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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
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Precious Metals Investment Focus 2017/2018                                                     


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Precious Metals Investment Focus 2017/2018

1.   Executive Summary                                                                           7
     Introduction 7 Gold 8 Silver 8 Platinum 9 Palladium 9

2.   Price and Market Forecast                                                                   11
     Introduction 11 Gold 12 Silver 12 Platinum 13 Palladium 14

3.   Price Review                                                                                16
     Introduction 16 Gold 16 Silver 20 Platinum 22 Palladium 24

4.   Mining Equities                                                                             26
     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                                                                      47
     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                                                                    58
     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                                                                         64
     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                                                                                  78
Metals Focus Precious Metals Investment Focus 2017/2018 - Degussa ...
Precious Metals Investment Focus 2017/2018

    Chapter 1                                        Executive Summary

   – In spite of a broadly favourable economic       Introduction
     backdrop, growth in precious metals             In many ways, the global macroeconomic and geopolitical backdrop has
     investment has been limited in 2017.            been positive for gold and the wider precious metals complex in 2017.
                                                     Monetary policy has remained accommodative across all major currencies,
   – Net investor longs in futures recorded          with real and in many cases even nominal short term interest rates having
     decent gains, but these are against             been negative throughout the year. Focusing on the all-important US
     relatively light positioning at the start of    monetary policy, the year saw market consensus increasingly question
     year following heavy sell-ofs in late 2016.     both the speed and extent of forthcoming policy rate hikes. In contrast,
                                                     investors have been eyeing the possibility for the ECB tightening cycle to
   – ETP demand has grown modestly, aside            commence. Meanwhile, the euphoria that Mr Trump’s election had fuelled
     from a decline in the palladium market.         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
   – Bar and coin sales have fallen for silver and   points, the dollar has spent much of the year in a downtrend.
     platinum, with gold rising modestly.
                                                     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
2017 Precious Metals Price
                                                     disappointed. Gold, for example, has trended up over the year, but failed to
Performance                                          break its 2016 peak and it looks like the full year average will be a mere 2%
  Index*                                             higher y/y. Silver and platinum, meanwhile, have been moving sideways for
                                                     most of 2017, the latter heading towards a full year average decline.

 140                                                 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.

 120                                                 Other than that, investors clearly appreciate that tail-risks abound,
                                                     including a major equity market correction, the North Korean war of words
 110                                                 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
  90                                                 the opportunity cost of exiting that ield too early, even in part.
   Jan-17           Apr-17          Jul-17
                                                     Looking ahead, we believe that this backdrop represents both a headwind
                 Gold                 Silver
                                                     and opportunity for precious metals. On the one hand, unless one of the
                 Platinum             Palladium
                                                     risks crystallise, it is diicult to see mainstream investors returning to the
*Index, 2nd January 2017 =100                        space in a large way. On the other, given their limited involvement in gold
Source: Metals Focus
                                                     and, in contrast, their extended positioning in equities, when the expected

Metals Focus Precious Metals Investment Focus 2017/2018 - Degussa ...
Chapter 1: Executive Summary                                   Precious Metals Investment Focus 2017/2018

Five-Year Precious Metals Price                                correction in the latter comes, this should result in hefty inlows into gold
                                                               and, to some extent, also other precious metals.
    Index*                                                     Gold
 160                                                           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

 120                                                           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
 100                                                           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.
    60                                                         While there is recognition of a generally supportive macro and geopolitical
                                                               backdrop for gold, many institutional investors have not returned to the
    40                                                         market. Some of the gap has been illed by machine-driven funds, that
     Sep-12        Mar-14        Sep-15         Mar-17
                                                               normally lack long-term commitment to one market.
                   Gold                  Silver
                   Platinum              Palladium             One silver lining of investors’ reticence is the light positioning and, given
                                                               the uncertain macroeconomic backdrop, gold’s price outlook can still be
* Index, 3rd September 2012=100
                                                               seen to have good potential. It was also signiicant that gold established
Source: Bloomberg
                                                               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
Value of Global Physical                                       uninspiring demand in other key markets, notably China. One positive
Investment in 2017* ($47.6Bn)                                  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
                    Platinum ($0.3Bn)                          remains signiicantly lower than over 2010-13. The increase comprises a
      Silver ($3.0Bn)                                          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).

                                                               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

                                                   Gold        sell-of in some industrial metals. Moreover, silver has sufered from its
                                              ($44.3Bn)        disadvantage over gold, in that the wealth management sector, that have
                                                               been buyers this year, typically favours gold. Aside from the drop in coin
NB: Value of palladium retail investment in 2017 is forecast
                                                               and bar demand, interest in silver ETPs has been mixed; having seen
to be $0.02Bn; *based on Metals Focus’ demand and
prices forecasts
                                                               global holdings hit a record high in July of 682Moz (21,216t), a subsequent
Source: Metals Focus                                           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.

