oil and gold- analysis

8/10/2019 Oil and Gold- Analysis

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A COMPARATIVE ANALYSIS OF

OIL VS GOLD

Submitted by:Nitima Malhotra - 15921

Mehul Goyal - 15953

Radhika Bobal - 15950

Apurva Desai - 15942


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Commodity Exchange

A commodities exchangeis an exchange wherevarious commodities and derivatives products aretraded.

Commodities, may be bought and sold ona commodity exchange in three types of markets: cash,futures and options.

Is considered to be essentially public because anybody

may trade through its member firms.

Regulates the trading practices of its members


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Provides the rules, procedures, and physical forcommodity trading, oversees trading practices, andgathers and disseminates marketplace information.

Most commodity markets across the world trade inagricultural products and rawmaterials (like wheat, barley, sugar, maize,cotton, cocoa, coffee, milk products, porkbellies, oil, metals, etc.)and contracts based on them.

These contracts can include spotprices, forwards, futures and options on futures.


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Transactions take place on the commodity exchangefloor, in what is called a pit.

As each transaction is completed in the pit, a pit reporterrecords it; this information is immediately displayed onthe trading floor quotation boardand also appears oncomputer screens in brokerage offices and tradingcenters worldwide.

Commodity market is one of a few investment areas

where an individual with limited capital can makeextraordinary profitsin a relatively short period.


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History and Evolution Of Commodity Exchanges

The shape of commodity exchanges has largely changedsince the start of the Chicago Board of Trade (CBOT),almost a century-and-a half ago, when farmers coming toChicago at times found no buyers, and had to dump theirunsold cereals in Lake Michigan.

Commodities future trading was evolved from need ofassured continuous supply of seasonal agricultural crops.

With the establishment of the Chicago Board of Trade,the world's first official futures exchange, 1848 marked a

turning point in the history of commodity trading.


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Farmers and dealers could exchange cash for

wheat.

The futures contracts developed as both

parties committed in a written contract to

respectively deliver and buy grain.

The first of what was then called "to arrive

contracts" were flour, timothy seed and hay,

which came into use in 1849."


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Commodity exchanges can contribute strongly to theeconomic development of a country and the well-beingof its population.

In many cases, they provide the best way to fill thevacuum left by the withdrawal of governments from

commodity marketing and pricing and, as such, can do agreat deal to soften the pains of adjustment to a (more)liberalized market economy.

Furthermore, they can help to rebalance the bargainingpower of weak groups (such as small farmers).

Some examples of less than successful marketsattempted in recent years are Tiger Shrimp and CheddarCheese.


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Commodity Exchanges Around The World

Virtually all of the futures exchanges in the United States datefrom the late nineteenth or early twentieth century.

Most of the commodity exchanges in Central and SouthAmerica trade physical commodities, for immediate orforward delivery.

The London Metals Exchange accounted for some 2.5 per centof world turnover.

There are also commodity exchanges of a more traditionalkind, oriented towards physical trade, in these countries,notably the French Rungis market for trade in fruit andvegetables, and the Dutch flower auction in Aalsmeer.

In Africa, the only active commodity futures exchange is inSouth Africa. (The South African Futures Exchange)


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Another country where exchanges have existed for a long time is Turkey.Around 20 of them have been engaged in active commodity trade.

Other commodity exchanges, not trading futures contracts, have beencreated since 1990 in Romania, Bulgaria, Ukraine, Lithuania and Estonia.Most of them concentrate on organising trade for immediate physical

delivery. In the Czech Republic, Kazakhstan, Indonesia, UAE plans are there to

introduce commodity exchanges.

After the decision of the Chinese Government of creating a centralmarket place in 1988, 30 futures exchanges emerged in late 1993, while

50 wholesale markets were keen to offer futures trading possibilities. Australia, New Zealand, Malaysia and Singapore all have active

commodity futures exchanges.


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Guidelines for Grant Of Recognition To New National Commodity

Exchange Under The Provisions Of The Forward Contracts (Regulation)

Act, 1952.

Stage One

Applications for setting up of a Nation-wide Multi CommodityExchange are submitted by organizations to the Government through

the Forward Markets Commission the commodity futures market

regulator.

The Government, on being satisfied that it would be in the interest of

trade and also in the public interest to do so, grants the principleapproval.


