gold future.pdf

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Gold Bullion International

The Price and Future of Gold

November 2010


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Gold Bullion International2

Historical Perspective

Precious Metals are a rare, naturally occurring metallic chemical

elements of high economic value.

Historically, precious metals were important as currency, but arenow regarded as investment and industrial commodities

Gold, Silver, Platinum and Palladium have an ISO 4217currency code

The best known precious metals are the coinage precious

metals Gold and Silver; they are better known for their usesin art, jewellery and coinage

Platinum and Palladium are primarily known for theirindustrial use in catalytic converters

The demand for precious metals is driven not by their practical

use, but also by their role as investments and a store of value

Historically, precious metals have been an important part of adiversified portfolio because its price increases in response toevents that cause the value of paper investments, such as stocksand bonds, to decline

Gold and silverare money.Everything else iscredit- J.P. Morgan
http://webapplications.acs.org/portaltools/shopper/productDetail.cfm?prod_cd=1-PT6449http://webapplications.acs.org/portaltools/shopper/productDetail.cfm?prod_cd=1-PT6416http://webapplications.acs.org/portaltools/shopper/productDetail.cfm?prod_cd=1-PT6415http://webapplications.acs.org/portaltools/shopper/productDetail.cfm?prod_cd=1-PT6417


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What is Gold?

Gold was one of the first metals to be discovered by man

Gold was discovered in Ancient times and used by the ancient SouthAmericans, Asians, Egyptians, Greeks, Romans and ChineseCivilizations

Gold is the oldest financial asset known to man

The first Gold bars were made as early as 4000 BC

The symbol origin is from the Latin word aurum meaning gold

While being the oldest asset class, physical gold bullion still trades

over the counter


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Gold does not oxidize, rust, tarnish, corrode, decay or deteriorate

Gold is so malleable that an ounce of gold can be stretched into awire over fifty miles long or beaten into a sheet to cover a hundredsquare feet.

Gold has universal value across continents and cultures

It has been estimated that all the gold in the world that has everbeen refined would form a single cube 20 m (66 ft) a side

All the gold that has ever been mined throughout history is still inexistence today

What makes Gold intriguing?


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Rationale for Investing in Gold

Store of Value

Portfolio Diversification (correlation & volatility)

Inflation Hedge

Dollar Hedge

Geopolitical Uncertainty

Performance

Supply Constraints

Increasing Demand


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Gold has no yield (unlike equities, bonds, mutual funds etc.)

Gold has minimal utility outside of jeweler

Gold is extremely dense and therefore heavy

Gold is not a consumable

High costs to store and insure

Difficulty in acquiring gold

Newer investment options for investors to protect against inflation (TIPS, ETFs etc.)

The other side of the coin


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Gold / S&P / MSCI World (1970 2010)

Gold out-performed equities in two decades (1970-1980 and 2000-2010)

Gold under-performed equities in two decades (1980-1990 and 1990-2000)

Gold has had its time and place as a preferred asset class


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The World Today


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The housing crisis of the 2007, driven by excessive leverage and irresponsible

lending practices, led to the worst financial crisis since the great depression

The resulting deflationary / deleveraging environment has had a devastating

impact on capital markets and asset prices

To prevent another Great Depression, the actions of governments and centralbanks incurred:

Very large fiscal deficits

Dramatic increases in outstanding government debts

Expansion of balance sheets of many major central banks as aconsequence of purchases of government debt or distressed assets

Historically, such an unprecedented expansion of monetary policy has led to:

Loss of faith in paper currencies

Substantially higher inflation over the medium term

Recent Events


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Money is being Printed

We have tried spending money. We are spending more than we have ever spent before and it doesnot work... We have never made good on our promises.... I say after 8 years of the Administrationwe have just as much unemployment as when we started, and an enormous debt to boot!

