precious thoughts #19 - gold anti-trust action … · gold does diverge from its relationship with...

North America Equity Research 25 November 2008

Precious Thoughts #19

Commentary, ideas, charts and tables

Global Gold and Precious Metals Americas

John Bridges CFA, ACSMAC

(1-212) 622-6430 [email protected]

J.P. Morgan Securities Inc.

Ankush Agarwal, CFA (1-212) 622-5623 [email protected]

J.P. Morgan Securities Inc.

South Africa Steve Shepherd (27-11) 507-0386 [email protected]

J.P. Morgan Equities Ltd.

Allan Cooke (27-11) 507-0384 [email protected]

J.P. Morgan Equities Ltd.

Asia Feng Zhang (852) 2800 8513 [email protected]

JPMorgan Chase Bank, N.A., Hong Kong

Australia Brendan James (61-3) 9608-4038 [email protected]

J.P. Morgan Securities Australia Limited

See page 24 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of J.P. Morgan in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.morganmarkets.com or can call 1-800-477-0406 toll free to request a copy of this research.

• Gold equities have been underperforming when gold investors were expecting more. In this note we conclude that the gold equities face challenges that explain their weakness and our preference for the metal. However, the tighter gold supplies and counterparty risk could give gold (and thus indirectly the equities) a lift through year end.

• The gold miners face a tough Q4. Even though fuel costs are falling, so are base metal credits. On the Q3 conference calls, mining companies were coy about the benefits of lower fuel costs since they still face cost pressures elsewhere.

• While current market moves are consistent with 1930s deflation, the very aggressive stimulus packages raise a new issue of currency stability. In the 1930s the dollar was so strong that the government repriced gold in an attempt to devalue the currency. Excessive liquidity expansion was essentially an elixir that extended economic growth and now may threaten confidence in the dollar. The rise in the CDS on the 10 year Treasury is, in our opinion, an indicator to watch as “fire alarm” for investor sentiment toward the dollar.

• Is it safe to go back in the water? The gold equities are correlated with both gold bullion prices and the general markets. We suspect they have been (at least in part) depressed by general market weakness. While we continue to recognize the difficulties the gold miners face, we feel they have probably underperformed enough for now, and we’d be buying the gold space for the run into the holidays.

Gold & Precious Metals Sector Suggestions: Overweight: Agnico-Eagle (AEM), Compania de Minas Buenaventura (BVN), Kinross (KGC), Goldcorp (GG), Newmont (NEM), Silver Wheaton (SLW), Randgold Resources (RRS), Harmony (HMY), Newcrest (NCM).

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John Bridges CFA, ACSM (1-212) 622-6430 [email protected]

Steve Shepherd (27-11) 507-0386 [email protected]

Investment Thesis Where’s the next Homestake? The gold bugs enjoy pointing to Homestake as one of the best-performing Depression-era stocks, rising 500% as the Dow crashed to about 40% of its peak level in 1929. Gold has shown two faces to the market: gold equities have underperformed the S&P500 since the beginning of this financial crisis, but gold bullion has outperformed the general markets handily. We continue to feel this results from the operational challenges the gold miners face as a group but points to upside potential for gold prices as mine supply continues to fall and now central bank sales diminish. Long-only funds can’t eat relative performance, and we can understand frustration with gold’s performance. Work we did on gold’s performance in the 1930s shows how gold was a strong relative performer. With hindsight, the best decision in the 1930s would have been to liquefy investments and hold dollar cash, and many seem to be expecting this outcome now with the rush to US government debt.

History doesn’t repeat, but it does rhyme. The dollar benefited in the late 1930s and beyond as 1) it took over from the pound as the world’s currency; and 2) the US economy boomed, helped by strong demographics and technological leaps stemming from WWII. It’s difficult to know now how the current stimulus packages will be paid for as US demographics drive a switch toward consumption over investment and also as the technologies of growth are commoditized and their use is exported to reduce cost.

In the current environment, capital flows into the dollar make sense with carry-trade unwinds and generalized fear, and our favorite technician feels the dollar could strengthen further. However, gold should not be simplified to being the dollar-not. Gold does diverge from its relationship with the dollar as it did in the late 1990s and, more recently, in late 2005-early 2006. We believe this occurs when the supply demand fundamentals of gold overcome the prevailing (price) relationship with the dollar. We see mine supply continuing to fall and now, with central banks depleting planned sales quotas, we expect official sector sales to fall quickly. Given the very large above-ground gold stocks, falling supply does not guarantee stronger pricing, but it does, in our opinion, create the right environment for stronger prices.