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Second Stage

In the second stage, the applicant who has been granted in principleapproval will have to comply with the following conditions within aperiod of one year from the date of grant of in-principle approval. TheExchange shall:

(i) Bring paid up capital of at least Rs 100 crore as per the proposed

equity capital structure (ii) Set up facilities for online trading with national reach and an

efficient real time monitoring and surveillance system;

(iii) Provide for an efficient clearing and settlement system.

(iv) Arrange for an efficient delivery mechanism.


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(vi) Provide for adequate infrastructure for dissemination of real timeprice and trade information;

(viii) Submit draft rules, regulations and bye-laws for conduct ofbusiness for in-principle approval of the Commission;

(ix) Plan for a network of well organized and capitalized brokeragehouses as members and other intermediaries. However, nomembership subscription or deposit of any nature shall be collectedbefore grant of recognition to the Exchange. No shareholder shall beallowed to be a trading member of the Exchange.

(x) Provide for efficient and effective grievance redressal mechanism.


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Process followed in the Commodities Exchange

Open Outcry Method Operating during regular trading

hours (RTH), the open outcrymethod consists of floor tradersstanding in a trading pit to call outorders, prices, and quantities of a

particular commodity. Different colored jackets are worn by

the traders to indicate their functionon the floor, In addition, complexhand signals (called Arb) are used.

Open outcry exchange trading is the

original style of trading that stockand commodities used to use.


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Electronic Trading Method

The fully electronic trading

system allows market

participants to trade from

booths at the exchange or

while sitting in a home oroffice thousands of miles

away.

Enables traders toefficiently manage multiple

simultaneous orders and

complex spread

relationships


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Chicago Mercantile Exchange

The Chicago Mercantile Exchange is a futures exchangelocated in Chicago, Illinois.

The CME was founded in 1898 as the Chicago Butter andEgg Board.

Originally, the exchange was a non-profit organization.The exchange demutualized in November 2000, wentpublic in December 2002, and it merged with the ChicagoBoard of Trade in July 2007 to become a designated

contract market of the CME Group Inc.


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NYSE EuroNext

The New York Stock Exchange traces its origins to 1792,when 24 New York City stockbrokers and merchantssigned the Buttonwood Agreement.

NYSE Euronext includes six cash equities exchanges in

five countries and six derivatives exchanges, togetheroffering trading, clearing and settlement in cashequities;equity, interest, commodity and currency derivatives;and bonds.

With more than 8,000 listed issues, NYSE Euronext is

home to the world's leading companies providing accessto the global liquidity they need to collaborate, competeand grow.


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Tokyo Mercantile Exchange

The Tokyo Commodity Exchange, Inc.(TOCOM) is Japan's largest derivativesplatform, offering futures contracts on

precious and industrial metals, oil-relatedenergy products, and rubber as wellas options on gold futures.

In 2008, TOCOM was demutualized and it

transformed itself from a membershiporganization into a corporation and changedits name to Tokyo Commodity Exchange, Inc


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Dalian Commodity Exchange

The Dalian Commodity Exchange(DCE) is a Chinese

futures exchange based in Dalian. It is a non-profit, self-

regulating and membership legal entity established on

February 28, 1993.

The Dalian Commodity Exchange (DCE) is the largest of

Chinas threefutures exchanges by contract volume,

accounting for 42 percent of the total volume of all

futures contracts traded nationwide in the first half of2009, though down from 47 percent in 2008.


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Multi Commodity Exchange

Multi Commodity Exchange(MCX) is an independent commodityexchange based in India. It was established in 2003 and is basedin Mumbai.

The turnover of the exchange for the fiscal year 2009 was US$ 1.24trillion, and in terms of contracts traded, it was in 2009 the world's

sixth largest commodity exchange. MCX is India's No. 1 commodity exchange with 83% market share in

2009

Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no. 3 in crudeoil and gold in futures trading

The highest traded item is gold.


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FUNDAMENTALS OF CRUDE

OIL


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OUTLINE

Oil and its Background

Oil Trading

Demand and Supply of Oil Macroeconomic Variables

Evolution of Crude Oil Market

Indian Oil and Gas Industry Movements in Oil prices


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Background

It is a naturally occurring ,toxic ,flammable liquid consisting of

a complex mixture of hydrocarbons of various molecular

weights and other liquid organic compounds, that are found

in geologic formations beneath the Earth's surface.

Primarily a Commodity

Crude Oil is also the raw material for many chemical products,

including pharmaceuticals ,solvents ,fertilizers and plastics.