Henry Morgenthau, Secretary of the Treasury during the New Deal, May 1939

Y2K

9/11


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Federal Reserve and Public Debt Securities


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U.S. Gold Reserves vs. Federal andAgency Debt Held By Foreigners


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Budget

The Long Term Budget Outlook Report for the period of 2010 to 2080 from the

Congressional Budge Office (CBO) states Under current law, the federal budget is on anunsustainable path

According to the report the U.S. will not be able to produce a budget surplus in 70 years

The current US debt total equates to almost $45,000 per person


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Potential outcomes of anAggressive Monetary Policy


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History Can Be Repetitive

In the Roman empire the silver content of the denarius coin was reduced over time

Production of goods gradually moved further and further into the peripheral areas

Tax ratios increased to 2/3rds of income

The size and complexity of the administrative organizations grew constantly

Gradually the silver content in the Roman denarius decreased from 95% to 0.5%

The Budget should be balanced,

the Treasury should be refilled,public debt should be reduced, thearrogance of officialdom should betempered and controlled, and theassistance of foreign lands shouldbe curtailed lest the Republicbecome bankrupt. People mustagain learn to work, instead ofliving on public assistance.

-Marcus Tullius Cicero, 55 BC


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Sovereign Risk

For the first time since 1970s, there is the possibility that a major

industrialized country will default (Ireland, Greece). Others might follow(Portugal, Spain)

10 Year CDS


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Inflation vs. Deflation

In periods of inflation, tangible assets are the preferred asset class

In times of deflation, cash is king

Gold is liquid, divisible, indestructible, and can be easily transported. It has a worldwidemarket and there is no default risk associated with it, which means it is cash of thehighest quality


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Inflation

You often hear that gold does not a hedge against inflation and that the CPI has outrun

gold since 1980 This is a cherry picked statistic, as seen below gold has outrun the CPI in all periods other

than the 1980 peak


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Inflation


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Deflation

During deflationary periods, governments usually need to increase their deficits by

escalating their borrowings to support the economy. Interest earned on 90-day Treasury bills below the inflation rate is a signal for

governments to try to stop deflation and reflate the economy

The twin engines of negative real interest rates and government deficits tend to makegold a very attractive investment

The decline in core inflation from 2.5 percent two years ago to under 1 percent today willsustain market fears of deflation and hence a more rapid depreciation of the U.S. dollar toarrest any deflationary pressures


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Rates of Return

Gold Shows a strong relationship with Real Rates of Return

Investors must take into account interest rates, not just inflation expectations

Interest rates take into account economic growth

Gold performs well in times of low real rates of return

In these environment the carrying cost of holding gold is very low


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Gold in a Diversified Portfolio


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Correlation

0.01

(0.11)

(0.08)

(0.06)

(0.13)

-1.00 -0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00

MSCI World excl. US

DJ Industrial Average

S&P 500

Wilshire 5000

3-Month T- Bill Yields

20 Year Correlation of Weekly Returns on Key Asset Classes and Gold (USD)

Last revised:

25 December 2009

Data: Global Insight,World Gold Council, Barclays

Capital


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Volatility


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Portfolio Insurance


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0

20

40

60

80

100

1900 1920 1940 1960 1980 2000

U.S. Dollar Euro (DM B efore 1999) Yen S terling Gold

Purchasing Power

Dollar Devaluation

0

20

40

60

80

100

1971 1976 1981 1987 1992 1997 2003 2008

0

100

200

300

400

500

600

700

800

900

Purchasing Power (1971=100)

Currency in Circulation

(billions)

Source: FactSet & US Geological Survey

Purchasing Power of Various Currencies


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Supply/Demand Dynamics of Gold


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Above Ground Stocks of Gold


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Major Gold Discoveries: 1997-2008

Source: Metals Economic Group; Kinross


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Discovery Quality is Declining


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Gold Mine Production Is Declining

Source: GFMS World Gold Survey 2010


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and Expected to continue


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Gold Demand



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Gold Demand by Sector

Jewelry

Industrial

Retail

ETF

InferredInvestment*

De-hedging

Investment

Consumption

* Inferred investment denotes the supply-demand residual and includes physical metal, OTC transactions, andspeculative flows. Reliable indicator of overall investor activity.

