gold price outlook september 2014
DESCRIPTION
Gold Price Outlook September 2014TRANSCRIPT
-
1The Gold Price OutlookBullish/Bearish Factors
Dr. Martin MurenbeeldSeptember 16, 2014Presented at the Denver Gold Forum 2014
-70
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0
10Change from previous week, tonnes
What Went Wrong in 2013?An orgy of ETF sales 881 tonnes in 2013!
2013-Q1 2013-Q2 2013-Q3
Source: Bloomberg, World Gold Council, DCM Economics
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2013-Q4
600700800900
10001100120013001400150016001700
1800190020002100
350475600725
850975110012251350147516001725
1850197521002225
What Went Wrong in 2013?Investors went to equities !!
Daily dataLast date: September 12, 2014
20082007 201220102009
Gold
2011 2014
S&P 500
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Source: Thomson Reuters Datastream, London Bullion Market Association
2013
Massive negative correlation in 2013: -.88
-100
-50
0
50
100
150
200
250
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Last month: July 2014
What Went Right in 2013?Chinese net imports from HK set record!
Source: Thomson Reuters Datastream, Hong Kong Census, DCM Economics
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2012: 557 tonnes
2013: 1158 tonnes
Chinese Gold Imports from Hong Kong(monthly tonnes)
Chinese Gold Re-Exports to Hong Kong(monthly tonnes)
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2Bearish Factors for 2014-15
1. The Fed must inevitably tighten policy The Fed is currently tapering QE will end late 2014 And the Fed will raise rates in 2015
2. US dollar will remain firm in 2014-15!?3. The world economy is sluggish
Gold typically weakens during recessions Inflation pressures remain subdued There is often a need for liquidity
4. Equity markets will continue to draw investment interest away from gold
5. Investors still have gold to sell and technicals bearish
300
600
900
1200
1500
1800
2100
2400
2700
3000
3300
3600
3900
4200
4500
4800
Jan-08 Jun-08 Dec-08 May-09 Nov-09 Apr-10 Oct-10 Mar-11 Sep-11 Feb-12 Aug-12 Jan-13 Jul-13 Dec-13 Jun-14 Nov-14
Bearish: (1) Fed Ends QEThe Fed balance sheet must inevitably decline
Last date: September 10, 2014
US TreasuriesOther AssetsCurrency
Swaps
Commercial Paper Market
Other Credit Extensions
Securitization Market (support for mortgages)
Agency Debt
Total assets have quintupled!
Liquidity to Banks
Total Assets $ billions
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Source: Federal Reserve
-5
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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 11 12 13 14 15
Bearish: (1) Fed Ends QEAnd real rates will have to rise - but before 2016?
Last month: August 2014
Gold prices often stall when real rates rise above 2%!
US real short term interest rate
Real rates below zero are very positive for gold
Real rates not above
zero before 2016 ??
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Source: US Bureau of Labor Statistics, Federal Reserve
0
250
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1000
1250
1500
1750
2000
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
-1.0
-0.5
0.0
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1.5
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2.5
3.0
Bearish: (1) Fed Ends QEUS real rates rose in 2013 taper tantrum
Last month: August 2014
GOLD
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Source: LBMA, US Bureau of Labor Statistics, Federal Reserve
10-year TIPS
29%
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3-36
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0
12
24
36
48
60
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Bearish: (1) Fed Ends QEBut gold may have fully discounted rising yields !
Last month: August 2014
GOLD% year-on-year
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Source: US Bureau of Labor Statistics, Federal Reserve
10-year TIPS
-30
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0
10
20
30
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60
00 02 04 06 08 10 12 14
ModelReal 10-year yields
US dollar index - change
Source: London Bullion Market Association, Federal Reserve, Bureau of Labor Statistics, WSJ
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GOLD% year-on-year
Correlation = .67
Last month: July 2014
Bearish: (1) Fed Ends QE Model: gold has fully discounted Fed actions!?
Bearish: (1) Fed Ends QE What do the Models say specifically?
Assuming a severe scenario, including a rise of 250 basis points in real interest rates and a 1000 point rise in the US dollar index, the models suggest that gold may decline anywhere from 18% to 29%!
