FOCUS| Gold
26 October 2018
Please refer to important information and MAR disclosures at the end of this report
COMMODITIES
After the gold rush...
KEY MESSAGES
Gold faces multiple headwinds, including higher US Treasury yields, a strong dollar currently and a Fed holding the course on policy rate normalisation. We see the recent jump in gold's price as limited in scope, and owing mostly to the recent de-risking in equity markets that we view as a correction rather than being in the throes of a bear market. Although we have nudged up our period average forecasts, directionally we remain negative on the price of the yellow metal through H1 2019. Our 2018 forecast is revised up to USD1260/oz (+USD 10/oz); our 2019 forecast is raised to USD1145/oz (+USD45/oz). Since our last publication in mid-July, the gold market has until very recently lacked lustre. The precious metal traded roughly in a USD1180 to USD1210/oz range while its realised 30-day volatility barely moved above 10%. With persistent dollar strength, higher US yields and little sign of inflation, gold struggled to move higher. No amount of concern tied to the escalating US-China trade dispute, EM difficulties or geopolitical events was sufficient to generate safe-haven demand and push gold higher. The USD1200/oz price level proved a hard technical support to breach. We suspect that private wealth managers bought dips below this level alongside macro funds looking for a hedge to their equity exposure, thus keeping gold afloat. In the past two weeks, equity jitters have thrown gold a lifeline and it has risen above USD1240/oz. But we are not expecting the de-risking in equities to last, suggesting that, given positive real rates and a strong dollar, investors will eventually shy away from gold.
TRADE IDEA
We expect equity market jitters to fade, at least in the near term, removing a key support for gold prices. The Fed continues to normalise policy rates, diverging from ECB policy, and the dollar is strong. Our forecast suggests 10-year US yields will hold above 3%. And with inflation contained, the real rate is positive and likely to drive a bout of of weakness in gold price in Q1 2019. As such, we like being long USD1190/1150 put spreads on March 2019, currently at a cost of USD5.90/oz.
Fig. 1: BNP Paribas gold/silver price forecasts
Gold ($/oz) (26/10/18) Revision* Q1 18 (actual) 1329 .. Q2 18 (actual) 1306 .. Q3 18 (actual) 1213 -27 Q4 18 1190 65 Q1 19 1145 45 Q2 19 1110 40 Q3 19 1175 70 Q4 19 1140 10 2017 (actual) 1257 .. 2018 1260 10 2019 1145 45
Sources: Bloomberg, BNP Paribas
Fig.2: Historical gold and silver prices
$/oz.
1800 1600 1400 1200 1000 Jan 12
Silver (26/10/18) 16.77 16.53 15.00 14.30 14.05 13.95 14.70 14.10 17.05 15.65 14.20
Gold/Silver Ratio 79 79 81 83 81 80 80 81 74 81 81
$/oz. 40 35
30
25
20100 Jan 13 Jan 14 Jan 15 Gold (lhs) Jan 16 Jan 17 Jan 18 Sil ver (rhs)
Sources: Bloomberg, BNP Paribas
* relative to 18 July 2018
Harry Tchilinguirian, Economist Commodities | BNP Paribas London Branch
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2 3 4500+
COMMODITIES
After the gold rush...
After the gold rush: The end of October saw a rush back into gold on the back of a sell-off in equity markets. The uplift to gold prices, however, proved modest as the yellow metal only manged to edge back above USD1240/oz. We expect the de-risking in equities, at least in the short term, to fade. Our equity strategists see the move as a correction, rather the beginning of a bear market. Q3 2018 US GDP growth came in above expectations and earnings reports so far this season are decent, which should allow equities to stabilise. That leaves gold facing a strong dollar, a Fed committed to hiking rates and positive real rates. Fed still on track: The September minutes of the FOMC showed a committee confident in its outlook for inflation and economic growth, albeit acknowledging potential foreign risks to the economy. Our base case is for two further hikes from the Fed (one in December, one in Q1 2019), but we would not discount the possibility of an additional hike if economic momentum remains positive. Market expectations, on the other hand, have moved closer to two rate hikes next year. Inflation not a concern yet: Looking at market-based measures, there does not appear to be too much concern over inflation, at least as measured by breakeven rates or by the evolution of TIPPS. US inflation in September saw a modest m/m change leaving the y/y headline figure at a subdued 2.3%. Traditional safe haven demand nowhere to be found: Since the summer, there has been no shortage of developments that could drive safe haven demand for gold. These include the escalation of the trade dispute between the US and China generating uncertainty over the economic Fig.3: US dollar long positioning has yet to fully unwind