We believe gold normally trades as a commodity, and its price potential is buffered by value-driven Asian demand. However, from time to time investors lose confidence in currencies (as they did in the late 1970s). Given the much larger size of the currency markets, only a small reallocation of funds into gold is needed to enliven the space. Already the confidence of enough small investors has been lost such that gold’s coin and small bar market has seized up. Barrick’s CFO reported in answer to our question that some banks had withdrawn funds from the lending market, and this may have lifted the cost of borrowing gold. Our chart of the rolling correlation between gold and the dollar is (in our opinion) beginning to show potential for a breakout. We’d be buying some gold for our Christmas stocking and Hanukkah gifts. We like the pure play on gold itself and also our Overweight stocks Agnico-Eagle (AEM), Compania de Minas Buenaventura (BVN), Kinross (KGC), Goldcorp (GG) and Newmont (NEM).

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In more detail Homestake did well in deflation Gold bug lore says that gold equities are strong performers during deflation because of Homestake’s record in the 1930s. Homestake was very successful, rising 500%, but we are wary of sample sizes of one. Homestake benefited from the 50% upward repricing of gold in 1934, which was essentially an attempt at a 1930s stimulus package by devaluing the dollar against gold.

Our research suggests that Homestake was helped in the 1930s by higher grades, a new mining method and a compliant labor force. Homestake reported higher grades in the 1930s, which was due to better grade ore, an improved mining method or a combination of the two. Additionally, Homestake benefited from a very motivated labor force. There are stories from the time about how, at shift’s end, miners were confronted by a line of hungry men applying for job openings.

Might deflation lower costs? From the peak in 1929 the CPI fell about 40% at the low point in 1933. For most sectors this was not very helpful since both revenues and costs declined. Homestake benefited because of the fixing of gold at the higher level and the higher grades that (we understand) were mined.

Sharply lower oil prices should help the gold miners after the painful energy price rises of the last two years, but is it enough? Over the last few years the sharp rise in cash costs came from a ~10% rise in input costs and a ~10% decline in grades mined. The biggest cost category is labor, and after several decades of underinvestment, labor shortages should support prices if this economic downturn is short lived. However, in an extended downturn, there may again be a line at the mine gate (or a waitlist on the website).

Copper bottoms. Majors Barrick, Goldcorp and Newmont have significant copper operations at Zaldivar, Alumbrera and Batu Hijau, respectively. With copper 60% off its peaks, this business is likely to depress gold company results. If deflation looms, then the table of relative performance in the 1930s suggests that copper could depress results for a while. Of note, the silver producers are also exposed to base metal credits and though seldom mentioned, reduced credits are likely to lead to higher reported costs.

Gold equities’ recent performance has been disappointing Far from outperforming in a period of economic weakness, the gold equities have disappointed against gold and the S&P. What’s going on?

Mine costs can be broadly broken down into labor 50%, energy (electric and diesel) 25%, consumables 15% and other 10%.

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Figure 1: Relative Performance of Gold, Gold Equities and S&P500

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100

120

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160

180

Nov -06 Feb-07 May -07 Aug-07 Nov -07 Feb-08 May -08 Aug-08 Nov -08

FT Golds Global

GOLD

S&P500

Source: Bloomberg.

We continue believe that gold equities trade as a type of gold option. The size of the option is the amount of gold that underpins each share, and the exercise price of the option is the ongoing cost of production, which includes cash costs, maintenance capex and essential G&A. Of course, the last five years have seen cash costs grow 119%. Option pricing models show that the exercise price is a key part of the value.

Option price = Stock price*Probability – (Exercise price, Time Probability)

Peter Munk (chairman and founder of Barrick) on his company’s AGM webcast earlier this year highlighted the challenges facing the industry, pointing to 1) the difficulty of finding new deposits, 2) environmental opposition that was making new mine development more difficult and 3) resource nationalism threatening to take projects away. And these comments come from the industry leader.

Between the mid-1980s and the mid-1990s the gold miners found organic growth easy. In the late 1990s the gold majors (with hedge books) were often able to maintain a growth profile by buying smaller companies. Hence, using the options analogy, there was no apparent expiry date on the option and for the better gold companies the option covered an increasing number of ounces.

As Peter Munk highlighted, it is reasonable to assume that the option value that the gold companies represent will deteriorate via a rising exercise price (cash costs) and/or falling ounces produced. We have one takeaway from the industry’s problems, and that is that the gold price must increase. We believe the price of gold was artificially low starting in the mid-1990s as physical oversupply from the mines, central banks and forward selling pressed down on prices. The lack of new discoveries suggests to us that higher prices are needed to bring on new supplies.

We have one takeaway from the industry's problems, and that is that the gold price must increase

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Pass the juice please. Oh, it’s empty. Europeans came to the Americas seeking the elixir of youth, an ancient fabled drink that would end aging. Alan Greenspan thought he had found the elixir for aging economies when, even as he solved the Asian and the dotcom crises with easy money, interest rates remained low.