But gold has already declined by nearly 30% ???
REAL INTEREST RATE* US DOLLAR**
MODEL 1969-2014 -5.656% -1.219%(R-squared = .362)
MODEL 1989-2014 -3.839% -1.235%(R-squared = .475)
MODEL 2000-2014 -1.691% -1.513%(R-squared = .454)
*Difference between 10-year Treasury yield and consumer price inflation (y-o-y)** Dollar index includes Cdn$, Yen, Pound, Euro (pre-1999: DM, Lira, FF)
***A 100-point rise in the real rate is 100 basis points***A 100 point rise in the US dollar is a rise in the index from, say, 75.00 to 76.00
IMPACT ON GOLD OF 100-POINT RISE***
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Bearish: (2) Dollar Strengthens The dollar rises others devalue against dollar
65
70
75
80
85
90
9507 08 09 10 11 12 13 14 15
500
750
1000
1250
1500
1750
2000
Latest week: September 12, 2014Correlation since 2006: -.80
Gold
Corr: -.90 Corr: -.84 Corr: -.77 Corr: -.48 Corr: -.29 Corr: -.80
Dollar Index includes: Canadian dollar, Aussie dollar, euro, yen, Swiss Franc, pound, rupee, RMB/yuan
Corr: -.58
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Source: Wall Street Journal, London Bullion Market Association, Dundee Capital Markets calculations
Corr: -.38to date
US Dollar(eight currencies)
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4-30
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0
10
20
30
40
50
82 84 86 88 90 92 94 96 98 00 13 13 13 13 13 12 14
-35
-28
-21
-14
-7
0
7
14
21
Last quarter: 2014-Q2
Bearish: (2) Dollar StrengthensGold/US dollar correlations always negative
Gold - %
US dollar index(four currencies)
US dollar index(eight currencies)
Correlation: -0.59Correlation: -0.64
US Dollar - %
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Source: Wall Street Journal, Dundee Capital Markets calculations
500600700800900
100011001200
13001400150016001700180019002000
Jan 07 Jul 07 Feb 08 Sep 08 Apr 09 Nov 09 Jun 10 Jan 11 Aug 11 Mar 12 Oct 12 Apr 13 Nov 13 Jun 14
Gold daily p.m. fixData through September 12, 2014
Bearish: (3) Global Economy SluggishRecessions always a major headwind for gold
EurozoneRecession/Depression
US recession
30%
37%
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Source: London Bullion Market Association
Billion US$
Bearish: (3) Global Economy SluggishIMF forecast: 3.4%-2014 and 4.0%-2015
-2
0
2
4
6
8
10
12
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
-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 12 14
(e)
(e)
Source: IMF World Economic Outlook, July 2014
-1
0
1
2
3
4
5
6
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
-5
-4
-3
-2
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0
1
2
3
4
5
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
World GDP (%) China GDP (%)
India GDP (%)
EU GDP (%)
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-1
0
1
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3
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5
6
7
8
1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012-50
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0
10
20
30
40
US recession
CRB and BoC commodity price indices are inflation-adjusted and highly correlated with world growth
World GDP %
Bank of Canada IndexCRB Index
Source: IMF, Bank of Canada, Thomson Reuters Datastream, DCM Economics
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Bearish: (3) Global Economy SluggishCommodities decline when world growth < 4%
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550
100
150
200
250
300
350
400
450
500
90 92 94 96 98 00 02 04 06 08 10 12 14-90
-60
-30
0
30
60
90
120
150
180
Last month: August 2014
US recessions
% year-over-year
CopperUS cents/lb
China Joins WTONov 2001
Bearish: (3) Global Economy SluggishCopper prices weakened in recent quarters
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Source: Wall Street Journal
150
190
230
270
310
350
390
430
470
90 92 94 96 98 00 02 04 06 08 10 12 14-48
-36
-24
-12
0
12
24
36
48
Bearish: (3) Global Economy SluggishAnd commodity prices generally are down
Last month: August 2014
US recessions
CRB INDEX: 19 commodity prices - Energy 39%, Agriculture 41%, Precious Metals 7%, Industrial Metals 13%
% year-over-year
Thomson Reuters/Jeffries
CRB Index
China Joins WTONov 2001
| DUNDEE CAPITAL MARKETS18
Source: Wall Street Journal
-3
-2
-1
0
1
2
3
4
5
6
7
90 92 94 96 98 00 02 04 06 08 10 12 14
Bearish: (3) Global Economy Sluggish Headline inflation is going nowhere fast !