Petroleum in an unrefined state has been utilized by humans

for over 5000 years. Oil in general has been used since

early human history to keep fires ablaze, and also for warfare.


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Trading in Crude Oil

Initially was a club for only the big guns

Mimimun Contract Size- 1000 Barrels

1 Barrel= 42 Gallons Trading mostly done on Commodity Exchanges

across the globe

ICE and NYMEX are the main exchanges Chicago Mercantile Exchange now allows a

contract size of 500 Barrels


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Demand for Oil

Global Economic Activity The key driver of oil demand has been robust global

economic growth, particularly in emerging market

economies


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Increasing Consumption

The rise in global economic activity has been

accompanied by corresponding growth in worldoil consumption. Since 2003, world oil

consumption growth has averaged 1.8 percent per

year.


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Price Controls and Subsidies

Many emerging market and developing economies

use subsidies and other administrative measuresto control domestic fuel prices.

These administered prices are generally set below

global market prices and, therefore, artificiallyboost the demand for oil.

Indeed, essentially all of the increase in global oil

consumption this year is expected to be in

countries where fuel prices are subsidized anddemand is not fully responsive to price signals.


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Supply of Oil

Stagnant Production While global demand has remained strong, overall non-

OPEC production growth has slowed. In the past three

years, non-OPEC production growth has been well below

rates seen earlier this decade.


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Concentrated Spare Capacity

World surplus production capacity remains low.

This puts upward pressure on prices and leavesworld oil markets vulnerable to supply

disruptions.


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Geopolitical Uncertainty

There is currently a high degree of uncertainty in

world oil markets due to fears about the adequacyof oil supplies in the future.

Current world oil supplies are highly concentrated,

and much of those supplies are held by nations

that limit access to private investment, therebypreventing full development of production

through enhanced expertise and technology

Actual supply disruptions directly affect world oilmarkets due to a loss of physical barrels available

to the market.


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Price-Inelastic Supply and Demand

The current short-run demand for oil is

relatively price inelastic

In the short run, the supply of oil is inelastic as

well.

If both supply and demand are not very

responsive to prices, it takes large price

increases to return markets to equilibrium ifthey get out of balance temporarily.


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Macroeconomic Variables

Exchange Rates

Typically, a depreciation of the dollar would be

expected to lead to a rise in the dollar price of oil

As oil is priced in dollars, a lower exchange valueof the dollar reduces the foreign-currency price

and thus boosts demand.

Shocks specific to the oil market can also feedback into exchange rates.


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Interest Rates

The relation between interest rates and oil prices

can vary, as it depends on the interactions ofmany economic variables

A decline in interest rates by itself might be

expected to raise oil prices to some extent,

suggesting a negative correlation between these

two variables.

But if the decline in interest rates is in reaction to

a downturn in economic activity, oil prices mayvery well fall in response to that weaker demand,

resulting in a positive correlation.


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Indian Oil and Gas Industry

The origin of oil & gas industry in India can betraced back to 1867 when oil was struck atMakum near Margherita in Assam.

At the time of Independence in 1947, the Oil &Gas industry was controlled by internationalcompanies.

India's domestic oil production was just 250,000tonnes per annum and the entire productionwas from one stateAssam.

The foundation of the Oil & Gas Industry in Indiawas laid by the Industrial Policy Resolution,1954, when the government announced thatpetroleum would be the core sector industry.


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During 1960s, a number of oil and gas-bearingstructures were discovered by ONGC in Gujarat

and Assam. Discovery of oil in significant quantities in

Bombay High in February, 1974 opened up newavenues of oil exploration in offshore areas.

During 1970s and till mid 1980s exploratoryefforts by ONGC and OIL India yieldeddiscoveries of oil and gas in a number ofstructures in Bassein, Tapti, Krishna-Godavari-

Cauvery basins, Cachar (Assam), Nagaland, andTripura.


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In 1984-85, India achieved a self-sufficiency levelof 70% in petroleum products.

In 1984, Gas Authority of India Ltd. (GAIL) wasset up to look after transportation, processingand marketing of natural gas and natural gasliquids.

By the end of 1980s, the petroleum sector wasin the doldrums. Oil production had begun todecline whereas there was a steady increase inconsumption and domestic oil production wasable to meet only about 35% of the domestic

requirement. The situation was furthercompounded by the resource crunch in early1990s.


