jpmorgan gold outlook · 2013-10-14 · 10 year tips spreads and usd/gold 10 year tips spreads and...

May 2010

J P M O R G A N G O L D O U T L O O K

Long-term inflation risks reflected in near-term pricing

STRICTLYPRIVATEAND

CONFIDENTIAL

M. Peter Neumann

Executive Director

JPMorgan Global Commodities Group

Michael Jansen

Executive Director

JPMorgan Global Commodities Research

Agenda

Page

1

Gold themes from the demand side 1

Gold’s micro fundamentals 13

JPMORGAN

GOLD

OUTLOOK

Gold’s value proposition(s)

� Gold as a hedge against inflation

� Gold retains its value in inflation-adjusted terms, or that in the very least is the perception of many analysts and investors

� Market concerns around inflation in the medium term are acute

� Gold as a store of value

� The total supply of above-ground gold is fixed in the short term, with limited mine supply elasticity to price in the medium

and long term.

� Demand for gold is investment-theme driven – gold is never consumed, only transformed and/or hoarded to varying

degrees

� Gold’s correlation with other asset classes is low to negative; gold is considered an efficient portfolio hedge

� Gold as a “hard” currency

� Gold is seen as money; as both a means of exchange and barometer of purchasing power

� Gold is no individual country or national central bank’s liability

� While gold is priced in USDs predominantly, it is quoted and traded in every other major paper currency

– As such gold is currently perceived as the “anti-currency”

2GOLD

THEMESFROM

THEDEMAND

SIDE

0

500

1000

1500

2000

2500

3000

3500

Jan-70

Jan-71

Jan-72

Jan-73

Jan-74

Jan-75

Jan-76

Jan-77

Jan-78

Jan-79

Jan-80

Jan-81

Jan-82

Jan-83

Jan-84

Jan-85

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Real Nominal Long term average price (since 1970)

Long term average real price

LBMA gold price – nominal – and adjusted for OECD All Items CPI, $/ozLBMA gold price – nominal – and adjusted for OECD All Items CPI, $/oz

Source: JPMorgan Commodity Research

Gold – long term real and nominal prices

3GOLD

THEMESFROM

THEDEMAND

SIDE

-2

0

2

4

6

8

10

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Emerging Asia Global Global Core

Annual change in inflation: global inflation (core and total) and emerging AsiaAnnual change in inflation: global inflation (core and total) and emerging Asia


Inflation: A two tiered environment beginning to be realised – inflation is much

stronger in Emerging Markets/BRICs – much softer in the Developed World

4GOLD

THEMESFROM

THEDEMAND

SIDE

Measures of inflation in US, trimmed mean and 16% trimmed mean, annualised monthly changesMeasures of inflation in US, trimmed mean and 16% trimmed mean, annualised monthly changes

Source: JPMorgan Commodity Research, Federal Reserve of Cleveland

US inflation is on track to keep falling

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Jan-83

Jan-84

Jan-85

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0Median CPI, Revised Methodology 16% Trimmed-Mean, Revised Methodology

5GOLD

THEMESFROM

THEDEMAND

SIDE

400

500

600

700

800

900

1000

1100

1200

1300

Jan-07

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

0.0

0.5

1.0

1.5

2.0

2.5

3.0Gold - $US/oz 10 Year TIPS Spreads

10 Year TIPS Spreads and USD/Gold 10 Year TIPS Spreads and USD/Gold


However the market is pricing in a return to average rates of headline inflation on

a 10 year timeframe – market not worried about lack of inflation near term

6GOLD

THEMESFROM

THEDEMAND

SIDE

30

35

40

45

50

55

60

Jul-98

Nov-98

Mar-99

Jul-99

Nov-99

Mar-00

Jul-00

Nov-00

Mar-01

Jul-01

Nov-01

Mar-02

Jul-02

Nov-02

Mar-03

Jul-03

Nov-03

Mar-04

Jul-04

Nov-04

Mar-05

Jul-05

Nov-05

Mar-06

Jul-06

Nov-06

Mar-07

Jul-07

Nov-07

Mar-08

Jul-08

Nov-08

Mar-09

Jul-09

Nov-09

Mar-10

30

35

40

45

50

55

60

Backlogs of Work (left hand axis) Suppliers Delivery Times (right hand axis, inverted)

low delivery times and low work backlog

long delivery times and high work backlog

JPMorgan Manufacturing and Service PMI series on supplier delivery times and work backlogsJPMorgan Manufacturing and Service PMI series on supplier delivery times and work backlogs