It’s tempting to try to seek a template to apply to this recession from history. As expectations decline, we have to cast our net wider for comparables. Some are gravitating to the 1930s now. Though we don’t claim to be historians, we don’t know of any time in history when commerce has been optimized to use huge quantities of credit, and then the credit was taken away. Given the unique character of this crisis, we are inclined to be conservative in asset allocation, and this points to gold.

Figure 2: US CDS Spread

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5

10

15

20

25

30

Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

Source: J.P. Morgan.

Supply demand Most of the time, gold trades in its normal (arithmetic) inverse relationship with the dollar. We believe there are times when tight or sloppy physical markets force a repricing of gold against the dollar.

Mine supply After the ramp in mine supply in the late 1980s and 1990s, mine supply has been falling, and this is a trend Barrick expects to continue.

Alan Greenspan thought he had found the elixir for aging economies

Is the CDS on the 10 year Treasury a bad sign?

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Figure 3: Gold Production

0

500

1,000

1,500

2,000

2,500

3,000

1835 1854 1873 1892 1911 1930 1949 1968 1987 2006

5.8% Grow th Rate (1981-1990)

-1.3% Grow th Rate (2002-2007)

1.5% Grow th Rate (1850-1980)

1.8% Grow th Rate (1991-2001)

Source: USGS, Adolph Soetbeer, Bureau of the Mint (US), Joeseph Kitchin (Union Corporation), GFMS Ltd.

Central banks Dollar strength and bold growth plans from the gold miners encouraged central banks to sell gold aggressively in the late 1990s. These two factors contributed to gold’s fall to the $250/oz level in 2001. The banks then decided to curb their sales to 400 tonnes with the first agreement in September 1999. The banks are now close to ending a second agreement that limits total sales to 500 tonnes pa and with Germany, Italy and France unwilling to sell, we expect gold supplies from this source to fall.

Figure 4: Central Bank Gold Sales in CBGA2, Year 4 Metric Tonnes

-100

0

100

200

300

400

500

Sep-07 Oct-07 Nov -07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May -08 Jun-08 Jul-08 Aug-08

Cumulativ e Target Sales (assumes ev en sales throughout the y ear to max imum limit)

Cumulativ e Weekly CB Sales

Source: ECB Weekly Financial Statement; Bloomberg and JPM estimates.

Note: Assuming that gold sales by Switzerland and Sweden are evenly spread throughout the year.

“We expect central bank sales to collapse” – GFMS

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Figure 5: Central Bank Gold Sales in CBGA2, Year 5 Metric Tonnes

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100

200

300

400

500




Source: ECB Weekly Financial Statement; DataStream and JPM estimates.


The following chart suggests a textbook inverse relationship between gold supply and price. Yet how does this fit in with the large above-ground stocks? Our conclusion is that central banks have leveraged this relationship with their large (30,000-tonne) holdings. We do know that in the late 1990s, with miners promising increasing supplies and the dollar rising, the banks were sellers. Now, with supplies falling (and a weaker dollar), the bank sales are slowing.

Figure 6: Production & Real Price of Gold

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

'70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '061,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800Real Gold Price (base '06) Production (tonnes)

Source: GFMS Ltd. and Bloomberg.

The gold coin and small bar market has seized Coins and bars have normally represented a small part of the gold market, but with interest in gold growing, demand has grown. Supplies from the mints that produce these products have lagged. Tight coin supplies could have added to the panic of

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some buyers. Yet the gold price has been stable, and larger bars are still readily available.

Gold lease rates The gold lease rate is a measure of the availability of gold. Lease rates fell as gold miners’ hedge books were paid down over the last few years and gold demand declined. However, lease rates have picked up recently in an echo of the tightness in the coin market. Jamie Sokalsky, CFO of Barrick Gold, said that this might be due to central banks withdrawing gold from the leasing market. We also understand investors are switching holdings from unallocated gold (a general liability of the bullion banks) to allocated gold (a more secure custodial holding).

If central banks’ liquidity injections and initiatives are successful, then worries about counterparty risk should decline. However, if further problems develop, it’s quite possible that counterparty risk could migrate into the gold market.

Figure 7: Gold Lease Rates

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

3 Month Gold Lease Rate

Source: Bloomberg.

Gold dollar correlation Gold normally tracks its inverse correlation with dollar as shown in the chart below. However, from time to time gold diverges from this understandable relationship. We feel these excursions stem from variations in the availability of gold. In the late 1990s gold was abundant, and its price had to decline in real terms to reflect this. In late 2005-early 2006, we believe a tightening gold supply contributed to the positive divergence that led gold to its ~$700/oz peak. Of note, the 27% move in gold price couldn’t be explained by the 5% decline in the dollar over this period.

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Figure 8: Annual Rolling Correlation over Monthly Data

-1.0-0.8-0.6-0.4-0.20.00.20.40.60.8

Dec-86 Dec-89 Dec-92 Dec-95 Dec-98 Dec-01 Dec-04 Dec-07

Source: Bloomberg.

