MW: Gold ETF holdings remain robust - and silver could outshine gold
In spite of poor demand outlook in the short term, ScotiaMocatta insists the long-term outlook for precious metals remains bullish.
Although gold prices remain under pressure as investment funds cut their risk exposure, ScotiaMocatta's recent Metal Matters analysis suggests "others are looking to diversify into gold as a means of protecting their wealth."
"Looking forward we think the need for safe-haven investments will grow while at the same time the level of distressed selling may ease, which is like to see gold prices trend high again. If fresh weakness is seen, then expect dips to attract even more buying," ScotiaMocatta asserted.
The current demand for physical gold has left numerous mints unable to fabricate enough gold coins and bars fast enough. "The question is whether this surge in broad based interest is the retail market buying at the end of the bull market, or are they the ones with cash who want to protect their wealth and are therefore a harbinger of where gold is heading? Generally we favour the latter view as we feel the legacy of the U.S. government's bailouts will undermine the value of the dollar and confidence in the financial system."
ScotiaMocatta also noted that gold ETF holdings remain robust. "In addition to strong retail interest, long term investors are also keeping their holdings of gold in the ETFs high." At the end of last month, 1,020 tonnes of gold was being held, down only 24 tonnes from the peak seen in mid-October.
"Considering the flood of liquidation in other assets classes in October, long-term gold investors have given gold a vote of confidence," the bullion company said.
However, the speculative end of the gold market is less bullish as net fund long positions dropped from a peak this summer of 202,783 contracts to 68,195 contracts. Meanwhile, the latest data shows the gross short position jumping 27% or 10,648 contracts on the week.
Nevertheless, ScotiaMocatta cautioned, that before getting too bullish on gold, these changes and developments may take months to unfold.
Silver
ScotiaMocatta advised that "silver is well placed to outshine gold." Admitting that silver is an industrial metal and has a tendency to be more volatile than gold, ScotiaMocatta asserted, "This works both ways and if gold starts to recover, then silver could outperform gold on the upside."
Since July, silver has seen its net fund long position shrink from 50,455 to 13,641 contracts. However, since July longer term ETF buyers have bought an additional 1,000 tonnes of silver. "The extent of silver's sell-off has been a surprise, but it shows what can happen when too many longs head for the exit at the same time," ScotiaMocatta noted. "However, the result of their distressed selling is no doubt providing opportunities for others, especially those looking to buy for the long term."
"With CFTC [Commodity Futures Trading Commission] data showing the net fund position increasing again and with ETF investors largely remaining bullish, it does look as though there is room for further investor buying," ScotiaMocatta advised, adding "in the absence of further turmoil a return towards $12.30/z to $13/oz could be possible."
PGMs
The large decline in PGM prices "has no doubt been caused mainly by distressed selling by funds and investors as well as destocking by industrial users," ScotiaMocatta noted. "Indeed it does look as though the rush to exist has left prices oversold. As a result, these low prices may make good longer term buying opportunities as both the demand and supply side of the fundamentals remain bullish long term."
ScotiaMocatta advised that emissions controls are likely to be applied to more engines and will spread geographically. Lower metals prices should spur jewellery demand, particularly platinum. Meanwhile, South Africa's energy shortages are likely to impact PGM output and delay investment in new mine production.
"As such, the long term outlook for the PGMs looks good and once funds switch from deleveraging to investing again, the PGMs may well attract their attention. In the short to medium term the impact of the economic slowdown will hit demand for these metals, but we would suggest that the hefty prices falls have discounted that to a large extent."
Now that PGM price rebounds have begun, ScotiaMocatta expects prices to recover to $1,309/oz for platinum and $279/oz for palladium, "but setbacks are likely along the way as the bulls are no doubt extremely nervous."