Last month: July 2014
Core CPI
Headline CPI
US recessions
% YoY
Feds PCE
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Source: US Bureau of Labor Statistics, US Bureau of Economic Analysis
0
200
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600
800
1000
1200
1400
1600
1800
2000
1986 1990 1994 1998 2002 2006 2010 2014
Recycled/Scrap Gold
Source: World Gold Council Gold Demand Trends - Full Year 2013Thomson Reuters GFMS
Bearish: (3) Global Economy Sluggish Scrap supply elevated when liquidity needs rise
tonnes
Asian Financial
Crisis
Great Recession
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-
60
25
50
75
100
125
150
175
J a n- 0 3 J a n- 0 4 J a n- 0 5 J a n- 0 6 J a n- 0 7 J a n- 0 8 J a n- 0 9 J a n- 10 J a n- 11 J a n- 12 J a n- 13 J a n- 14
Bearish: (3) Global Economy Sluggish India: import barriers to preserve liquidity
INDIAGold Imports(monthly tonnes)
12-month MA
Last month: August 2014Source: Thomson Reuters Datastream, DCM estimates
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600700800900
10001100120013001400150016001700
1800190020002100
300425550675
800925105011751300142515501675
1800192520502175
Bearish: (4) Equity Markets Rally Further Monetary factors also help equities!
Daily dataLast date: September 12, 2014
20082007 201220102009
Gold
2011
Monetary Reflation!
2014
S&P 500
| DUNDEE CAPITAL MARKETS22
Source: Thomson Reuters Datastream, London Bullion Market Association
2013
-60
0
60
120
180
240
300
-36
-24
-12
0
12
24
36Weekly dataLast date: September 2, 2014
2009
Specs net long
2007 20142010 2011
Gold Price (quarterly % change)
2008 2012
Bearish: (5) Gold for Sale COMEX specs net-long position still significant
607.7tonnes
Source: US CFTC, Comex
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2013
09/02 Net-Long: 301 Tonnes
295.9tonnes
0
250
500
750
1000
1250
1500
1750
2000
2250
2500
2750
Apr-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14
TonnesLast date: September 11, 2014
Other
SPDR Gold ETF
Source: ExchangeTradedGold.com, Bloomberg
| DUNDEE CAPITAL MARKETS24
Bearish: (5) Gold for Sale ETF holdings still substantial !
1715 Tonnes
2633 Tonnes
-
7950
1050
1150
1250
1350
1450
1550
1650
1750
1850
1950
Bearish: (5) Technical Picture
Last date: September 16, 2014
Gold - $/oz
2012
50-day MA
2010 2011 2014
200-day MA
Death Cross!
$1895
$1614
$1419$1469
$1540
$1795
$1694
$1385
| DUNDEE CAPITAL MARKETS25
Source: London Bullion Market Association
2013
$1242
$1192
$1340
Bullish Factors for 2014-15
1. ETF supply down dramatically in 2014-152. Asian physical demand will continue to expand3. Central banks will continue to buy gold4. Global debt crisis will require ongoing monetary
reflation5. Global imbalances will remain unresolved until
the dollar declines significantly6. The commodity cycle will run many more years7. Geopolitical crises will multiply 8. Gold price not expensive by normal measures
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0
10
20Change from previous week, tonnes
2013-Q1 2013-Q2 2013-Q3
Source: Bloomberg, DCM Economics
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2013-Q4 2014-Q1 2014-Q2 2014-Q3 2014-Q4
Bullish: (1) Gold SupplyMassive sales not to be repeated in 2014-15
-48 tonnes2014 to date
-869 tonnes2013
Billion US$
0
300
600
900
1200
1500
2009 2010 2011 2012 2013 2014
0
300
600
900
1200
1500
2009 2010 2011 2012 2013 2014
(e)
0
300
600
900
1200
1500
2009 2010 2011 2012 2013 2014
Net Mine Supply + Scrap Supply
Net Mine Supply + Scrap CB Demand
Net Mine Supply ( supply less dehedging)
Lower gold prices will curtail some mine output!