Precious Metals Investment Focus 2017/2018           Chapter 1: Executive Summary

Value of ETP Holdings at                                 Platinum
                                                         The rise in some areas of platinum investment could be viewed as a sign
end-August 2017 ($113.1Bn)
                                                         of improved sentiment. In particular, net Nymex long positions have risen

                 Palladium ($1.5Bn)                      34% intra-year to 1.9Moz (60t), which has made up for a muted rise in ETPs
     Platinum ($2.4Bn)                                   (+2% to 2.4Moz, 75t). However, the gains in the futures market need to be
Silver ($11.7Bn)                                         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
                                               Gold      light duty diesel segment of autocatalyst demand accounts for over a
                                          ($97.5Bn)      quarter of global platinum oftake. Until recently, rising overall car sales in
                                                         Europe and higher loadings, due to the implementation of Euro 6 emissions
Source: World Gold Council, Bloomberg, Metals Focus      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).
Value of Net Long Positions* at
end-August 2017 ($42.9Bn)                                Palladium
                                                         The strength in the palladium price has been nothing short of impressive;
               Palladium ($2.3Bn)                        it has clearly been the best performer across the precious metals so far,
Platinum ($2.0Bn)                                        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
($5.8Bn)                                                 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
                                                 Gold    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
*Net long investor positions in Comex/Nymex futures
                                                         seen investor buying, including continued speculative purchases in China.
(basis non-commercial plus non-reportable open
                                                         These contributed to a liquidity squeeze mid-year that, while only brief,
Source: CFTC, Metals Focus                               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.

Precious Metals Investment Focus 2017/2018

    Chapter 2                                                 Price & Market Forecast

   – Gold prices are forecast to rise 10% y/y                 Introduction
     to an average of $1,400 next year, as low                On balance, we believe that the wider macroeconomic backdrop remains
     interest rates and disappointment about                  positive for precious metals prices through to 2018. Crucial to this view
     US equities encourage investment.                        is that monetary policies are likely to remain accommodative, with most
                                                              major currencies seeing negative real rates for some time to come.
   – Silver will be lifted by gold, with the 2018             Meanwhile, we believe that the downtrend that the US dollar has seen for
     average forecast to hit $20.60, up 18% y/y.              much of the year will continue. Last but not least, we believe a US equity
                                                              markets correction is likely within the next twelve months.
   – Platinum will also enjoy positive spill-overs
     from gold, rising to $1,090 (+12% y/y).                  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
   – Palladium’s rally is expected to slow, but               platinum, the forecast year-on-year price rise will be higher than for gold
     a new record annual average of $880 is                   in 2018. In part, this relects their underperformances this year and so we
     forecast for 2018.                                       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.

Precious Metals Historic Spot Prices and Quarterly Forecast, US$/oz
    Gold                                                                     Silver
   1,450                                                                    23




   1,050                                                                    13
       Jan-16           Jan-17          Jan-18                               Jan-16         Jan-17       Jan-18

    Platinum                                                               Palladium

   1,300                                                                   1,000

   1,200                                                                    900

   1,100                                                                    800

   1,000                                                                    700

     900                                                                    600

     800                                                                    500

     700                                                                    400
       Jan-16           Jan-17         Jan-18                                 Jan-16         Jan-17      Jan-18

Source: Metals Focus, Bloomberg. Forecast prices are quarterly averages.

Chapter 2: Price & Market Forecast                          Precious Metals Investment Focus 2017/2018

Gold Supply & Demand                                         Gold
                                                             Metals Focus expects the global macroeconomic environment to remain
Moz                             2016       2017F 2018F
                                                             generally favourable for gold investment and hence prices for the rest
Supply                                                       of 2017 and well into 2018. Of course, the prospect of one further rate
Mine Production                104.9       104.2    104.1    hike in late 2017, two to three more in 2018 and the start of balance sheet
Recycling                        41.7       38.6     39.5    normalisation by the Fed poses headwinds for the metal. However, the
Net Hedging Supply                   1.1     0.3        -    speed at which monetary authorities move towards ‘normal’ monetary
Total Supply                    147.7      143.1    143.7    policies will continue to be slow and probably no faster than markets are
                                                             currently pricing in. Even assuming inlation remains at current levels,
Demand                                                       this will perpetuate the current negative or low short-term real interest
Jewellery                        64.0       63.9     65.0    environment in the US. Meanwhile, negative rates are also seen across
Industrial                       10.4       10.5     10.7    other key currencies, importantly including the euro, even taking into
Physical Investment              33.1       34.8     35.9    account the growing likelihood of the ECB starting to tighten policy in the
Net Hedging Demand                     -       -      0.6    near future.
Oicial Sector Purchases          12.5       11.9     11.3
Total Demand                   120.0       121.0    123.5    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
Market Balance                   27.7       22.0     20.1    likely to fall short of expectations. Looking ahead, we are sceptical about
Gold Price (US$/oz)             1,251      1,275    1,400    the current US administration’s ability to raise infrastructure spending, cut
                                                             taxes, reduce regulation and renegotiate trade deals, and this is likely to
Source: Metals Focus
                                                             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

US Inlation
                                                             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

-1                                                           oftake is expected to bottom out this year, before recording its irst annual

-2                                                           gain in ive years in 2018. However, overall volumes will remain relatively

-3                                                           low by historical standards. As a result, the market is expected to remain
  2008       2010      2012      2014        2016            in a sizeable surplus next year, although these excess supplies should be
                                                             easily absorbed by institutional investors.
                    CPI Urban Consumer

                    PCE Core Price Index
Source: Bloomberg
                                                             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.

