Kitco Gold 2014

Commodities Strategist

Walter de Wet

[email protected]

+27-11-415-4176


Leon Westgate

[email protected]

+44-203-145-6822


Melinda Moore

[email protected]

+44-203-145-6887

This material is "non-independent

research". Non-independent

research is a "marketing

communication" as defined in the

UK FCA Handbook. It has not been

prepared in accordance with the full

legal requirements designed to

promote independence of research

and is not subject to any prohibition

on dealing ahead of the

dissemination of investment

research.

www.standardbank.com/research

27 February 2014

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Gold physical demand: YTD run rate Government bond yields in the US are still important for gold, and the recent decline in

the US 10-year government bond yields is a key reason why ETF holdings have flat-lined

this year. Also, we still to expect the US bond yield to move higher towards year-end,

with a target of 3.75% (currently around 2.66%). This, we believe, is likely to put

pressure on ETF gold holdings.

Therefore, if one assumes that gold will move higher on a sustainable basis where yields

move higher too, one also has to assume that gold physical demand, especially from Asia,

will be strong. It is well known, and evident from China’s import data China, that China

was one of the few pillars of support for gold in 2013.

We continue to monitor developments in Asia, and China in particular. At the moment,

gold demand from Asia is weak. Earlier this month, we would have ascribed this to

seasonality. However, seasonal weakness is over now, so now we ascribe the current

demand weakness to the gold price that moved above $1,300 in recent weeks.

We are witnessing demand weakness in two indicators. The first is the SGE premium,

which has traded in negative for the past three days (see Figure 1). The second indicator

is the YTD run rate for gold demand from Asia more broadly, which is captured in our

Standard Bank Gold Physical Flow Index. We compare the YTD activity relative to

previous years. So far in 2014, we are below the run rate of 2013 (see Figure 2). It is still

early in the year, and worth noting that the gold price’s sharp decline came only in April

last year - the event that triggered the sharp rise in Asia demand. But so far it appears as

if we need another leg down in the gold price to trigger the same reaction.

If physical demand is weak, and bond yields move higher, we believe gold seems destined

to struggle, especially once future market movement settles (i.e. when speculative short-

covering stops). From a tactical perspective, we still look for gold a lower gold price in Q1

and Q2.. Once again, key in this is the US 10y government bond yield.

By Walter de Wet

SGE gold premium vs. spot gold

Source: Standard Bank Research, SGE

-5

0

5

10

15

20

25

1 150

1 200

1 250

1 300

1 350

1 400

10-Oct 10-Dec 10-Feb

SGE

pre

m (

$/

oz)

Spo

t go

ld (

$/

oz)

Spot gold SGE premium

Gold Physical Flow Index

Source: Standard Bank Research

0

50

100

150

200

250

300

350

400

1 34 67 100 133 166 199 232

Inde

x

Trading days

2011 20122013 2014

Standard Bank Global | Commodities 27 February 2014

2

Base metals

Copper is testing the $7,000 level – the first time since November last year, with selling

in Asia pushing the price lower. We still forecast a copper price of above $7,000 on

average for all four quarters of this year. Therefore, we expect to see some buying if the

price drops too far below this level. LME cancelled warrant copper inventory dropped

further today (6,800mt), with the bulk of the cancellations coming from Europe.

Copper cancelled warrants as a percentage of total LME inventory now stands at 54%.

For base metals, we expect the market to look towards next week’s data releases, and in

particular the Chinese manufacturing PMI (despite the data being perhaps distorted by

the public holidays in February). From a base metal perspective, we are especially

interested in how the order books of fabricators and manufacturers will develop over the

next few months. The December and January manufacturing PMI New Export Orders

sub-index dropped below 50, indicating diminishing new export orders.

A further drop in new orders could signal reluctance from Chinese fabricators to buy

metal, which could put further downward pressure on prices.

The zinc/lead spread dropped to below $70 yesterday. As pointed out, fundamentally

we still favour lead over zinc (on a 12m view). Between $50 – $0, we would expect

renewed interest to initiate long the spread again. But for now, the market seems still to

like zinc. However, lead is sitting on its 200d MA.

By Walter de Wet

Bulks

Today it was the PBOC’s turn to calm investment markets, with an unidentified official

stating that China’s system cash supplies were adequate and that a post-CNY drain was

normal, and not to be read as a change in monetary policy towards a more tightening

bias. Although markets rallied early, by COB, the PBOC’s further cash drain, together

with Saturday’s PMI results and next week’s National People’s Congress headline

nervousness had returned, muting any initial euphoria.

