Metal Matters October 2012 Gold prices continue to make headway as the rally has once again been fuelled by broad based quantitative easing (QE). In addition to QE, the Fed said that it would not be in any hurry to tighten monetary policy at the first signs of growth… … this means that the Fed may not stamp out inflation if it is seen when growth starts to emerge. The fact further QE has been announced in the EU, US, Japan and China in September, highlights the trouble the financial markets are in. Funds’ interest in Gold has returned with vigour and ETF buying by investors has accelerated. The dollar may well weaken as the US election campaign focuses on the US deficit and the ‘fiscal cliff’. We feel Gold has embarked on another major up leg. Silver followed Gold’s lead, but true to form it has outperformed Gold on a percentage basis. Prices have encountered selling above $35/oz - supply in this region may take some time to be absorbed. PGM prices shot higher on the back of QE and as strikes in South Africa disrupted mine output. For now, we expect supply issues to be the main driver for PGM prices, as demand from the auto industry is likely to be subdued.
Gold’s rally continues to climb and the outlook remains bullish overall..
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Metal Matters October 2012
Gold prices continue to make headway as the rally has once again been
fuelled by broad based quantitative easing (QE).
In addition to QE, the Fed said that it would not be in any hurry
to tighten monetary policy at the first signs of growth…
… this means that the Fed may not stamp out inflation if it is
seen when growth starts to emerge.
The fact further QE has been announced in the EU, US, Japan
and China in September, highlights the trouble the financial
markets are in.
Funds’ interest in Gold has returned with vigour and ETF
buying by investors has accelerated.
The dollar may well weaken as the US election campaign
focuses on the US deficit and the ‘fiscal cliff’.
We feel Gold has embarked on another major up leg.
Silver followed Gold’s lead, but true to form it has outperformed Gold
on a percentage basis.
Prices have encountered selling above $35/oz - supply in this
region may take some time to be absorbed.
PGM prices shot higher on the back of QE and as strikes in South Africa
disrupted mine output.
For now, we expect supply issues to be the main driver for PGM
prices, as demand from the auto industry is likely to be subdued.
Metal Matte rs October 2012
2
Gold’s rally continues to climb and the
outlook remains bullish overall
In last month’s Metal Matters we thought
the likelihood of more quantitative easing
(QE) would drive prices higher and this has
now unfolded with various types of QE
announced in Europe, the US and Japan,
during September. Monetary easing has also
been seen in Australia and further stimulus
spending has been announced in China. All
in all, these events highlight the trouble the
global economy is in. More QE also runs the
risk of debasing the value of paper money
and the legacy of all this debt creation
remains a big unknown risk that could still
undermine the financial system down the
road.
QE fuels another rally
After the QE fuelled rally out of the 2008
financial crisis that led to Gold rallying from
$682/oz to the highs at $1,921/oz, a move of
180%, the market had become overbought.
Having consolidated between September
2011 and September this year, the market
was well placed to move higher again. The
trigger for the break out from the downward
wedge on the chart was the prospect of more
broad based QE. Having broken out of the
wedge on 21st August, prices have moved
higher in four steps, with each round of QE,
or stimulus, further fueling the rally. Prices
have now challenged and breached the
February high at $1,790.80/oz, leaving the
November peak at $1,803/oz as the main
barrier to overcome before prices can focus
on the $1,921/oz high again.
Funds increase exposure
The latest CFTC data shows the net long
fund position (NLFP) climbed steadily
during September to reach 203,896
contracts, up from 158,491 contacts at the
end of August and up from a recent low of
112,977 contacts in late July. As the chart
shows, the rebound in fund interest has been
extremely strong and interestingly the NLFP
has now moved above the previous peak
seen at the end of February, when prices
were around the $1,790/oz level. What is
interesting is that the NLFP is still well
below the highs seen in 2011, 2010 and
the peak of 262,331 contracts seen in
2009. This means the NLFP is 22%
below the 2009 high.
ETF investors accelerate purchases Longer term investment buying also
started to gather pace in August. In July,
holding dropped 14.5 tonnes, in August
they climbed 63.5 tonnes and rose a
further 73.6 tonnes in September. This
buying has taken ETF holdings to a
record level of 2,558.6 tonnes. The
reacceleration in ETF buying and the
turn round in fund buying in recent
weeks imply sentiment has indeed
turned bullish. Given the momentum,
further buying may well follow.
China – going for Gold As well as being an important Gold
consumer, China has become the
world’s largest producer and is likely to
be the largest importer of Gold in 2012.
It is also buying Gold mining companies
around the world. China is, therefore,
building up its Gold reserves and that
may well be in an effort to diversify
Metal Matte rs October 2012
3
their holdings of what used to be hard
currencies. It could also be in preparation for
eventually making the yuan freely
convertible. China last published its Gold
reserves in 2009 - they had doubled to 1,054
tonnes. If they republish, the market should
be braced for another significant increase.
Central banks continue to buy
In the first half of the year, central banks
bought 254.2 tonnes of Gold, according to
the World Gold Council (WGC). This was
up from 203.2 tonnes in the same period last
year. The buying has tended to come from
central banks in developing countries, which
suggest they are putting a proportion of the
proceeds from their trade surpluses into
Gold, rather than have too much exposure to
hard currency. Considering what lies ahead
for the US in the fourth quarter, we are
unsurprised dollar holders may be nervous.
Potential for dollar weakness Up until the recent move higher in Gold, the