Metals Focus Precious Metals Investment Focus 2017/2018 - Degussa

Metals Focus Precious Metals Investment Focus 2017/2018 - Degussa

Metals Focus Precious Metals Investment Focus 2017/2018

Metals Focus Precious Metals Investment Focus 2017/2018 - Degussa

Degussa. Proud sponsors of Precious Metals Investment Focus 2017/2018 The Degussa name is synonymous with quality and durability unsurpassed in the world of precious metals. Today, this rich history and tradition is carried by Degussa Goldhandel GmbH. As an internationally operating company handling gold, silver and platinum metals, Degussa is Europe’s market leader among independent precious metal traders. In addition to headquarters in Frankfurt am Main, Degussa ofers its extensive range of bullion products at ten locations in Germany as well as at its international branches in London, Singapore, Zurich, Geneva and Madrid.

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Metals Focus Precious Metals Investment Focus 2017/2018 - Degussa

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Metals Focus Precious Metals Investment Focus 2017/2018 - Degussa

Precious Metals Investment Focus 2017/2018 Philip Newman Nikos Kavalis Oliver Heathman Neil Meader Philip Klapwijk Junlu Liang George Coles Peter Ryan Elvis Chou, Taipei Chirag Sheth, Mumbai Çagdas Küçükemiroglu, Istanbul Yiyi Gao, Shanghai Gary Gong, Shanghai Madeleine Hinton Daniel Macfarlane Pete Roberts Charles de Meester Carmen Eleta Neelan Patel Lisa Mitchell Unit T, Reliance Wharf, 2-10 Hertford Road, London, N1 5ET Telephone: +44 20 3301 6510, Email: Bloomberg Metals Focus Launch Page: MTFO Bloomberg chat: IB MFOCUS ISBN : 978-0-9935876-8-9 Metals Focus Precious Metals Investment Focus 2017/2018 PRODUCED BY WITH THE SUPPORT OF

Metals Focus Precious Metals Investment Focus 2017/2018 - Degussa

Precious Metals Investment Focus 2017/2018 About Metals Focus Metals Focus is one of the world’s leading precious metals consultancies. We specialise in research into the global gold, silver, platinum and palladium markets, producing regular reports, forecasts, proprietary data and bespoke consultancy. The quality of Metals Focus’ work is underpinned by a combination of top-quality desk-based analysis, coupled with an extensive program of travel to generate ’bottom up’ research for our forecasting reports and consultancy services. Our analysts regularly travel to the major markets speaking to contacts from across the value chain from producers to end-users, to obtain irst hand and unique information for our reports.

Copyright, October 2017 This Report (or any part of this Report) must not be reproduced, distributed, transmitted or communicated to any third party without express written consent from Metals Focus Ltd. In cases where the Report has been provided electronically, only the authorised subscriber, in respect of whom an individual user licence has been granted, may download a copy of this report. Additional user licences may be purchased from Metals Focus Ltd on request. The commission of any unauthorised act in relation to the work may result in civil or criminal actions.

Disclaimer Unless otherwise stated, Metals Focus Ltd are the owner or the licensee of all intellectual property rights in this Report. This Report (including any enclosures and attachments) has been prepared for the exclusive use and beneit of the addressee(s). Nothing contained in this Report constitutes an ofer to buy or sell precious metals or related securities or investments and nor does it constitute advice in relation to the buying or selling of the same. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this Report.

Whilst every care has been taken in preparing the information published in this Report, Metals Focus Ltd does not guarantee the accuracy or currency of the content. Metals Focus Ltd does not accept responsibility for any errors or omissions and accepts no liability for any loss or damage howsoever arising, nor to any third party in respect of this Report.

Metals Focus Precious Metals Investment Focus 2017/2018 - Degussa

Precious Metals Investment Focus 2017/2018 Metals Focus would like to thank the sponsors of the Precious Metals Investment Focus for their generous support.

Metals Focus Precious Metals Investment Focus 2017/2018 - Degussa

Precious Metals Investment Focus 2017/2018

Metals Focus Precious Metals Investment Focus 2017/2018 - Degussa

Precious Metals Investment Focus 2017/2018 7 11 16 26 47 58 64 78 1. Executive Summary Introduction 7 Gold 8 Silver 8 Platinum 9 Palladium 9 2. Price and Market Forecast Introduction 11 Gold 12 Silver 12 Platinum 13 Palladium 14 3. Price Review Introduction 16 Gold 16 Silver 20 Platinum 22 Palladium 24 4. Mining Equities Introduction 26 Gold Mining 28 Gold-Silver & Silver Mining 34 Platinum Group Metal (PGM) Mining 38 Streaming & Royalty Equities 42 Focus Box: Mining Equities Proile 27 Focus Box: Streaming & Royalty Companies’ Proile 42 Focus Box: Precious Metal Mining Indices 43 Focus Box: Precious Metal Mining Funds & ETFs’ Proile 44 5.

Exchanges & OTC Market Introduction 47 Gold 48 Silver 53 Platinum 55 Palladium 56 Focus Box: Commodity Exchanges Proile 47 Focus Box: Precious Metals in the Over-the-Counter and Allocated Metal Account Markets 50 Focus Box: The New Era for Gold Benchmarks 52 6. Exchange Traded Products Introduction 58 Gold 59 Silver 59 Platinum & Palladium 62 Non-physically Backed and Basket ETPs 63 Focus Box: Precious Metal ETPs Proile 58 7. Physical Investment Introduction 64 Gold 66 Silver 71 Platinum & Palladium 76 Focus Box: Physical Investment Proile 64 Focus Box: The Changing Dynamics of Indian Physical Investment 67 Focus Box: Precious Metals Retirement Accounts 72 Focus Box: Gold Jewellery as a Form of Investment 75 8.