Precious Metals Investment Focus 2017/2018        Chapter 2: Price & Market Forecast

Silver Supply & Demand                             In contrast to our bullish expectations for institutional investment next
                                                   year, it is diicult to argue that silver will enjoy much support from supply-
Moz                       2016    2017F 2018F
                                                   demand developments. For the third year in a row, the silver market is
Supply                                             expected to remain in a fundamental surplus of around 70Moz. The main
Mine Production            888     857     867     disappointment remains physical investment, the key culprit for the silver
Recycling                  161      161    162     market moving into a major surplus over 2016-17. Even though demand for
Government Sales             1       1       1     bars and coins is expected to recover next year, this is against a low base,
Net Hedging Supply            -      5      15     with the global total still the second lowest this decade. In essence, this

Total Supply              1,051   1,024   1,045    relects the ongoing weakness in the US and India.

Demand                                             A more positive picture is expected for fabrication (excluding bars and
Industrial                 487     502     509     coins), as industrial oftake is forecast to grow by 2% to a new all-time
Photography                 38      36      34     high, thanks to rising end-use in a wide range of sectors such as solar
Jewellery & Silverware     234     244     251     and automotive. Jewellery and silverware oftake is also forecast to grow,
Physical Investment        212      170    184     though we expect these gains will be modest because of projected price
Net Hedging Demand          12        -       -    rises causing damage in such countries as India. Jewellery will also receive
Total Demand               985     952     979     a beneit from structural change in the West and China, as higher margin
                                                   styles gain market share, making consumption more price inelastic. On the
Net Market Balance          66      72      66     supply side, a marginal rise in mine output and a recovery in recycling will
Silver Price (US$/oz)     17.14   17.60   20.60    see total supply record its irst annual increase in four years.

Source: Metals Focus
                                                   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
Platinum Supply & Demand
                                                   this is against low prices in 2017. Platinum is the only precious metal on
Koz                       2016    2017F 2018F
                                                   track to record successive price losses in 2016 and 2017 (basis annual
Supply                                             averages). In addition, relatively light positioning in futures creates the
Mine Production           6,209   6,153   6,026    prospect for these positions to grow. In a small market, this could therefore
Recycling                 1,826   1,898   1,981    have a greater impact on platinum prices than is the case elsewhere.
Total Supply              8,035   8,051   8,007    Finally, even though platinum’s poor fundamentals are weighing on
                                                   investor conidence, much should already be factored into current prices,
Demand                                             although their negative impact could easily reappear looking further out.
Autocatalyst              3,334   3,305   3,217
Jewellery                 2,308   2,302   2,311    Despite some 50% of the South African platinum industry being loss
Industrial                1,713   1,795   1,821    making during 2016 on an AISC basis, we do not believe this will translate
Physical Investment        628     266     209     into steep production cuts in the foreseeable future, given the high
Total Demand              7,983   7,668   7,557    unemployment rate in the country and potential political pressures
                                                   closures would lead to. This situation, along with a modest rise in
Net Market Balance          51     383     450     autocatalyst recycling, will keep annual platinum supply above 8Moz per
Platinum Price (US$/oz)    989     970    1,090    annum during 2017-18.

Source: Metals Focus
                                                   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

Chapter 2: Price & Market Forecast                          Precious Metals Investment Focus 2017/2018

Palladium Supply & Demand                                    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
Koz                             2016        2017F 2018F
                                                             prices, as demand in China continues to struggle with a structural change
Supply                                                       in consumer preferences and a shift to lighter platinum pieces. Retail
Mine Production                 6,766       6,675   6,685    investment, the other sizeable price sensitive area, is expected to continue
Recycling                       2,373       2,401   2,524    easing, relecting disappointment over platinum’s persistently signiicant
Total Supply                    9,139       9,076   9,210    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.
Autocatalyst                    7,980       8,229   8,339
Jewellery                            283      287    284     Palladium
Industrial                      2,039       2,080   2,006    Palladium has been the best performer among the precious metals during
Physical Investment                   11       24     24     2017-to-date, rising by over 30% from the start of the year, as it rallied to
Total Demand                  10,313 10,619 10,654           touch $1,000. In spite of a pull-back thereafter, it has been trading above
                                                             $900 at the time of writing. Palladium’s spectacular gains can be attributed
Net Market Balance             -1,174       -1,543 -1,444    to improvements in its already favourable supply/demand fundamentals,
Palladium Price (US$/oz)             615      830    880     growing conidence in the general commodity sector following Trump’s
Source: Metals Focus                                         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.