Rising Modestly
Stable
Stable
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Tonnes Tonnes
Tonnes
Bullish: (1) Gold SupplyIndeed, supply to jewelers/investors unlikely to rise
-
80100200300400500600700800900
10001100120013001400
09-Q1 10-Q1 11-Q1 12-Q1 13-Q1 14-Q1
RoWChinaIndia
51%
| DUNDEE CAPITAL MARKETS29
tonnes
Source: World Gold Council Gold Demand Trends Second Quarter 2014data tabulated by Thomson Reuters GFMS
Bullish: (2) Consumer Demand* India/China becoming richer LT demand positive
*Consumer demand = jewelry plus bar/coin/medal investment demand
0
50
100
150
200
250
300
350
400
2007-Q1 2008-Q1 2009-Q1 2010-Q1 2011-Q1 2012-Q1 2013-Q1 2014-Q1
*Consumer demand = jewelry plus bar/coin/medal investment demand
30
Bullish: (2) India Consumer Demand*Demand down in 2014-H1 (YoY) but trend positive
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Source: World Gold Council Gold Demand Trends Second quarter 2014data tabulated by Thomson Reuters GFMS
0
50
100
150
200
250
300
350
400
2007-Q1 2008-Q1 2009-Q1 2010-Q1 2011-Q1 2012-Q1 2013-Q1 2014-Q1
31
Bullish: (2) China Consumer DemandDown in 2014-H1 - but trend very positive
| DUNDEE CAPITAL MARKETS
Source: World Gold Council Gold Demand Trends Second quarter 2014data tabulated by Thomson Reuters GFMS
*Consumer demand = jewelry plus bar/coin/medal investment demand
| DUNDEE CAPITAL MARKETS32
0
10
20
30
40
50
60
70
80
09 10 11 12 13 14
Source: Shanghai Gold Exchange, Sharelynx Gold, DCM Economics
Bullish: (2) China Consumer DemandShanghai deliveries in clear uptrend!
12-week MA
Shanghai Gold Deliveries (tonnes weekly totals)
Date: Sept 12, 2014
-
9| DUNDEE CAPITAL MARKETS33
0
400
800
1200
1600
2000
2400
09 10 11 12 13 14
Source: Shanghai Gold Exchange, Sharelynx Gold, DCM Economics
Shanghai Gold Deliveries (cumulative tonnes)
Bullish: (2) China Consumer DemandCumulative Shanghai deliveries on trend!
Date: Sept 12, 2014
-100
-50
0
50
100
150
200
09-Q1 10-Q1 11-Q1 12-Q1 13-Q1 14-Q1
Central Bank Gold Purchases
| DUNDEE CAPITAL MARKETS34
tonnes
Source: World Gold Council Gold Demand Trends - First Quarter 2014Thomson Reuters GFMS
Bullish: (3) CBs Buying Gold CB demand will continue for years
Bullish: (3) CBs Buying Gold Global FX reserves are excessive (62% in $s)
A number of central banks like the fact that gold is not a liability of the Federal Reserve/US Treasury
RUSSIACHINA
OIL EXPORTERS
Source: IMF International Financial Statistics, July 2014
| DUNDEE CAPITAL MARKETS35
bn$ bn$China 3993.2 India 289.3Japan 1210.0 Algeria 191.6Saudi Arabia 741.7 Mexico 181.1Switzerland 505.5 Thailand 160.8Taiwan 423.7 Malaysia 127.3Russia 409.6 Turkey 109.9Brazil 367.0 Indonesia 105.4Korea 355.8 Libya 104.3Hong Kong 320.8
TOTAL 9596.9
Addendum: Fuel Exporters $1839 bn
Foreign Exchange Reserves(countries over $100 bn) China wants the CNY to be used more actively in Chinese
and SE Asian trade; indeed many countries want the US dollar to be replaced in global trade and global reserves.