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The government in order to increase explorationactivity, approved the New Exploration LicensingPolicy (NELP) in March 1997 to ensure level playing

field in the upstream sector between private andpublic sector companies in all fiscal, financial andcontractual matters.

To meet its growing petroleum demand, India isinvesting heavily in oil fields abroad. India's state-owned oil firms already have stakes in oil and gasfields in Russia, Sudan, Iraq, Libya, Egypt, Qatar,Ivory Coast, Australia, Vietnam and Myanmar.

Oil and Gas Industry has a vital role to play in

India's energy security and if India has to sustain itshigh economic growth rate.


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MOVEMENTS

IN OIL PRICES

MONTHLY MOVEMENTS:


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MONTHLY MOVEMENTS:

0

20

40

60

80

100

120

140

Aug-0

7

Sep-0

7

Oct-07

Nov-0

7

Dec-0

7

Jan-0

8

Feb-0

8

Mar-08

Apr-08

May-0

8

Jun-0

8

Jul-08

Aug-0

8

Sep-0

8

Oct-08

Nov-08

Dec-0

8

Jan-0

9

Feb-0

9

Mar-09

Apr-09

May-0

9

Jun-0

9

Jul-09

Aug-0

9

Sep-0

9

Oct-09

Nov-0

9

Dec-0

9

Jan-1

0

Feb-1

0

Mar-10

Apr-10

May-1

0

Jun-1

0

Jul-10

Aug-1

0

World Crude Oil Prices (USD per Barrel)

World Crude Oil Prices (USD per Barrel):


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75.91

81.27

90.3289.76

85.53

Aug-07 Sep-07 Oct-07 Nov-07 Dec-07

Crude Oil Prices (USD per Barrel)-2007



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0

20

40

60

80

100

120

140

Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

AxisTitle



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Crude Oil Prices (USD per

Barrel)-2009, 71.99

0

10

20

30

40

50

60

70

80

90

Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09



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75.9877.6

83.56

67.91

75.09 74.69

71.2873.56

Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10



YEARLY MOVEMENTS


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YEARLY MOVEMENTS

Crude Oil Prices (USD per

Barrel, $70.67

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

$90.00

$100.00

Crude Oil Prices (USD per Barrel


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$27.39

$23.00 $22.81

$27.69

$37.66

2000 2001 2002 2003 2004




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$50.04

$58.30

$64.20

$91.48

$53.48

$70.67

2005 2006 2007 2008 2009 2010 Partial




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OUTLINE

Gold and its background

Timeline of Gold trading

Demand and Supply of Gold

Gold as an Investment Avenue

Factors affecting Gold Prices

Movements in gold prices and reasons forfluctuations


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About Gold and its Background

Gold, the first metal used by humans, remains one of themost valued metals since prehistoric times.

Primarily a monetary asset, and partly a commodity

The distinction between gold and commodities is important.Gold has maintained its value in after-inflation terms overthe long run, while commodities have declined.

Some analysts like to think of gold as a currency without acountry. It is an internationally recognized asset that is notdependent upon any governments promise to pay.


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TIMELINE OF GOLD TRADING

20thCentury- Since 1919 London market set the price for Golddaily around the world

Major interruption- World War II which forced all the

participating governments to use the gold to support theirmilitary operations

1954- London Gold market reopened and Gold trading began inearnest for Europe

1960s Beginning- U.S. Government banned ownership of Gold.Standard price of $35.0875/oz decided for purchasing and sellingGold between U.S. and Europe central banks.


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At the end of this decade, London market had to shut down for 2 weeksstraight to stabilize prices and private investors were shut out.

1970s- Freeing of Markets- U.S. Govt. banned all gold transactions in1971. Intended to stop dollar outside from converting to gold. Theyweakened the $ by increasing gold to $38/oz

Two years later they repeated the same devaluation and gold pricebecame $42/oz, but gold trading did not stop!

U.S. Govt. gave up and full blown trading was allowed in 1975 on NYCommodity Exchange and Chicago International Monetary Market


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Many Governments started liquidating their stock for hard cash. IMFunloaded over 30% of its gold portfolio. This was a full reversal fromthe last decade

1980s- Market Boom and Bust- The appetite for gold continued. Goldbecame the new safety. It took the sudden jarring of the Black Mondayand the market collapse of October 19, 1987 to momentarily stall theclimb of Gold prices and further investment

By next year gold started trading massively globally. The ice waspermanently broken when an anonymous buyer started gobbling uphuge portions of gold and gold futures. It was later identified as theJapanese Govt.

