The Gold Price Outlook Bullish/Bearish Factors

Transcription

1 The Gold Price Outlook Bullish/Bearish Factors DGG European Gold Forum Dr. Martin Murenbeeld Zurich - May 6, 214

2 Last Year s Forecast April 16, 213 Scenario C was downgraded and the probabilities were shifted towards Scenario A in the latest update! Gold Price Scenarios 213-avg 213-end 214-avg Scenario A: p = 3% $1519 $141 $1338 Scenario B: p = 5% $1637 $1665 $17 Scenario C: p = 2% $1767 $195 $213 Weighted $1625 $1653 $177 Actual $1411 $125???? 2

3 1 What Went Wrong in 213? An orgy of ETF sales 881 tonnes in 213! Change from previous week, tonnes Q1 213-Q2 213-Q3 213-Q4 Source: Bloomberg, World Gold Council, DCM Economics 3

4 What Went Wrong in 213? ETF investors sold gold Tonnes Last date: April 24, T -34% Other SPDR Gold ETF -561 T -42% Apr-3 Mar-4 Mar-5 Mar-6 Mar-7 Mar-8 Mar-9 Mar-1 Mar-11 Mar-12 Mar-13 Mar-14 Source: ExchangeTradedGold.com, Bloomberg 4

5 3 24 What Went Wrong in 213? And the specs sold off net-long positions Weekly data Last date: April 22, 214 Gold Price (quarterly % change) tonnes 6 Specs net long Source: US CFTC, Comex ETF sales plus COMEX spec selling totaled nearly 15 tonnes in 213!

6 19 What Went Wrong in 213? And everyone bought equities* S&P 5 Gold Daily data Last date: April 3, Source: Thomson Reuters Datastream, London Bullion Market Association Massive negative correlation in 213: * what s good for gold is also good for equities

7 What Went Right in 213? Chinese demand picked up the slack! Chinese Gold Imports from Hong Kong (monthly tonnes) 557 tonnes (net) 1158 tonnes (net) Chinese Gold Re-Exports to Hong Kong (monthly tonnes) -1 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Source: Thomson Reuters Datastream, Hong Kong Census, DCM Economics Last month: February 214 7

8 225 What Went Right in 213? Chinese imports from Hong Kong hit record levels Chinese Gold Imports through Hong Kong (monthly tonnes) month MA Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Source: Thomson Reuters Datastream Last month: February 214 8

9 Where are we now? Struggling! Gold - $/oz Death Cross! 5-day MA 2-day MA Golden Cross! Last date: May 1, Source: London Bullion Market Association $1895 $1795 $1694 $1614 $154 $1469 $142 $1385 $125 $1192 $1157 $158

10 The Outlook for A balance between Bullish and Bearish factors! 1. Eight Bullish Factors, including: ETF supply will decline dramatically Asian physical demand will continue Global debt crisis will require ongoing monetary reflation Long-run central bank demand will remain firm 2. Five Bearish Factors, including: Fed will end QE US dollar will remain firm in 214 Inflation will remain mostly absent Financial assets will remain attractive 3. Forecast Flat to moderately bullish! 1

11 Bullish: (1) Gold Supply Supply to jewelers/investors unlikely to rise 15 Net Mine Supply ( supply less dehedging) Tonnes Billion US$ 15 Net Mine Supply + Scrap Supply Tonnes 12 Rising Modestly Stable Net Mine Supply + Scrap CB Demand Tonnes Stable Lower gold prices should curtail mine output going forward! (e)

12 2 1 Bullish: (1) Gold Supply Massive sales in 213 not to be repeated in 214! Change from previous week, tonnes tonnes 214 to date tonnes Q1 213-Q2 213-Q3 213-Q4 214-Q1 214-Q2 214-Q3 214-Q4 Source: Bloomberg, DCM Economics 12

13 Bullish: (2) Consumer Demand* India/China becoming richer LT demand positive tonnes RoW China India % 1 9-Q1 1-Q1 11-Q1 12-Q1 13-Q1 14-Q1 13 Source: World Gold Council Gold Demand Trends - Full Year 213 data tabulated by Thomson Reuters GFMS *Consumer Demand = Jewelry + bar/coin