To encourage other countries to hold CNY balances (and as reserve currency) the CNY must have:
Deep capital markets, which allows the CNY to be readily banked around the world and therefore acceptable for transactions
Some form of guarantee to enhance acceptability in the initial phase of internationalization (historically this included some form of gold convertibility)
Bullish: (3) CBs Buying Gold Other currencies vying to become reserve currencies
-
10
0
10
20
30
40
50
60
70
1970 1975 1980 1985 1990 1995 2000 2005 2010
Annual data (last year 2013)
US Budget:Percent of total outlays
Bullish: (4) Global Debt Crisis Entitlements are killing Western economies
Entitlements
DefenseInterest on Debt
Other
| DUNDEE CAPITAL MARKETS37
Source: Bureau of Economic Analysis
0
10
20
30
40
50
60
70
80
2010 2015 2020 2030 2050
JapanWestern EuropeCanada US
Population Ratio: 65+/15-64
| DUNDEE CAPITAL MARKETS38
Source: United Nations Department of Economic and Social AffairsSource: United Nations Department of Economic and Social Affairs
Super-aged
Bullish: (4) Global Debt Crisis And developed economies are aging
0
50
100
150
200
250
Japan Greece Italy Portugal US Spain France UK Canada
2003 2009 2015
Source: IMF Fiscal Monitor April 2014
General Government Debt% of GDP
Over 90% spells trouble (Reinhart/Rogoff)
| DUNDEE CAPITAL MARKETS39
Bullish: (4) Global Debt CrisisWhich leads to ever higher debt/GDP ratios
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For debt ratio to declineA+B > C !
As it stands only Germany will really reduce its Debt/GDP ratio in 2014 !
Primary Nominal 5-yearBalance GDP Growth Bond Yield
A B C A+B-CGreece 1.5 -5.8 5.0 -9.3
Japan -7.6 1.0 0.2 -6.8Spain -4.3 -0.6 0.7 -5.6
Ireland -3.4 0.1 0.5 -3.8Portugal -0.7 0.3 1.6 -2.0
US -4.1 3.4 1.7 -2.4Canada -2.6 3.3 1.6 -1.0
Italy 2.0 -0.4 1.0 0.6Germany 1.7 2.7 0.2 4.1Sources:Primary Balance - IM F Fiscal M onitor, April 2014Nominal GDP - IM F World Economic Outlook, April 2014Yields as of September 5, Thomson Reuters DataStream (Greece: April 10 bond sale)
RED: Debt/GDP ratio to rise further!
Estimates for 2013
Bullish: (4) Global Debt CrisisUnless growth and inflation can be boosted !
-
11
0
1
2
3
4
5
6
7
1940-49 1950-59 1960-69 1970-79 1980-89 1990-99 2000-09 2010-13
Average US real GDP growth rate
| DUNDEE CAPITAL MARKETS41
Source: Bureau of Economic AnalysisRobert Gordon, NBER WP 18315, August 2012
Bullish: (4) Global Debt CrisisBut growth appears to be in secular decline !
Robert Gordon: There is no guarantee that growth will continue indefinitely
Government Choices:Austerity:
Cut services and raise taxes Deflate and accept
depressionReflation:
Go for growth: Inflate-devalue Default/financial repression
Bullish: (4) Global Debt CrisisWhat will governments do about debt/entitlements?
| DUNDEE CAPITAL MARKETS42
Bad for gold
Good for gold
0
200
400
600
800
1000
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
People's Bank of ChinaBank of England*Federal ReserveEuropean Central BankBank of Japan
January 2000 = 100
Last month: July 2014
Set to 100
*Bank of England June 2706 = 130
Bullish: (4) Global Debt CrisisAll balance sheets expanding ECB soon too!
Source: Thomson Reuters Datastream
| DUNDEE CAPITAL MARKETS43
80
85
90
95
100
105
110
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
REAL GDPQ4 2007 = 100
Last quarter: 2014-Q2
United States
Eurozone
Bullish: (4) Global Debt CrisisEurozone in desperate need of growth/inflation
| DUNDEE CAPITAL MARKETS44
Source: US Bureau of Economic Analysis, Eurostat, DCM Economics calculations
-
12
200
350
500
650
800
950
1100
1250
1400
1550
1700
1850
82 84 86 88 90 92 94 96 98 00 12 12 12 12 10 12 140.0
1.5
3.0
4.5
6.0
7.5
9.0
10.5
12.0
13.5
15.0
16.5
Global LiquidityGold
(month average)
Global Liquidity: FX Reserves + US MBaseSource: London Bullion Market Association, IMF International Financial Statistics, Federal Reserve
Bullish: (4) Global Debt Crisis Liquidity is important to gold
Last month: Gold August 2014
Liquidity June 2014
| DUNDEE CAPITAL MARKETS45
Oversold in 2013?