Platinum:Palladium Ratio
                                                             Going forward, given our doubts about the US economy, there is a good

 Ratio                                                       chance that investor sentiment towards risky assets will weaken, which
 4.0                                                         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
 2.5                                                         higher. From mid-2018 onwards, however, the price is anticipated to pick
 2.0                                                         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
 0.5                                                         autocatalyst oftake will continue to post decent gains next year due to
  Jan-10       Jan-12      Jan-14          Jan-16
                                                             growth in gasoline car sales in emerging markets as well as Europe where
                                                             palladium should beneit from rising gasoline penetration. To some extent,
Source: Bloomberg                                            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.

Chapter 3: Price Review                                Precious Metals Investment Focus 2017/2018

      Chapter 3                                        Price Review

     – Palladium, gold, silver and platinum saw        Introduction
       respective intra-year price rises to 27th       The precious metals have, so far in 2017, all enjoyed year-to-date gains.
       September of 37%, 11%, 5% and 2%.               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
     – Palladium’s gains emerged as its tight          as a major shock as strength at some point was always expected due to its
       fundamentals fed through to its irst real       physical tightness, including strong speculative interest. Gold’s rise of 11%
       world liquidity scare this decade.              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
     – The other three, especially gold, were          managed any rise (2%) could be viewed as a modest success, given its
       more driven by dollar weakness, sluggish        unsupportive market fundamentals, but that highlights how platinum can
       US rate rises and geopolitics.                  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
     – Investors were the prime driver of price        platinum’s has occurred at a time when a cross-metal rally should generate
       gains, although interest from hedge funds       more signiicant price gains due to its less liquid market.
       and retail investors was generally limited
                                                       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.

Precious Metal Prices’ Relative                        With recent prints in the $1,350s, it is easy to forget how weak prices were
Performance, 2017*                                     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
 150                                                   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
 120                                                   to the big picture has been dollar weakness; gold in euro terms has been
                                                       lacklustre, being a fraction down on January 2017.

 100                                                   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
      Jan-17   Mar-17     May-17   Jul-17     Sep-17   early push came from Comex longs being closed out and this was joined

                  Gold               Silver
                                                       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
                  Platinum           Palladium
                                                       was seen as decisively pro-growth, leading to marked gains in US equities.
* Index: 2 January 2017 = 100                          This was underpinned by talk of higher inlation, faster rate rises and
Source: Bloomberg                                      hawkish Fed commentary. That and the growing likelihood of monetary

Chapter 3: Price Review                                     Precious Metals Investment Focus 2017/2018

Probability of Fed’ Rates Being                             policy divergence with other key economies meant further dollar strength.
                                                            The price underside was also poorly defended by physical markets.
Unchanged by December 2017
                                                            Chinese demand for example was lacklustre, with irming SGE premiums

 Probability (%)                                   US$/oz   more due to import licence restrictions. Indian demand also had to cope
                                                            with the demonetisation of high value notes announced on 8th November.
 100                                               1,400

     80                                                     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
     60                                                     curbing of “Trump trade” exuberance was also apparent; equities did little
                                                   1,200    more than tread water in January. Politics elsewhere came to the fore
                                                            as fears grew of market-unsettling victories for populists in Europe, in
                                                   1,100    particular France. Physical demand in Asia was also supportive as Chinese
                                                            buying was boosted by seasonal factors and trade optimism. Indian bullion
     0                                             1,000    imports also saw early gains on the back of low stocks and year-on-year
     Jan-17      Apr-17         Jul-17                      comparisons being against a strike-hit 2016.

              Probability (%)            Gold Prices
                                                            Prices then tried to push higher, but rallies into the $1,290s stalled in both
* Percentage probability inferred by bond prices            April and June. Key to upward pressure was the return of dollar weakness
Source: Bloomberg
                                                            and the inter-linked falling perceived chance of a September rate hike and
                                                            the slide in US inlation from March. Falling inlation, however, also acted
                                                            as a negative for gold, as did the actual, if expected, rate rises in March
                                                            and June. Other factors were more actively bearish, including an equities
                                                            rally in mid-May and a slide in oil prices from mid-April to late June. In
                                                            addition, victories for mainstream parties in France and the Netherlands,
                                                            and the apparent resolution of problems in Italian banking removed some
                                                            uncertainty. Those negatives for gold, however, never led to a rout, partly
Gold Prices & the US Dollar,
                                                            as strong y/y gains in Indian bullion imports helped defend the underside.
2017                                                        More important though was the absence of aggressive shorting, outside of
                                                            a brief window in July. This is thought to be largely down to concerns that,
 US$/oz                                             Index
                                                            even if equities were trending ever higher, valuations were only getting
 1,400                                               90
                                                            more overblown in an era of endless turmoil in US politics and repeated
 1,350                                               92     failures to pass legislation. Others feared the market complacency implicit
                                                     94     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
                                                     100    launch over Japan on 29th August. Gold received a further boost from
 1,150                                               102    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
 1,100                                               104
     Jan-17         Apr-17        Jul-17                    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
                    Gold Price
                                                            in bond yields and the dollar. As a result, gold shot up to the earlier noted
                    US Dollar Index (Inverted)
                                                            13-month high of $1,358 on 8th September. Prices have since eased,
Source: Bloomberg                                           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