Rising delivery times, and rising backlogs of work out of JPM PMI surveys

suggest that inflation risks are not as sanguine as the recent CPI outcomes imply

7GOLD

THEMESFROM

THEDEMAND

SIDE

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000Jan-97

Jul-97

Jan-98

Jul-98

Jan-99

Jul-99

Jan-00

Jul-00

Jan-01

Jul-01

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

US Reserve Balances with US Federal

Reserve Banks

Federal Reserve Bank Total Assets

US Reserve Balances with the Federal Reserve BanksUS Reserve Balances with the Federal Reserve Banks


Monetisation of Fiscal Deficits delivers Significant Upside Risk to Inflation Long

Term (will the pay off eventually be: recession or inflation?)

8GOLD

THEMESFROM

THEDEMAND

SIDE

0

200

400

600

800

1000

1200

31/01/2008

29/02/2008

31/03/2008

30/04/2008

31/05/2008

30/06/2008

31/07/2008

31/08/2008

30/09/2008

31/10/2008

30/11/2008

31/12/2008

31/01/2009

28/02/2009

31/03/2009

30/04/2009

31/05/2009

30/06/2009

31/07/2009

31/08/2009

30/09/2009

31/10/2009

30/11/2009

31/12/2009

31/01/2010

28/02/2010

31/03/2010

30/04/2010

Greece

Italy

Spain

Portugal

5yr U

SD CDS Sovereign Countrie

s5yr U

SD CDS Sovereign Countrie

s

Source: JPMorgan Commodity R

esearch

Sovereign Risk –Elevated as EMU Stresses Linger. R

ecent massive bailout

package only a

lleviates short te

rm funding needs –long term stresses remain

9

G O L D T H E M E S F R O M T H E D E M A N D S I D E

0

200

400

600

800

1000

1200

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

650

700

750

800

850

900

950

1000GREECE CDS USD SR 5Y ITALY CDS USD SR 5Y SPAIN CDS USD SR 5Y EUXU XAU-EUR X-RATE

5yr USD CDS Sovereign Countries5yr USD CDS Sovereign Countries


Gold in EUR terms has failed to drop even though CDS points towards lower

default risk: gold is trading the longer term risks

10GOLD

THEMESFROM

THEDEMAND

SIDE

400

500

600

700

800

900

1000

1100

1200

1300

Jan-06

Mar-06

May-06

Jul-06

Sep-06

Nov-06

Jan-07

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

70.0

75.0

80.0

85.0

90.0

95.0

Gold - $US/oz USD Index - INVERSE

USD and USD/Gold USD and USD/Gold


Gold has managed to ride out the USD rally extremely well, reflecting underlying

demand on the back of longer term risks

11GOLD

THEMESFROM

THEDEMAND

SIDE

50

100

150

200

250

300

350

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

US gold stocks adjusted for performance of S&P 500 gold price

Gold price ($US/oz) and performance of HUI gold stocks index divided by performance of S&P500 (both indexed to January 2005)

Gold price ($US/oz) and performance of HUI gold stocks index divided by performance of S&P500 (both indexed to January 2005)


Gold’s relative outperformance to gold stocks also indicating the prospect of the

gold price reflecting bearish global macro health themes

12GOLD

THEMESFROM

THEDEMAND

SIDE

Agenda

Page

13

Gold’s micro fundamentals 13

Gold themes from the demand side 1

JPMORGAN

GOLD

OUTLOOK

2000

2500

3000

3500

4000

4500Dec-89

Dec-90

Dec-91

Dec-92

Dec-93

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Mine Supply Secondary/Scrap

Metric tonnes per AnnumMetric tonnes per Annum

Source: GFMS, JPMorgan Commodity Research

Supply from Above Ground (Scrap) and Below Ground (Mines) - Improving

14GOLD’SMICRO

FUNDAMENTALS

0

500

1,000

1,500

2,000

2,500 2006 2007 2008 2009

Some very high cost operations but overall, profitability is considerableSome very high cost operations but overall, profitability is considerable

Source:

Cash costs: rising but not as fast as the price

420.6703.7589.7468.92009

447.0776.9631.7514.02008

363.2623.0533.8455.02007

281.7511.0464.0382.02006

Avg90th75th50th

Gold Total Production Costs $/oz

Profit margin for 75th Percentile Producer

Total Costs Cash Price Margin

2006 464.0 604.7 30%

2007 533.8 697.3 31%

2008 631.7 872.4 38%

2009 589.7 974.4 65%

15GOLD’SMICRO

FUNDAMENTALS

0

100

200

300

400

500

600

700

Dec-89

Dec-90

Dec-91

Dec-92

Dec-93

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Metric tonnes per Annum of Gross Central Bank SalesMetric tonnes per Annum of Gross Central Bank Sales


Mine/Scrap availability increase acting to counter the declining appetite of

Central Banks to sell

16GOLD’SMICRO

FUNDAMENTALS

0

500

1000

1500

2000

2500

3000

3500

4000

4500Dec-89

Dec-90

Dec-91

Dec-92

Dec-93

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Jewellery Non-Jewellery Fab Coins/Bars

Metric tonnes per AnnumMetric tonnes per Annum


Traditional Demand – Weak as You Can Imagine

17GOLD’SMICRO

FUNDAMENTALS

Metric tonnes per Annum (NET PRODUCER BUYING)Metric tonnes per Annum (NET PRODUCER BUYING)


And You Cant Rely on Dehedging to Fill the Gap

0

50

100

150

200

250

300

350

400

450

500

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Size of the Global Hedge Book (moz)Size of the Global Hedge Book (moz)

0

20

40

60

80

100

120

Jun-01

Jun-02

Jun-03

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Net Puts

Other Products

Net Calls

Net Forwards

18GOLD’SMICRO

FUNDAMENTALS

Source: JPMorgan global commodity research

Million oz of gold investments by categoryMillion oz of gold investments by category

So why is gold so Bid…Investors, investors, investors

Rolling 12month purchases of gold by central banks (MT)Rolling 12month purchases of gold by central banks (MT)

Gold Supply and Physical Metal Demand (mt)Gold Supply and Physical Metal Demand (mt)

2,400

2,600

2,800

3,000

3,200

3,400

3,600

3,800

4,000

4,200

q405

q106

q206

q306

q406

q107

q207

q307

q407

q108

q208

q308

q408

q109

q209

q309

q409

Physical Demand (fabrication and bars/coins) Metal Supply

Key Points:

• Global demand from traditional drivers – jewellery and non-jewellery fabrication very weak

•But investment demand strong – and more than an offset – all excess material easily absorbed

•Investment drivers – excess liquidity, current debasement and inflation fears to remain in play for 2010 and into 2011 – expecting further investment flow

•Gold prices likely to peak mid-2010 but remain firm afterwards

Investors

5

15

25

35

45

55

65

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

ETFs

Futures

Futures

-1000

-800

-600

-400

-200

0

200

400

600

800

1000

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

19GOLD’SMICRO

FUNDAMENTALS

0

10

20

30

40

50

60

Nov-04 May-05 Nov-05 May-06 Nov-06 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09

Streettracks Lyxor iShares NewGold GBS - ASX ETFSecurities ZKB

Gold in ETFs, 000ozGold in ETFs, 000oz


With the gold market in surplus, any slip in gold oz in ETFs is potentially worrying

20GOLD’SMICRO

FUNDAMENTALS

Key Points

� The USD rebound in 2010 initially took some of the gloss off the gold price, but gold is back at record highs on most currency

pairings – the USD, EUR, GBP for instance. This is sovereign risk at work.

� The macro picture for gold is friendly – accommodative monetary conditions, still aggressive fiscal expansion, debt

monetisation and possible USD and broader currency debasement.

� However the micro fundamentals are less supportive. The hedge book is wound down, mine supply is growing solidly (likely to

slow into 2011 however), while scrap supply is strong.

� The one positive micro fundamental is the change in central bank selling activity. IMF sales will be renewed in 2010-2011 but

absolute volumes are small.

� Cash costs appear to be better behaved. This is bullish for gold producer margins in 2010-2011 but the long term bull case in

energy and ongoing yield deterioration in the big 4 suggests that cash cost creep will emerge sooner or later, which is

supportive for gold prices in the long term.

� Long term issues around reserve repletion are also slightly positive for the gold market but at current prices miners are

incentivised to add reserves via exploration and organic development.

� We expect gold prices to be extremely strong in 2010, with an average of $1250/oz in Q3.

