Insights.abnamro.nl/en

Precious Metals Watch

06 July 2016

New precious metal forecasts

Sharp price rally since the Brexit referendum

We have been asked three questions lately. Why have gold and silver prices rallied

sharply? Why has silver outperformed gold? Do we expect further upside in prices? Gold

and silver prices have rallied substantially since the Brexit referendum and silver has

considerably outperformed gold prices. Safe haven demand, the market pricing out of Fed

rate hikes this year and next year and more BoE and ECB monetary policy easing are the

main reasons behind the price rally. In addition, silver’s outperformance is mainly a catch-

up to gold in thinner market conditions as silver prices were relatively more attractive. Our

forecasts for the end of September (USD 1,350 per ounce gold) and end of December

(USD 20 per ounce silver) have been reached. This has resulted in a sharp drop the

gold/silver ratio (in line with our view). What is more, speculative net long positions in both

gold and silver are excessive and make prices vulnerable to an abrupt change in

sentiment. Though the overall outlook is positive.

Net long speculative positions excessive in gold… …and silver

Number of contract in gold Number of contracts in silver

Source: Bloomberg, ABN AMRO Group Economics Source: Bloomberg, ABN AMRO Group Economics

0

100,000

200,000

300,000

400,000

10 11 12 13 14 15 16

Long contracts Short contracts Net positions

0

40,000

80,000

120,000

10 11 12 13 14 15 16

Long contracts Short contracts Net positions (lhs)

Group EconomicsMacro & Financial MarketsResearch

Georgette Boele

Co-ordinator FX & Precious Metals

Strategy

Tel: +31 20 629 7789

georgette.boele@nl.abnamro.com

• Sharp rally in prices since the Brexit referendum…

• …and we expect higher prices in Q3 2016

• But profit taking in Q4 2016 and Q1 2017 because of anticipation of

Fed rate hikes in 2017

• We expect such a sell-off in prices to be temporary …

• …and to be an opportunity to position for higher prices afterwards…

• …as the overall longer-term outlook remains bullish

2 Precious Metals Watch - New precious metal forecasts - 06 July 2016

Replay of April-May?

There are some concerns that we may see a replay of the end of April’s price action. The

month of May brought sharply falls in both gold and silver prices because financial

markets started to anticipate for Fed rate hikes this year. Will this also happen in July,

August or September? We don’t think so. We don’t expect Fed rate hikes this year (in line

with market consensus) and the anticipation of possible Fed rate hikes in 2017 is still 3 to

six months away. There is a risk that stronger-than-expected US data and/or surprisingly

hawkish Fed commentary would start this process earlier. But this is not our base case. In

addition, the environment remains very supportive gold and silver. For a start, we don’t

expect a strong rally of the US dollar (only versus sterling) and this will help gold and silver

prices as they are proxy currencies. Moreover, demand for safe haven assets will likely be

alive in the short-term.

Any sell-off to be temporary as longer-term outlook remains positive

The overall bullish outlook for precious metal prices will not change in our view. The

reason behind the Fed rate hikes is crucial for its effect on the US dollar. We expect

moderate US growth and some pick-up in inflation expectations triggering the Fed to hike

rates. This is not a major bull-case for the US dollar as US real rates will unlikely move

higher. This will remain a supportive driver for gold and other precious metal prices.

US real yields likely to remain supportive for gold… …and silver

Gold price 10y US real yields (reverse scale) Gold price 10y US real yields (reverse scale)

Source: Bloomberg, ABN AMRO Group Economics Source: Bloomberg, ABN AMRO Group Economics

Gold is not expensive… …neither is silver

Index Index

Source: Bloomberg, ABN AMRO Group Economics Source: Bloomberg, ABN AMRO Group Economics

-4

-3

-2

-1

0

1

2

31,000

1,200

1,400

1,600

1,800

2,000

10 11 12 13 14 15 16

Gold price (lhs) 10y US real yields (rhs)

-4

-3

-2

-1

0

1

2

310

20

30

40

50

10 11 12 13 14 15 16

Silver price (lhs) 10y US real yields (rhs)