Bullish: (4) Global Debt Crisis Gold often 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 12 14-14
-7
0
7
14
21
28
35
42
Global LiquidityGold
Global Liquidity: FX Reserves + US MBaseSource: London Bullion Market Association, IMF International Financial Statistics, Federal Reserve
Correlation: .62Last month: August 2014
% %
| DUNDEE CAPITAL MARKETS46
Oversold in 2013?
Bullish: (4) Global Debt Crisis Liquidity in one form or another
-36
-24
-12
0
12
24
36
48
60
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14-36
-24
-12
0
12
24
36
48
60
Gold
G-6 M2 Money Supply: US, China, EU, Japan, UK, CanadaSource: London Bullion Market Association, IMF International Financial Statistics, Federal Reserve
Correlation: .49Last month: August 2014
Global LiquidityG-6 money supply - M2
%
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Gold oversold in 2013?
60
70
80
90
100
110
120
130
140
150
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
Bullish: (5) Dollar Fundamentally OvervaluedUS dollar in long-term downtrend
Last month: August 2014
US Dollar IndicesFed Major (March 1973=100)
Murenbeeld-EFXR0 (Jan 1999=100)Murenbeeld-NEFXR (Jan 1999=100)
US recession
| DUNDEE CAPITAL MARKETS48
Source: Wall Street Journal, Federal Reserve, DCM Economics
??
-
13
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14-900
-800
-700
-600
-500
-400
-300
-200
-100
0
Bullish: (5) Dollar Fundamentally OvervaluedThe US trade deficit has declined recently
Last month: July 2014
US trade balance
(Goods and Services)
12-month total
$billion
12-month total
(goods only)
$billion
| DUNDEE CAPITAL MARKETS49
Source: US Census Bureau
Bullish: (5) Dollar Fundamentally Overvalued on back of rising US energy production
-500
-450
-400
-350
-300
-250
-200
-150
-100
-50
0
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14-5000
-4500
-4000
-3500
-3000
-2500
-2000
-1500
-1000
-500
0
Balance12 mo total
Last month: June 2014
Million barrels/month
6.2 million barrels/day
12.7 million barrels/day
Million barrels/year
Source: US Energy Information Administration
| DUNDEE CAPITAL MARKETS50
Billion US$
Source: Thomson Reuters Datastream
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14-900
-800
-700
-600
-500
-400
-300
-200
-100
0
World
51
bn$
12-monthtotal bn$
Billion US$
-35
-30
-25
-20
-15
-10
-5
0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14-350
-300
-250
-200
-150
-100
-50
0
China
bn$
12-monthtotal bn$
Billion US$
-16
-14
-12
-10
-8
-6
-4
-2
0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14-160
-140
-120
-100
-80
-60
-40
-20
0
EU
bn$
12-monthtotal bn$
Billion US$
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Japan
bn$
12-monthtotal bn$
Last month: July 2014
| DUNDEE CAPITAL MARKETS
Bullish: (5) Dollar Fundamentally OvervaluedBut deficits with most countries much too large
Billion US$
Bullish: (5) RMB Fundamentally UndervaluedWhile China has huge trade surpluses
(e)
Source: Thomson Reuters Datastream
0
25
50
75
100
125
150
175
200
225
95 98 01 04 07 10 130
90
180
270
360
450
540
630
720
810
World
52
bn$ 4-quarter total bn$Billion US$
0
10
20
30
40
50
60
70
80
90
100
95 98 01 04 07 10 130
40
80
120
160
200
240
280
320
360
400
US
0
10
20
30
40
50
60
70
80
95 98 01 04 07 10 130
40
80
120
160
200
240
280
320
EU
bn$ 4-quarter total bn$
bn$ 4-quarter total bn$
0
3
6
9
12
15
18
95 98 01 04 07 10 130
10
20
30
40
50
60
Japan
bn$ 4-quarter total bn$
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Last quarter: 2014-Q1
-
14
Bullish: (5) Dollar Fundamentally OvervaluedSome Asian currencies undervalued by 30%+
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Some Asian currencies would appear to be seriously undervalued
even the Euro is undervalued by some 25% against the US dollar!