Appendices Contents

Metals Focus Precious Metals Investment Focus 2017/2018 - Degussa

Introduction In many ways, the global macroeconomic and geopolitical backdrop has been positive for gold and the wider precious metals complex in 2017. Monetary policy has remained accommodative across all major currencies, with real and in many cases even nominal short term interest rates having been negative throughout the year. Focusing on the all-important US monetary policy, the year saw market consensus increasingly question both the speed and extent of forthcoming policy rate hikes. In contrast, investors have been eyeing the possibility for the ECB tightening cycle to commence. Meanwhile, the euphoria that Mr Trump’s election had fuelled initially has in large part dissipated, as the new administration has failed to deliver on some of its most widely publicised plans.

Related to these points, the dollar has spent much of the year in a downtrend. The year has also seen a lurry of geopolitical tensions. Among these, North Korea’s nuclear weapons programme and increasingly incendiary comments out of both that country and the US stand out. In Europe, the irst few months of the year saw growing concerns about the rise of populism within Europe, though the outcome of the elections that took place in the year has helped ease these fears. Finally, the unconventional nature of President Trump and his confrontational comments towards a number of traditional allies of the US create a wider feeling of uncertainty.

With all this in the background, one may wonder why precious metals prices have not fared better. Other than palladium, that has beneited from its strong fundamentals, price performance for the sector may have disappointed. Gold, for example, has trended up over the year, but failed to break its 2016 peak and it looks like the full year average will be a mere 2% higher y/y. Silver and platinum, meanwhile, have been moving sideways for most of 2017, the latter heading towards a full year average decline. Behind such lacklustre performance lies a reticence by professional investors to move into gold.

In large part, this relates to the lack of an obvious trigger for material price upside in the short to medium term. Other than that, investors clearly appreciate that tail-risks abound, including a major equity market correction, the North Korean war of words spiralling into full blown military conlict or a liquidity crisis erupting in China. However, the probability of each event is seen as low. Importantly, given the continued strength of equity markets, investors are mindful of the opportunity cost of exiting that ield too early, even in part. Looking ahead, we believe that this backdrop represents both a headwind and opportunity for precious metals.

On the one hand, unless one of the risks crystallise, it is diicult to see mainstream investors returning to the space in a large way. On the other, given their limited involvement in gold and, in contrast, their extended positioning in equities, when the expected Executive Summary Chapter 1 – In spite of a broadly favourable economic backdrop, growth in precious metals investment has been limited in 2017. – Net investor longs in futures recorded decent gains, but these are against relatively light positioning at the start of year following heavy sell-ofs in late 2016. – ETP demand has grown modestly, aside from a decline in the palladium market.

Bar and coin sales have fallen for silver and platinum, with gold rising modestly.

2017 Precious Metals Price Performance *Index, 2nd January 2017 =100 Source: Metals Focus 90 100 110 120 130 140 150 Jan-17 Apr-17 Jul-17 Index* Gold Silver Platinum Palladium Precious Metals Investment Focus 2017/2018 7

Metals Focus Precious Metals Investment Focus 2017/2018 - Degussa

Chapter 1: Executive Summary 8 Precious Metals Investment Focus 2017/2018 correction in the latter comes, this should result in hefty inlows into gold and, to some extent, also other precious metals. Gold This September, improved investor demand saw gold touch a 13-month high of $1,358, generating an intra-year gain of around $200. This however came short of the 2016 high, and was followed by liquidations that took the price down to the $1,280s.

Through to the price peak, investors’ net long Comex positions more than doubled intra-year to 25Moz (787t), while ETP demand rose by 9% this year to 69.0Moz (2,145t). OTC positions, however, seem to have seen modest inlows. Overall, these relatively modest gains relect the aforementioned lack of conviction among large investors. While there is recognition of a generally supportive macro and geopolitical backdrop for gold, many institutional investors have not returned to the market. Some of the gap has been illed by machine-driven funds, that normally lack long-term commitment to one market.

One silver lining of investors’ reticence is the light positioning and, given the uncertain macroeconomic backdrop, gold’s price outlook can still be seen to have good potential. It was also signiicant that gold established a series of higher lows this year, which may encourage those professional investors mindful of a still broadly unsupportive supply/demand backdrop. Mine output in 2017 for instance remains near record highs, while jewellery fabrication continues to languish at multi-year lows. Although investors have watched Indian imports improve sharply, this compares with an exceptionally weak 2016.

Furthermore, this upturn is being ofset by uninspiring demand in other key markets, notably China. One positive development within the physical market is the expected rise in retail investment this year. Even so, a 5% lift is modest and the global total remains signiicantly lower than over 2010-13. The increase comprises a dramatic rise in the Middle East, plus modest gains in Europe, India and East Asia, which are nearly ofset by a slump in the US (the latter relecting disillusionment with gold’s lack of price action for much of 2017). Silver This year so far, silver has underperformed gold, with the former rising by less than 10%.