� The gold market though is exposed to a significant thematic change. Any change of heart around sovereign risk, inflation risks,

exit strategies would be tough for the gold market given the inherent considerable excess supply of gold relative to traditional

fundamentals.

21GOLD’SMICRO

FUNDAMENTALS

Gold Supply and Demand - MTGold Supply and Demand - MT


The Gold Market Surplus: Not a Problem with Longer Term Thematic Tailwinds

Significant further investment flows are needed to keep price moving higher

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E

Supply

Mine Production 2,645 2,612 2,620 2,492 2,551 2,486 2,478 2,409 2,572 2,601 2,636

% change 1.2% -1.2% 0.3% -4.9% 2.4% -2.5% -0.3% -2.8% 6.8% 1.1% 1.3%

Central Bank Sales 520 547 617 469 674 365 484 232 41 150 100

Scrap 713 841 944 849 886 1,133 982 1,316 1,674 1,450 1,400

Net producer Hedging - - - - - - - - - - -

Implied Disinvestment 16 - - 35 - - - - - - -

Total Supply 3,894 4,000 4,181 3,845 4,111 3,984 3,944 3,957 4,287 4,201 4,136

% change -3.0% 2.7% 4.5% -8.0% 6.9% -3.1% -1.0% 0.3% 8.3% -2.0% -1.5%

Demand

Jewellery 3,008 2,660 2,482 2,614 2,707 2,297 2,417 2,193 1,759 1,920 2,060

% change -6.1% -11.6% -6.7% 5.3% 3.6% -15.1% 5.2% -9.3% -19.8% 9.2% 7.3%

Other fabrication 474 481 513 552 575 650 672 696 659 679 694

% change -14.9% 1.3% 6.7% 7.6% 4.2% 13.1% 3.4% 3.6% -5.4% 3.1% 2.2%

Bar Hoarding 261 264 180 257 263 235 236 386 187 215 225

Net Producer de-hedging 151 412 255 422 86 434 444 352 254 25 25

Implied investment - 184 751 - 479 368 175 330 1,428 1,362 1,132

Total Demand 3,894 4,000 4,181 3,845 4,111 3,984 3,944 3,957 4,287 4,201 4,136

% change -3.1% 2.7% 4.5% -8.0% 6.9% -3.1% -1.0% 0.3% 8.3% -2.0% -1.5%

Residual 16- 184 751 35- 479 368 175 330 1,428 1,362 1,132

22GOLD’SMICRO

FUNDAMENTALS

400

500

600

700

800

900

1000

1100

1200

1300

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09E

1Q10

2Q10E

3Q10E

4Q10E

1Q11E

2Q11E

3Q11E

4Q11E

Actual Forecast

Gold price forecasts, London fix, $/ozGold price forecasts, London fix, $/oz


Gold Price Forecasts

LT Real

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2010 $Aluminium 1,431 1,729 1,895 2,593 2,664 2,624 1,696 2,213 2,025 2,150 2,250 2,350 2,200 Copper 1,779 2,889 3,506 6,669 7,286 6,902 5,157 7,288 6,688 7,250 7,750 8,250 5,500 Nickel 9,636 13,921 14,563 23,125 36,935 21,327 15,363 22,858 18,250 19,000 19,500 20,000 16,000 Zinc 829 1,055 1,394 3,249 3,384 1,908 1,669 2,388 2,125 2,100 2,400 2,600 2,000 Lead 507 890 946 1,287 2,739 2,105 1,729 2,263 2,013 1,850 2,000 2,100 1,800 Tin 4,891 8,483 7,480 9,234 15,021 18,395 13,314 17,430 17,750 18,000 18,500 19,000 17,500 Gold 363 416 445 604 697 872 976 1,178 1,175 1,100 1,000 1,000 950 Platinum 692 846 897 1,139 1,305 1,575 1,205 1,650 1,788 1,800 1,800 1,800 1,600 Palladium 200 236 202 320 355 349 262 523 675 742 775 800 700 Silver 4.9 6.7 7.3 11.5 13.4 15.0 14.7 18.1 18.1 16.9 15.4 15.4 13 Alumina 249 397 445 492 300 400 254 332 304 323 338 353 280

23GOLD’SMICRO

FUNDAMENTALS

jpmorgan gold outlook · 2013-10-14 · 10 year tips spreads and usd/gold 10 year tips spreads and...

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