Dundee Wealth on Gold

8/8/2019 Dundee Wealth on Gold

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Thoughts on Gold and ResourcesThe Forbes Manhattan Conference

Dr. Martin MurenbeeldNovember 4, 2010

1

1. Gold bullion is in a long-termbull market

2. Resources will continue tobenefit from Asian demand

for years to come

Overview

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2

1. Global fiscal and monetary reflation:PIIGS, US, etc.

2. Global imbalances:the dollar must decline

3. Global FX reserves are excessive:diversification

4. Central bank attitudes to gold:now positive

5. Gold is not in a bubble:room to rise

6. Mine supply is flat:peak gold?

7. Investment demand:long-run uptrend

8. Commodity price cycle:many years to run

9. Geopolitical environment:positive

Gold in a Bull MarketNine bullish arguments:

3

1. Baby-Boomer Retirements:The fiscal stressesthis would cause was visible years ago

2. The Great Recession:Pushed budgets intorecord deficit just when the early boomers areabout to retire

3. The Euro Common Currency:Membership in theEuro System allowed interest rates toconverge - and undisciplined governmentsto borrow excessively

Bullish: (1) Global ReflationAntecedents of the (PIIGS) Sovereign Debt Crisis:


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Source: Congressional Budget Office, November 6th presentation byDirector ElmendorfSlide: FederalDebt Under CBOsLong-Term Budget Scenarios

Policy Options:Increase retirement age Decrease benefitsDecrease payment per service Decrease number of servicesIncrease tax rates for services Institute new taxes (VAT?)

US Scenarios

Source: Office of Parliamentary BudgetOfficerFiscal SustainabilityReport,Feb 18,2010

Canadian Scenarios

Bullish: (1) Global ReflationThe baby-boomers are about to retire

5

-16

-14

-12

-10

-8

-6

-4

-2

0

2

4

2007 2009

Source: OECD, IMF

Bullish: (1) Global ReflationFiscal policy blown out by Great Recession

US Canada Japan Germany France Italy UK Greece Portugal Spain OECD China India

Fiscal Balances% of GDP

THEY ARE ALL PIGS!


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-200

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2200

15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10

Last month: September 2010

Bullish: (1) Global ReflationMonetary policy blown up by Great Recession

$bn

1929 StockMarket Crash

WWII

VietnamWa r

NixonEliminatesThe FixedGold Price Y2K

September11, 2001

September 2008Federal Bailouts

Begin

US Monetary Base

7

Government Choices:

Renege on promises

Cut other services

Raise taxes

Print more money?

Bullish: (1) Global ReflationSo how will governments handle their debts?


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8

150

300

450

600

750

900

1050

1200

1350

82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

0.0

1.5

3.0

4.5

6.0

7.5

9.0

10.5

12.0

Global Liquidity(trillion$)

Gold(US$)

Latest month:

Liquidity: June 2010Gold: September 2010

Global Liquidity: FX Reserves + US MBaseSource: IMF, Federal Reserve

Bullish: (1) Global Reflation

Money drives gold

9

Bullish: (1) Global ReflationGold rises and falls with liquidity

-36

-24

-12

0

12

24

36

48

60

82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

-14

-7

0

7

14

21

28

35

42

Global Liquidityyoy%

Goldyoy% Latest month:Liquidity: June 2010Gold: September 2010

Global Liquidity: FX Reserves + US MBaseSource: IMF, Federal Reserve


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10

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

70

77

84

91

98

105

112

119

126

133

140

US Dollar Index(four currencies)

Last quarter:

US$ - 2010-Q3Current Account 2010-Q2

Current Account - %GDP

Bullish: (2) Global ImbalancesThe US current account deficit is rising again

* So will continued recession!

US recession

11

Bullish: (2) Global ImbalancesThe US trade deficit with China is unsustainable

-30

-25

-20

-15

-10

-5

0

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

-300

-250

-200

-150

-100

-50

0

Last month: August 2010

US trade with China

12-month moving totalbn$

US recessions

$bn


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1

2

3

4

5

6

7

8

9

10

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

0

300

600

900

1200

1500

1800

2100

2400

2700

The Chinese RMB was devaluedat year-end 1993 by 34% ofwhich only a little has been givenback recently

RMB/US$Chinese FX reserves($bn)

Bullish: (2) Global ImbalancesChina must revalue; reserves are excessive!