This may surprise as silver’s strong, but more volatile, relationship to gold tends to see it outperform in a rising market. Instead, silver has struggled, with levels today some 20% down on last year’s highs. In particular, silver had to contend with a mid-year drag from a sell-of in some industrial metals. Moreover, silver has sufered from its disadvantage over gold, in that the wealth management sector, that have been buyers this year, typically favours gold. Aside from the drop in coin and bar demand, interest in silver ETPs has been mixed; having seen global holdings hit a record high in July of 682Moz (21,216t), a subsequent retreat saw these gains wiped out.

Similarly, net Comex longs achieved a record high in April of 584Moz (18,169t), but have since fallen quite sharply. However, even if an under-performer this year, we still believe that silver is likely to rally strongly looking further out, when the case for precious metals’ upside becomes clearer.

Value of Global Physical Investment in 2017* ($47.6Bn) NB: Value of palladium retail investment in 2017 is forecast to be $0.02Bn; *based on Metals Focus’ demand and prices forecasts Source: Metals Focus Gold ($44.3Bn) Platinum ($0.3Bn) Silver ($3.0Bn) Five-Year Precious Metals Price Performance * Index, 3rd September 2012=100 Source: Bloomberg 40 60 80 100 120 140 160 Sep-12 Mar-14 Sep-15 Mar-17 Index* Gold Silver Platinum Palladium

Chapter 1: Executive Summary 9 Precious Metals Investment Focus 2017/2018 Platinum The rise in some areas of platinum investment could be viewed as a sign of improved sentiment.

In particular, net Nymex long positions have risen 34% intra-year to 1.9Moz (60t), which has made up for a muted rise in ETPs (+2% to 2.4Moz, 75t). However, the gains in the futures market need to be set against a sharp drop in late 2016. Moreover, this compares poorly with net long gold positions (+115%). That the growth in platinum investment has fallen short relects its challenging supply/demand conditions. Looking at these in some detail, meaningful cuts in South African output continue to look unlikely, hence our 2017 forecast of a mere 1% fall in global mine supply. More important than the lack of producer discipline is investors’ take on the outlook for demand.

This relates to the challenges facing European light duty diesel sales. It is worth remembering that the light duty diesel segment of autocatalyst demand accounts for over a quarter of global platinum oftake. Until recently, rising overall car sales in Europe and higher loadings, due to the implementation of Euro 6 emissions limits, have ofset the impact of this loss of market share. However this is changing. Already, for 2017 and 2018 we are forecasting 1% and 3% y/y declines in platinum demand from the auto sector. This trend seems likely to continue and it is a major concern for investors.

We also forecast a marked drop in coin and bar demand this year. Overall, platinum investors must therefore contend with a growing physical surplus, which is also set to continue for some years to come. Returning to this year, this will result in further growth to already sizeable above-ground stocks which, by end- 2017, are estimated to reach some 9Moz (270t).

Palladium The strength in the palladium price has been nothing short of impressive; it has clearly been the best performer across the precious metals so far, rising by more than 30% intra-year. The scale at which it has gained ground on platinum has also focussed attention, with palladium moving to a premium over platinum in late September, for the irst time since 2001. This relects palladium’s strong fundamentals, characterised by physical deicits since 2012. These have seen above-ground stocks fall from 18Moz (560t) at end-2010 to an end-2017 forecast of 14Moz (430t). In addition, investor interest in palladium has grown following Trump’s victory, seen as a boost to pro-cyclical assets.

This has been relected in the strong inlows into Nymex investor positions over the year. In contrast, ETP palladium holdings are down year-to-date, suggesting some of the longer-term investors in the metal decided to take advantage of rising prices and take some proit. Meanwhile, the over-the-counter and physical markets have seen investor buying, including continued speculative purchases in China. These contributed to a liquidity squeeze mid-year that, while only brief, served as a warning for future potential tightness. Looking ahead, there is a risk that some of the inventory that has been moved to China will be sold and this would weigh on palladium.

Even so, this would be a short-term risk and would not detract from the metal’s strong fundamentals, which should maintain investor interest.

Value of ETP Holdings at end-August 2017 ($113.1Bn) Source: World Gold Council, Bloomberg, Metals Focus Gold ($97.5Bn) Palladium ($1.5Bn) Platinum ($2.4Bn) Silver ($11.7Bn) Value of Net Long Positions* at end-August 2017 ($42.9Bn) *Net long investor positions in Comex/Nymex futures (basis non-commercial plus non-reportable open interest). Source: CFTC, Metals Focus Gold ($32.8Bn) Palladium ($2.3Bn) Platinum ($2.0Bn) Silver ($5.8Bn)

11 Precious Metals Investment Focus 2017/2018 Precious Metals Historic Spot Prices and Quarterly Forecast, US$/oz Source: Metals Focus, Bloomberg.

Forecast prices are quarterly averages. Introduction On balance, we believe that the wider macroeconomic backdrop remains positive for precious metals prices through to 2018. Crucial to this view is that monetary policies are likely to remain accommodative, with most major currencies seeing negative real rates for some time to come. Meanwhile, we believe that the downtrend that the US dollar has seen for much of the year will continue. Last but not least, we believe a US equity markets correction is likely within the next twelve months. The gold price will be the main beneiciary of these conditions, but silver and, to a lesser extent, platinum should also beneit.