Germany joined in 1993 and India and Turkey joined the bandwagonwith Russia in 1994


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Modern Day Status- London Market continues to be the standard for goldcontracts. At 10.30 a.m. and 3 p.m. daily gold prices are set and published,which are then used as official prices by producers, consumers and centralbanks.

The NY market alternatively, opens as the second the London fix takes placeand gold then trades throughout the day.

CONCLUSION: As long as the perceived value of gold continues, the metal willcontinue to stand on its own as an asset that can be traded. And, withtoday's current financial instabilities, it will be no surprise that gold willcontinue to be seen as a safe harbor for battered portfolios.

The primary risk to gold commodity markets and their growth continues tobe government involvement and regulatory restrictions on ownership, whichcould again be the death knell of gold market trading in the future.


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DEMAND AND SUPPLY OF GOLD

DEMAND

Jewellerydemand

Investmentdemand

Industrialdemand


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SUPPLY

Mineproduction

Recycledgold(scrap)

Centralbanks

Goldproduction
http://www.invest.gold.org/assets/image/invest/img/charts/stockflowpie3_en.gifhttp://www.invest.gold.org/assets/image/invest/img/charts/stockflowpie2_en.gif


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http://www.invest.gold.org/assets/image/invest/img/charts/stockflowpie3_en.gifhttp://www.invest.gold.org/assets/image/invest/img/charts/stockflowpie2_en.gifhttp://www.invest.gold.org/assets/image/invest/img/charts/stockflowpie1_en.gif


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GOLD AS AN INVESTMENT

AVENUEGold has attracted investors throughout the centuries,protecting their wealth and providing a 'safe haven' in

troubled or uncertain times. This appeal remains compelling

for modern investors


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WHY GOLD?

Safehaven

PortfolioDiversific

ation

InflationHedge

DollarHedge

RiskManage

ment

Demandand

Supply


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HOW TO INVEST IN GOLD?

Bars

Coins

Exchange-traded

instruments

Certificates

Accounts

Derivatives, CFDs and

spread betting

Mining companies

MAIN FACTORS INFLUENCING GOLD


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MAIN FACTORS INFLUENCING GOLD

PRICES

Tighteningof gold

supply

Inflationand

interestrates

Currencyfluctuation

Geo-political

concerns

MOVEMENTS IN GOLD PRICES AND


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MOVEMENTS IN GOLD PRICES AND

REASONS FOR FLUCTUATIONS

MONTHLY MOVEMENTS

Gold Price

(US$/ounce)-2006,

629.42

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

Jan/06 Feb/06 Mar/06 Apr/06 May/06 Jun/06 Jul/06 Aug/06 Sep/06 Oct/06 Nov/06 Dec/06

Gold Price (US$/ounce)-2006

FINDINGS


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FINDINGS Average $590, Range $524.75-$725.00

The price rallies almost continuously in the first half of the year, reaching a26-year high of $725 on 12 May, supported by a weaker dollar and risinginflation, as well as political factors, notably continued tensions in theMiddle East.

In the second quarter, the gold price traded in a range of $567/oz to $725/ozwhich is exceptionally wide for gold.

Attendant on this was a level of volatility not seen since 1983, withannualized 22-day volatility just breaching 40%.

By the end of September the market calmed at 25% the average volatility

Year-on-year, investors were still reaping substantial benefits in the form ofreturns of 41%, based on quarterly average prices.

Nonetheless, high volatility took its toll on the jewellery market. It was onlyas the quarter drew to a close that demand from this sector began to re-emerge, thereby redefining a new price floor.

India accounted for no less than 43% of global retail investment demand forgold jewellery in Q2


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2007

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00




FINDINGS


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FINDINGS

Factors affecting the Gold market in 2007-

Jewellerydemand was 6% higher in 2007 than in 2006 in tonnage termsand 22% higher in dollar terms, making a new dollar record at $54bn.

Demand in India, particularly weak in Q1 2006, rose 48% in tonnage terms

Supply and Demand

The economies of a number of golds key markets notably India, China

and the Middle East were all strong, some very strong. The second factor was favourable price volatility and price movements.

Industrial Demand and Dental Demand

reached a new record at 465.5 tonnes in 2007, a rise of 2% on 2006.