Long
Short
Sources: Bloomberg MacroBond, BNP Paribas
outlook, jitters rippling through emerging markets following concerns over Turkey and Argentina, or geopolitical developments in Europe or the Middle East. In each case, gold has failed to convincingly react and rally higher. Treasuries over gold: Investor appetite has yet to emerge. In particular, holdings of gold in physically backed ETFs remain considerably lower than the peak achieved at the end of April and only marginally ticking higher since their early October low during the recent turbulence in equity markets. The opportunity cost of holding gold becomes greater in a higher-yield environment, notably when inflationary pressures are absent. The 10-year US Treasury yield hit our year-end target sooner than expected, reaching above 3.2% in early October. While the yield has declined, our current forecasts see it returning to 3.2% in June 2019, providing a strong disincentive for holding gold. US yield headwinds are likely to abate in H2 2019 when we see these easing with a slowdown in the US economy. USD strength: Although there has been a retrenchment in long USD positions, according to BNP Paribas' bespoke index, the positioning has yet to return to neutral and the DXY index has enjoyed a rally since end-September, which took it back to its August highs. We see the dollar as structurally overvalued and forecast a depreciation of the greenback in 2019. But, should dollar strength persist, gold will suffer. While the Fed is tightening policy, the ECB is only going to end asset purchases in all likelihood in December (conditional on the economic data). ECB president, Mario Draghi, has made repeated references to the fact that monetary policy would remain accommodative even if the ECB ended its net asset purchases. As such, we expect a first deposit rate hike to occur only in September 2019. This policy divergence can explain the dollar's current strength. H1 2019 downside risks: While gold risk-reversals continue to price call options above put options, we see downside risks to gold's price in the first half of 2019. These risks can emerge if the US economy sees further positive surprises that cement expectations of more Fed hikes than we currently envisage, thus providing buoyancy to the dollar. This bearish scenario can be reinforced in the event of a surprise outcome in the US midterm elections in November. Should Republicans retain control of Congress, contrary to current poll surveys, then speculation of more deregulatory legislation and further tax cuts would rise. And if these measures were to be implemented, the US may yet extend its late-cycle expansion in 2019, reinforcing the perception that the Fed will retain a restrictive monetary stance and prop up yields for the balance of the year.
Fig.4: Gold risk reversals
3 3 2Gold 25 delta risk reversal (%)
CallsPuts1-1
-1 Jan 17
PutsCalls
Jul 17 3rd Month Jan 18 6rd Month Jul 18 1 Year
Sources: Bloomberg MacroBond, BNP Paribas
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26/10/2018COMMODITIES
Data and Charts
Fig. 5: Gold price and total market open interest
700 650 600 550 500 450 400 350 300 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Open Interest - thousands (lhs) Jan 17 Jan 18 Price $/oz (rhs) 1900 1800 1700 1600 1500 1400 1300 1200 1100 1000 900 90 80
70
Fig. 6: Gold/silver ratio
Gold / silver ratio
60 50 40 Jan 12
Jan 13 Jan 14 Jan 15 Gold/silv er rati o
Jan 16 Jan 17 Jan 18 90 day moving average
Sources: Bloomberg, BNP Paribas
Sources: Bloomberg, BNP Paribas
Fig. 7: Gold investor demand - ETFs
100 80 1500
Fig. 8: Gold managed money net position
Net Position of Managed Money 60% participants (as % of open interest) 50% 40% Net Long 30% 20% 10% 0% -10% Net Short -20% -30% Jan 16 Jan 17 Jan 18 Futures Only Futures & O pt ions Combined 300 250 200 150 100 50 0 -50 -100 -150 Net Short Jan 16 Jan 17
Thousands