For silver and platinum, the forecast year-on-year price rise will be higher than for gold in 2018. In part, this relects their underperformances this year and so we expect both to make up some lost ground. The fact that the size of the white metal markets are much smaller and hence less liquid than gold will mean that speculative demand will have a more pronounced impact on prices. Finally, palladium is projected to post the smallest price rise in 2018 among the four metals, but this is against a new all-time high this year. Price & Market Forecast Chapter 2 Gold Silver Platinum Palladium 1,050 1,150 1,250 1,350 1,450 Jan-16 Jan-17 Jan-18 13 15 17 19 21 23 Jan-16 Jan-17 Jan-18 700 800 900 1,000 1,100 1,200 1,300 Jan-16 Jan-17 Jan-18 400 500 600 700 800 900 1,000 Jan-16 Jan-17 Jan-18 – Gold prices are forecast to rise 10% y/y to an average of $1,400 next year, as low interest rates and disappointment about US equities encourage investment.

Silver will be lifted by gold, with the 2018 average forecast to hit $20.60, up 18% y/y. – Platinum will also enjoy positive spill-overs from gold, rising to $1,090 (+12% y/y). – Palladium’s rally is expected to slow, but a new record annual average of $880 is forecast for 2018.

Chapter 2: Price & Market Forecast 12 Precious Metals Investment Focus 2017/2018 US Inlation Source: Bloomberg -3 -2 -1 2008 2010 2012 2014 2016 % CPI Urban Consumer PCE Core Price Index Gold Metals Focus expects the global macroeconomic environment to remain generally favourable for gold investment and hence prices for the rest of 2017 and well into 2018. Of course, the prospect of one further rate hike in late 2017, two to three more in 2018 and the start of balance sheet normalisation by the Fed poses headwinds for the metal. However, the speed at which monetary authorities move towards ‘normal’ monetary policies will continue to be slow and probably no faster than markets are currently pricing in.

Even assuming inlation remains at current levels, this will perpetuate the current negative or low short-term real interest environment in the US. Meanwhile, negative rates are also seen across other key currencies, importantly including the euro, even taking into account the growing likelihood of the ECB starting to tighten policy in the near future.

Another key driver behind the forecast return of investor interest in gold will be the future performance of the US economy, which we believe is likely to fall short of expectations. Looking ahead, we are sceptical about the current US administration’s ability to raise infrastructure spending, cut taxes, reduce regulation and renegotiate trade deals, and this is likely to generate further disappointment. Importantly, we believe that all this will eventually result in a sizeable correction to US equities, prices for which have looked excessively high for some time now.

The above alone should ofer gold a boost later in the year and into the next.

The likelihood for geopolitical risks to remain in the background should also help. As the opportunity cost of investing in gold remains relatively low, we believe that institutional investors will once again be convinced by the positives. In contrast, the scope for a rise in the gold price stemming from developments in the physical markets seems far less compelling. Total supply, for instance, is forecast to rise marginally, as irming prices encourage a modest rise in recycling. On the demand side, jewellery oftake is expected to bottom out this year, before recording its irst annual gain in ive years in 2018.

However, overall volumes will remain relatively low by historical standards. As a result, the market is expected to remain in a sizeable surplus next year, although these excess supplies should be easily absorbed by institutional investors.

Silver With its close link to gold, silver is projected to beneit from a recovery in investor interest in safe haven assets. Given the relatively light additions to investor positions so far in 2017, this should leave scope for healthy gains next year. In addition, the fact that the size of the silver market is smaller and hence less liquid than gold will amplify the impact of speculative interest on the price. With these factors in mind, we forecast silver to average $20.60 next year, with the gold:silver ratio falling to the mid-60s in the fourth quarter of 2018.

Gold Supply & Demand Moz 2016 2017F 2018F Supply Mine Production 104.9 104.2 104.1 Recycling 41.7 38.6 39.5 Net Hedging Supply 1.1 0.3 - Total Supply 147.7 143.1 143.7 Demand Jewellery 64.0 63.9 65.0 Industrial 10.4 10.5 10.7 Physical Investment 33.1 34.8 35.9 Net Hedging Demand - - 0.6 Oicial Sector Purchases 12.5 11.9 11.3 Total Demand 120.0 121.0 123.5 Market Balance 27.7 22.0 20.1 Gold Price (US$/oz) 1,251 1,275 1,400 Source: Metals Focus

Chapter 2: Price & Market Forecast 13 Precious Metals Investment Focus 2017/2018 In contrast to our bullish expectations for institutional investment next year, it is diicult to argue that silver will enjoy much support from supplydemand developments. For the third year in a row, the silver market is expected to remain in a fundamental surplus of around 70Moz. The main disappointment remains physical investment, the key culprit for the silver market moving into a major surplus over 2016-17. Even though demand for bars and coins is expected to recover next year, this is against a low base, with the global total still the second lowest this decade.

In essence, this relects the ongoing weakness in the US and India.

A more positive picture is expected for fabrication (excluding bars and coins), as industrial oftake is forecast to grow by 2% to a new all-time high, thanks to rising end-use in a wide range of sectors such as solar and automotive. Jewellery and silverware oftake is also forecast to grow, though we expect these gains will be modest because of projected price rises causing damage in such countries as India. Jewellery will also receive a beneit from structural change in the West and China, as higher margin styles gain market share, making consumption more price inelastic. On the supply side, a marginal rise in mine output and a recovery in recycling will see total supply record its irst annual increase in four years.

Platinum Our forecast recovery to an annual average price of $1,090 next year is almost entirely down to platinum’s positive correlation with gold. Even so, the expected 11% rise may surprise as that means platinum will outperform both gold and palladium. However, it is worth stressing that this is against low prices in 2017. Platinum is the only precious metal on track to record successive price losses in 2016 and 2017 (basis annual averages). In addition, relatively light positioning in futures creates the prospect for these positions to grow. In a small market, this could therefore have a greater impact on platinum prices than is the case elsewhere.

