gold for beginners

8/9/2019 Gold For Beginners

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Gold For Beginners: EM Conference Call

Edel Tully, Precious Metals Strategy

Edel.Tully +44 207 567 6755

Julien Garran, Metals and Mining [email protected] +44-20-7568 3540

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June, 2010


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Golds Bull Run Persists

Source: Bloomberg, UBS


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Assets and loan flow

Local banks lendto local consumers

& businesses

Growth picks up,Asset prices rise

Global central banksreserves rise

US authorities

reflateThis attracts more

Capital flows

This bids upcommodity prices

Raises central bankReserves at commodity

exporters

Capital flowsout of the US toemerging economies



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Clock watching

Long; US equities, growth,bonds,

Short; Commodities,emerging markets

Sou rce: UBS

Risk on

Risk on

Risk off

Risk off

Absolute trades Relative trades

Very

positive

emerging

markets

and

resources

Very

negative

emerging

marketsand

resources

1

42

3

Reflationary boom

Long; US bonds, US dollarShort; Commodities,

emerging markets

Long; Commodities,emerging markets

Short; dollar, bonds

Long; Commodities, commodity

currencies, emerging marketsShort; US bonds,

debtor currencies

I

nflationary bust

Deflationary bust Disinflationary boom

US$s Out US$s Out

US$s In US$s In


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2010 markets impacted by European SovereignRisk

Eurozone sovereign (10y) spreads over Bunds

Eurozone Sovereign CDS premium (5y senior)


Faith in fiat currencies weakens, gold viewed as flight to quality


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Gold in Multiple Currencies

Gold in alternative currencies remains popular trade

YTD: XAUEUR +31%; XUAGBP +23%; XAUUSD +11%



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Gold and the USD a negative relationship nomore

In May, decoupling of traditional gold and USD relationship Previously, a stronger USD had negatively impacted golds direction



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Gold versus the UBS Risk Index

Risk averse market conditions in Q2 fuels gold strength



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The Path to Monetary Policy Normalisation begins

Source: UBS FX Strategy

RBA and Norges Bank have already raised interest rates

UBS economists expect a US rate hike from September, ECB much later

Rising US interest rates (in particular) without an inflation backdrop could benegative for gold

0.0

3.0

6.0

9.0

PerCen

2009

G10 Po licy Interest Rates

2009 2007

BO J

SN B

EC B

Riksbank BOC Fed

BO E

RBA

RBNZ

Norges


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Gold and Inflation Expectations

QE actions of 2009 created an inflation potential

Prompted gold buying but those expectations now stalled Some concerns for anticipated inflation remain, but time horizon extended



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Emerging Markets are telling an inflation storythough

Era of declining inflation in emerging markets is over Inflation is largely concentrated in Asia China and India centred gold positive



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Fiscal Indicators Past, Present and Predicted inflatiorisk?

Government Debt as % of GDP

Government Balance as % of GDP

Source: UBS


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Unstable Debt Dynamics - Potential for Inflation

j QE actions of 2009 fuelled significant gold demand

j Risk that persistently high levels of public debt will drive down capitalaccumulation, productivity growth and long term potential growth.

j Long term fiscal imbalances pose significant risk of higher inflation:

Through Debt Monetisation (quantitative theory of money)

But increasing interest rates to fight inflation equals larger debt burden

Potential to inflate away the real value of debt

j BIS Paper: The future of public debt: prospects and implications

History shows that countries that ran high public debts eventually ended up with high

inflation because governments were unwilling to pay high interest rates Examples of Belgium, Spain and Italy pegging interest rates and resorting to debt

monetisation post WW1


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Lack of confidence in monetary system, golds moment

The main thing we miss today is universal money. Gold fulfilled thisrole from the time of Augustus to 1914. The absence of gold as an

intrinsic part of our monetary system makes our century, the one thathas just past, unique in several thousand years

I firmly believe gold will be a part of the international monetary system

sometime in the twenty first century.

