WGC projects continuing gold purchases by central banks

WGC projects continuing gold purchases by central banks 

by Commerzbank Commodity Research


  • Imminent resumption of oil production in South Sudan and lower future North Sea oil imports by South Korea weigh on Brent
  • Price gap between Brent and WTI falls to 7-week low
  • Gold seems to be unimpressed by continued ETF outflows and the firmer US dollar, silver ETF holdings at record high
  • PBoC deputy governor dampens speculation about gold buying by Chinese central bank
  • Lower Indonesian tin exports contribute to rise in tin price
  • Strong demand for feed supports wheat price, rising supply from Brazil weighs on soybean price

Energy: Brent is trading at $108.5 per barrel this morning, having slipped by $2 for a time yesterday to close at its lowest level in three months. News that South Sudan plans to resume oil production in three weeks’ time is weighing on the price of Brent. South Sudanese oil production has been interrupted since January 2012 as a result of disputes between South Sudan, which has the oil reserves, and Sudan, which has the necessary pipeline systems. Before the shutdown, the country’s production totalled 350 thousand barrels of crude oil per day. Likewise weighing on Brent is the fact that South Korea looks set to import considerably less oil from the North Sea as of April. Since mid-2011, a free trade agreement with the EU has meant that refineries in South Korea had an incentive to step up their imports of crude oil from the North Sea, which lent buoyancy to the Brent price. Although the North Sea oil imports were exempted from the 3% import duty, the refineries in South Korea were able to claim tax refunds after processing the oil. As a result, South Korean oil imports from Great Britain surged eight-fold to 24.8 million barrels last year and its imports from Norway increased nine-fold to 18.8 million barrels. From April, this loophole will be plugged, and refineries in South Korea will then only be able to claim refunds for duties they have actually paid. As a result, the backwardation of the Brent forward curve has noticeably flattened, and the price differential between Brent and WTI has narrowed to a seven-week low of $16 per barrel. 

Precious metals: Despite renewed outflows from the gold ETFs, and in spite of a firmer US dollar, the gold price made another bid to cross the psychologically important $1,600 per troy ounce mark yesterday, though it rebounded from it again, just like it did the day before. Nonetheless, gold has shown relative strength in recent days, and appears to have overcome its downswing. Part of the funds taken out of gold ETFs are finding their way into the ETFs of other precious metals. Silver has benefited particularly from this trend recently: yesterday, the silver ETFs tracked by Bloomberg saw inflows of nearly 60 tons, thus expanding their holdings to a record high of 19,706 tons. In much the same way as the ETF outflows have no longer been weighing on gold of late, however, silver has likewise not been profiting from the inflows. 
The World Gold Council expects central banks to intensify their efforts to diversify their currency reserves this year and, among other things, to buy gold given that gold is under-represented as compared with currencies. On the other hand, the deputy governor of the Chinese central bank, Yi, has made only cautious remarks about China’s gold purchases, saying that if the central bank were to buy too much gold, the gold price would rise sharply and thus pose a burden to domestic consumers. According to Yi, gold should therefore not account for more than 2% of China’s currency reserves. According to the WGC, the proportion is currently 1.8%. That said, Yi can imagine China importing 500-600 tons or more of gold per year.

Base metals: Although the price of tin has not been able to buck the downswing among base metals in recent weeks entirely, it has meanwhile managed to recoup some of its losses. At around $24,000 per ton, tin this morning is trading at its highest price for more than three weeks. The Indonesia Ministry of Trade reported last week that the country’s tin exports in February, at 8,354 tons, were at the same level as the year before – month-on-month, however, they had fallen by 8.7%. Poor weather conditions were to blame, which severely hampered tin mining and transport. Even though the worst of the rainy season is now over in Indonesia, the world’s biggest exporter of tin, production is likely to continue to be affected by the weather this month. The state weather agency is still forecasting heavy rainfall in March – among other places in Bangka-Belitung, the country’s largest tin production region. As a result, exports are likely to be subdued this month too. Given the recent rise in stock levels, however, fears of any shortage on the global tin market appear premature. At 13,760 tons, tin stocks in the warehouses of the LME are at a ten-month high. We nonetheless anticipate higher prices during the course of the year if the global economy – and by extension demand – were to recover and supply were to fall short of the predicted levels.

Agriculturals: The wheat price on the CBOT has not let itself be deterred by a brief relapse yesterday afternoon, and this morning has climbed to a ten-day high of $7.1 per bushel. Robust demand for feed is facilitating the price recovery. Since wheat has cost less than corn recently, many feed lots in the US are likely to have switched to wheat. This should be reflected in an upward revision of demand estimates and a downward revision of US wheat ending stocks. In view of this situation, not to mention robust export demand, it is only a question of time before the wheat price will also begin to rise on the MATIF. It is currently trading at €233 per ton, i.e. still just slightly above a nine-month low. By contrast, the soybean price fell recently, and at $14.4 per bushel is trading at its lowest level since the start of the month. Given that prices were increasing up until mid-week, importers are refraining from making purchases. What is more, the supply from Brazil should reach the market soon. At the end of last week, nearly half of the Brazilian crop had been harvested. Furthermore, the supply also appears meanwhile to have reached the world market. According to sources in the country, 11.9 million tons of soybeans and soybean products were ready for shipment in Brazilian ports yesterday, which is a good one million tons more than a week earlier.