Net Long
60 40 20
0 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
1000
500Jan 18
Known ETF holdings (troy.oz) lhs
SPRD Gold Trust hol di ngs (m.t) rhs
Managed Money Net Futures O nly Posi tion (k.contracts)
Sources: Bloomberg, BNP Paribas
Sources: Bloomberg, CFTC, BNP Paribas
Fig. 9: Inflation expectations breakevens
3.5 3.0 2.5
2.0 1.5 1.0 Jan 12
Fig. 10: Gold in different currencies
Front month gold price in various currencies (normalised) 180
160
Yield (%)
2 Oct 2014 = 100
140 120
100
80
60 Oct 14 Oct 15 Oct 16 Oct 17 Oct 18
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18 5Y 5Y Forward
US Breakeven 10Y
US Breakeven 5Y
US $/oz
AU$/oz
ZAR/oz
INR/oz
Sources: Bloomberg, BNP Paribas
Sources: Bloomberg, BNP Paribas
Fig. 11: Gold vs. selected government bond yields
2000
1800
Fig. 12: Gold vs. 5-year TIPPS
4.0
3.0
1600
1400 1200
2.0
1.0 0.0
1000 Jan 12
-1.0 Jan 13 Jan 14 Jan 15 Gold price ($/oz) lhs German 10 y r Bund (%) rhs Jan 16 Jan 17 Jan 18 US 5 yr Tresuary (%) rhs
1900 1800 1700 1600 1500 1400 1300 1200 1100 1000 Jan 12
-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Gold price ($/oz) lhs US 5yr TIPPS (%) Inv ert ed rhs
Sources: Bloomberg, BNP Paribas
Sources: Bloomberg, BNP Paribas
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26/10/2018COMMODITIES
Data and Charts
Fig. 13: Gold and silver realised volatility (30 and 60 days)
Historical Volatility Front Month (%) Historical Volatility Front Month (%)
Fig. 14: Gold risk reversals
4 2
Gold 25 delta risk reversal (%)
251st Mth COMEX gold
40
1st Mth COMEX silver
CallsPuts
30
0 -2 PutsCalls -4 -6 Jan 13
1520
5 Jan 16
Jan 17
Vol 30 day s
Jan 18
Vol 60 day s
10 Jan 16
Jan 17
Vol 30 day s
Jan 18
Vol 60 day s
Jan 14
Jan 15 3rd Month
Jan 16
Jan 17
Jan 18 1 Year
Sources: Bloomberg, BNP Paribas
Sources: Bloomberg, BNP Paribas
Fig. 15: Gold volatility surface (derived)
Gold 1 Week 1 Month 2 Month 3 Month 6 Month 1 Year 2 Year Puts 10 11.79 10.91 10.87 10.81 11.38 12.01 13.29 25 11.52 10.54 10.43 10.33 10.76 11.22 12.32 Delta 50 11.77 10.72 10.55 10.41 10.76 11.11 12.15 25 12.99 11.96 11.77 11.62 12.00 12.38 13.49 Calls 10 14.53 13.63 13.48 13.40 13.87 14.38 15.71 Silver
Fig. 16: Silver volatility surface (derived)
Puts 10 18.24 17.52 17.66 17.75 18.41 18.80 20.63 25 17.68 17.07 17.21 17.23 17.88 18.26 19.78 Delta 50 17.82 17.17 17.29 17.26 17.91 18.26 19.61 25 18.92 18.45 18.63 18.64 19.34 19.79 21.31 Calls 10 20.54 20.20 20.48 20.60 21.37 22.08 23.85
1 Week 1 Month 2 Month 3 Month 6 Month 1 Year 2 Year
Sources: Bloomberg (Ticker XAUUSD Curncy), BNP Paribas. OTM puts: calculated by subtracting the RR from ATM implied volatility augmented by implied fly volatility. OTM calls: calculated by adding the RR to ATM implied volatility augmented by implied fly volatility.
Source: Bloomberg (Ticker XAGUSD Curncy), BNP Paribas. OTM puts: calculated by subtracting the RR from ATM implied volatility augmented by implied fly volatility. OTM calls: calculated by adding the RR to ATM implied volatility augmented by implied fly volatility.
Fig. 17: Gold call option open interest selected strikes
Gold Call Options (k.contracts) 22 20 18 16 14 12 10 8 6 4 2 0 Apr 18 Jun 18 Aug 18 Oct 18 Z8C 1250 Z8C 1300 H9C 1250 H9C 1300 Gold Put Options (k.contracts) 10 9 8 7 6 5 4 3 2 1 0 Apr 18 Jun 18 Aug 18 Oct 18 Z8P 1225 Z8P 1200 H9P 1225 H9P 1200
Fig. 18: Silver call option open interest selected strikes
Silver Call Options (k.contracts) 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Apr 18 Jun 18 Aug 18 Oct 18 Z8C 14.75 Z8C 15 H9C 14.75 H9C 15 Silver Put Options (k.contracts)
1.0 0.8
0.6
0.4
0.2
0.0 Apr 18
Jun 18
Aug 18
Oct 18
Z8P 14.5 Z8P 14.25
H9P 14.5 H9P 14.25
Sources: Bloomberg, BNP Paribas
Sources: Bloomberg, BNP Paribas
Fig. 19: Gold correlation* with DXY dollar index
Correlation: Gold vs. Dollar trade -weighted index (DXY) 100% 80% 60% 40% 20% 0% -20% -40% -60% -80% -100% Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 30 days 60 days 120 days 100%
Fig. 20: Gold correlation* with silver
Correlation: Gold vs. Silver
90% 80% 70% 60% 50% 40% Jan 14
Jan 15 30 days
Jan 16 60 days
Jan 17
Jan 18 120 days
Sources: Bloomberg, BNP Paribas *correlation in daily returns
Sources: Bloomberg, BNP Paribas *correlation in daily returns
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26/10/2018
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