Robert MundellNobel Laureate in EconomicsAcceptance SpeechDecember 1999


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Getting Specific on Gold Fundamentals

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Central Bank Gold Sales: 2009 = Historic Year

Change in multi-decade official sector approach Overall net sellers of 41 tonnes in 2009, but net buyers in Q2, Q3 and Q4 One of the largest fundamental shifts in this market

Source: GFMS, WGC, UBS


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Makeup of Gold Official Sector Reserves

Source: WGC, UBS

Asia significantly underweight Gold


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CBGA3 Limited Sales to Date, IMF dominated

Source: WGC, UBS


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Not just the official sector which has altered its goldcourse

j In 2009, gold investment demand was larger than jewellery demand the first occasion since 1980

j Jewellery fabrication represented just 43% of global mine production

j Investment angle takes up the slack

Gold price heavily dependant on investor sentiment; supply and demand balances oflimited importance

j Main players this year:

Official Sector: continued IMF selling, but overall buying dominated trend

Investors: getting longer

Jewellery holders: priced out of the market

Potential for scrap supply to dampen rallies Fundamentals of limited importance; externalities of economic forces will drive gold


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Gold Primary Mine Supply

Mine supply typically follows a downward trend Increased 7% in 2009 due to new projects But Q1 2010 South African gold production fell 12.4% YoY Henry Tax implications - expect lower mine supply

Source: GFMS, UBS


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Jewellery Demand the negative trend extends

Source: GFMS, UBS


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Jewellery Sales in Traditional Hubs Decline

Current gold price prohibitively expensive India reflective of other regional hubs



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As jewellery demand diminishes, investors nowdominate

Sharp surge in investment is the primary catalyst for rising gold price

Source: GFMS, UBS


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Producer Hedging Story Unchanged

Global Hedge Book at 236 tonnes end 2009 Anticipate limited demand from this avenue going forward

Source: GFMS, UBS


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Scrap Supply record high in 2009

With current gold price, expect scrap supply to resemble 2009 This will act to curtail rallies

Source: GFMS, UBS


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Gold Through the Investment Lens

j Macroeconomic forces and sovereign crisis have prompted heightened investor

flow > significant safe haven demand for gold

j Investment demand is the strongest driver

Through all investment vehicles: Futures, OTC, ETFs, Bars and Coins.

j The fear trade: coin and small bar demand

Reflects concern over debt position of many industrialised nations, inside and outsideEurope

j The diversification trade

j The Armageddon trade

j Diversification within diversification increased enquiries about allocated /segregated metal

j Underpinning the market:

Official Sector see-change: from net sellers to net buyers

Medium term threat of inflation


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Intense ETF buying in May new record high

After a slow Q1, ETF buyers have returned in force May inflows equal 4.8 moz, largest monthly creation since Feb 09

Source: UBS; WGC, ETFS, ZKB, and others


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ETFs Drilling down in on a daily basis

Rolling monthly increase hit 5.34 moz on June 3, levels not seen since March 09 Closely aligned to demand for physical metal bars and coins

Source: UBS; Bloomberg, WGC, ETFS, ZKB, and others


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Comex Net Longs Get Longer

Comex speculators /investors near record net long position Following Marchs liquidation, one way path has been followed

Source: CFTC, Bloomberg, UBS


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US Mint Coin Sales - May volume highest since1999

Replicated across Mints & UBS sales - reflection of the fear trade

Source: US Mint, Bloomberg, UBS


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Gold Train continues Short Term Thoughts

j Investment demand persists

ETF inflows at all time high

Comex net longs near all time high

Persistent coin and small bar demand

j Jewellery demand sluggish

j Scrap supply risk In May, this helped to stall golds rally; similar to Q1 2009

$1250 appears to be a significant supply point

j So long as fears surrounding the worlds debt baggage remain heightened andsovereign risk concerns continues, gold should benefit

j Threat of gold caught in cross-fire of another extreme de-risking event

Buy on dips

j Forecast $1300/oz in one-month; $1200 in three months


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Looking further out

j Gold to average $1135/oz this year, $1250 in 2011

Expect new high in H2 2010

Exchange investment demand to remain firm

Jewellery demand at current prices to fall, scrap to rise

Extension of safe haven demand

Central banks as net buyers

jAnticipate greater diversification flows

j Inflation threat to grow

j So long as fears surrounding the worlds debt baggage remain heightened andsovereign risk concerns continues, gold should benefit


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