Investment

2007 started as a mixed year for gold investment with strong rises in retailinvestment coinciding with relatively small inflows into Exchange TradedFunds and substantial disinvestment from the inferred investment

category. Total (net) investment for the first half year, adding all theseelements together, amounted to just 32.5 tonnes, or $663m.


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2008

Gold Price (US$/ounce)-2008,

822.00

0.00

200.00

400.00

600.00

800.00

1,000.00

1,200.00


AxisTitle



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FINDINGS

Equities were the worst performer as it became increasingly clear that thecredit crisis was not going to be resolved quickly and as macro economicdata, particularly from the US, hinted at a slowdown that was becomingboth deeper and more broad based

All of this has been good for the US bond market. The yield on benchmark10-year Treasury bonds tumbled from 4.6% at the end of Q3 to 4.0% at the

end of Q4. It was gold and the broader commodity complex that stole the

limelight. The dollar gold price rallied by 12% in Q4, to end the year at$833.92, just short of its all time record of $850/oz in January 1980

The macro economic picture in the United States continued to deterioratein the fourth quarter

The gold price reached a new record in Q1 08, for the second consecutivequarter, fixing at $1011/oz on the London PM fix on March 17. The averagequarterly price climbed to $924.83/oz, up $138.58/oz from the finalquarter of last year.

Increased investor interest seems to have been the main driving force

behind the price increase again.

The fallout from the credit crisis continued to dominate market trends in


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The fallout from the credit crisis continued to dominate market trends inQ1 08. The break in the gold price through the $1000/oz level, to fix atsuccessive records of $1003.50/oz and $1011.25/oz on March 14 andMarch 17 on the London PM fix, coincided with news of the joint JP

Morgan Chase/US Federal Reserve Bank bail out of Bear Sterns. The macro economic picture in the United States went from bad to worse

in the first quarter, with weakness in the housing and financial sectorsspreading deeper into the broader economy.

The rise in oil prices was the main factor behind the excellentperformance of some of the commodity baskets.

The third quarter brought with it one of the largest financial crisis inhistory. One-by-one mega-financial institutions, like Freddie Mac, FannieMae, Merrill Lynch, Lehman Brothers, AIG and Washington Mutualannounced that they could no longer function in the current creditenvironment, and were either taken into public ownership or swallowed

up by healthier financial institutions. World equity markets plummetedand credit conditions tightened still further

Q3 highlights an important point that we often make: there is no stablecorrelation between changes in the price of gold and changes in the priceof oil. Sometimes the two move in tandem, but at other times they dont.

Over the past twenty years, gold and oil have moved in the same direction

twelve times, but in opposite directions in eight times.


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2009

0.00

200.00

400.00

600.00

800.00

1,000.00

1,200.00




FINDINGS


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FINDINGS Tonnage gold demand in the first quarter of 2009 was up a strong 38% on the

levels of a year earlier. In $US value terms, this represented a 36% rise to

$29.7bn. Global economic conditions continued to take their toll on jewelleryand industrial demand while underpinning safe haven demand from investors.

The gold price averaged $US908.41 during Q1, down 2% on the Q1 2008 average

The biggest source of growth in demand for gold was investment. Identifiableinvestment demand reached 595.9 tonnes in Q1, up 248% from 171.3 tonnes inQ1 2008. Taking into account inferred investment, which in the first quarter

largely reflected investor flows into bullion accounts, total investment off-takereached 711.2 tonnes, up 173% on the levels of a year earlier

Gold supply in Q1 was up 34% relative to year-earlier levels.

Of course, Q3 2008 was an exceptionally strong quarter, benefiting from thestart of the safe haven investor flows in the west as financial sector concerns

escalated as well as a surge in gold demand in several key non-western marketsin response to a correction in the gold price.

If we compare the 12 months to September 2009 against the correspondingperiod a year earlier, tonnage demand was up 2%. Alternatively, if we take theaverage Q3 result over the five years to 2007 (832 tonnes) and compare Q3 2009against this benchmark of a more typical Q3, the decline in tonnage is just 4%.

All three sectors of gold demand experienced an increase in tonnage


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All three sectors of gold demand experienced an increase in tonnagerelative to Q2 2009, but a decline relative to Q3 2008. The biggest declinerelative to year-earlier levels was in identifiable investment, which fell46%. Using the five year average benchmark described earlier, investment

recorded a 73% rise. The $US gold price in 2009, at an average of $972.35/oz, was up 12% on

$871.96 in 2008. In Q4, the gold price averaged $1,099.63, up a verystrong 38% on the levels of Q4 2008.

