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Precious Metals Forecast Mid-Year 2013

Monetary decisions and tendencies are increasingly responsible for driving gold. Worries over the US Fiscal Cliff, which concerned us at

the beginning of the year, have taken a back seat. Inconsistent statements by Fed bankers regarding the tapering of the US Quantitative

Easing program, however, have lately been strongly affecting gold. At some point anticipated to begin as early as September 2013, such

plans have been dubbed unlikely shortly after. As a result, important economic data which may sway opinion and strategy of FED bankers

in either direction will continue to dominate the scene.

On a whole, the great popularity which gold enjoyed for years can no longer be taken for granted. The vigorous outflows from ETFs in the

first half of this year only emphasizes that investors have already begun to rearrange their portfolios. Other asset classes - especially

shares - lure with higher revenues and should the voices that support an early end of the US bond purchasing program gain ground,

further corrections and continuously waning interest are by all means possible. The metal would lack the backing of inflation fears which

had lent considerable support to gold ever since the printing of money set in. Generally, however, the problems that motivated the various

economic programs have by far not sustainably been solved. Private investors may hence justifiably continue to be unsettled – especially

as the high equity markets may also foretell a correction in the medium term.

In an environment of falling prices the situation for some producers will worsen leaving them to battle for profitability.

Considering the first six months of this year, China may come first in the list of gold importers this year and hence exceed India’s demand

for the first time. Since the price correction mid-April, gold imports into China increased considerably and 999.9 gold continues to be in

high demand. We are skeptical, however, whether the physical demand out of China will last on this level until year-end. Yet India, sever-

ely impaired by increasingly restrictive import rules, is falling behind as driver of the metal compared to previous years. Support lent by

central bank purchases is also diminishing. Whilst national banks bought 532 tonnes last year, metal consultancy GFMS forecasts 400

tonnes for 2013. In terms of metal supply, we expect a small increase on the part of primary producers. Due to the considerably lower pri-

ce level, however, metal available from recycling may well decline by 20% compared to last year.

Overall, gold is lacking the drivers that could reverse the downward trend in which the metal finds itself since mid-April.

Gold

We expect the Euro to trade below the level of 1.2500 in relation to the USD by the end of the year and hence considerably weaker than at

the moment (1.3280). This expectation is founded on the economic situation of the associated countries. The involved central banks,

namely the European Central Bank and Federal Reserve, have adapted their policies according to their national economic situation.

As a result, the ECB adhered to its expansive monetary policies and cut – despite their opposite statement at the beginning of this year –

the main refinancing rate in May from 0.75% to 0.50%. Besides, further expansive measures were considered as likely such as additional

longer-term refinancing operations (LTRO). This strategy, in combination with the continuously smoldering debt crisis in some European

countries, will weigh on the Euro.

In contrast, the US economy is recovering which could result in a less hawkish policy on the part of the Federal Reserve and could put an

early end to the Quantitative Easing program in support of the American economy. Such measures - previously expected as early as Sep-

tember - would lend support to the US Dollar.

EUR/USD Ø 2013: 1.2600 High: 1.3500 Low: 1.2000

Ø 1,260 $/oz High: 1,500 $/oz Low: 1,050 $/oz

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The platinum market was in recent months characterized by three fundamental factors which will be highly relevant for the prices’ future

development as well: the situation in South Africa, the sales figures of the automotive industry and the interest on the part of investors.

Responsible for about 60% of platinum supply, South African mines continue to suffer from repeated wild cat strikes. Such strike action

must mostly be blamed on rivaling unions, namely the Association of Mineworkers and Construction Union (AMCU) and the National Uni-

on of Mineworkers (NUM). Claims target a doubling of wages (AMCU) or else an increase by 60% (NUM). Even though the current price

should have taken into account the various strikes already, the price of platinum could benefit from aggravating strike action.

Thomson Reuters GFMS expects a small deficit (demand exceeds supply) to the amount of 11.664 kg which must be ascribed to lower

supply stemming from recycling – this concerns in particular automotive catalysts (-9%) as well as jewelry (-19%). Besides, mines are

struggling to remain profitable in the course of declining prices. Further production cuts can hence not be ruled out. The respective reduc-

tion in supply as well as an increase in electricity cost by the governmental energy provider Eskom may therefore have a positive impact

on prices. The introduction of a “master agreement” which is also supposed to ensure the sustainability of the South-African mining indust-

ry may ease the tension. Relevant contracts, however, are yet to be signed.

The lion share of platinum used in the automotive industry falls upon Europe as diesel engines, for whose exhaust gas treatment platinum

is employed, only plays an important role here. Yet, it is a well-known fact that European vehicle demand is weak which weighs substanti-

ally on the platinum market. The by far stronger demand in emerging markets cannot compensate the situation as it is mainly palladium

that is being used as catalyst there.

The decisive factor may hence lie again in the investor’s behavior. In this respect, it is in particular the South-African ETF New Wave, re-

cently introduced by Absa Capital, which needs to be considered. The fund already holds approximately 550,000 ounces of platinum

which translates into 24% of the entire ETF stocks.