Concluding Gold has been competing with the dollar as a relatively safe haven for investors as stock markets have fallen. Initially, gold and the dollar performed well, but it’s wrong to compare dollar strength with the performance of the dollar-denominated gold price since, as the dollar rises, it slows the upward movement of dollar gold. In the less volatile Swiss Franc, gold achieved a new all-time high about one month ago. Until the fear-driven flows into the dollar slow, the dollar could continue to rise, but gold’s improved visibility may be preparing gold for strength into the year end. We would like to see gold perform in absolute terms, but we are very happy with gold’s outperformance of the S&P 500 as seen in the following chart.

Figure 9: S&P500 Index per Ounce of Gold – Long Term (Log Scale)

Source: J.P. Morgan (published by JPM’s technical analyst, Murray Morrison).

Gold has had a stealth bull market against the S&P so far

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Coverage List Table 1: J.P. Morgan's Global Precious Metals Coverage List Company Ticker J.P. Morgan Analyst Share Price US$ Short Interest Short Int Ratio Recommendation 21-Nov-08 21-Nov-08 21-Nov-08 Gold North America Agnico-Eagle Mines AEM OW Bridges $32.31 2,292,112 0.42x Barrick Gold ABX N Bridges $27.05 9,058,522 0.49x Compania de Minas Buenaventura BVN OW Bridges $12.72 542,387 0.32x Goldcorp GG OW Bridges $24.22 7,179,725 0.41x Kinross Gold KGC OW Bridges $13.77 9,477,189 0.79x Newmont Mining NEM OW Bridges $28.79 8,845,339 0.82x Gold Reserve GRZ N Bridges $0.40 781,111 2.35x Africa AngloGold Ashanti AU N Shepherd $19.61 5,406,391 1.77x DRDGold DROOY* UW Shepherd $0.33 577,624 2.44x Gold Fields GFI N Shepherd $7.30 9,400,354 1.19x Harmony HMY OW Shepherd $7.16 6,407,748 1.94x Randgold Recources RRS OW Shepherd $30.61 n/a n/a Australia Lihir Gold LGL N James $1.13 n/a n/a Newcrest Mining NCM OW James $13.50 n/a n/a Asia Pacific Zijin Mining Group Co ZIJMF N Zhang $0.26 632,687 23.84x Silver North America Coeur d'Alene CDE N Bridges $0.50 54,304,431 4.28x Pan American Silver PAAS N Bridges $27.81 1,386,632 0.63x Silver Wheaton SLW OW Bridges $2.81 4,971,988 0.88x Platinum Group Metals (PGMs) North America Stillwater Mining SWC UW Bridges $2.71 6,070,044 5.50x Africa AngloAmerican Platinum AMS SJ N Shepherd $37.48 n/a n/a Aquarius Platinum Limited AQP SJ UW Shepherd $1.67 n/a n/a Eastern Platinum EPS SJ OW Shepherd $0.21 n/a n/a Impala Platinum IMP SJ OW Shepherd $9.34 n/a n/a Lonmin Plc. LMI LN N Shepherd $11.18 n/a n/a Northam Platinum NHM SJ N/A Shepherd $2.06 n/a n/a Source: J.P. Morgan estimates, Bloomberg.

Note: J.P. Morgan ratings: OW = Overweight; N = Neutral; UW = Underweight. "na" means not available. Short Interest Ratio = Short Interest divided by Average Daily Volumes.

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Metal charts Figure 10: Precious Metals

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200

Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08

Silver

Platinum

Palladium

Gold

Source: Bloomberg.

Figure 11: COMEX Open Interest

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250

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350

400

450

500

550

600

650

Nov-06 M ar-07 Jun-07 Sep-07 Dec-07 Apr-08 Jul-08 Oct-0880

100

120

140

160

180

200Comex Gold Open Interest Comex Silver Open Interest

Source: Bloomberg.

Gold has sharply outperformed its peer precious metals that have more industrial usage

Lower open interest leaves investors with “dry powder” to support new purchases

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Figure 12: Gold ETF Holdings

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25

30

35

Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08

Millions ounces

iShares COMEX Gold (USA)

streetTRACKS Gold Trust (USA)

NewGold Issuer Ltd (JSE)

Lyxor Gold Bullion Securities (LSE)

Gold Bullion Securities Ltd (ASX)

Source: www.iShares.com, www.exchangetradedgold.com & www.lyxorgbs.com

Note: We are tracking the GOLDIST ETF in Turkey and will include it in the above chart once it has meaningful gold volumes.

