Scotia report oct 12

Metal Matters October 2012

Gold prices continue to make headway as the rally has once again been

fuelled by broad based quantitative easing (QE).

In addition to QE, the Fed said that it would not be in any hurry

to tighten monetary policy at the first signs of growth…

… this means that the Fed may not stamp out inflation if it is

seen when growth starts to emerge.

The fact further QE has been announced in the EU, US, Japan

and China in September, highlights the trouble the financial

markets are in.

Funds’ interest in Gold has returned with vigour and ETF

buying by investors has accelerated.

The dollar may well weaken as the US election campaign

focuses on the US deficit and the ‘fiscal cliff’.

We feel Gold has embarked on another major up leg.

Silver followed Gold’s lead, but true to form it has outperformed Gold

on a percentage basis.

Prices have encountered selling above $35/oz - supply in this

region may take some time to be absorbed.

PGM prices shot higher on the back of QE and as strikes in South Africa

disrupted mine output.

For now, we expect supply issues to be the main driver for PGM

prices, as demand from the auto industry is likely to be subdued.

Metal Matte rs October 2012

2

Gold’s rally continues to climb and the

outlook remains bullish overall

In last month’s Metal Matters we thought

the likelihood of more quantitative easing

(QE) would drive prices higher and this has

now unfolded with various types of QE

announced in Europe, the US and Japan,

during September. Monetary easing has also

been seen in Australia and further stimulus

spending has been announced in China. All

in all, these events highlight the trouble the

global economy is in. More QE also runs the

risk of debasing the value of paper money

and the legacy of all this debt creation

remains a big unknown risk that could still

undermine the financial system down the

road.

QE fuels another rally

After the QE fuelled rally out of the 2008

financial crisis that led to Gold rallying from

$682/oz to the highs at $1,921/oz, a move of

180%, the market had become overbought.

Having consolidated between September

2011 and September this year, the market

was well placed to move higher again. The

trigger for the break out from the downward

wedge on the chart was the prospect of more

broad based QE. Having broken out of the

wedge on 21st August, prices have moved

higher in four steps, with each round of QE,

or stimulus, further fueling the rally. Prices

have now challenged and breached the

February high at $1,790.80/oz, leaving the

November peak at $1,803/oz as the main

barrier to overcome before prices can focus

on the $1,921/oz high again.

Funds increase exposure

The latest CFTC data shows the net long

fund position (NLFP) climbed steadily

during September to reach 203,896

contracts, up from 158,491 contacts at the

end of August and up from a recent low of

112,977 contacts in late July. As the chart

shows, the rebound in fund interest has been

extremely strong and interestingly the NLFP

has now moved above the previous peak

seen at the end of February, when prices

were around the $1,790/oz level. What is

interesting is that the NLFP is still well

below the highs seen in 2011, 2010 and

the peak of 262,331 contracts seen in

2009. This means the NLFP is 22%

below the 2009 high.

ETF investors accelerate purchases Longer term investment buying also

started to gather pace in August. In July,

holding dropped 14.5 tonnes, in August

they climbed 63.5 tonnes and rose a

further 73.6 tonnes in September. This

buying has taken ETF holdings to a

record level of 2,558.6 tonnes. The

reacceleration in ETF buying and the

turn round in fund buying in recent

weeks imply sentiment has indeed

turned bullish. Given the momentum,

further buying may well follow.

China – going for Gold As well as being an important Gold

consumer, China has become the

world’s largest producer and is likely to

be the largest importer of Gold in 2012.

It is also buying Gold mining companies

around the world. China is, therefore,

building up its Gold reserves and that

may well be in an effort to diversify


3

their holdings of what used to be hard

currencies. It could also be in preparation for

eventually making the yuan freely

convertible. China last published its Gold

reserves in 2009 - they had doubled to 1,054

tonnes. If they republish, the market should

be braced for another significant increase.

Central banks continue to buy

In the first half of the year, central banks

bought 254.2 tonnes of Gold, according to

the World Gold Council (WGC). This was

up from 203.2 tonnes in the same period last

year. The buying has tended to come from

central banks in developing countries, which

suggest they are putting a proportion of the

proceeds from their trade surpluses into

Gold, rather than have too much exposure to

hard currency. Considering what lies ahead

for the US in the fourth quarter, we are

unsurprised dollar holders may be nervous.

Potential for dollar weakness Up until the recent move higher in Gold, the

popular safe havens seem to have been the

US dollar, the yen, US treasuries and

German bunds. We have viewed all these as

being overbought in recent months and it is

interesting that the dollar has shown some

weakness recently. With the US election on

6th

November rapidly approaching and the

budget deficit, deficit ceiling and the fiscal

cliff all likely to become issues before and

after the election, we feel there is a

significant risk that the dollar could come

under further downward pressure. With the

other safe-havens mentioned above still

looking overbought and being fiat-products

too, we feel there is potential for Gold to

regain market share as a safe-haven.