Despite the fact that a strong USD often implies declining precious metal prices, we expect platinum to trend higher on the back of the

here discussed reasons.

Platinum

Silver Ø 23.00 $/oz High: 30.00 $/oz Low: 15.00 $/oz

Ø 1,500 $/oz High: 1,750 $/oz Low: 1,300 $/oz

As mentioned in our forecast at the beginning of this year, demand by investors has influenced silver significantly. In the past few months

speculative investors in particular have sold their positions after the price had reached very high levels on the back of particularly loose

monetary policies put in place by the Central Banks. Since the severe correction in April the market now seems to find its equilibrium be-

tween 18 and 23 USD.

In addition, it was noticeable in recent months, that less silver was available on the part of recycling due to the lower price level which also

showed effect on the availability of granules. We expect to see the price for an ounce of silver at 24 USD by the end of this year – hence at

a premium of 3.50 USD/oz compared to now.

Silver was - as anticipated in our forecast issued in January - subject to stronger volatility than gold. A well above historical average gold-

silver-ratio of currently 66 was the result. Should gold rise up, we consider it as highly likely that silver follows suit, while exaggerating the

move.

Towards year-end, a respective rally may also well occur – supported possibly by the prospect of a higher VAT rate in Germany for silver

bullion coins (19% instead of 7%). Last but not least, the economic support by Central Banks suggests stronger industrial demand which,

however, is predominantly of psychological value as the respective quantities are relatively low compared to those by investors.

Palladium Ø 750 $/oz High: 850 $/oz Low: 650 $/oz

As forecast at the beginning of the year, palladium with its intrinsic high volatility has indeed exceeded platinum in relative terms. In fact, pal-

ladium has been the most stable of the four big precious metals. We consider the metal as justly priced at the current level around 700 - 750

USD/oz.

Palladium is being produced as by-product of nickel in Russia (31% of global production) and of platinum in South Africa (28% of global pro-

duction). The price of the metal was substantially affected by Russian stock sales - which yet continue to be a mystery to the market. Assu-

med depleted, Russia may launch fresh purchases which would then support palladium. Whilst such a scenario is by all means considered

as not unlikely, it has so far not been confirmed.

Generally speaking, palladium – of which Thomson Reuters GFMS predicts a supply deficit of 33,281 kg - is subject to similar risks as plati-

num. The automotive industry accounts for nearly 66% of palladium demand.

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The increased demand in automotive catalysts for petrol engines (+9%) is hence a significant driver of the deficit. The increasing need for

cars in emerging markets, including China, as well as recovering market in North America should equally support the price. By 2020,

Norilsk Nickel, one of the leading palladium and nickel producers, expects a supply deficit of 60 tonnes.

Investor’s demand could also be of decisive impact. Absa Capital which very successfully launched the platinum-backed ETF New Wave

in South Africa plans a similar product with palladium. Not even the difficult sourcing of palladium due to regulatory hurdles seems to have

a deterring effect.

Should this Exchange Traded Fund fare as positively as its platinum forerunner, it may increase demand in palladium with respective

effect on the metal’s price. We hence see palladium despite its already achieved gains well supported.

Rhodium, Ruthenium, Iridium

The environment for rhodium, ruthenium and iridium has hardly changed over the first half of 2013 and the expectations and prices ranges

predicted at the beginning of this year, have to a large extent been met.

Rhodium currently trades at a 9-year low. The price of the past seven months ranged from 960 - 1,275 USD/oz, yet, for four month now,

the metal finds itself in a continuous downward trend. The automotive industry still refrains from any larger purchases and other industrial

sectors have been unable to balance this due to the generally lower total demand.

The South-African mines continue to face a dilemma: Either they sell at very low prices and hence earn little money on their metal and

push prices even lower in an environment of little demand. Or, they hold off and do not sell the metal, resulting in no income at all which

would aggravate the general situation at the four major platinum mines that are all based in South Africa. It currently seems, as if the pres-

sure was somewhat alleviated but we are still far from seeing a rally in the near future. Until the end of 2013, we expect rhodium to trade in

a range of 900 – 1,100 USD/oz.

Ruthenium was even less volatile than assumed six months ago: There was hardly a notable price range. In the past four weeks, howev-

er, there was a slight downward movement. There is some demand on the part of the data storage industry but due to technical advance-

ments, quicker recycling cycles and stronger supply, the price was unable to benefit from it. We are therefore expecting a similar range for

the remaining months of 2013: 70 - 90 USD/oz.

Iridium has evolved just as indicated in our weekly reports. As the metal is frequently used in applications such as crucibles where the

metal is not expended, purchases are not sustainable. Hence the market has also seen more substantial sales in the past four months

which could not be compensated due to lacking liquidity and hardly available demand. The price hence declined by over 15% over this

period of time. It must be taken into account, however, that iridium traded near its all-time-high at the beginning of this year which rendered

sales for potential sellers more attractive. We deem it possible, that there is still room for prices to decline further and expect to see iridium

trade in a range of 650 USD/oz - 900 USD/oz in the next six months.

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All prices shown are interbank market bid prices, all charts unless stated other-wise are based on Thomson Reuters.

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