Figure 13: Silver ETF Holdings

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60

110

160

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260

Apr-06

Jun-06

Aug-06

Oct-06

Dec-06

Feb-07

Apr-07

Jun-07

Aug-07

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Feb-08

Apr-08

Jun-08

Aug-08

Oct-08

Millions ounces

iShares Silver Trust

Source: www.iShares.com

Although there have been some sell-offs, the growth trend continues

Like the performance of silver metal, the silver ETF is looking a little tired

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Figure 14: Gold Sales under the CBGA Agreement Metric tonnes

400.0 404.0 393.1 418.1385.0

497.2

395.8

475.8

357.3

24.0

0

100

200

300

400

500

600

CBGA1Year1

CBGA1Year2

CBGA1Year3

CBGA1Year4

CBGA1Year5

CBGA2Year1

CBGA2Year2

CBGA2Year3

CBGA2Year4

CBGA2Year5

Source: IMF, International Financial Statistics, ECB Weekly Financial Statement, announcements and data from individual countries.

Note: CBGA year is different from calendar year and runs from 27th September to 26th September of the following year, the first Agreement year having commenced on 27th September 1999.

Figure 15: Estimates of Weekly Gold Sales in the Current CBGA Agreement Year Metric tonnes

0123456789

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26-Sep-08 10-Nov -08 Source: ECB Weekly Financial Statement, Bloomberg and JPM estimates.


Figure 16: Cumulative Estimates of Weekly Gold Sales in the Current CBGA Agreement Year

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100

200

300

400

500




Source: ECB Weekly Financial Statement; Bloomberg and JPM estimates.


Gold sales seem to be headed lower

Sharp fall-off in gold sales equals a tighter market

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Gold in different currencies Figure 17: Gold in US Dollars

225325425525625725825925

10251125

Jan-02

Nov -02

Sep-03

Jul-04

May -05

Mar-06

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Nov -07

Sep-08

Gold in USD

Source: Bloomberg.

Figure 18: Gold in Australian Dollars

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1200

1400

1600

Jan-02

Nov -02

Sep-03

Jul-04

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Sep-08

Gold in AUD

Source: Bloomberg.

Figure 19: Gold in Canadian Dollars

350450550650750850950

10501150

Jan-02

Nov -02

Sep-03

Jul-04

May -05

Mar-06

Jan-07

Nov -07

Sep-08

Gold in CAD

Source: Bloomberg.

Figure 20: Gold in South African Rand

18002800380048005800680078008800

Jan-02

Nov -02

Sep-03

Jul-04

May -05

Mar-06

Jan-07

Nov -07

Sep-08

Gold in ZAR

Source: Bloomberg.

Figure 21: Gold in Indian Rupees

1100016000210002600031000360004100046000

Jan-02

Nov -02

Sep-03

Jul-04

May -05

Mar-06

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Nov -07

Sep-08

Gold in INR

Source: Bloomberg.

Figure 22: Gold in Swiss Francs

400500600700800900

10001100

Jan-02

Nov -02

Sep-03

Jul-04

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Mar-06

Jan-07

Nov -07

Sep-08

Gold in CHF

Source: Bloomberg.

Figure 23: Gold in Euros

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750

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Sep-08

Gold in EUR

Source: Bloomberg.

Gold is only weak in USD

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Precious Metal Companies Gold Figure 24: Newmont Mining

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2.4

Nov -06 Apr-07 Aug-07 Jan-08 Jun-08 Oct-08$20

$30

$40

$50

$60NEM/FT Golds (LHS) NEM

Source: Bloomberg.

Figure 25: Barrick Gold

1.11.2

1.31.41.51.6

1.71.8


$25

$35

$45

$55ABX/FT Golds (LHS) ABX

Source: Bloomberg.

Figure 26: Goldcorp

0.91.0

1.11.21.31.4

1.51.6


$20

$30

$40

$50GG/FT Golds (LHS) GG

Source: Bloomberg.

Figure 27: Kinross Gold

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$12

$17

$22

$27KGC/FT Golds (LHS) KGC

Source: Bloomberg.

Figure 28: Compania de Minas Buenaventura

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1.2

Nov -06 Apr-07 Aug-07 Jan-08 Jun-08 Oct-08$5$10$15$20$25$30$35$40$45BVN/FT Golds (LHS) BVN

Source: Bloomberg.

Figure 29: Agnico-Eagle

1.41.61.82.02.22.42.62.83.0

Nov -06 Apr-07 Aug-07 Jan-08 Jun-08 Oct-08$15$25$35$45$55$65$75$85

AEM/FT Golds (LHS) AEM

Source: Bloomberg.

Kinross is delivering on our hopes, compared to its peer group

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Figure 30: Newcrest Mining

0.40.50.60.70.80.91.01.11.2


$15

$20

$25

$30

$35

$40NCM/FT Golds (LHS) NCM

Source: Bloomberg.