Gold Price High, Low, Close (London, US$/oz) and Key Events in 2016/2017

                                                                                                                                                                                                                                                 Gold hits ytd high    DXY at ytd
                                                             Demonetisation                                                                                                                                                                              of $1,358     low of 91.0
                                                             initiative begins
                                                             in India
                                                                                                                                                                                                                                                                            S&P 500
                                                                           China producer                                                                              News of US inlation (CPE, March)
                                                                                                                                                                                                                                    North Korea’s irst missle
                1,350                      Donald Trump                     price index at                                                                             falling to 1.6%                                                    launch over Japan
                                                elected                     ive-year high                        Uncertainty
                                              President                                                          in EU politics
                                              of the US                                                          spurs safe-haven                                                      WTI at ytd low of $42
                                                                                                                 buying                    S & P up 6% ytd
                                                                                                                                           to record high
                                                                                                                                           over 2,400
                                                                                        Taiwan jets
                                                                                        after Chinese                                                                   Euro at 6-month
                                                                                                                                                                         high over $1.10                        Comex net long
                1,300                                                                   navy enters
                                                                                                                                                                                                                positions fall to
                                                                                        Taiwan’s waters
                                                                                                                                                                                                               an 18-month low
                                                                                                     DXY at ytd high                                                                                                  of 7.4Moz
                                                                                                     of 103.8                      Russian central bank
                                                                                                                                added almost 800koz to
                                                                                                                                 gold reserves in March


                                 ETPs see largest
                              daily outlow since
                             July 2013 of 569koz
                                                                                                                                                                                      Fed raises rates by                                VIX at record low
                                                                                                                                                                                   0.25% to upper bound
                                                                                                                                                                                         target of 1.25%
                1,200             ETPs at 2016
                                high of 64.5Moz                                                                                                                                            Indian Goods & Services
                                                                                                                                                                                               Tax (GST) introduced
                                                                                                                                                                                                                                        US Senate rejects
                                                                                                                                                                                                     Emmanuel Macron                    ACA repeal proposal
                                        Shanghai Gold
                                                                                                                                                                                                      elected President
                                                                                                                                                                                                                                                                                      Precious Metals Investment Focus 2017/2018

                                        Exchange Premium                                                                                        Fed raises rates by                                           of France
                                        Index at 2016                                                                                           0.25% to upper bound                                                                         Angela Merkel wins a fourth term
                                        high of 74.2                                                                                            target of 1.00%                                                                                    as Chancellor of Germany
                                                                                                                  Donald Trump’s
                                                              Fed raises rates by                                 inauguration as
                1,150                                     0.25% to upper bound                                    President
                                                                 target of 0.75%
                                                                                                                                                                                                                                                             FOMC Meeting
                                                                                                                                                                                                                                                             FOMC Minutes
                                                                                                                                                                            Italy & EU Commission
                                                                                                                                                                                                                                                 50 - Day Moving Average
                                                                                                                                                Populist PVV                   agree Monte Paschi
                                                                                                     Gold's posts its 2017 low of $1,146                                               bank rescue
                                                             US 10-year treasury                                                                beaten in Dutch                                                                                  100 - Day Moving Average
                                                                                                     on the second trading day
                                                             bond yields at 2016                                                                elections
                                                                                                     of the year
                                                                  high of 2.64%                                                                                                                                                                  200 - Day Moving Average
                    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

     NB: Black line indicates daily trading range; Source: Metals Focus, Bloomberg

                                                                                                                                                                                                                                                                                      Chapter 3: Price Review
Chapter 3: Price Review                                    Precious Metals Investment Focus 2017/2018

Gold Investment                                            production is set to fall for the irst time this decade. Mining also made
                                                           headlines through output-curbing resource nationalism in places such as
     Moz                                             Moz   Indonesia. It also cannot have hurt sentiment that environmental matters
                                                           will trim China’s output and hedging has stayed minimal. In addition, some
      40                                              80
                                                           comfort has been taken from global jewellery oftake running broadly lat
                                                      75   y/y despite higher prices. However, central bank buying has eased and the
                                                      70   market is aware of its growing reliance on just one country, Russia.

      20                                              65

                                                      60   Silver
      10                                                   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
       0                                              50   recovery to back over $18 as the new year began but since then it has
       Jan-16        Jul-16    Jan-17     Jul-17           underperformed its yellow cousin. After a rally to $18.65 in mid-April, silver
                  Comex Net Long Positions* (LHS)          trended down, rather than sideways, hitting a 15-month low of $15.19 in
                  ETP Holdings (RHS)                       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
*Combined non-commercial and non-reportable
                                                           that, having oscillated in a rough range of 68-72 from September 2016 to
Source: CFTC, Bloomberg                                    April, the gold:silver ratio has risen to a new normal of around 75.