Finally, even though platinum’s poor fundamentals are weighing on investor conidence, much should already be factored into current prices, although their negative impact could easily reappear looking further out. Despite some 50% of the South African platinum industry being loss making during 2016 on an AISC basis, we do not believe this will translate into steep production cuts in the foreseeable future, given the high unemployment rate in the country and potential political pressures closures would lead to. This situation, along with a modest rise in autocatalyst recycling, will keep annual platinum supply above 8Moz per annum during 2017-18.

On the demand side, we expect to see little change next year in the global total. Autocatalyst demand is expected to disappoint, with a second consecutive decline. Moreover, its questionable long-term outlook, in the face of diesel’s declining market share of European sales, is hurting investor conidence in platinum. Increasingly negative sentiment and policies towards the technology seem to be accelerating this process. Next year, diesel’s share in Europe is forecast to drop to 41%, compared Silver Supply & Demand Moz 2016 2017F 2018F Supply Mine Production 888 857 867 Recycling 161 161 162 Government Sales 1 1 1 Net Hedging Supply - 5 15 Total Supply 1,051 1,024 1,045 Demand Industrial 487 502 509 Photography 38 36 34 Jewellery & Silverware 234 244 251 Physical Investment 212 170 184 Net Hedging Demand 12 - - Total Demand 985 952 979 Net Market Balance 66 72 66 Silver Price (US$/oz) 17.14 17.60 20.60 Source: Metals Focus Platinum Supply & Demand Koz 2016 2017F 2018F Supply Mine Production 6,209 6,153 6,026 Recycling 1,826 1,898 1,981 Total Supply 8,035 8,051 8,007 Demand Autocatalyst 3,334 3,305 3,217 Jewellery 2,308 2,302 2,311 Industrial 1,713 1,795 1,821 Physical Investment 628 266 209 Total Demand 7,983 7,668 7,557 Net Market Balance 51 383 450 Platinum Price (US$/oz) 989 970 1,090 Source: Metals Focus

Chapter 2: Price & Market Forecast 14 Precious Metals Investment Focus 2017/2018 to over 55% at the start of this decade. Turning to jewellery, the second biggest demand component, this has also failed to beneit much from soft prices, as demand in China continues to struggle with a structural change in consumer preferences and a shift to lighter platinum pieces. Retail investment, the other sizeable price sensitive area, is expected to continue easing, relecting disappointment over platinum’s persistently signiicant discount to gold. Against this backdrop, the platinum market is expected to see a growing surplus, which will push stocks to around 9Moz (280t) by end-2018, equivalent to almost 15 months of fabrication demand.

Palladium Palladium has been the best performer among the precious metals during 2017-to-date, rising by over 30% from the start of the year, as it rallied to touch $1,000. In spite of a pull-back thereafter, it has been trading above $900 at the time of writing. Palladium’s spectacular gains can be attributed to improvements in its already favourable supply/demand fundamentals, growing conidence in the general commodity sector following Trump’s election win and investors’ fading memories of painful losses in palladium in 2014-15. More importantly, even though above-ground inventories are still sizeable, they have been falling since 2012.

In addition, strong speculative demand for physical metal in China has seen a sizeable part of the above-ground stockpile removed from the terminal markets and thus the pool of liquidity available to the OTC market. Since late 2016, this has been accompanied by persistent backwardation in palladium futures, a typical response to tightening supplies.

Going forward, given our doubts about the US economy, there is a good chance that investor sentiment towards risky assets will weaken, which will inevitably afect palladium. With this in mind, we expect further proit taking to emerge in late 2017 and early 2018, although the scale of such liquidations should be limited. In addition, after notable gains this year, the palladium price may well need a period of consolidation before moving higher. From mid-2018 onwards, however, the price is anticipated to pick up again before trading above $1,000 later in the year. This in turn will send the annual average to a new record of $880 next year, up by 6% y/y.

This renewed rally is largely premised on assumptions that palladium autocatalyst oftake will continue to post decent gains next year due to growth in gasoline car sales in emerging markets as well as Europe where palladium should beneit from rising gasoline penetration. To some extent, its price strength and tightening supplies have already become major concerns for OEMs, yet any measure to reduce loadings would take time to implement and so it is unlikely that this would materially afect demand in the next couple of years. On the supply side, the total is expected to rise, but not by enough to outweigh forecast gains in fabrication demand.

The palladium market is therefore expected to remain in a sizeable deicit next year, a trend that started in 2012. Above-ground stocks of palladium as a result are expected to fall to around 12Moz (380t) by end-2018, equivalent to some 14 months of fabrication demand. This marks the irst time that palladium’s demand cover drops below platinum. Platinum:Palladium Ratio Source: Bloomberg 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Jan-10 Jan-12 Jan-14 Jan-16 Ratio Palladium Supply & Demand Koz 2016 2017F 2018F Supply Mine Production 6,766 6,675 6,685 Recycling 2,373 2,401 2,524 Total Supply 9,139 9,076 9,210 Demand Autocatalyst 7,980 8,229 8,339 Jewellery 283 287 284 Industrial 2,039 2,080 2,006 Physical Investment 11 24 24 Total Demand 10,313 10,619 10,654 Net Market Balance -1,174 -1,543 -1,444 Palladium Price (US$/oz) 615 830 880 Source: Metals Focus

16 Precious Metals Investment Focus 2017/2018 Chapter 3: Price Review Introduction The precious metals have, so far in 2017, all enjoyed year-to-date gains. The most eye-catching has been palladium’s stellar surge of 37% to 27th September (and it achieving a premium to platinum). Few would see that as a major shock as strength at some point was always expected due to its physical tightness, including strong speculative interest. Gold’s rise of 11% to late September was still noteworthy, especially the rally above $1,350 as North Korea kicked the market out of any summer slumber. That platinum managed any rise (2%) could be viewed as a modest success, given its unsupportive market fundamentals, but that highlights how platinum can track the gold in the short to medium term.