Figure 31: Lihir Gold

0.03

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0.15

Nov -06 Apr-07 Aug-07 Jan-08 Jun-08 Oct-08$0.5$1.0$1.5$2.0$2.5$3.0$3.5$4.0$4.5LHG/FT Golds (LHS) LHG

Source: Bloomberg.

Figure 32: AngloGold Ashanti

0.60.8

1.01.21.41.6

1.82.0


$20

$30

$40

$50AU/FT Golds (LHS) AU

Source: Bloomberg.

Figure 33: Gold Fields

0.20.3

0.40.50.60.7

0.80.9


$9

$14

$19

$24GFI/FT Golds (LHS) GFI

Source: Bloomberg.

Figure 34: DRDGold

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Nov -06 Apr-07 Aug-07 Jan-08 Jun-08 Oct-08$0.0$2.0$4.0$6.0$8.0$10.0$12.0$14.0$16.0DROOY/FT Golds (LHS)

DROOY

Source: Bloomberg.

Figure 35: Harmony Gold

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$9

$14

$19

$24HMY/FT Golds (LHS) HMY

Source: Bloomberg.

Figure 36: Randgold Resources

0.81.01.21.41.61.82.02.22.4


$25

$35

$45

$55RRS/FT Golds (LHS) RRS

Source: Bloomberg.

Figure 37: Zijin Mining

-0.010.020.03

0.040.050.060.07

Nov -06 Apr-07 Aug-07 Jan-08 Jun-08 Oct-08$0.0

$0.5

$1.0

$1.5

$2.0ZIJMF/FT Golds (LHS) ZIJMF

Source: Bloomberg.

In Australia, Newcrest is outperforming Lihir

Although Randgold remains the relative standout, the weaker Rand has been helping the South Africans compared with the FT gold benchmark recently

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Silver Figure 38: Coeur d’Alene

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$1

$2

$3

$4

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$6CDE/FT Golds (LHS) CDE

Source: Bloomberg.

Figure 39: Pan American Silver

0.60.70.80.91.01.11.21.31.4

Nov -06 Apr-07 Aug-07 Jan-08 Jun-08 Oct-08$5$10$15$20$25$30$35$40$45PAAS/FT Golds (LHS) PAAS

Source: Bloomberg.

Figure 40: Hecla Mining

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0.4

0.5

Nov -06 Apr-07 Aug-07 Jan-08 Jun-08 Oct-08$0$2$4$6$8$10$12$14

HL/FT Golds (LHS) HL

Source: Bloomberg.

Figure 41: Apex Silver

-

0.2

0.4

0.6

0.8

1.0

1.2


$5

$10

$15

$20

$25SIL/FT Golds (LHS) SIL

Source: Bloomberg.

Figure 42: Silver Wheaton

-0.1

0.20.30.40.5

0.60.7


$5

$10

$15

$20

$25SLW/FT Golds (LHS) SLW

Source: Bloomberg.

Figure 43: Silver Standard Resources

-

0.5

1.0

1.5

2.0


$10

$20

$30

$40

$50SSRI/FT Golds (LHS) SSRI

Source: Bloomberg.

Figure 44: Hochschild

4.06.08.0

10.012.014.016.018.020.0


$150

$250

$350

$450

$550HOC LN/FT Golds (LHS)HOC LN

Source: Bloomberg.

Times are tough in silver land

18




PGMs Figure 45: Anglo American Platinum

1.52.5

3.54.55.56.5

7.58.5


$70

$120

$170

AMS SJ/FT Golds (LHS) AMS SJ

Source: Bloomberg.

Figure 46: Impala Platinum

0.5

0.7

0.9

1.1

1.3

1.5

1.7


$10

$20

$30

$40

$50

$60IMP SJ/FT Golds (LHS) IMP SJ

Source: Bloomberg.

Figure 47: Lonmin

-

1.0

2.0

3.0

4.0

5.0

Nov -06 Apr-07 Aug-07 Jan-08 Jun-08 Oct-08$0$10$20$30$40$50$60$70$80$90

LMI LN/FT Golds (LHS) LMI LN

Source: Bloomberg.

Figure 48: Stillwater Mining

-0.10.20.30.40.50.60.70.8


$5

$10

$15

$20

$25SWC/FT Golds (LHS) SWC

Source: Bloomberg.

Figure 49: North American Palladium

-

0.1

0.2

0.3

0.4

0.5

0.6

Nov -06 Apr-07 Aug-07 Jan-08 Jun-08 Oct-08$0$2

$4$6

$8$10

$12$14PAL/FT Golds (LHS) PAL

Source: Bloomberg.

Sharply weaker industrial demand is hurting the PGMs, and this is exacerbated by the difficulty of closing productive capacity in South Africa

19




Macro charts Figure 50: Dollar Index vs. Gold Price (inverted) in the Long Term

$225

$325

$425

$525

$625

$725

$825

$925

Jan-86 Jul-88 Jan-91 Jul-93 Jan-96 Jul-98 Jan-01 Jul-03 Jan-06

40

50

60

70

80

90

100

110

120

Gold Bullion (inv erted) DXY Index

Source: Bloomberg.