                                                           Silver’s slide in late 2016 to below $16 was largely down to forces similar to
                                                           those hitting gold, such as a rising dollar. Of interest was that, even if the
                                                           market was bearish, the gold:silver ratio did not soar, as might be expected
                                                           given silver’s typically higher gearing. This was thought due to silver
                                                           beneiting from the pro-growth hopes from the new Trump administration;
                                                           not only could that directly boost silver demand (mainly in infrastructure
Silver Prices and the Gold:Silver
                                                           projects), but prices also saw a boost from base metal strength, especially
Ratio, 2017                                                for copper. There was certainly scant support from the physical markets;
                                                           Indian bullion imports in Q4.16 were down over 60% y/y for example.
     US$/oz                                     Ratio

     19                                              78    The drivers of the February rally over $18 were again similar to gold but,
                                                     76    with prices so strong, it was of note that the gold:silver ratio only narrowed
     18                                                    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
     17                                              72    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.
     16                                                    Another characteristic favouring gold over silver concerns the impact of
                                                     68    the wealth management sector. When these investors have been active in
                                                           the precious metals space they have favoured gold over silver.
     15                                              66
      Jan-17         Apr-17      Jul-17
                                                           Silver’s behaviour mid-year deserves analysis as prices weakened steadily,
               Silver Price      Gold:Silver Ratio         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
Source: Bloomberg
                                                           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 Price High, Low, Close (London, US$/oz) and Key Events in 2016/2017

                              US Mint                                     US Mint                                               US Mint                                                 US Mint
                         Eagle Sales                                  Eagle Sales                                          Eagle Sales                                             Eagle Sales
                        Q3.16 4.3Moz                                 Q4.16 7.1Moz                                         Q1.17 8.0Moz                                            Q2.17 4.3Moz
                           (-70% y/y)                                   (-35% y/y)                                           (-46% y/y)                                              (-63% y/y)

                                                                                                                                                         Fed raises rates by
                                             Donald Trump                                                                                                0.25% to upper bound
                                                  elected                                                                                                target of 1.25%
                                                President                                              Au:Ag ratio at
                                                of the US                                             ytd low of 67.4
                                                                                                                                                                                                                        Copper prices at
                                                                                                                                                                                                                            3-year high

                                                                                                                              Silver hits ytd high of
                                                                                                                             $18.66; highest since
                                                                                                                                                                                                            North Korea’s irst missle
                 19                                                                                                                                                                                               launch over Japan
                                                                                                                              mid-November 2016
                                                                           Fed raises rates by
                                                                           0.25% to upper bound                                                                   Au:Ag ratio at
                                                                           target of 0.75%                                                                        ytd high of 79.4        ETP holdings at     Comex gross short
                                                                                                                                                                                             record high      positions at record
                                                                                                                                                                                                              reporting low

                                                                                                                                                                                Indian bullion imports
                                                                                                                                                                                in May at near 2-year                                              S&P 500
                                                                                                                                                                                high of 771t                                                       Index
                 18                                                                                                                                                             Operations suspended
                                                                                                                                                                                  at the Escobal silver
                                                                                                                                                                                    mine in Guatemala                  US Mint
                                                                                                                                                                                                                       Eagle Sales
                                                                                                                                                                                                                       +69% y/y
                                                                                                                                                                                                                       in July


                                        US dollar
                                        GBP falls to
                                        31-year low
                                                                                                                                                                                                                                                             Precious Metals Investment Focus 2017/2018

                                                                                                  Donald Trump’s                                                                                                                  Angela Merkel wins
                                                                                                  inauguration as                                                                                                                     a fourth term as
                                                                                                  President                                                                                                                     Chancellor of Germany
                                           initiative begins                                                                                                         Indian Goods & Services
                 16                                  in India                                                                                                            Tax (GST) introduced                            Dow Jones Index closes above
                                                                                                           Fed raises rates by
                                                                                                       0.25% to upper bound                                                                                              22,000 for the irst time
                                                                                                             target of 1.00%                                     Copper prices
                                                                                                                                                                 at a 5-month low                                                       FOMC Meeting
                                                                                                                                                                                                                                        FOMC Minutes

                                                                                                                                                                                                                              50 - Day Moving Average

                                                                                                                                                                                                                              100 - Day Moving Average

                                                                                                                                                                                                                              200 - Day Moving Average
                  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

     NB: Black line indicates daily trading range; Source: Metals Focus, Bloomberg

                                                                                                                                                                                                                                                             Chapter 3: Price Review
Chapter 3: Price Review                                     Precious Metals Investment Focus 2017/2018

Silver Investment                                           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
  Moz                                                 Moz   heavy short covering on Comex, whereas gross longs barely moved.