Source: IMF

13

Bullish: (2) Global ImbalancesUS energy deficit bleeds dollars on world markets

-48

-44

-40

-36

-32

-28

-24

-20

-16

-12

-8

-4

0

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

-480

-440

-400

-360

-320

-280

-240

-200

-160

-120

-80

-40

0

Last month: August 2010

Total energy-relatedpetroleum products

12-month running total

$bn

$bn

12-month running total

US imports of crude oil

US recessions


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Bullish: (2) Global ImbalancesThe Obama Administration wants the dollar down

We cant go back to the era where theChinese or the Germans or othercountries just are selling everything tous, were taking out a bunch of creditcard debt or home equity loans, butwere not selling anything to themPresident Obama on CNN in run-up to the G-20 Meeting in Pittsburgh, Sep2009

So now we have currency wars!

15

-9

0

9

18

27

36

45

54

63

72

81

90

69 73 77 81 85 89 93 97 01 05 09

-1

0

1

2

3

4

5

6

7

8

9

10

Global FX Reserves

Bullish: (3) Global ReservesForeign exchange reserves have exploded*

Global FX Reserves% change yoy

Source: IMF

65% of FX Reservesare in US$!!

$7 trillion risesince 2002

* Most are held by emerging country central banks

(e)


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Bullish: (3) Global ReservesGlobal reserves are excessive

bn$ bn$

China 2648.3 India 256.2

Japan 1015.1 Brazil 254.1

Russia 436.6 Switzerland 202.4

Saudi Arabia 422.4 Thailand 149.3

Taiwan 372.1 Algeria 146.2

Korea 281.4 Mexico 106.1

Hong Kong 260.6

TOTAL 6550.9

Addendum: Fuel Exporters $1350.5bnSource: IMF - data through August 2010

Foreign Exchange Reserves(countries over $100 bn)

17

The choices for a central bank are limited:

1. Other currencies

These currencies must have deep internationalcapital markets - some do not: renminbi, ruble: somedo: yen, pound, euro(but is euro now suspect?)

2. SDRs issued by the IMF

The SDR is a basket currency that includes only thedollar, yen, pound, and euro - it has limited use

outside of central bank markets

3. Gold, other hard assets, mining investments

But gold market is narrow and China likescommodity-producing assets

Bullish: (3) Global ReservesDiversification out of $s in FX reserves likely


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1. CBGA signatories are selling less gold(not selling at all)

2. China raised its gold reserves from 600to 1054 tonnes

3. India bought 200 tonnes of IMF gold

4. Russia and India have suggested a newSDR basket should include gold

Bullish: (4) Central Bank AttitudesCentral bank attitudes towards gold have changed

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0

100

200300

400

500

600

700

800

900

1000

1100

1200

1300

1400

69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

Bullish: (5) Gold Not in a BubbleGold looks like it is in bubble

Last date: October 22, 2010

Friday p.m. fix


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20

10

100

1000

10000

69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

Bullish: (5) Gold Not in a Bubble but that may be a function of perspective


Friday p.m. fixlog scale

Compound return from A to B is 6.8%From A to any other point it is moreA

B

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0

250

500

750

1000

1250

1500

1750

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Average price $635(2010-Q3$)

Average price $371(Nominal $)

Bullish: (5) Gold Not in a BubbleIt is not in a bubble in constant Dollars

Last date: 2010-Q3Gold peak of$850 translatesinto $2385 intodays money!


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Bullish: (5) Gold Not in a BubbleNot in terms of oil prices

0

5

10

15

20

25

30

35

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Barrels of oil per ounce of goldLatest month: September 2010

Average:15.03

Average:15.03

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Bullish: (5) Gold Not in a BubbleNot in terms of copper prices

0

100

200

300

400

500

600

700

800

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Latest month: September 2010

Pounds of copper per ounce of gold

Average:343


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0

1000

2000

3000

4000

5000

6000

7000

8000

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Bullish: (5) Gold Not in a BubbleNot if US gold had to cover US money supply

Price of gold to cover US M2(Cover ratio = .24)

Price of gold to cover US M1(Cover ratio = .38)

$3100

$7000

cover ratio as determined in 1934 when gold was revalued to $35

25

0

5

10

15

20

25

30

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Depression 1930-1933Gold revalued to $35 in 1934Gold revalued 5 years after peak

