracts Stocks (Moz)* Vol (million contracts) OI (‘000 contracts)*

134.1 8.3 124.1

117.6 7.8 105.1

108.6 12.5 129.6

96.4 19.4 117.1

CFTC (Futures Only Data) non-commercial Net Positions * 33,672 30,407


TOCOM Stocks (Moz)* Futures Vol (‘000 contracts) Futures OI (‘000 contracts)*



4Q 2011






76.20 1,631.5

80.17 1650.9

84.18 1,670.6

79.62 1,646.3

112.1 2.9 104.2

132.8 3.43 110.0

138.5 1.1 109.7

141.6 1.2 111.9




1Q 2012


0.4 301.2 7.9

0.26 111.8 2.6

0.27 235.4 5.6

0.25 375.6 8.1

0.20 34.9 5.9

0.21 32.59 5.7

0.24 11.5 5.5

0.24 8.0 5.0









Silver Bullion Imports (tonnes) USA 4676 Japan 1909 India 5048 Italy 926 Hong Kong 3082 China (exports) (4043)

3775 2994 1259 701 2671 900

3888 4198 3483 1650 192 3475

Other Indicators Gold/Silver ratio*

* figures are period averages unless marked; ~ not available yet, italics = estimate.


Metal Matters PGM prices diverged in April with Palladium outshining Platinum Platinum prices continued to oscillate lower in April - a trend that started in late February and judging by European auto sales that is not such a surprise. Palladium, however, found support around $630/oz in early April and put in a 9% rally to $686/oz. Palladium’s stronger performance, however, seems to have been driven by a recovery in investor interest – something this report has been expecting for some months now. Palladium’s strength v Platinum The outlook for Palladium is generally strong - it has a price advantage over Platinum, which is enabling it to gain market share and the fundamentals also show a production deficit, with the market only being balanced by sales from Russian stockpiles. These, in turn are expected to dwindle. Demand for Palladium is also benefitting for regional circumstances. The countries where auto sales are strong, or have the most potential to recover, have a preference for vehicles with petrol-engines, and these require Palladium based autocatalysts. Unluckily for Platinum, Europe’s preference is for diesel vehicles that use Platinum-based autocatalysts and the outlook for European auto sales is bleak. In addition, even taking into account the lost production in South Africa due to earlier strikes, Platinum is expected to be in a supply surplus this year.

Mixed investment trends ETF investors cut exposure to Platinum by 2.2% in April, while they increased their

May 2012 holdings of Palladium by 2 percent. CFTC data shows the funds have reduced their positions in April with the net long fund positions (NLFP) in Platinum and Palladium falling 35% and 29% respectively. That said, whereas the NLFP in Platinum has accelerated lower, the latest data shows Palladium’s NLFP climbed to 5,745 contracts from 4,963 contracts a week earlier.

Technical & Summary – Platinum prices are retesting key support around $1,540/oz, which is where the 50% Fibonacci level is. If that gives way we would look for prices to work down to the 61.8% level at $1,493/oz. Palladium has held up better with prices around the 38.2% Fibonacci level, but prices are pulling back so a retest of the uptrend line at $650/oz seems likely. Below there lie the 50% and 61.8% retracement levels at $631/oz and 609/oz, respectively. Given the global economic climate we feel there is room for prices to pull back further, but we would look for buying opportunities into rebounds once these sell-offs have run their course. Medium term we are bullish for PGMs, with Palladium the most favoured.


Metal Matters

May 2012

PGM Statistics 2008 London Prices (US$/oz) Platinum 1,583 Palladium 355 Rhodium 6,549

1,210 265 1,592

1,616 529 2,456

1,725 737 2,026

1,536 631 1,592

Japanese Parity Prices (Y/g) Platinum 5,123 Palladium 1,147

3,501 767

4,398 1,432

4,268 1,824

South African Parity Prices (Rand/kg) Platinum 395,276 313,191


126.2 619

NYMEX Stocks ('000oz) Platinum Palladium

55.7 425


131.1 477


CFTC Futures Only Data Long / (short) non-commercial Platinum 6,797 12,685 20,270 Palladium 7,062 9,173 13,532


4Q 2011

1Q 2012



1,612 686 1,463

1,665 688 1,488

1,592 659 1,384

3,677 1,511

3,962 1,685

4,252 1,758

4,019 1,663






137.4 542

174.2 565

184.7 598

198.1 593

197.5 591

23,041 10,950

19,513 6,075

25,419 9,437

23,520 8,141

14,923 5,745

Tocom - Platinum Stocks ('000oz) Vol (Million contracts) OI ( '000 contracts)

14.1 6.9 52.3

16.6 3.6 36.1

20.1 3.87 52.6

26.6 3 49.8

32.3 0.9 45.1

28 0.9 43.6

24.3 0.33 45.9

22.9 0.24 45.8

Tocom - Palladium Stocks ('000oz) Vol ('000 contracts) OI ( '000 contracts)

25.7 684 14.8

20.5 108 4.6

12.7 137.2 3.9

10.8 110 2.9

10.2 24.0 2.5

6.2 17.5 2.6

5.3 6.0 2.8

5.1 4.4 2.5

Other Indicators (US$/oz) Pt-Au spread 689 Pt-Pd spread 1,200

257 949

392 1,079

145 977

-179 1,005

-48 949

-6 963

-92 880

Platinum Bullion imports (kg) USA 112,000 Japan 59,634

2009 151,830 53,663

2010 151,830 53,663

2011 129,090 62,230

2012 11,696 (Jan-Feb ) 11,528 (Jan-Mar)

PalladiumBullion imports (kg) USA 120,810 Japan 75,363

2009 50,000 64,723

2010 70,710 70,241

2011 98,900 66,484

2012 11,380 (Jan-Feb ) 11,531 (Jan-Mar)

~ = data not available yet, italics = estimates


Metal Matters

May 2012

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Metal Matters

May 2012

This report has been prepared on behalf of Scotiabank and is not for the use of private individuals. The Scotiabank trademark represents the precious metals business of The Bank of Nova Scotia. The Bank of Nova Scotia, a Canadian chartered bank, is incorporated in Canada with limited liability. Opinions, estimates and projections contained herein are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither the Bank of Nova Scotia, its affiliates, employees or agents accepts any liability whatsoever for any loss arising from the use of this report or its contents. The Bank of Nova Scotia, its affiliates, employees or agents may hold a position in the products contained herein. This report is not a direct offer financial promotion, and is not to be construed as, an offer to sell or solicitation of an offer to buy any products whatsoever. This market commentary is regarded as a marketing communication. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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May 2012 - ScotiaMocatta Metal Matters  

Research Report detailing a monthly analysis of Gold and Silver markets.

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