14 2 Bullish: (3) CB s Buying Gold Data show demand holding up 15 tonnes Central Bank Gold Sales/Purchases 9-Q1 1-Q1 11-Q1 12-Q1 13-Q1 14-Q1 Source: World Gold Council Gold Demand Trends - Full Year 213 Thomson Reuters GFMS 14

15 Bullish: (3) CB s Buying Gold Global FX reserves are excessive (62% in $ s) Foreign Exchange Reserves (countries over $1 bn) bn$ bn$ China Hong Kong Japan India Saudi Arabia Algeria Switzerland Mexico Russia Thailand Taiwan Malaysia Brazil Libya Korea 341. Turkey 14.3 TOTAL Addendum: Fuel Exporters $184 bn Source: IM F - data through M arch 214 Some central banks like the fact that gold is not a liability of the Federal Reserve RUSSIA? CHINA? OIL EXPORTERS? 15

16 Bullish: (4) Global Debt Crisis Entitlements are killing Western economies 7 6 US Budget: Percent of total outlays Entitlements Defense Interest on Debt 1 Other Annual data (last year 213) Source: Bureau of Economic Analysis 16

17 Bullish: (4) Global Debt Crisis Countries accordingly have high debt/gdp ratios Percent of GDP General government debt 1 Over 9% spells trouble (Reinhart/Rogoff) 5 Japan Italy US Portugal Greece Spain France Source: IMF Fiscal Monitor April

18 Bullish: (4) Global Debt Crisis Higher growth needed (and lower interest rates) Estimates for 213 Primary Nominal 5-year Balance GDP Growth Bond Yield A B C A+B-C Greece Japan Spain Ireland Portugal US Canada Italy Germany Sources: Primary Balance - IM F Fiscal M onitor, April 214 Nominal GDP - IM F World Economic Outlook, April 214 Yields as of April 28, Thomson Reuters DataStream (Greece: April 1 bond sale) RED: Debt/GDP ratio to rise further! For debt ratio to decline A+B C > As it stands only Germany will actually have reduced its Debt/GDP ratio in 213!! 18

19 Bullish: (4) Global Debt Crisis So what will governments do? Government Choices: Austerity: Cut services/raise taxes Deflate accept depression Reflation: Inflate-devalue-default Financial repression Bad for gold Good for gold 19

20 1 Bullish: (4) Global Debt Crisis All balance sheets expanding ECB excepted January 2 = People's Bank of China Bank of England* Federal Reserve European Central Bank Bank of Japan 4 2 Set to 1 Last month: March *Bank of England June 26 = 13 Source: Thomson Reuters Datastream 2

21 11 Bullish: (4) Global Debt Crisis But ECB will have to change policies 15 REAL GDP Q4 27 = 1 1 United States 95 9 Eurozone 85 8 Last quarter: 213-Q Source: US Bureau of Economic Analysis, Eurostat, DCM Economics calculations 21

22 Bullish: (4) Global Debt Crisis Liquidity is important to gold Gold oversold in 213? Gold (month average) Global Liquidity Global Liquidity: FX Reserves + US MBase Source: London Bullion Market Association, IMF International Financial Statistics, Federal Reserve Last month: Gold April 214 Liquidity March 21r

23 6 48 Bullish: (4) Global Debt Crisis Gold often rises and falls with liquidity % % Gold Global Liquidity Correlation:.62 Gold oversold in 213? Last month: April Global Liquidity: FX Reserves + US MBase Source: London Bullion Market Association, IMF International Financial Statistics, Federal Reserve 23

24 Bullish: (5) Dollar Fundamentally Overvalued US dollar should continue to decline US recession US Dollar Indices Fed Major (March 1973=1) Murenbeeld-EFXR (Jan 1999=1) Murenbeeld-NEFXR (Jan 1999=1) Last month: April Source: Wall Street Journal, Federal Reserve, DCM Economics 24