Ratio: S&P vs. Gold1871 = 1.00S&P Index: 1941-43=10.0

Recession 1973-1975Gold cut loose in 1971Gold cut 5 years after peak

Peak - 2000

Bullish: (5) Gold Not in a BubbleGold still cheap In terms of financial assets

Current

10/01/2010Gold $1315SP 1150

With gold = $1315 then S&P = 265

With S&P at 1150 then gold = $5660


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500

1000

1500

2000

2500

1 2 3 4 5 6 7 8 9 10 11 12

Bullish: (5) Gold Not in a BubbleIt may one day be but that day is not now

Set to 100

GOLD PRICE 1971-1982

NASDAQ 1990-2009

GOLD PRICE 2001-2010

Years

27

700

1100

1500

1900

2300

2700

70 72 7 4 76 78 8 0 82 84 8 6 88 90 9 2 94 96 9 8 00 02 0 4 06 08 1 0 12

Western World Mine Output (GFMS)

Model EstimateThe Mine Production Model is based on lagged

gold prices and lagged production

Bullish: (6) Gold SupplyModel suggests WW mine flat

Source: GFMS, Murenbeeld

Tonnes

World Mine Output (GFMS)


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1. Difficult governments:i.e., Venezuela

2. Governments are in debt:i.e., Australia hasintroduced a resource super-profits tax

3. Environmental hurdles:i.e., the Gulf of Mexicodisaster changes the future for off-shoredrilling

4. Peak gold, peak oil, peak :The low-hanging fruit has been picked

Bullish: (6) Gold SupplyThe general commodity supply outlook is impaired

29

1. Central banks are rediscovering that gold is not another centralbanks liability (i.e., China holds US Federal Reserve liabilities!)

2. The private sector is beginning to worry about the nature of fiatcurrencies and the likelihood of currency debasement

3. The private sector is also discovering that gold has attractiveportfolio characteristics (gold improves the efficient frontier)

4. Commodities in general, and gold specifically, are morphing into aninvestment asset class (like real estate did once it becamesecuritized)

5. Jewelry demand wasnt always the dominant demand in the gold

market; private and central bank demand was historically moredominant

6. Major deregulation of Asian gold markets encourages people with anaffinity for gold to invest in gold (and jewelry in many parts of theworld is seen to be investment as well as adornment demand)

Bullish: (7) Investment DemandCan we make a case for investment demand?


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0100

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800

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1000

1100

1200

1300

1400

1500

1600

1700

ETF demandhas been verystrong duringthis period offinancial stress

Bullish: (7) Investment DemandThe gold ETF rising strongly since introduction


2003 2005 20082004 2006 2009 2010

GOLD TONNAGE - ETF

2007

31

0

5

10

15

20

25

30

35

40

45

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Net retail investment demand plus ETFs asa percent of total identifiable gold demand

Source: World Gold Council Gold Demand TrendsBased on data tabulated by GFMS2010 estimate by DundeeWealth Economics

Bullish: (7) Investment DemandRetail investment plus ETF demand rising

(e)


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Billion US$

Bullish: (7) Investment DemandRetail investment demand will grow in Asia

-20

0

20

40

60

80

100

120

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

0

20

40

60

80

100

120

140

160

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

0

200

400

600

800

1000

1200

1400

1600

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Without ETF

With ETFs

0

50

100

150

200

250

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

World tonnes

India tonnesUS - tonnes

China tonnes

Net Retail Investment Demand (excluding ETFs)

Source: World Gold Council, GFMSEstimates by DundeeWealth Economics

2001H1

2001H1

2001H1

(e)

(e)

(e)

(e)

2001H1

33

0

10

20

30

40

50

60

70

Equities Private Debt Government

Debt

Managed

Assets

Managed

Commodities

Bullish: (7) Investment DemandInvestment demand in gold/commodities will grow

Source: McKinsey & Company, IMF, BarclaysEstimates are for 2008

Global financial assetstotal $ 117 trillion

Managed assets$ 40 trillion

Managedcommodities$ 300 billion

Equities declinedby 45% in 2008


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3434

TheDynamic Strategic GoldFund

GOLD BULLIONPhysical bullion

Bullion certificates

GOLD EQUITIESSenior, Intermediate & Junior Producers

Production & Development

Best-in-class companies

Bullish: (7) Investment DemandGold investment products more sophisticated

35

Bullish: (9) GeopoliticalThe biggest geopolitical crisis to date

200

300

400

500

600

700

800

900

30-Jul-79 11-Oct-79 28-Dec-79 13-Mar-80 30-May-8012-Aug-80 24-Oct-80 14-Jan-81 27-Mar-81

Gold Price: 1979-1980

Iranian hostage crisis /Russia in Afghanistan

Cyclical peak in goldabout $400(or 100%)


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1. Policy exit strategies:in US, Asia, Europe

2. Strong dollar:against the euro

3. Deflation:government debt more attractive

4. Liquidity of last resort:for Greece, Italy,

5. Dehedging finished:hedging to recommence

6. Chinese recession:commodity demand will

decline

Outlook: Six Bearish Arguments

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-5

-4

-3

-2

-1

0

1

2

3

4

5

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Bearish: (1) Exit StrategiesReal rates will rise with exit strategies

Last month: September 2010

When above 2%gold pricesoften stall

US real short terminterest rate

Real rates below zero arevery positive for gold

Exitstrategy!