Silver, however, is perhaps this year’s surprise underperformer as a year-to-date rise barely greater than platinum’s has occurred at a time when a cross-metal rally should generate more signiicant price gains due to its less liquid market. Silver’s sluggishness has left the gold:silver ratio at a high of around 75:1 - a level that does not sit well with bull market conditions. More interest has been shown in the platinum-palladium spread as the gulf in their fundamentals and bouts of investor buying of that story were widely expected to push palladium to a premium. This was realised on 27th September, which marks a radical change from early 2017’s platinum premium of over $200.

As for the gold-platinum spread, most market participants look to have adjusted to the new reality of a platinum discount of well over $300.

Gold With recent prints in the $1,350s, it is easy to forget how weak prices were at the beginning of the 12 months under review; from a high in September 2016 of $1,353, prices fell to a 10-month low of $1,123 by mid-December. The market, however, soon perked back to life this year, with levels back over $1,250 by late February. After largely rangebound conditions to mid-August, vigour then returned, with a decisive break out to a 13-month high of $1,358 on 8th September. Prices may have since eased, but gold’s year-to-date gain of 11%, as of late September, remains impressive. Key to the big picture has been dollar weakness; gold in euro terms has been lacklustre, being a fraction down on January 2017.

The initial price slide was partly down to growing expectations of a rate hike in December, which also helped trigger a rally in the dollar. Much of the early push came from Comex longs being closed out and this was joined later by selling in other arenas such as ETPs. This change was itself largely driven by the US presidential election on 8th November, as Trump’s victory was seen as decisively pro-growth, leading to marked gains in US equities. This was underpinned by talk of higher inlation, faster rate rises and hawkish Fed commentary. That and the growing likelihood of monetary Price Review Chapter 3 Precious Metal Prices’ Relative Performance, 2017* * Index: 2nd January 2017 = 100 Source: Bloomberg – Palladium, gold, silver and platinum saw respective intra-year price rises to 27th September of 37%, 11%, 5% and 2%.

Palladium’s gains emerged as its tight fundamentals fed through to its irst real world liquidity scare this decade. – The other three, especially gold, were more driven by dollar weakness, sluggish US rate rises and geopolitics. – Investors were the prime driver of price gains, although interest from hedge funds and retail investors was generally limited 90 100 110 120 130 140 150 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Gold Silver Platinum Palladium Index*

18 Precious Metals Investment Focus 2017/2018 Chapter 3: Price Review policy divergence with other key economies meant further dollar strength. The price underside was also poorly defended by physical markets. Chinese demand for example was lacklustre, with irming SGE premiums more due to import licence restrictions. Indian demand also had to cope with the demonetisation of high value notes announced on 8th November. The turnaround in the market early this year was mainly due to a slide in the US dollar and receding expectations of three US rate hikes in 2017. A curbing of “Trump trade” exuberance was also apparent; equities did little more than tread water in January.

Politics elsewhere came to the fore as fears grew of market-unsettling victories for populists in Europe, in particular France. Physical demand in Asia was also supportive as Chinese buying was boosted by seasonal factors and trade optimism. Indian bullion imports also saw early gains on the back of low stocks and year-on-year comparisons being against a strike-hit 2016.

Prices then tried to push higher, but rallies into the $1,290s stalled in both April and June. Key to upward pressure was the return of dollar weakness and the inter-linked falling perceived chance of a September rate hike and the slide in US inlation from March. Falling inlation, however, also acted as a negative for gold, as did the actual, if expected, rate rises in March and June. Other factors were more actively bearish, including an equities rally in mid-May and a slide in oil prices from mid-April to late June. In addition, victories for mainstream parties in France and the Netherlands, and the apparent resolution of problems in Italian banking removed some uncertainty.

Those negatives for gold, however, never led to a rout, partly as strong y/y gains in Indian bullion imports helped defend the underside. More important though was the absence of aggressive shorting, outside of a brief window in July. This is thought to be largely down to concerns that, even if equities were trending ever higher, valuations were only getting more overblown in an era of endless turmoil in US politics and repeated failures to pass legislation. Others feared the market complacency implicit in the VIX’s record lows, and also important was the continuance of negative real rates for the medium term despite the fall in inlation.

Geopolitics then gave gold a shot in the arm with North Korea’s irst missile launch over Japan on 29th August. Gold received a further boost from fears of a retaliatory overreaction by the US, and the emergence of the debt ceiling issue in that country, an outcome made more complex by the cost of Hurricane Harvey’s damage. The rally was given extra fuel by Fed commentary that cast doubt on a rate rise in December and led to a fall in bond yields and the dollar. As a result, gold shot up to the earlier noted 13-month high of $1,358 on 8th September. Prices have since eased, which is understandable given easing geopolitical tensions and dollar strength.