This table is based on the PIIEs FEER analysis, modified to target zero current account balances.
Dollar DollarCountry Overvaluation Country OvervaluationSingapore 48.2 UK 15.9Taiwan 42.2 Russia 15.7Sweden 34.6 Poland 11.7HongKong 34.1 Indonesia 8.2Switzerland 33.2 Venezuela 7.3China 29.8 Chile 4.8Malaysia 28.3 Australia 2.7Japan 27.8 Argentina 2.0Euroarea 25.4 India 1.1Philippines 24.1 UnitedStates 0.0Korea 23.1 Mexico 0.0Israel 20.3 Canada 1.6Czech 20.1 SouthAfrica 3.7Thailand 19.7 Turkey 9.2Norway 19.3 NewZealand 11.0SaudiArabia 17.3 Colombia 11.2Hungary 16.8 Brazil 17.9
Source: PIIE Estimates of Fundamental Equilibrium Exchange rates, May 2014;Reworked by DCM Economics to force zero current account balances
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 Price 2013 cents/lb
Shortest cycle 16 years
*despite reversals which are common in all long cycles
| DUNDEE CAPITAL MARKETS54
Source: Wall Street Journal, DCM Economics
Bullish: (6) Commodity Cycle The shortest copper cycle lasted 16 years*
0
200
400
600
800
1000
1200
1400
1600
1800
1800 1825 1850 1875 1900 1925 1950 1975 2000
Shortest bull-cycle 10 years
10-year MA
Real Gold Price2013$/ounce
Correction
| DUNDEE CAPITAL MARKETS55
Source: Thomson Reuters Datastream, LBMA, DCM Economics
Bullish: (6) Commodity Cycle The shortest gold cycle lasted 10 years
5.25
5.50
5.75
6.00
6.25
6.50
6.75
7.00
7.25
7.50
1800 1825 1850 1875 1900 1925 1950 1975 2000
Shortest bull-cycle 10 years
10-year MA
LN (Real Gold Price)2013$/ounce
Correction
| DUNDEE CAPITAL MARKETS56
Source: Thomson Reuters Datastream, LBMA, DCM Economics
Bullish: (6) Commodity Cycle And log data suggests a correction was overdue
US Civil War
Gold set at $35
-
15
0
100
200
300
400
500
600
700
800
900
70 71 72 73 74 75 76 77 78 79 80 81
The 1970 Bull Market - Price Corrections
London Daily PM Fix
70-14%60
-29%90127
129
180
-28%-47%104
195
154137-11%
190168-12%
-20%243
193
-17%
426
354
850
482-43%US recession
Bull market ends
Mid-Cycle Correction
(more than 86 weeks)
Geopolitical Crisis!
| DUNDEE CAPITAL MARKETS57
Source: London Bullion Market Association
Bullish: (7) GeopoliticalThe biggest geopolitical crisis to date
200
300
400
500
600
700
800
900
Iranian hostage crisis and Russia in Afghanistan
Cyclical peak in goldabout $400(or 100%)
IRAN
Gold Price: Jul 30/79 to May 29/80
1979 1980 1981
| DUNDEE CAPITAL MARKETS58
Source: London Bullion Market Association
Bullish: (7) GeopoliticalBut there have been others
340
350
360
370
380
390
400
410
420
Counterstrike commences; US bombs Iraq
about $30
Gold Price: Jul 2/90 to Jun 28/91
1990 1991
Oil peaks at $40
Iraq invades Kuwait
IRAQabout $40
| DUNDEE CAPITAL MARKETS59
Source: London Bullion Market Association
Bullish: (7) GeopoliticalSome boosted gold by more than 10% - most not!