     700                                              700
                                                            As with gold, silver fundamentals’ price impact was slight, although in
                                                      675   this case mildly bearish. As intimated above, the main negative has been
     500                                                    retail investment. Its weakness in the US has also had a multiplier efect as
     400                                              650   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
     300                                              625
                                                            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
     100                                                    9s silver, industrial oftake has been good and there were supportive
      0                                               575   developments elsewhere. Mine output for instance is set to fall this year
      Jan-16     Jul-16      Jan-17      Jul-17             and resource nationalism (for example in Guatemala) has been in the news.
                Comex Net Long Positions* (LHS)
                ETP Holdings (RHS)

*Combined non-commercial and non-reportable
positions.                                                  The year so far may have seen moments of strength, in the form of rallies
Source: CFTC, Bloomberg                                     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 year-
Platinum Prices & Their Gold
                                                            to-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
 US$/oz                                       US$/oz
                                                            2016 as they fell from over $1,190 in August to below $900 in December.
 1,050                                            -150
                                                            There were many real world reasons for this, including the absence of

                                                  -200      voluntary supply cuts in South Africa, successful wage negotiations
                                                            with that country’s trade unions, concerns about diesel following
                                                  -250      announcements of future diesel bans in certain European cities, and soft
     950                                                    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
     900                                                    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.
     850                                          -400
       Jan 17      Apr 17       Jul 17                      This interplay between platinum’s sizable and growing market surpluses
                 Platinum Price (LHS)                       and gold’s macro-dominated price moves have then come to characterise

                 Gold - Platinum Differential (RHS)
                                                            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
Source: Bloomberg                                           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 & Palladium Price High, Low, Close (London, US$/oz) and Key Events in 2016/2017
                                         European Car Sales                                    European Car Sales                                   European Car Sales                                     European Car Sales
                                         Q3.16 +1.8% y/y                                       Q4.16 +3.3% y/y                                      Q1.17 +7.2% y/y                                        Q2.17 +1.4% y/y

                                                                                                                                                                                                                                        Platinum’s discount
                                                                                                                                                                                                                                             to gold widens
                                                          Sibanye completes                   Northam Platinum             USD:ZAR
                 1,100                                                                                                                                                                                                                           over $350
                                                          acquisition of the                   buys Glencore’s            strengthens
                                                          Rustenberg mine                        Eland mine for              to 12.3                                               Platinum fall to ytd low of     Nymex net long positions
                                                                                                     US$175M                                                                              $891; lowest since       fall to an eight-year low
                                                                                                                                                                                            December 2016           of 513koz

                                                                                                                                                       Platinum ETP holdings hit 2.54Moz,
                                                                                                                                                                  their highest level since
                                                                                                                                                                          November 2015

                                                                                                                                        South African
                                        Platinum holdings
                  900                                                                                                                       President
                                        in ETPs fall to a 3-year                                                                                                                                                             UK Government
                                        low of 2.25Moz
                                                                                                                                         ires Finance                         LMC: June diesel share                                                S&P 500 Index
                                                                                                                                              Minister                       in Europe at 45% versus                         announces ban on
                                                                                                                                                                                                                                                    at record high
                                                                                                                                                                                   50% in June 2016                          internal combustion
                                                                                                                                 Toyota announces                                                                                                      of 2,500
                                                                                                                                                                                                                             engine sales from 2040
                                                                                                                                 new model of
                                                                                         Platinum ETP holdings                   catalyst, designed
                                                                                           fall to a three-month                                                                                  Volvo announces no
                                                                                                                                 to use 20% less
                                                                                                  low of 2.36Moz                                                                                   new pure internal
                  800                                                                                                            precious metal                                                                                                       Palladium prices at
                                                AMCU sign                                                                                                                                      combustion engine models
                                             3-year wage deal                                                                                                                                 launched from 2019 onwards                            a premium to platinum
                                                                                                                                                   Yen platinum price
                 1,000                                                                                                                                                                                                                                  for the irst time
                         Palladium                                                                             London mayor announces              falls below 3,300/g                                                                                     in 16 years
                                                                 Mayors of Paris,
                                                               Athens, Madrid and                               charge for older vehicles
                                                                                                                                                                                          French Government announces
                                                               Mexico City pledge                               entering the city centre,
                                                                                                                                                                                         ban on internal combustion engine
                                                           to ban diesel vehicles from                         efective October this year
                                                                                                                                                                                                  sales from 2040
                                                              city centres by 2025

                                                                                                     Pt:Pd ratio at ytd
                                                                                                        high of 1.36
                                                      Donald Trump
                                                    elected president
                                                     of United States
                                                                                                                                                                                                                                                  Palladium gets within
                                                                                                                                                                                                                                                                            Precious Metals Investment Focus 2017/2018