Gains could have been stronger and more resilient, however, if there had been greater participation during the year from professional investors, particularly still equity-focused hedge funds. As normal, the fundamentals were more of a footnote for prices, if on balance mildly positive. The press and investors certainly noted that mine Probability of Fed’ Rates Being Unchanged by December 2017 * Percentage probability inferred by bond prices Source: Bloomberg Gold Prices & the US Dollar, 2017 Source: Bloomberg 1,000 1,100 1,200 1,300 1,400 20 40 60 80 100 Jan-17 Apr-17 Jul-17 Probability(%) Gold Prices Probability (%) US$/oz 90 92 94 96 98 100 102 104 1,100 1,150 1,200 1,250 1,300 1,350 1,400 Jan-17 Apr-17 Jul-17 Gold Price US Dollar Index(Inverted) US$/oz Index

Chapter 3: Price Review 19 Precious Metals Investment Focus 2017/2018 Gold Price High, Low, Close (London, US$/oz) and Key Events in 2016/2017 NB: Black line indicates daily trading range; Source: Metals Focus, Bloomberg 1,100 1,150 1,200 1,250 1,300 1,350 1,400 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 50 - Day Moving Average 100 - Day Moving Average 200 - Day Moving Average Donald Trump’s inauguration as President Fed raises rates by 0.25% to upper bound target of 1.00% S&P 500 Index passes 2,500 WTI at ytd low of $42 Emmanuel Macron elected President of France Comex net long positions fall to an 18-month low of 7.4Moz Gold's posts its 2017 low of $1,146 on the second trading day of the year North Korea’s irst missle launch over Japan Gold hits ytd high of $1,358 Angela Merkel wins a fourth term as Chancellor of Germany Indian Goods & Services Tax (GST) introduced Russian central bank added almost 800koz to gold reserves in March FOMC Meeting FOMC Minutes Fed raises rates by 0.25% to upper bound target of 1.25% DXY at ytd high of 103.8 DXY at ytd low of 91.0 Euro at 6-month high over $1.10 Populist PVV beaten in Dutch elections ETPs at 2016 high of 64.5Moz ETPs see largest daily outlow since July 2013 of 569koz Donald Trump elected President of the US Demonetisation initiative begins in India Fed raises rates by 0.25% to upper bound target of 0.75% Shanghai Gold Exchange Premium Index at 2016 high of 74.2 China producer price index at ive-year high Taiwan jets scrambled after Chinese navy enters Taiwan’s waters US 10-year treasury bond yields at 2016 high of 2.64% Uncertainty in EU politics spurs safe-haven buying S & P up 6% ytd to record high over 2,400 News of US inlation (CPE, March) falling to 1.6% VIX at record low US Senate rejects ACA repeal proposal Italy & EU Commission agree Monte Paschi bank rescue

20 Precious Metals Investment Focus 2017/2018 Chapter 3: Price Review production is set to fall for the irst time this decade. Mining also made headlines through output-curbing resource nationalism in places such as Indonesia. It also cannot have hurt sentiment that environmental matters will trim China’s output and hedging has stayed minimal. In addition, some comfort has been taken from global jewellery oftake running broadly lat y/y despite higher prices. However, central bank buying has eased and the market is aware of its growing reliance on just one country, Russia. Silver Similar to gold, silver had a tough time in late 2016 as it fell from over $20 in September to an 8-month low of $15.63 in December.

It managed a fair recovery to back over $18 as the new year began but since then it has underperformed its yellow cousin. After a rally to $18.65 in mid-April, silver trended down, rather than sideways, hitting a 15-month low of $15.19 in July. A rally then emerged but ran out of steam at the $18 mark in early September, leaving April with the current year-to-date high. This meant that, having oscillated in a rough range of 68-72 from September 2016 to April, the gold:silver ratio has risen to a new normal of around 75. Silver’s slide in late 2016 to below $16 was largely down to forces similar to those hitting gold, such as a rising dollar.

Of interest was that, even if the market was bearish, the gold:silver ratio did not soar, as might be expected given silver’s typically higher gearing. This was thought due to silver beneiting from the pro-growth hopes from the new Trump administration; not only could that directly boost silver demand (mainly in infrastructure projects), but prices also saw a boost from base metal strength, especially for copper. There was certainly scant support from the physical markets; Indian bullion imports in Q4.16 were down over 60% y/y for example. The drivers of the February rally over $18 were again similar to gold but, with prices so strong, it was of note that the gold:silver ratio only narrowed to an unexceptional 68.

This was due in part to reappraisals of Trump’s ability to boost US GDP growth (and so lift silver oftake). Some US retail investor interest also waned as “their” man was now in the White House, and Indian bullion imports were weak, down 16% y/y in January-February. Another characteristic favouring gold over silver concerns the impact of the wealth management sector. When these investors have been active in the precious metals space they have favoured gold over silver. Silver’s behaviour mid-year deserves analysis as prices weakened steadily, despite largely rangebound conditions in gold. This was in part down to silver’s industrial linkages, which left it vulnerable to the general slide in commodity prices from mid-April to late June.

The funds certainly were on the attack, with silver aggressively shorted from mid-April. In other arenas however, price dips below $16.50 and even more so $16.00 encouraged bargain hunting. ETP holdings for instance rose fairly steadily to a historic high in mid-July and US Eagle sales that month were up 69% y/y. It was other agents, however, that sparked of the late August rally over the $18 mark. The key driver was again gold’s own rally, on the back of such drivers Silver Prices and the Gold:Silver Ratio, 2017 Source: Bloomberg 66 68 70 72 74 76 78 15 16 17 18 19 Jan-17 Apr-17 Jul-17 Silver Price Gold:Silver Ratio US$/oz Ratio Gold Investment *Combined non-commercial and non-reportable positions.