Shanghai Equities rose a further unconvincing 0.3% to 2,047 points today, coming off

intra-day highs of 2,068, with property and auto stocks remaining weak. Shanghai 7-

day interbank rates rose to 3.44% today, after the PBOC drained a further RMB 60 bln

via a 14-day repo at 3.8% again, taking the week’s net withdrawals to RMB 160bln,

combined with RMB 108bln last week (RMB268bln).

Shanghai Rebar Futures May-14 contract closed up RMB 23/t at RMB 3,340/t,

rallying from RMB 3,333/t into the close. Dazong HRC April-14 futures shifted up

RMB 4/t to RMB 3,396/t. Among physical steels, Tangshan billet prices rose RMB

10/t to RMB 2,850/t. Rebar prices fell RMB 20/t in Shanghai and Beijing. HRC prices

fell RMB 10/t in Shanghai and Beijing. China’s daily steel output fell 4.8% to

1.9664mt in mid-February, with CISA mill inventories at 17.266mt, up 6% p/p and up

47% since end-December.

Dalian Commodity Exchange IO active May-14 contract prices rose RMB 4/t to RMB

824/t, with lower volumes of 88,000 lots traded today. Among physical iron ore, RioT

tendered a PB fines Fe 61.4% March cargo at $117.58/t, below yesterday’s levels of

$118.11/t. However globalORE saw bids for PB fines improve to $119.10/t, while on

CBMX a Fe 61% cargo was bid at $117.50/t.

The TSI Fe 62% China CFR price index rose 20 cents to $118/t (MTD: $121.54/t).

The Platts Fe 62% index rose 75 cents to $118.25/t (MTD: $121.41/t), while the TSI

Fe 58% index fell $1.60/t to $106.10/t (MTD: $111.24/t). The Metal Bulletin Fe

62% index rose 54 cents to $117.87/t, while its Fe 58% index fell 43 cents to


3

$102.76/t. The Argus Fe 62% index rose 80 cents to $116.50/t. Mysteel’s Fe 62%

index remained flat at $117.50/t, while its Fe 58% index was stable at $105.50/t.

In IO supply news, MMX has concluded the part-sale of its Sudeste port to Trafigura

and Mubadala today, giving them a 65% stake. MMX will have rights to ship 7mtpa

from the port. Vale has shipped its first Valemax to Malaysia’s Teluk Rubiah port, with

383,500 tonnes of ore aboard. Vale plans to blend ores from different production units

to improve final quality for its Asian customer base from this 35mtpa distribution

centre. We are still yet to fully understand the company’s logic in operating this

discharge/re-load strategy: although the theoretical concept of trying to capture some

of Australia’s freight competitiveness is appealing, reality is proving impractical. Flinders

Mines is keen to use Balla Balla‘s proposed port to explore exporting 5-20mtpa of

hematite from its Pilbara project, from H2:15, having agreed to a $25/t service charge

and a 30% revenue share for Fe 55.2% sales over $A60/t.

The Baltic Exchange Cape index shifted upwards by another 9.7% to $13,762/day,

with C3 up 7% at $21.527/t and C5 up 3.4% at $9.568/t.

Eurozone sentiment lifted slightly in February from 101 to 101.2, largely driven by

services and suggesting GDP growth of 1.5%. Meanwhile Spain’s Q4:13 GDP rose by

0.2% y/y, with both household spending and investment up for the 2nd quarter in a

row.

For Q2:14 thermal coal prices, API 2 is trading at $72.95/t; API 4 is trading at $73/t;

while Newcastle is trading at $76.25/t. Two ARA cargoes traded today for May-14, the

first at $73.25/t and the second at $73.05/t, down from Tuesday’s June deals by 35-

55 cents/t, but above yesterday’s offers, providing some support to paper.

Zhengzhou Futures May-14 contract price rose RMB 1/t to RMB 538/t. A South China

physical NAR 5500 cargo traded at $77/t CFR, with early May bid at $76.90/t, with

concern about Daqin’s upcoming April rail maintenance at play, together with improved

macro sentiment today. Port stocks are at 19.16mt, off 1.1% d/d. Shenhua is selling

coal flat this week, with NAR 5500 spot trading at RMB 568.8/t, in line with Q1

contract settlements. Shanxi’s Daqin line expects to rail 15mt more in 2014. China’s

January thermal imports reached 26.4mt, above December’s 24mt, including lignite

imports of 7.9mt and anthracite imports of 3.8mt.