25 Bullish: (5) Dollar Fundamentally Overvalued US trade deficits are much too large bn$ Billion US$ bn$ Billion US$ World 12-month total bn$ 12-month total (goods only) China month -35 total bn$ bn$ Billion US$ bn$ Billion US$ EU 12-month total bn$ Japan 12-month total bn$ Source: Thomson Reuters Datastream Last month: February

26 Bullish: (5) RMB Fundamentally Undervalued China s trade balance surpluses significant! bn$ Billion US$ 4-quarter total bn$ bn$ Billion US$ 4-quarter total bn$ World US bn$ 4-quarter total bn$ bn$ 4-quarter total bn$ (e) EU Japan Source: Thomson Reuters Datastream 26

27 7 65 Bullish: (6) Commodity Cycle The shortest copper cycle lasted 16 years* Shortest cycle 16 years Real Copper Price 213 cents/lb year MA *despite reversals which are common in all long cycles Source: Wall Street Journal, DCM Economics 27

28 Bullish: (6) Commodity Cycle The shortest gold cycle lasted 1 years* LN (Real Gold Price) 213$/ounce US Civil War Shortest bull-cycle 1 years year MA Gold set at $35 CORRECTION *data converted to log-data for easy visual! Source: Thomson Reuters Datastream, LBMA, DCM Economics 28

29 9 8 The 197 Bull Market - Price Corrections London Daily PM Fix 85 Bull market ends US recession % 9-29% 6-14% % -2% % -47% Source: London Bullion Market Association Mid-Cycle Correction (more than 86 weeks) 14 Geopolitical Crisis! % %

30 16 14 Bullish: (7) Gold Not "Expensive" The NASDAQ was a real bubble not gold 12 1 NASDAQ SILVER: 21/11/23 to date GOLD: 21/3/3 to date Everything set to Source: Thomson Reuters Datastream, DCM Economics Years 3

31 11 Bullish: (7) Gold Not "Expensive" To back US money supply higher prices needed Price of gold to cover US M2 (Cover ratio =.24) $ Price of gold to cover US M1 (Cover ratio =.38) $ Cover ratio as determined in 1934 when gold was revalued to $35 Source: Thomson Reuters Datastream, DCM Economics 31

32 35 Bullish: (7) Gold Not "Expensive" But gold close to long-term average versus oil to date average: Barrels of oil per ounce of gold Last month: April Source: Thomson Reuters Datastream, London Bullion Market Association 32

33 8 7 Bullish: (7) Gold Not "Expensive" Gold close to long-term average with copper Pounds of copper per ounce of gold to date average: 349. Last month: April Source: Thomson Reuters Datastream, London Bullion Market Association 33

34 15 Bullish: (7) Gold Not "Expensive" And gold/silver ratio close to long-term average 9 75 Ounces of silver per ounce of gold to date average: Last month: April Source: Thomson Reuters Datastream, London Bullion Market Association 34

35 9 8 7 Bullish: (8) Geopolitical The biggest geopolitical crisis to date about $4 (or 1%) IRAN Cyclical peak in gold Gold Price: Jul 3/79 to May 29/8 Iranian hostage crisis and Russia in Afghanistan Source: London Bullion Market Association 35

36 Bullish: (8) Geopolitical the Ukraine/Crimea crisis added about $1 Ukraine/Crimea The Ukraine/Crimea crisis would appear to have added about $1 to the gold price the first time around. We ll see what the (likely) second round will look like! Gold Price: Oct 1/13 to date Source: London Bullion Market Association 36

37 9 Bearish: (1) Need for Liquidity The EM s have significant gold reserves of late Tonnes Last month: February US Gold Reserves 7 EM s Gold Reserves Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Source: IMF International Financial Statistics 37

38 Bearish: (1) Need for Liquidity Recycled gold elevated when liquidity needs rise 2 18 tonnes Recycled/Scrap Gold Great Recession Asian Financial Crisis Source: World Gold Council Gold Demand Trends - Full Year 213 Thomson Reuters GFMS 38

39 Bearish: (1) Need for Liquidity Indian CA deficit* has led to gold import barriers INDIA Gold Imports (monthly tonnes) Last month: January month MA 5 25 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan Source: Thomson Reuters Datastream, DCM estimates *Need to preserve scarce FX liquidity!