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Assuming central banks do not print money:

1. Tighter fiscal policies will be a drag on economicgrowth

2. Inflation pressures will remain subdued, and thethreat of deflation will linger

3. Confidence in monetary policy (and fiscal policy)will improve

4. Which all will weigh heavily on the gold price

Bearish: (1) Exit Strategiesfiscal policies must be tightened

39

Bearish: (4) Liquidity of Last ResortThe PIIGS need cash!

The PIIGS hold over3000 tonnes of gold

We have beenconcerned about Italyfor years

But Greece, Portugal,and Spain might bethe first to sell wereit to come to that

tonnes

Greece 112

Ireland 6

Iceland 2

Italy 2452

Portugal 383

Spain 281

Total 3236

Gold Reserves


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1. Chinas growth rate will decline (a recession is


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Billion US$

Commodity/ResourcesThe IMF forecasts a moderate global recovery

-2

0

2

4

6

8

10

12

8 0 8 2 8 4 8 6 8 8 90 92 94 96 98 00 02 04 06 08 10

-2

0

2

4

6

8

10

12

14

16

18

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

(e)

(e)

Source: IMF, October 2010

-1

0

1

2

3

4

5

6

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

-5

-4

-3

-2

-1

0

1

2

3

4

5

8 0 82 8 4 8 6 8 8 9 0 9 2 9 4 9 6 9 8 00 02 0 4 06 0 8 1 0

World GDP (%) China GDP (%)

India GDP (%)

EU GDP (%)

43

Commodity/ResourcesChina has a major impact on commodities

-3

0

3

6

9

12

15

18

21

24

27

30

90 92 94 96 98 00 02 04 06 08 10

Source: World Metals Bureau

Chinese consumption of copperAs a % of world copper consumption

US consumption of copperAs a % of world copper consumption


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44

0

5

10

15

20

25

30

35

40

45

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Percent of world consumption

Up 839%

Commodity/ResourcesChinas oil consumption has risen dramatically

45

0

1

2

3

4

5

6

7

8

9

1980 1985 1990 1995 2000 2005 2010

As a percent of world consumption

Up 410%

Commodity/ResourcesChinas nickel consumption has risen significantly


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0

10

20

30

40

50

60

Copper Aluminum Nickel Zinc Lead

2000 2009Percent of world consumption

Commodity/ResourcesBRICs appetite for commodities has surged

47

5

10

15

20

25

30

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

BRIC US

Percent of world consumption

Commodity/ResourcesBRIC set to overtake US oil consumption


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Commodity/ResourcesAll commodities exhibit long cycles *

50

100

150

200

250

300

350

400

450

500

550

600

650

700

1850 1875 1900 1925 1950 1975 2000

10-year MA

Real Copper Price2009 cents/lb

Shortest cycle 16 years

*despite reversals, which are common in all cycles

49

Commodity/ResourcesIncluding gold which has had no reversal to date

0

200

400

600

800

1000

1200

1400

1600

1800 1825 1850 1875 1900 1925 1950 1975 2000

Shortest bull-cycle 10 years

10-year MA

Real Gold Price - 2009$/ozSeveral yearsof counter-

trenddevelopments


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1. Commodity prices have been driven higher byfundamental structural changesin the globaleconomy

2. Which suggests thatthe long-cycle is intactandwill continue for many years

3. Someshort-term price weakness is of coursepossibleas Chinas economic growth deceleratesto more normal and sustainable levels (8%-9%)

and demand in OECD remains subdued.

Commodity/ResourcesIn short, the demand side of market has exploded

51

Last ThoughtBoomers create asset bubbles

Boomers have rotated through three assets:

Equities Saving, Pension Assets

This asset bubble exploded in 2000-2001

Real Estate Family Home, Recreational Property

This asset bubble exploded in 2007-2008

Debt Instruments Retirement Income

This asset bubble exploded in 2011-2012 ??After debt?

Resources and Gold the emerging asset class?


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Dundee Wealth on Gold