The gold price finished 2009 25% higher than where it started. Afterrecovering from a first quarter correction,the middle part of the year was

broadly characterised by a period of range trading in a $US900-$1,000/ozband. Finally, the sustained break above the key $1,000/oz level came inearly September, with record highs being repeatedly tested during theremainder of the year.

In fact, it is clear from this analysis that the sources of support for the

gold price were broadly based during 2009. Furthermore, an importantbalancing effect came into play between the various sectors at differentstages during the year. Nowhere was this balancing effect stronger than inthe US. In 2009, exceptional growth in retail investment demand largelyoffset a 20% decline in jewellery demand to leave total tonnage virtuallyunchanged on 2008 levels.


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2010

1,116.51

1,095.41

1,113.34

1,148.69

1,205.43

1,232.92

1,192.97

1,216.68

Jan/10 Feb/10 Mar/10 Apr/10 May/10 Jun/10 Jul/10 Aug/10




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FINDINGS Global economic data continued to show signs of growth during Q1 2010, as

the world emerges from the so-called Great Recession. The first quarter of 2010 was also marked by concerns that some European

countries would not be able to meet their debt obligations.

Indeed, the euro had fallen by 5.4% against the dollar (US$) in Decemberalone, and the British pound did not fare much better, depreciating by 3.9%against the dollar over the same period.

Luckily for the gold market, a stronger dollar against the euro or the pounddoes not necessarily mean lower prices. In fact, gold is affected by a myriadof factors and fundamental drivers of demand and supply help offset some ofthe short-term effects of currency appreciation. Many developing economiesare recovering faster than their developed counterparts, especially in

countries like India and China, which are key markets in gold consumption.This, in turn, can have positive effects for gold demand.

The 3-year correlation of weekly gold returns versus the trade weighted dollarwas about -0.51, by the end of Q1 2010.

Moreover, continuing growth in other developing economies such as China islikely to support future gold demand.


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YEARLY MOVEMENTS

0.00

200.00

400.00

600.00

800.00

1,000.00

1,200.00

1,400.00

Gold Price (US$/ounce)

Gold Price (US$/ounce)


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Were gold prices driven by oil prices, or were the

two commodity prices driven up by other forcesacting on each with similar effect?

This brings up the important question ofcausation.


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Relationship between oil and gold

Pertinent factors affecting the gold price:


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For many years it was believed that the oil price had a direct impact on the

gold price. Then the creditcruncharrived, after the oil price had hit $145+

before tumbling to $35 a barrel. Since then the oil price has been treated as

irrelevant to the gold price.

Its major role was to give us a feel of the state of the global economy. After

all, economies still run on oil. Nothing on that front has changed, so oil

remains a good measure of the state of the world economy. But since 2007a great deal has changed in the global economy and the oil market. These

changes are structural and long-term. But they have to be see in

perspective for their impact on the future oil price and indirectly the gold

price.

The major structural change has been the expansion of the client base of

the oil market and so the potential for huge demand growth. While oil

supply is growing, we do not believe that in a growing world economy there

will be enough supply to satisfy demand.

Pertinent factors affecting the gold price:

Some long-term studies show gold to be strongly correlated with


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economic indicators other than oil prices, such as the S & P 500 and 10-

year T-bills .Investors should also study the circumstances surrounding the

tight gold-oil relationship of the '70s, and consider the

similarities/differences in respect to the current oil bull


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The Oil price will affect the Gold price

The coming massive oil crisis is just over the horizon. Markets wontwait until they

arrive they discount the changes well ahead of them. The picture of a swing in

wealth and power to the east, from the west is shown by the changing shape of oil

demand and supply. Add to that the crises that always attend such power swings

and oil market changes are pointing to the time when gold will hit peak demand and

gold price rise to unseen levels. Then the oil price will influence the gold price as a

joint measure of the state of the global monetary scene.


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REASON FOR OIL'S SUPERIOR RISE, AND THE RELATIVE

UNDERPERFORMANCE OF GOLD :

1.Peak oil theory

2. Emerging market needing oil, not gold3. Oil is consumed and gone, while there are lots of gold

4. Jewelry market favoring platinum, not gold anymore

5. Central banks having lots of gold to sell


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GRAPHS OF OIL AND GOLD FROM 2000 TO 2007.