Figure 51: Dollar Index vs. Gold Price (inverted) in the Short Term

404550556065707580859095

Nov -06 Feb-07 May -07 Jul-07 Oct-07 Dec-07 Mar-08 Jun-08 Aug-08 Nov -08

$500$550$600$650$700$750$800$850$900$950$1,000

Dollar Index (inv erted) Gold Bullion

Source: Bloomberg.

Figure 52: Annual Rolling Correlation between Gold and the US Dollar

-1.0-0.8-0.6-0.4-0.20.00.20.40.60.8

Dec-86 Dec-89 Dec-92 Dec-95 Dec-98 Dec-01 Dec-04 Dec-07

Source: Bloomberg.

Gold might be in the early stages of a “disconnect” from the dollar

A bear market rally or a breakout for gold? Time will tell

As this chart shows, gold’s breakout against the dollar has been violent so far

20




Figure 53: S&P 500 vs. FT Global Golds

40

60

80

100

120

140

160


FT Golds Global S&P500

Source: Bloomberg.

Figure 54: The FT Gold Indices

30

80

130

180

230


FT Golds AustaliaFT Golds AfricaFT Golds N.AmericaFT Golds Global

Source: Bloomberg.

Figure 55: 5-day % Change in Regional FT Golds

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Jan-08 Mar-08 May -08 Jul-08 Sep-08 Nov -08

Australia Africa N America

Source: Bloomberg.

Are the gold equities basing?

Capital flows into the North American gold stocks has made this group the best performer

North American golds are performing well

21




Gold’s Purchasing Power Figure 56: Barrels of Crude Oil an Ounce of Gold Can Buy – LONG TERM

0

5

10

15

20

25

30

35

40

45

50

'70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08

-1 Std Dev.

+1 Std Dev.

Avg.

Source: Bloomberg.

Figure 57: Barrels of Crude Oil an Ounce of Gold Can Buy – SHORT TERM

6

7

8

9

10

11

12

13

14

15

16

17

Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08

-1 Std Dev.

+1 Std Dev.

Avg.

Source: Bloomberg.

Lower-priced oil should help, but the lagged effect of higher oil prices on consumables is likely to slow the benefit

22




Figure 58: Ounces of Silver an Ounce of Gold Can Buy – LONG TERM

102030405060708090

100

'70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08

Source: Bloomberg.

Figure 59: Ounces of Silver an Ounce of Gold Can Buy – SHORT TERM

45505560657075808590

Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08

Source: Bloomberg.

Figure 60: Ounces of Platinum an Ounce of Gold Can Buy – LONG TERM

0.00.20.40.60.81.01.21.41.6

'70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08

Source: Bloomberg, Inet, J.P. Morgan.

Silver underperforming long term . . .

. . . and in the short term

More industrial platinum is also losing out to gold. And yes, when times are tough, gold does trade at a premium to platinum

23




Figure 61: Pounds of Copper an Ounce of Gold Can Buy – LONG TERM

150

250

350

450

550

650

750

'86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 Source: Bloomberg.

Figure 62: S&P500 Index per Ounce of Gold – Long Term (Log Scale)

1

10

100

'70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08

S&P500 Index per ounce of Gold80m mov ing av g

Source: Bloomberg.

Figure 63: S&P500 Index per Ounce of Gold – Short Term

1.5

2.5

3.5

4.5

5.5

6.5

7.5

'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

S&P500 Index per ounce of Gold

Source: Bloomberg.

Copper has been losing out, too

Gold is established in its relative uptrend

Stairway to gold investor heaven?

24




Companies Recommended in This Report (all prices in this report as of market close on 24 November 2008, unless otherwise indicated) Agnico-Eagle Mines (AEM/$33.50/Overweight), Compania de Minas Buenaventura (BVN/$14.65/Overweight), Goldcorp Inc (GG/$25.60/Overweight), Harmony Gold Mining Co Ltd (HARJ.J/8,120c/Overweight), Harmony Gold Mining Co Ltd (HMY/$8.07/Overweight), Kinross Gold (KGC/$14.28/Overweight), Newcrest Mining (NCM.AX/A$23.60/Overweight), Newmont Mining (NEM/$31.49/Overweight), Randgold Resources Ltd (RRS.L/2,378p/Overweight), Silver Wheaton (SLW/$2.81 [21-November-2008]/Overweight)

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

• ISE option specialist: An affiliate of JPMSI is associated with a specialist or market maker that makes a market in the options of Silver Wheaton, and therefore such specialist may have a position (long or short) in the options of the issuer and may be on the opposite side of public orders in such options.