Source: CFTC, Bloomberg 50 55 60 65 70 75 80 10 20 30 40 Jan-16 Jul-16 Jan-17 Jul-17 Comex Net Long Positions* (LHS) ETP Holdings(RHS) Moz Moz

Chapter 3: Price Review 21 Precious Metals Investment Focus 2017/2018 Silver Price High, Low, Close (London, US$/oz) and Key Events in 2016/2017 NB: Black line indicates daily trading range; Source: Metals Focus, Bloomberg 15 16 17 18 19 20 21 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 50 - Day Moving Average 100 - Day Moving Average 200 - Day Moving Average Donald Trump’s inauguration as President Fed raises rates by 0.25% to upper bound target of 1.00% S&P 500 Index passes 2,500 Dow Jones Index closes above 22,000 for the irst time Silver hits ytd high of $18.66; highest since mid-November 2016 Angela Merkel wins a fourth term as Chancellor of Germany Indian Goods & Services Tax (GST) introduced FOMC Meeting FOMC Minutes Fed raises rates by 0.25% to upper bound target of 1.25% US Mint Eagle Sales Q1.17 8.0Moz (-46% y/y) US Mint Eagle Sales Q2.17 4.3Moz (-63% y/y) US Mint Eagle Sales Q4.16 7.1Moz (-35% y/y) US Mint Eagle Sales Q3.16 4.3Moz (-70% y/y) North Korea’s irst missle launch over Japan Fed raises rates by 0.25% to upper bound target of 0.75% Donald Trump elected President of the US Demonetisation initiative begins in India US dollar strengthens, GBP falls to 31-year low Au:Ag ratio at ytd low of 67.4 Copper prices at a 5-month low Au:Ag ratio at ytd high of 79.4 Copper prices at 3-year high ETP holdings at record high Comex gross short positions at record reporting low US Mint Eagle Sales +69% y/y in July Indian bullion imports in May at near 2-year high of 771t Operations suspended at the Escobal silver mine in Guatemala

22 Precious Metals Investment Focus 2017/2018 Chapter 3: Price Review as the jump in geopolitical tensions over North Korea, a slide in the dollar and expectations for slower US rate rises. Much of this push came from heavy short covering on Comex, whereas gross longs barely moved. As with gold, silver fundamentals’ price impact was slight, although in this case mildly bearish. As intimated above, the main negative has been retail investment. Its weakness in the US has also had a multiplier efect as reports on the slump in Eagle sales have rarely been followed by talk of the compensating shift to 1oz rounds.

Investors have been aware of the surge in Comex stocks, which has been attributed to this weak retail investment in the US and also India. As suggested by still decent premiums on four 9s silver, industrial oftake has been good and there were supportive developments elsewhere. Mine output for instance is set to fall this year and resource nationalism (for example in Guatemala) has been in the news. Platinum The year so far may have seen moments of strength, in the form of rallies over $1,000 in February and early September. However, this was usually just on the back of gains elsewhere in the precious metals complex.

The metal’s already poor fundamental outlook also tended to deteriorate as the year progressed. This helps explain the ease with which prices were knocked back in May and July towards December 2016’s 11-month low of $890. That also lies behind the marked widening in its discount to gold and the evaporation of its premium over palladium. As we go to press, platinum has again been pushed back (to around $920), virtually wiping out any yearto-date gain and making it the year’s worst performing precious metal. Prices today may seem soft, but losses were greater in the second half of 2016 as they fell from over $1,190 in August to below $900 in December.

There were many real world reasons for this, including the absence of voluntary supply cuts in South Africa, successful wage negotiations with that country’s trade unions, concerns about diesel following announcements of future diesel bans in certain European cities, and soft jewellery demand in China. All that helped trigger the heavy shorting on Nymex seen in late 2016. Weakness in gold and silver prices were scarcely a help either, although it is worth noting that the discount to gold narrowed from over $330 in October to the low $200s by December. This interplay between platinum’s sizable and growing market surpluses and gold’s macro-dominated price moves have then come to characterise price behaviour so far this year.

Platinum certainly began 2017 in quite a positive manner as it rallied to what proved to be the high for the year so far of $1,045 in late February. This phase was very much down to strength in gold, itself due to such factors as a weak dollar, and it was of note that platinum’s discount to gold held fairly steady at the time. There was certainly a perception too that platinum had moved into oversold territory, triggering decent short covering on Nymex. These opening months were also the only time in the 12 months under review when platinum’s premium to palladium did not weaken notably. This we ascribe in part to faltering Platinum Prices & Their Gold Diferential Source: Bloomberg -400 -350 -300 -250 -200 -150 850 900 950 1,000 1,050 Jan 17 Apr 17 Jul 17 Platinum Price (LHS) Gold - PlatinumDifferential(RHS) US$/oz US$/oz Silver Investment *Combined non-commercial and non-reportable positions.

Source: CFTC, Bloomberg 575 600 625 650 675 700 100 200 300 400 500 600 700 Jan-16 Jul-16 Jan-17 Jul-17 Comex Net Long Positions* (LHS) ETP Holdings(RHS) Moz Moz

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