Global Metals Weekly：Gold rises as the world stumbles

BofA Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 25 to 26. Link to Definitions on page 24. 11362227 Global Metals Weekly Gold rises as the world stumbles Commodities | Global 21 February 2014 Global Commodity Research MLPF&S Michael Widmer +44 20 7996 0694 Metals Strategist MLI (UK) michael.widmer@baml.com Francisco Blanch +1 646 855 6212 Commodity & Deriv Strategist MLPF&S francisco.blanch@baml.com Peter Helles +44 20 7996 8154 Commodity Strategist MLI (UK) peter.helles@baml.com Kranthi Gade +1 646 855 4765 Commodity Strategist MLPF&S kranthi.gade@baml.com Peter Gross +1 646 855 2330 Commodity Strategist MLPF&S peter.gross@baml.com Chart 1: China’s local gold premium has fallen Source: Bloomberg, BofA Merrill Lynch Global Commodity Research  Gold is the ultimate sentiment trade After falling below $1,200/oz in 2013, gold has staged an impressive rally, hovering around $1,320/oz at present. While anecdotal evidence suggests that physical gold demand has picked up in recent weeks, we note that local gold premia in several traditional physical gold markets remain subdued (Chart 1). Hence, we believe the rally was heavily influenced by faster-money investors. In fact, non-commercial market participants have been adding net length on CME and outflows from physically backed ETFs have subsided. This turnaround of investor sentiment highlights that gold remains the ultimate sentiment trade. Bearish consensus fundamentals have been challenged New buyers emerged after most of the bearish consensus macro assumptions have been challenged year-to-date. Many gold market participants anticipated steady US growth, continued tapering and rising rates. However, partially because of the cold winter weather, the economy has faced a soft patch. This has had various implications, including a re-pricing of the Fed’s reaction function. Of course, EM turmoil, seen as the key risk to financial market stability at present, has exacerbated developments in the US. We summarise these relationships in our 2014 gold mind map. Gold to bottom out in 2014, but headwinds remain As we noted previously, after last year’s precipitous decline, the worst may be behind for gold, so 2014 may provide interesting entry points for investors. To pick just one supportive driver, some of the EMs are facing structural idiosyncratic problems and this may incentivise gold market participants to stop reducing their exposure to the metal. In addition, there is some apprehension the Fed may be misjudging the size of the output gap. Having said that, we see continued headwinds that make it unlikely for gold to break out of recent ranges to the upside in the coming quarters. For instance, deflationary pressures in the Eurozone limit the scope for tighter monetary policy at a time the US has started to taper. Partially because of this, EURUSD could hit 1.25 by the end of the year. Gold may fall below $1,200/oz again, but should stabilise Taking a shorter-term view, we believe gold could fall back below $1,200/oz as immediate concerns over the US and EM subside through 2Q14. As such, we leave our price forecasts unchanged for now. -60-40-200204060Feb-13Jul-13Dec-13China, local gold premium US$/oz barbarayy_tong@citickawahbank.com Barbara Tong 02/24/14 01:09:29 AM CITIC Bank International Global Metals Weekly 21 February 2014 2 Table 1:Trading views on mined commodities General synopsis Global growth to accelerate next year, although this is partially driven by DM, where economic activity is less commodity intensive. Those raw materials with supply constraints will likely outpeform. Headwinds to gold to persist. Commodity Period Average View Comment Aluminium 1Q14 1,650 The physical market remains extremely tight, partially because of production curtailments. 2Q14 1,750 The aluminium market is set to be stabilising, partially because producers have been cutting output. 2014 1,775 Capacity closures and thawing LME inventories to push prices up. Copper 1Q14 7,050 Chinese New Year an inflection point. Copper to trade above $7,500/t later in 1Q14. 2Q14 6,750 The market should increasingly be better supplied 2014 7,013 Copper is not too hot and not too cold; the physical market may be weaker 2H14 than in 1H14. Lead 1Q14 2,205 Seasonally, demand strengthens towards the end of the quarter. 2Q14 2,300 Tight supplies should show in falling LME inventories 2014 2,308 Scrap holds the key to the market. We anticipate a market deficit for 2014. Nickel 1Q14 14,329 Indonesia's export ban should be increasingly bullish. 2Q14 14,500 Prices to stabilise, before rallying into 3Q, a