Source: GFMS, World Gold Council, VM Group

Secular increase in investment demand driven partly by ETFs


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ETF Demand

0

10

20

30

40

50

60

70

2004 2005 2006 2007 2008 2009 2010

GLD Asset Growth 2004-2010 ($bn)


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Gold is under-owned


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Extremely Low Penetration


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Gold is a Small % of GlobalFinancial Assets


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Reserve Assets


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Reserve Dollar Diversification

China Takes Aim atDollar- WSJ

China Set to Reduce

Exposure to Dollar- Washington Post

China Urges NewMoney Reserve toReplace Dollar- New York Times

Indian Joins Russia,China in QuestioningU.S. Dollar Dominance- New York Times

Medvedev PromotesRuble to Lessen DollarDominance- New York Times


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Reserve Dollar Diversification



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Chinese Demand is Twofold

Chinese gold demand increased 26% inthe second quarter amid boominginterest in retail investment demand forgold. - World Gold Council

China said it will let more banks importand export gold, the government'sclearest signal yet that it plans to loosenrestrictions on trading of the yellow metal.- Wall Street Journal

The international gold market is nowpaying a lot more attention to China's

gold demand, not just from an officialreserve asset perspective, but also

private demand. Behind India, China isthe second-largest physical consumer.Therefore any step to integrate,liberalize, and expand this marketshould, in time, foster a rising appetitefor gold. - UBS

The liberalized trading rules willeventually give hundreds of millions ofChinese citizens new access to gold-linked investment products.- Wealth Daily


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New Central Bank Buying

(250)

(200)

(150)

(100)

(50)

0

50

100

150

200

250

Q2 2000 Q2 2001 Q2 2002 Q2 2003 Q2 2004 Q2 2005 Q2 2006 Q2 2007 Q2 2008 Q2 2009

Quarterly Change in Central Bank Gold Holdings (tonnes)

- Net official sector salesevery year 1989-2009

1989-2009 net salestotaled nearly 8,000tonnes; declineof 1/5th in official goldreserves and 10% totalgold supply

Central Bank GoldAgreements since

September 1999


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New Central Bank Buying

Selling pressure by the Central Bankswas supposed to decrease the price ofgold

The effects of Central Bank buyingcould be exponential


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Producers are No Longer Hedging

0

500

1000

1500

2000

2500

3000

3500

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Tonnes

Outstanding Delta Adjusted Producer Hedge Positions


Barrick shutshedge book as worldgold supply runsout- The Telegraph

Brigus Gold toEliminate 100% ofGold HedgeCommitments

- Business Wire

AngloGold Ashantieliminates gold

hedge book- WSJ.com


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How can I invest in Gold?


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Gold Investment Options

Bullion

Easy to buy/sell

Easily transported, stored, highly liquid

Tangible asset / inherently valuable

Competitive prices that are widely quoted

Accurately assayed and 99.5%+ pure gold

Requires secure storage

Manufacturing premiums added to price

Typically have higher minimums forinvestment

No dividend / interest yield

Mining Stocks

Current prices widely quoted

Highly liquid

May yield dividends

Price more volatile than bullion

Geopolitical risk

Industry / exploration risk

Corporate governance risk Limited transparency into reserve base

Exchange TradedFunds (ETFs)

Prices widely quoted / highly liquid

Relatively cost efficient

ETFs may not track the price of goldaccurately

Limited track record (started in earnest in2003)

Subject to price manipulation by hedge fundmanagers

Gold weight backing each unit declinesthrough management fee

Not necessarily 100% gold bullion backed

Trust may include other collateral besidesgold bullion

Advantages DisadvantagesOption


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Physical Metal Value Proposition

Physical Ownership investors retain full title to underlying assets

No Counterparty/Default Risk investors are not exposed to risks related to thefinancial solvency of banks, exchanges and investment trusts

No Tracking Error unlike precious metals ETFs, physical precious metals provideinvestors with zero tracking error

Liquidity bullion is highly liquid and is traded in the OTC market amongst

broker/dealers, refiners and miners

Collateral Precious metals are universally accepted as collateral for loans throughbanks/institutions

Fully Insured all stored bullion is usually 100% insured

Physical Audits investors can request to complete a physical verification of every

bar stored

Physical Delivery investors can elect physical delivery of bullion

Betting against gold is the same as betting on governments. He who bets on governments andgovernment money bets against 6,000 years of recorded human history- Charles de Gaulle

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