Premium Hard Coking Coal spot prices are trading in the $120-125/t Qld FOB range,

with China CFR prices ranging $132-137/t. On the Dalian Exchange, May-14 coke

price traded up RMB 1/t to RMB 1,284/t, while HCC prices closed off RMB 3/t to

RMB 917/t. Stocks are at 12.25mt, up 0.2% w/w. Environmental pressures are

continuing to keep steel mill demand weak.

By Melinda Moore


4

Commodity Prices Base Metals

LME 3 month Open Close High Low Daily change

Change (%) Cash Settle Change in cash settle

Cash - 3m

Aluminium 1 806 1 799 1 806 1 781 -8 -0.42 1 742.50 -25 -44.50 Copper 7 319 7 339 7 349 7 267 20 0.27 7 332.00 -8 64.50 Lead 2 201 2 212 2 220 2 184 11 0.50 2 176.50 -11 -24.50 Nickel 14 556 14 725 14 755 14 430 169 1.16 14 565.00 130 -49.00 Tin 22 339 22 165 22 339 21 927 -174 -0.78 22 150.00 -140 16.00 Zinc 2 078 2 089 2 093 2 061 11 0.54 2 069.50 -6 1.50 Daily LME Stock Change (mt)

Metal Today Yesterday In Out One day change

YTD change (mt)

Cancelled warrants

(mt)

Cancelled warrants

(%)

Contract turnover

Aluminium 5 466 875 5 468 900 2 925 4 950 -2 025 8 800 2 509 700 46 157 224 Copper 328 375 330 675 25 2 325 -2 300 -38 050 184 900 56 130 184 Lead 208 850 209 450 0 600 -600 -5 600 42 550 20 33 140 Nickel 260 700 260 832 216 348 -132 -936 106 290 41 56 754 Tin 9 260 9 510 0 250 -250 -425 2 670 29 5 579 Zinc 875 150 876 650 0 1 500 -1 500 -58 325 296 925 34 67 139

Shanghai 3-month Open Last 1d Change COMEX Open Close Change Change (%) Aluminium 13770 13765 -45 Ali Feb'14 - - - - Copper 51490 51660 10 Cu Feb'14 335.1 333.65 -1.45 -0.43 Zinc 22 339 22 165 -1

ZAR metal prices Aluminium Copper Lead Nickel Tin Zinc ZAR/USD fix

Cash 18 915 79 589 23 626 158 103 240 438 22 464 10.8550 3-month 19 779 80 711 24 326 161 938 243 760 22 974 10.9975 Precious metals

AM Fix PM Fix High bid Low offer Closing bid Daily change

EFP's

Gold 1 247.75 1 238.00 1 256.15 1 235.84 1 241.37 -13.07 -0.9/-0.5 Silver - 1 239.57 20.36 19.68 19.88 -0.42 -2/0 Platinum 1 456.00 2 003.00 1 469.50 1 436.75 1 449.00 -15.00 +1.5/+3.5 Palladium 746.00 19.85 749.70 741.15 747.80 -0.30 +0.0/+1.0

Forwards (%) 1 month 2 months 3 months 6 months 12 months Gold 0.01 0.02167 0.03 0.065 0.15333 Silver 0.62 0.616 0.618 0.612 0.568 USD Libor 0.157 0.20235 0.2366 0.3341 0.5726

Technical Indicators 30-day RSI 10-day MA 20-day MA 100-day MA

200-day MA

Support Resistance

Gold 48.08 1 244.87 1 231.66 1 279.02 1 319.42 1 237.23 1 243.45 Silver 47.01 20.11 19.95 20.96 21.38 19.77 19.95 Platinum 57.09 1 441.97 1 415.77 1 410.52 1 432.96 1 447.96 1 459.58 Palladium 56.5 743.41 733.12 723.90 722.27 744.08 748.43

Active Month Future COMEX GLD

COMEX SLV NYMEX PAL

NYMEX PLAT

DGCX GLD TOCOM GLD

CBOT GLD

Settlement 1239.1 19.825 745.25 1453.5 1239.4 4162 1241.8 Open Interest 414732 138423 39198 60759 1575 83634 147 Change in Open Interest 20300 5136 2860 -275 309 -19108 -166