The idea that the oil price is an important driver of the gold price has

l b i i ht b th t i f th ld b h


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also been given weight by the commentaries of the many gold bugs who,

over recent years, have often cited the rising oil price as a reason to

expect a higher gold price.

Some gold bugs even claim, in one breath, that a higher oil price is bullishfor gold and then, in the next breath, that gold is money. It seems not to

have occurred to them that there's no reason for the demand for money

and the demand for industrial commodities to move in the same

direction.

On a side note, gold is unfortunately not money right now, but in many

respects it still trades as if it were. For example, it typically turns in its

best performances when real economic growth and confidence are

falling.

In a similar way, THE MISTAKEN VIEW THAT THE OIL MARKET IS ANIMPORTANT DRIVER OF THE GOLD MARKET IS CAUSING A

STRONGER CORRELATION BETWEEN THE TWO MARKETS THAN

THERE SHOULD BE, WHICH, IN TURN, REINFORCES THE FAULTY

ANALYSIS.


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But just as the "dollar is going to plunge due to the widening trade

deficit" idea that was so popular at the end of 2004 was eventually

overwhelmed by real interest rate differentials (the true fundamentaldrivers of intermediate-term exchange-rate trends), we suspect that the

"oil price drives the gold price" idea that is currently quite popular will,

before much longer, be overwhelmed by genuine fundamentals.

IN OUR OPINION, CHANGES IN THE OIL PRICE ARE NEITHER HERENOR THERE AS FAR AS THE PRICE OF GOLD BULLION IS

CONCERNED.

Under the current monetary system the directions of the long-term price

trends in oil and gold will tend to be the same because inflation is aprimary driver of both markets, but it is what's happening on the monetaryfront, not what's happening with oil supply/demand, that matters to the gold

market.

Changes in the oil price do however have an important effect on


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Changes in the oil price do, however, have an important effect on

gold mining shares, but it's not the effect that most people would

expect. To be specific, as far as gold mining equities are concerned a

rise in the oil price is BEARISH and a fall in the oil price is BULLISH.

The reason, of course, is that gold miners are major CONSUMERS of

oil (a large chunk of a gold miner's costs are energy-related).

Over the last 50 years or so, gold and oil have generally moved together in terms of


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price, with a positive price correlation of over 80 percent. During this time, the price of oil

in gold ounces has averaged about 15 barrels per ounce. However, with recent soaring oil

prices, the relationship has strayed far from this average.

The size disparity between oil and gold markets must also be considered. While annual

gold production is approximately US$35 billion, annual oil production is US$1.5 trillion, by

far the largest-trading world commodity. As oil prices increase and demand for US dollar

diversification increases, there will be an ever-expanding number of petro dollars and

other offshore dollar holders chasing a relatively small amount of bullion ounces.

In conclusion, the price of oil is poised to rise steadily as the supply/demand imbalance

increases and the dollar declines, even if there are no supply disruptions, terrorist threats

or geopolitical concerns to consider. As this happens, the price of precious metals will

climb until they eventually catch up to their historic ratios.

Should oil producers demand euros, dinars or precious metals in payment for theirproduct, the decline in the US dollar will accelerate while the price of precious metals

explodes. If oil producers and other foreign US dollar holders begin to sell the trillions they

hold and diversify into alternatives, then the price of both oil and precious metals will rise

to levels that today are hard to imagine

CONCLUSION


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The oil price does not drive the gold price andthe only reason the two markets have similar

long-term trends is that they have one

important long-term driver in common:

monetary inflation.

The correlation we found out using month end

data for 30 years gave us correlation of +0.84.

(PFA the excel sheet for the same)

CONCLUSION


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There is, however, an inverse relationship between the oil

price and the prices of gold shares, but this relationship

only comes to the fore during periods when the oil price ismoving sharply lower or sharply higher relative to the gold

price.


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Crude Oil Gold

Risk of supply exhaustion? Yes No

Existence of a supply cartel? Yes No

Elastic demand? No Yes

Demand driven by industry

growth?

Yes No

Impacted by expectations of

uncertainty?

Yes Yes

Qualitative Comparison of the Main Drivers

of Crude Oil and Gold Price Movements

COMPARISON


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COMPARISON


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.

THANKYOU!

oil and gold- analysis

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