40 2 Bearish: (2) Fed Ends QE US real rates rise TIPS rise GOLD year TIPS Last month: April Source: US Bureau of Labor Statistics, Federal Reserve 4

41 Bearish: (2) Fed Ends QE US real rates rise but gold down too far!? GOLD % year-on-year 1-year TIPS Last month: April Source: US Bureau of Labor Statistics, Federal Reserve Gold fell too far in 213?

42 6 Bearish: (2) Fed Ends QE Real 1-year rate rising year Treasuries less CPI GOLD % year-over-year Last month: April Source: US Bureau of Labor Statistics, Federal Reserve 6. 42

43 6 Bearish: (2) Fed Ends QE Real TB-rate also rising somewhat GOLD % year-on-year day TB less CPI Last month: April Source: US Bureau of Labor Statistics, Federal Reserve 43

44 5 4 Bearish: (2) Fed Ends QE But real ST rates <2% do not usually slow gold! US real short term interest rate Gold prices often stall when real rates rise above 2%! Real rates below zero are very positive for gold Real rates not above zero before 216?? -5 Last month: April Source: US Bureau of Labor Statistics, Federal Reserve 44

45 Bearish: (3) Global Economy Sluggish Recessions always a major headwind for gold Gold daily p.m. fix Data through May 1, US recession 37% % Eurozone Recession/Depression 5 Jan 7 Jul 7 Feb 8 Sep 8 Apr 9 Nov 9 Jun 1 Jan 11 Aug 11 Mar 12 Oct 12 Apr 13 Nov 13 Jun 14 Source: London Bullion Market Association 45

46 Bearish: (3) Global Economy Sluggish Commodities decline when world growth < 4% CRB Index CRB and BoC commodity price indices are inflationadjusted and highly correlated with world growth Bank of Canada Index World GDP % -3-1 US recession Source: IMF, Bank of Canada, Thomson Reuters Datastream, DCM Economics 46

47 Bearish: (3) Global Economy Sluggish And commodity prices generally are down US recessions % year-over-year Thomson Reuters/Jeffries CRB Index China Joins WTO Nov 21 Last month: April Source: Wall Street Journal CRB INDEX: 19 commodity prices - Energy 39%, Agriculture 41%, Precious Metals 7%, Industrial Metals 13% 47

48 Bearish: (3) Global Economy Sluggish US CPI is trending lower too! % YoY Core CPI Headline CPI Last month: March US recessions Fed s PCE Source: US Bureau of Labor Statistics, US Bureau of Economic Analysis 48

49 US Dollar stronger 65 7 Bearish: (4) Dollar Strengthens The dollar rises others devalue against dollar Corr: -.9 Corr: -.84 Corr: -.77 Corr: -.48 Corr: -.29 Corr: -.8 Corr: -.58 Corr: -.2 to date Gold Since 26 correlation: Latest week: April 25, Dollar Index includes: Canadian dollar, Aussie dollar, euro, yen, Swiss Franc, pound, rupee, RMB/yuan Axis is inverted! Source: Wall Street Journal, London Bullion Market Association, Dundee Capital Markets calculations 5 49

50 5 4 Bearish: (4) Dollar Strengthens Gold/US dollar correlations always negative Gold % US Dollar - % Inverted scale US dollar index (four currencies) US dollar index (eight currencies) Last quarter: 214-Q Source: Wall Street Journal, Dundee Capital Markets calculations correlation: -.59 correlation:

51 19 Bearish: (5) Equity Markets Rally Further Equity markets are competition for gold!? S&P 5 Gold Monetary Reflation! Daily data Last date: April 3, Source: Thomson Reuters Datastream, London Bullion Market Association 51

52 Forecast Issued March 28, 214 Gold Price Scenarios 214-avg 214-end 215-avg Scenario A: p = 25-15% $1182 $115 $165 Scenario B: p = 5-55% $137 $135 $14 Scenario C: p = 25-3% $149 $1535 $1667 Weighted $1311 $1367 $1438 Averages to date: Q1 - $1293; April - $13 52