Energy Energy futures pricing 1 month Change 2 month Change 3 month Change 6 month Change Sing Gasoil ($/bbbl) 121.911 0.01 122.241 0.35 121.456 0.27 120.12 0.16 Gasoil 0.1% Rdam ($/mt) 915.75 -3.25 910.5 -2.25 905.75 -1.50 897.75 -0.50 NWE CIF jet ($/mt) 980.59 0.50 978.69 1.84 974.92 2.34 966.31 1.32 Singapore Kero ($/bbl) 122.276 -0.07 122.861 0.35 122.076 0.27 120.04 0.16 3.5% Rdam barges ($/mt) 560.352 0.86 563.92 0.14 565.98 -0.04 565.98 -0.12 1% Fuel Oil FOB ($/mt) 587.47 -1.10 583.52 -4.66 586.88 -4.16 591.79 -2.62 Sing FO180 Cargo ($/mt) 611.758 -0.89 608.54 -2.80 602.11 -1.73 596.23 -0.70 Thermal coal Q1 14 Change Q2 14 Change Q3 14 Change Cal 14 Change API2 (CIF ARA) 84.10 0.00 81.60 0.05 81.95 -0.20 82.85 -0.05 API4 (FOB RBCT) 84.30 -0.10 81.30 -0.05 80.75 -0.30 81.85 -0.15

Source: LME, NYMEX, COMEX, SHFE, Standard Bank Research


5

Commodity Prices Latest Price 1-week 1-month 3-month 6-month 1-year Bulks Steel—Physical Turkish Scrap 80:20 (Iskinderun CFR) $/t 392.98 0.14% 1.96% 10.61% 10.86% -0.80% China Tangshan Steel Billet $/t 496.00 -1.59% -0.20% 1.43% -0.60% -7.81% China HRC export (Shanghai FOB) $/t 533.00 0.00% 0.19% 0.57% 6.18% -6.16% North Europe HRC domestic (ex-works) $/t 430.00 0.00% 0.00% -1.71% -1.71% -8.51% North America HRC domestic (Midwest FOB) $/t 684.00 0.29% 0.15% 6.21% 8.06% 8.40% Steel—Futures LME Billet Cash $/t 315.00 9.95% 23.53% 50.00% 120.28% 7.51% LME Billet Futures (1-mth) $/t 315.00 9.95% 23.53% 48.58% 115.75% 6.78% LME Steel Billet Stocks—change 0.00 - - - - - Shanghai Rebar Futures (Active contract) $/t 532.14 -3.20% -7.66% -4.07% 3.15% -14.09% Shanghai Rebar Futures On-Warrant Stocks—change 0.00 - - - - - SHFE Rebar - Open Interest 6420.00 - - - - - SHFE Rebar - Total Volume 1020.00 - - - - - China Steel Inventory (million tonnes) 12.98 1.25% 0.39% -10.12% -18.71% 1.55% Iron ore China Iron Ore Fines (62% Fe; CFR Tianjin) $/t 131.50 -2.59% -5.67% -0.23% 6.31% -17.03% China Iron Ore Fines (58% Fe; CFR Tianjin) $/t 122.10 1.08% -3.02% -0.33% 6.82% -16.71% SGX AsiaClear IO Swaps 62% Fe $/t (1-mth) 131.31 -1.55% -5.31% 0.88% 7.58% -13.11% Platinum 37358.00 - - - - - China Iron Ore Inventory (million tonnes) 81.50 0.26% 0.73% 16.30% 12.62% 11.69% Coking coal Premium Hard Coking Coal (Qld FOB) $/t 136.25 0.00% -1.70% -9.02% -4.39% -15.90% Capesize freight Saldanha South Africa-Beilun China 17.75 -6.58% -13.41% -21.98% 31.48% 42.00% Financials pricing RMB Currency 6.06 0.07% -0.29% -1.06% -1.22% -2.75% China 7-day repo 4.02 -19.28% -10.67% -10.67% 11.67% 34.45% API2 (CIF ARA) 2030.93 -3.72% -9.26% -8.18% 3.33% -10.74% Source: LME, SGX, McCloskey, SHFE, Bloomberg


6

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Kitco Gold 2014