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The Giant Rebound

May 2016

Following the recent rally, gold and silver are testing critical technical resistance levels. Will the rally last?

Economic uncertainty around the globe triggered amongst the most profitable quarters for precious metals in recent times, as investors turned towards the safe-haven asset class. While the trend towards the latter part of the quarter, going into the early part of April has indicated an increased risk appetite, the category continues to find favour amongst investors. Some recent trends, detailed herein, include the consolidation of gold, the unexpected and sudden outperformance of silver and directionless move of platinum.

Gold Regains Shine

Aided by continued loose monetary policies, diminishing Fed rate increase expectations and concerns around global economic growth, the precious metal gained 16.4% in the first quarter of the current year, registering the best first quarter in 30 years. Most of these gains did come in the initial half of the quarter, with the month of March and April, this far seeing the metal consolidate in the range between $1210/oz to $1281/oz. The same period has been marked by a sharp rally across global equity markets indicating a risk-on rally. While this would indicate concerns for the gold traders, the period has seen sharp rebounds, suggesting strong support on dips.

As a recent report by Scotiabank, Metal Matter (April 2016) highlights, holdings in ETFs climbed to 1,809 tonnes on 25th March, up from 1,740 tonnes at the end of February and up 22.7% from the low of 1,474 tonnes in mid-December. ETF holdings are now back at levels last seen in December 2013. The peak in holdings was the 2,647 tonnes seen on 1st January 2013. The quarter as a whole has seen strong investment demand – as the World Gold Council (WGC) reported.

Gold-backed ETFs have seen their strongest inflows since the 2008-2009 financial crisis. The WGC presents an encouraging foundation for a sustained bull run in gold, “History also shows that two consecutive quarters of strong returns have typically resulted in a more sustained rally. So far, we have had one very strong quarter. But inflows into gold look set to remain robust in the second quarter, as the current macroeconomic environment remains supportive for both investment and central bank demand. The inter-connectedness of global financial markets has increased the likelihood of successive economic crises and market contagion, in our view. In addition, the prolonged presence of low (even negative) interest rates has fundamentally altered the way investors think about risk.”

While all of these factors discussed indicate an inherent strength in move in gold prices, technically, as prices continue to remain midway in the channel, it remains to be seen which level gets taken out first $1210/oz or $1281/oz, which would determine the intermediate trend.

The Silver Lining

Recent weeks have seen a significant reversal of trend, with silver overtaking gold in terms of returns. It has touched the highest level since the mid of last year. The gold/silver price ratio, as highlighted in our previous edition, had moved to a near 10 year high – it has since retraced rapidly, from a level of 84 since the beginning to March to around 76 currently, surprising many. Fundamentally, silver price has been given a boost by it being a byproduct of minerals including copper, lead and zinc.
With the drop in global consumption of these industrial minerals, silver supply is becoming increasingly tight. In a recently released outlook, French bank Societe Generale expects the primary supply of silver to drop by 9.2% this year and a further 13% next year. For now, the level around $16.45/oz remains critical for the metal as a resistance level, sustenance above which could possibly see the metal continue the recent outperformance in the coming months.

Platinum Rally Continues

Price continues to face pressure around the $1000/oz level. While this level, as discussed previously, has meant a near 23% from the 7-year low of $812 per oz seen in January, it is unable to reflect the fundamentals which indicate a continued forecasted deficit in the supply-demand trend. The metal traded at an average discount of 23% to the price of gold over the last quarter; to give a perspective, this has increased from a 2% discount in Q1 last year and a 9% in 2014.


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