                                                                                                                                                                                                                                                  5¢ of $1,000; highest
                                                                                                                                                                                                                                                  since level February
                                                                                                                                                      Palladium’s discount to platinum         Palladium ETP holdings                          Net long positions on
                                                                                                                                               below US$50/oz, lowest level in 15 years            fall to a seven and a                       Nymex hit a three-
                                                                                                                                                                                                            half year low                      year high of 2.57Moz
                                                                                                                                                                                                              of 1.42Moz
                  600                                                                         China lifts auto purchase tax to
                                                                                              7.5% instead of 10% for 2017                                                                                                                     50 - Day Moving Average

                                                                                                                                                                                                                                               100 - Day Moving Average
                           US Car Sales China Car Sales                        US Car Sales    China Car Sales                     US Car Sales     China Car Sales                     US Car Sales       China Car Sales
                         Q3.16 -1.3% y/y Q3.16 +27.7% y/y                   Q4.16 +0.6% y/y    Q4.16 +15.7% y/y                  Q1.17 -1.0% y/y    Q1.17 +5.1% y/y                   Q2.17 -2.8% y/y      Q2.17 -0.9% y/y                     200 - Day Moving Average
                    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

     NB: Black line indicates daily trading range; Source: Metals Focus, Bloomberg

                                                                                                                                                                                                                                                                            Chapter 3: Price Review
Chapter 3: Price Review                                   Precious Metals Investment Focus 2017/2018

Platinum Investment                                       conidence in Trump’s ability to deliver higher GDP growth, which buoyed
                                                          gold and with it platinum, but hit industrial metals, including palladium.
 Moz                                                Moz
                                                          Platinum’s subsequent slide back below $900 by early May was of note
  3.5                                               2.6
                                                          as it was in this two-month window that the discount to gold blew out to
                                                          what now seems to be the new normal of $300-$350. With gold trending
  2.5                                                     sideways to higher at the time, platinum-speciic drivers were needed
  2.0                                                     and here we would single out downgrades to diesel’s forecast share of
  1.5                                                     the European car market. Japanese investors, for a long time some of
                                                          platinum’s most ardent supporters, also appear to have become sorely
                                                    2.3   disillusioned with platinum’s persistent and growing discount to gold. The
                                                          sustenance given to South Africa’s platinum sector from the price strength
  0.0                                               2.2   of its palladium and rhodium by-products was also seen as postponing the
   Jan-16        Jul-16       Jan-17       Jul-17
                                                          cuts in output needed to balance the platinum market.
                  NYMEX Net Long Positions* (LHS)
                  ETP Holdings (RHS)                      Prices then saw a brief rally in May, due partly to rand resilience despite the
                                                          iring of South Africa’s inance minister, which raised talk of output cuts.
*Combined non-commercial and non-reportable
positions.                                                However, this quickly unwound in June, partly through news from Volvo
Source: Bloomberg                                         and the French government on moves away from pure internal combustion
                                                          engines to hybrids and electric vehicles. A greater rally then began in July
                                                          that took prices briely back over $1,000 in early September. This was
                                                          almost entirely down to gold-tracking as that metal powered ahead on the
                                                          back of such events as rising tensions over North Korean actions and the
                                                          reappearance of the US debt ceiling problem. There was certainly nothing
                                                          of substance in platinum’s fundamentals at the time, with it becoming
                                                          clearer then that Chinese jewellery demand was far softer than had been
Palladium Prices & Their
Platinum Diferential
                                                          expected and that autocatalyst scrap was on the rebound. With this
                                                          background story in play, it came as little surprise that platinum followed
                                                          gold lower during the last few weeks as it reacted to drivers such as the
 US$/oz                                         US$/oz
                                                          easing of geopolitical tensions and hawkish talk at the September FOMC.
 1,000                                              300

     950                                            250

     900                                            200   Palladium
     850                                            150   Unlike the other precious metals, palladium only saw temporary weakness
                                                          in late 2016, as it fell from over $700 in late September to a 3-month low
     800                                            100
                                                          of $611.52 by the end of October. From that point, however, palladium
     750                                            50
                                                          barely looked back, rallying this year to an intra-day high of $999.95 on 4th
     700                                            0     September - levels last seen in February 2001. (For the record, the market
     650                                            -50   actually saw ofers at just over the $1,000 mark at that peak.) Also dramatic
       Jan 17        Apr 17       Jul 17                  was the disappearance of the platinum:palladium premium; it fell fastest
                Palladium Price (LHS)                     (from over $370 to under $150) in November 2016 but more eye-catching
                Platinum - Palladium Differential (RHS)   has been its move to a slight premium on 27th September.

Source: Bloomberg                                         The fact that prices marched upwards with only brief retreats en route is
                                                          largely down to the metal’s yawning and growing market deicits (this stood
                                                          at 1.2Moz in 2016 and is forecast to reach 1.5Moz this year). Both investors
                                                          and end users are aware of this general situation and also the fact that the
                                                          deicit is likely to persist at high levels for the next few years as both supply
                                                          and demand remain relatively price inelastic. However, this situation has
                                                          been in existence for some time and so, if this broad outlook was already

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