Technical – Gold prices have embarked on

another up leg, we feel. Having broken out

of the falling wedge pattern that governed

prices during the pull back and consolidation

that followed the September 2011 peak,

prices are now challenging resistance

between $1,790/oz and the November 2011

peak at $1,803/oz. Clearance of the latter,

would open up the path to the $1,921/oz

high and above there to the uncharted

waters that lead to $2,000/oz and

beyond. The stochastics are holding up

in the strong zone and overall pressure

seems to be building below key

resistance at $1,803/oz.

Summary - We have been bullish for

Gold in recent months and given the

latest round of QE, much of which now

seems to be unlimited is scope, we feel

there is still considerable room on the

upside for Gold prices. Guardians of

financial assets, whether they be

investors, creditor central banks, or

sovereign wealth funds, are likely to be

nervous about holding to much of their

reserves in former hard currencies. Even

the government bonds denominated in

hard currencies, although no doubt safe,

will still lose value if the underlying

currency is debased. Down the road,

once the tools to fix the financial crisis

have been found, when QE is being

pulled-in and inflation is contained, then

the bull market in Gold may end - but

such a set-up seems a long way off from

where we stand now. For now, the

financial system is being kept afloat as

central banks pump endless amounts of

money into the system, but the fact

money is being created at will, implies

the value of money is being debased and

as that dawns on more people, then more

savings are likely to be used to buy

assets with intrinsic value. There will no

doubt be corrections along the way, but

overall we see Gold rising as money

loses its value.


4

Gold Statistics 2008 2009 2010 2011 Q2 2012 Q3 2012 Aug-12 Sep-12

London Prices (US$/oz)

AM fix 872.54 970.19 1225.46 1573.16 1609.76 1653.46 1625.68 1741.93

Pm fix 871.71 970.14 1224.76 1571.52 1610.76 1654.80 1626.03 1744.45

Average 872.12 970.17 1225.11 1572.34 1610.26 1654.13 1625.86 1743.19

Parity prices

Australian - A$/oz 1,033 1,225 1,332 1,526 1594 1,592 1,551 1,676

South Africa Rand/kg 222,354 250,148 278,299 284,314 13040 13,646 13,408 14,419

Japan Y/g 2,802 2,810 3,327 3,868 4000 4,032 3,966 4,225

India Rupee/oz 38,052 47,272 56,264 73,266 87180 90,821 90,001 94,533

Lease Rates

1 Month * 0.41 -0.04 -0.08 -0.14 -0.11 -0.13 -0.09 -0.22

3 Month * 0.65 0.15 -0.06 -0.06 0.04 -0.02 0.04 -0.13

6 Month * 0.81 0.47 0.04 0.11 0.23 0.19 0.23 0.11

12 Month * 0.80 0.80 0.32 0.35 0.50 0.49 0.51 0.43

COMEX - futures contracts

Stocks ('000oz) 8,068 8,983 10,748 10,938 10,944 10,941 10,924 10,955

Vol (million contracts) 39.54 32.55 43.91 47.75 11.2 10.0 2.79 3.46

OI ('000 contracts) 393 401 554 482 418 434 438 467

CFTC (futures only data)

Net Spec position Long (Short) 149,279 185,095 213,602 169,667 122,775 162,820 158,491 203,905

TOCOM

Stocks ('000oz) 244 171 141 120 149 128 127 125

Volume ('000 contracts) 15,164 11,913 11,003 16,073 2,729 2,655 796 1,107

OI ('000 contracts) 140 93 109 123 136 141 149 142

Other Indicators

FT Au Mines Index 2,658 2,647 3,340 3,716 2824 2,955 2,855 3,310

Dow Jones Index 11,221 8,934 10,635 12,085 12,829 13,178 13,090 13,437

US$ Index 77.1 80.5 81.3 76.3 81.1 81.3 81.2 80.0

Gold Bullion Imports, tonnes (exports)

Dubai 229 173 250 250

Hong Kong /China** 222 45 228 431

India 880 779 1123 1023

Italy 136 103 109 93

Japan 35 18 19 12

Singapore 38 27 112 150

South Korea 32 23 27 24

Taiwan 13 10 12 16

Turkey 166 38 42 125

Data: Financial Times; Bombay Bullion Association; LBMA; TOCOM; COMEX; CFTC, REUTERS

Figures are period averages unless marked by *, indicating the period end. OI= Open Interest on the exchange

~ = data not available yet, italics = estimates, ** China only 2009, 2010 & 2011


5

Silver’s rally pauses, after climbing 35%

above the June low Silver prices have raced higher since

hammering out base over the summer that

reconfirmed support was in place just

above the $26/oz level. Prices started to

climb higher in mid-August and that

continued until mid-September, after which

time upward momentum waned and prices

started to consolidate. The high in

September was at $35.19/oz, prices then

pulled back to $33.34/oz on 26th

September

as the market consolidated. Since then

prices have tried higher again, reaching

$35.39/oz on 1st October. Although this

was a fresh high, there does seem to be

considerable overhead supply above

$35/oz, as so far prices have not managed

to close above that level.