100

300

500

700

00 02 04 06 08 10 12 14 16

Gold/EUR index Gold/GBP indexGold/USD index Gold/JPY index

0

200

400

600

800

1,000

00 02 04 06 08 10 12 14 16

Silver/EUR index Silver/GBP indexSilver/USD index Silver/JPY index

3 Precious Metals Watch - New precious metal forecasts - 06 July 2016

In addition, as the graphs above show gold and silver prices are still at relatively attractive

levels despite the rally so far this year. They should continue to attract investors as central

banks globally (such as the BoE and the ECB) continue to have accommodative policies

and prices of other assets with some safe haven characteristics are more expensive. Net-

long speculative positions in gold and silver may be extreme, but total positions in gold

ETFs are far from extreme and still have room to increase (see graph below).

Total known ETF positions vs gold price

In million troy ounces Gold price USD/ounce

Source: Bloomberg, ABN AMRO Group Economics

Moreover, slowly but surely we expect global growth to improve modestly over time and

this should result a some upward adjustment in cyclical demand expectations for silver,

platinum and palladium. This and the relatively attractive price levels of cyclical precious

metals compared to gold should result in an outperformance of silver, platinum and

palladium compared to gold.

Silver outperformance to gold is underway… …while platinum’s outperformance has not started yet

Gold/silver ratio Gold/platinum ratio

Source: Bloomberg, ABN AMRO Group Economics Source: Bloomberg, ABN AMRO Group Economics

New forecasts

To reflect all the dynamics above we have adjusted our precious metals forecasts. We

now expect more strength in gold and silver prices in Q3. We have adjusted Q4 2016 and

Q1 2017 forecasts to reflect the temporary impact of expectations of Fed rate hikes in

2017. This would be an opportunity to buy precious metals as the long-term trend remains

positive.

200

600

1,000

1,400

1,800

2,200

0

20

40

60

80

100

96 98 00 02 04 06 08 10 12 14 16

Total ETF positions gold (lhs) Gold price (rhs)

20

40

60

80

100

90 92 94 96 98 00 02 04 06 08 10 12 14 16

Gold/silver ratio

0.4

0.6

0.8

1.0

1.2

1.4

90 92 94 96 98 00 02 04 06 08 10 12 14 16

Gold/Platinum ratio

4 Precious Metals Watch - New precious metal forecasts - 06 July 2016

ABN AMRO precious metals forecasts

Changes in red/bold

Source: ABN AMRO Group Economics

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

DISCLAIMER

This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics.The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer.

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New

End period 06-Jul Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17

Gold 1,366 1,061 1,233 1,322 1,425 1,350 1,300 1,400 1,425 1,450

Silver 20.2 13.9 15.38 18.48 21.50 19.00 18.00 20.00 22.00 24.00

Platinum 1,071 894 976 1,018 1,150 1,050 1,000 1,200 1,300 1,400

Palladium 601 562 563 597 620 600 580 625 650 700

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

Gold 1,181 1,258 1,374 1,388 1,300 1,325 1,350 1,413 1,438 1,381

Silver 14.9 16.8 20.0 20.3 18.0 18.5 19.0 21.0 23.0 20.4

Platinum 975 1,004 1,084 1,100 1,041 1,025 1,100 1,250 1,350 1,181

Palladium 527 568 609 610 578 590 603 638 675 626

Old

End period 06-Jul Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17

Gold 0 1,061 1,233 1,300 1,350 1,370 1,370 1,400 1,425 1,450

Silver 0.0 13.9 15.38 18.00 19.00 20.00 21.00 22.00 23.00 24.00

Platinum 0 894 976 1,100 1,150 1,200 1,250 1,300 1,350 1,400

Palladium 0 562 563 620 640 660 680 700 720 740

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

Gold 1,181 1,266 1,325 1,360 1,283 1,370 1,385 1,413 1,438 1,401

Silver 14.9 16.7 18.5 19.5 17.4 20.5 21.5 22.5 23.5 22.0

Platinum 975 1,038 1,125 1,175 1,078 1,225 1,275 1,325 1,375 1,300

Palladium 527 592 630 650 600 670 690 710 730 700