260
270
280
290
300
310
320
330
340
350
360
370
380
390
about $25
2001 2002
Attack on WTC
9/11
about $70
US attacks Iraq on 3/20
2003
IRAQ
AL QUEDA
| DUNDEE CAPITAL MARKETS60
Source: London Bullion Market Association
Gold Price: Jun 23/01 to May 8/03
-
16
Bullish: (7) GeopoliticalThe Ukraine/Crimea crisis added $100 in 2014-Q1
1150
1200
1250
1300
1350
1400
Gold Price: Oct 01/13 to date
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Source: London Bullion Market Association
2013 2014
Ukraine/Crimea
about $100
0
200
400
600
800
1000
1200
1400
1600
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Bullish: (8) Gold Not "Expensive"The NASDAQ was a real bubble not gold
Everything set to 100
NASDAQ 1990-2009
GOLD: 2001/03/30 to date
Years
SILVER: 2001/11/23 to date
| DUNDEE CAPITAL MARKETS62
Source: Thomson Reuters Datastream, DCM Economics
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
11000
1934 1944 1954 1964 1974 1984 1994 2004 2014
Bullish: (8) Gold Not "Expensive"To back US money supply higher prices needed
Price of gold to cover US M2(Cover ratio = .24)
Price of gold to cover US M1(Cover ratio = .38) $3700
$9800
Cover ratio as determined in 1934 when gold was revalued to $35
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Source: Thomson Reuters Datastream, DCM Economics
0
5000
10000
15000
20000
25000
30000
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Gold Price
Updated through 2013-Q4
Price of gold to cover $US FX reserves
Price of gold to cover 35% of $US FX reserves
Price of gold to coverUS debt held by world
Bullish: (8) Gold Not "Expensive"To back US$ reserves higher prices needed
| DUNDEE CAPITAL MARKETS64
Source: Thomson Reuters Datastream, DCM Economics
-
17
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 12 14
Last month: August 2014
Bullish: (8) Gold Not "Expensive"Gold close to long-term average versus oil
Barrels of oil per ounce of gold
1970 to date average:
15.12
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Source: Thomson Reuters Datastream, London Bullion Market Association
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 12 14
Last month: August 2014
Bullish: (8) Gold Not "Expensive"Gold close to long-term average with copper
Pounds of copper per ounce of gold
1970 to date average: 349.8
| DUNDEE CAPITAL MARKETS66
Source: Thomson Reuters Datastream, London Bullion Market Association
15
30
45
60
75
90
105
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Last month: August 2014
Bullish: (8) Gold Not "Expensive"And gold/silver ratio close to long-term average
Ounces of silver per ounce of gold
1970 to date average: 55.0
| DUNDEE CAPITAL MARKETS67
Source: Thomson Reuters Datastream, London Bullion Market Association
Gold Price Scenarios
Forecast Update: June/Sept 2014
2014-avg 2014-end 2015-avg
Scenario A: p = 25% $1257 $1120 $1075Scenario B: p = 50% $1283 $1295 $1355Scenario C: p = 25% $1302 $1385 $1525_______________________________________________
Weighted $1283 $1274 $1335
| DUNDEE CAPITAL MARKETS68
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18
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The author(s) is an economist with Dundee Capital Markets, a division of Dundee Securities Ltd. (Dundee). The author(s) is not a research analyst or an investment advisor. Dundee, may have an investment banking, financial advisory or other relationships with some or all of the issuers mentioned herein and may trade in any of the securities mentioned herein, either for their own account of for the accounts of their customers, or provide advice in respect of or conduct research on such securities.The comments in this report are solely those of the author. The information contained in this report (including any opinions oropinions and estimates) is current as of the date of publication and has been prepared from publicly available information, internally developed data and other sources believed to be reliable, but that have not been independently verified. The information in this report is subject to change without notice and are provided in good faith but without legal responsibility. The views expressed should not be considered a recommendation to buy or sell nor should they be relied upon as investment advice. No representation or warranty is made regarding the use or the results of the information contained herein in terms of its completeness, correctness, accuracy, timeliness, reliability, or otherwise, and do not accept any responsibility for any loss or damage that results from such use.Dundee Securities Ltd. Any reproduction or distribution in whole or in part of this research report without permission is prohibited.