Supply above $35/oz

This is not so surprising as earlier on in the

year, during the first quarter, traders were

reporting considerable producer selling

interest around the $35/oz to $37/oz area. It

therefore seems reasonable to assume that

there is still selling interest in this region

and until it is absorbed, the uptrend will

struggle to make headway.

Funds have returned as strong buyers

As the chart above shows, the net long fund

position (NLFP) has rebounded sharply to

34,010 contracts, up from a recent low of

6,222 contracts at the end of June. Like

Gold, the run up in the NLFP has overcome

two previous peaks, but there is still plenty

of room for the fund position to grow

further, judging by earlier peaks that lie

between 50,000 and 66,000 contracts.

ETF investors increase holdings too

The combined holdings in the Silver ETFs

we follow climbed 319 tonnes in

September, this was after a 258 tonne

increase in August and an 89 tonne increase

in July. Year to date, ETF investors have

bought 1,110 tonnes, which averages 123

tpm – this highlights the step up in interest

in recent months.

Technical – This weekly chart shows the

rapid gains in Silver and with prices

approaching the peak seen in November

2011, and most of the body of trading seen

in February this year (ignoring the short-

lived spike up to $37.51), it is not

surprising that the rally has encountered

selling. The stochastic indicators are

holding up in the strong zone, so while they

do so the buying may remain strong enough

to absorb the selling. This means that if the

selling dries up, prices should then be able

to extend to the upside again. Overall,

considering the speed of the rebound we

feel prices may need to consolidate for

longer. Given the robustness of the rally off

the base, we would not be surprised to see

the rally head higher again once it has had

time to consolidate.

Summary – Silver has put in a strong

rebound and the pick-up in fund and

investor interest shows sentiment has

turned bullish again. We expect Silver to

follow Gold’s lead and as we remain

bullish for the latter, we are bullish for the

former. Above $35.70/oz, trading may

become quite thin again, especially if

current trading is absorbing forward selling.


6

Silver Statistics

2008 2009 2010 2011 Q2 2012 Q3 2012 Aug-12 Sep-12


Daily Fix 15.02 14.65 20.16 35.12 29.42 29.91 28.70 33.61

Parity (London) prices

Japan (Y/g) 48.47 42.36 54.53 86.78 73.12 72.89 69.99 81.47

India (Rupee/oz) 646.9 714.9 925.1 1641.7 1,578.5 1,641.6 1,588.5 1,822.7

COMEX – futures contracts

Stocks (Moz)* 134.1 117.6 108.6 96.4 143.2 119.9 112.5 109.4

Vol (million contracts) 8.3 7.8 12.5 19.4 3.9 3.1 1.2 1.1

OI (‘000 contracts)* 124.1 105.1 129.6 117.1 117.2 127.5 121.8 137.4

CFTC (Futures Only Data) non-commercial

Net Positions * 33,672 30,407 36,412 21,783 10,417 25,228 28,638 34,010

TOCOM

Stocks (Moz)* 0.4 0.26 0.27 0.25 0.26 0.21 0.22 0.21

Futures Vol (‘000 contracts) 301.2 111.8 235.4 375.6 24.3 33.2 10.3 16.8

Futures OI (‘000 contracts)* 7.9 2.6 5.6 8.1 4.7 4.8 4.7 4.9

Other Indicators

Gold/Silver ratio* 60.9 65.07 60.92 45.9 55.9 53.8 52.4 51.3

Silver Bullion Imports (tonnes)

USA 4676 3775 5771 6464

Japan 1909 2994 4198 4282

India 5048 1259 3483 4087

Italy 926 701 848 441

Hong Kong 3082 2671 1657 1243

China (exports) (4043) 900 4857 4469

* figures are period averages unless marked; ~ not available yet, italics = estimate.


7

Platinum and Palladium rise an average

of 26%, compared with Gold’s 13% rise

PGM prices have rallied sharply on two

counts in recent months. Like the rest of

the metals complex, prices are up on the

back of QE and stimulus spending, but

PGM prices have also rallied on the back

of unrest at South African mines. Given

South Africa supplies 75% of the world’s

Platinum, 34% of its Palladium and 83% of

the Rhodium, it is not surprising that prices

reacted the way they did. Neither is it

surprising that prices pulled back once the

news stopped being headline news. Going

forward, we feel the Marikana mine

episode will turn out to be wake-up call for

the market in that it highlights the social

and political problems facing the precious

metals industry in the region.

Global auto industry is weak

Had the disruption to South Africa’s

supply happened when the auto industry

was in full swing, then the reaction would

likely have been more severe. However,

given the political wrangling in South

Africa, we feel supply disrupts are likely to

become more frequent. This is likely to

underpin prices going forward, albeit

possibly at lower levels as prices

consolidate after the recent strong gains

and the market contends with weak auto

sales in Europe. ACEA, the European

Automobile Manufacturers Association,

predicts that European car sales may reach

a 17-year low this year and may not

recover next year. Moody’s lowered its

forecast for global light vehicle sales

growth to 2.9% in 2013, its January

forecast had been for 4.5% growth. It

expects Western European demand to

contract 3% in 2013, having earlier

expected 3% growth. Sales in China are

also running below par, which means the

US is the main growth market and the one

bright spot.

Investor and fund buying fuel the rally Funds were active buyers of Platinum and

Palladium in September, with the NLFP

positions growing 35% and 53%

respectively, with both metals seeing

considerable short-covering too. ETF

investors seem to have followed the

headlines more, which have focused on the

disruption to Platinum supply, with South

Africa’s Palladium supply not mentioned

much. From the start of August to the

recent peaks, Platinum holdings jumped

13%, while Palladium holdings climbed

just 0.6%. Given this, it is surprising

Palladium prices climbed as much as they

did, but that now seems to have been

corrected as Palladium prices have pulled

back more than Platinum prices.

Technical & Summary – Both PGM

charts show strong rallies and both have

undergone a period of consolidation, which

for Palladium was considerably deeper

than for Platinum. Given the extent of the

gains, it seems likely that further

consolidation will be seen, which for

Platinum may be seen at lower levels,

possibly around the $1,550/oz area. All in

all, we expect weak global auto sales

growth to dampen demand for PGMs - so

all eyes will remain on supply.


8

PGM Statistics

2008 2009 2010 2011 Q2 2012 Q3 2012 Aug-12 Sep-12


Platinum 1,583 1,210 1,616 1,725 1,505 1,554 1,570 1,664

Palladium 355 265 529 737 631 608 604 638

Rhodium 6,549 1,592 2,456 2,026 1,328 1,162 1,126 1,131

Japanese Parity Prices (Y/g)

Platinum 5,123 3,501 4,398 4,268 3,741 3,788 3,829 4,033

Palladium 1,147 767 1,432 1,824 1,569 1,481 1,473 1,545

South African Parity Prices (Rand/kg)

Platinum 395,276 313,191 367,518 385,179 377,635 397,558 401,280 426,677

NYMEX Stocks ('000oz)

Platinum 55.7 131.1 126.2 137.4 195.9 197.8 191.3 210.9

Palladium 425 477 619 542 586 553 546 542

CFTC Futures Only Data Long / (short) non-commercial

Platinum 6,797 12,685 20,270 23,041 15,936 28,728 28,663 38,723

Palladium 7,062 9,173 13,532 10,950 4,317 8,061 7,803 11,918

Tocom - Platinum

Stocks ('000oz) 14.1 16.6 20.1 26.6 25.9 39.9 39.5 40.5

Vol (Million contracts) 6.9 3.6 3.87 3 0.2 0.9 0.28 0.36

OI ( '000 contracts) 52.3 36.1 52.6 49.8 46.4 50.2 48.7 52.7

Tocom - Palladium

Stocks ('000oz) 25.7 20.5 12.7 10.8 5.7 7.6 8.0 5.5

Vol ('000 contracts) 684 108 137.2 110 4.4 11.9 4.0 4.3

OI ( '000 contracts) 14.8 4.6 3.9 2.9 2.2 2.2 2.2 2.3

Other Indicators (US$/oz)

Pt-Au spread 689 257 392 145 -128 -140 -125 -91

Pt-Pd spread 1,200 949 1,079 977 858 926 925 1,032

Platinum Bullion imports (kg) 2009 2010 2011 2012

USA 112,000 151,830 151,830 129,090 94,956 (Jan-July)

Japan 59,634 53,663 53,663 62,230 31,437 (Jan-Aug)

PalladiumBullion imports (kg) 2009 2010 2011 2012

USA 120,810 50,000 70,710 98,900 47,290 (Jan-July

Japan 75,363 64,723 70,241 66,484 36,316 (Jan-Aug)

~ = data not available yet, italics = estimates


9

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10

This report has been prepared on behalf of Scotiabank and is not for the use of private

individuals. The Scotiabank trademark represents the precious metals business of The Bank of

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Scotia report oct 12