• Lead or Co-manager: JPMSI or its affiliates acted as lead or co-manager in a public offering of equity and/or debt securities for Kinross Gold within the past 12 months.

• Client of the Firm: Compania de Minas Buenaventura is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service and non-securities-related services. Goldcorp Inc is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Harmony Gold Mining Co Ltd is or was in the past 12 months a client of JPMSI. Kinross Gold is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Newcrest Mining is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service. Newmont Mining is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Silver Wheaton is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services and non-securities-related services.

• Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for investment banking services from Goldcorp Inc, Kinross Gold, Newmont Mining, Silver Wheaton.

• Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next three months from Compania de Minas Buenaventura, Goldcorp Inc, Harmony Gold Mining Co Ltd, Kinross Gold, Newcrest Mining, Newmont Mining, Silver Wheaton.

• Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other than investment banking from Compania de Minas Buenaventura, Goldcorp Inc, Kinross Gold, Newcrest Mining, Newmont Mining. An affiliate of JPMSI has received compensation in the past 12 months for products or services other than investment banking from Harmony Gold Mining Co Ltd, Newcrest Mining, Newmont Mining.

25




0

25

50

75

100

125

Price($)

Nov05

Feb06

May06

Aug06

Nov06

Feb07

May07

Aug07

Nov07

Feb08

May08

Aug08

Nov08

Agnico-Eagle Mines (AEM) Price Chart

OW $34

OW $30

OW OW

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price ($)

Price Target ($)

08-Dec-05 OW 17.17 - 31-Jan-06 OW 23.53 30.00 03-Apr-06 OW 30.45 34.00 20-Apr-06 OW 35.50 --

0

14

28

42

56

70

Price($)

Nov05

Feb06

May06

Aug06

Nov06

Feb07

May07

Aug07

Nov07

Feb08

May08

Aug08

Nov08

Compania de Minas Buenaventura (BVN) Price Chart

N OW



Price Target ($)

02-Nov-06 N 13.19 -- 06-Jun-07 OW 16.89 --

26




0

16

32

48

64

80

Price($)

Nov05

Feb06

May06

Aug06

Nov06

Feb07

May07

Aug07

Nov07

Feb08

May08

Aug08

Nov08

Goldcorp Inc (GG) Price Chart

N OW



Price Target ($)

31-Jan-06 N 26.50 - 06-Jun-07 OW 24.31 -

0

2,542

5,084

7,626

10,168

12,710

15,252

17,794

20,336

Price(c)

Nov05

Feb06

May06

Aug06

Nov06

Feb07

May07

Aug07

Nov07

Feb08

May08

Aug08

Nov08

Harmony Gold Mining Co Ltd (HARJ.J) Price Chart

N 8,500c N 10,600cN 12,000cOW 14,200c OW 8,100c OW 11,600c

N 9,400cN 10,000c N 12,300cN 14,200cN 11,600c OW 9,200c OW 13,200c

N 9,700cUW 8,500c N 10,300cN 12,400cOW 11,600c N 11,275c OW 11,600c OW 10,800c

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends.Break in coverage Aug 15, 2003 - Sep 11, 2003, and Jan 28, 2004 - May 05, 2004. This chart shows J.P. Morgan'scontinuing coverage of this stock; the current analyst may or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price (c)

Price Target (c)

21-Dec-05 N 8289 9700 10-Mar-06 N 8245 9400 22-Mar-06 N 9060 8500 23-Mar-06 UW 9011 8500 11-May-06 N 10000 10000 21-Jul-06 N 10293 10600 06-Sep-06 N 10203 10300 05-Oct-06 N 10351 12300 23-Oct-06 N 10826 12000 20-Nov-06 N 11140 12400 12-Dec-06 N 10775 14200 13-Dec-06 OW 10700 14200 08-Mar-07 OW 9750 11600 12-Mar-07 N 9912 11600 17-Jul-07 N 10349 11275 13-Sep-07 OW 7515 9200 13-Dec-07 OW 7180 8100 28-Feb-08 OW 9480 11600 09-May-08 OW 9200 13200 20-Jun-08 OW 9050 11600 10-Nov-08 OW 6800 10800

27




0

8

16

24

32

Price($)

Nov05

Feb06

May06

Aug06

Nov06

Feb07

May07

Aug07

Nov07

Feb08

May08

Aug08

Nov08

Harmony Gold Mining Co Ltd (HMY) Price Chart

N N

UW OW OW

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends.Break in coverage Aug 15, 2003 - Sep 11, 2003, and Jan 28, 2004 - May 05, 2004. This chart shows J.P. Morgan'scontinuing coverage of this stock; the current analyst may or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.


Price Target ($)

23-Mar-06 UW 14.13 - 11-May-06 N 16.82 - 13-Dec-06 OW 15.33 - 12-Mar-07 N 13.42 - 12-Sep-07 OW 10.66 -

0

10

20

30

40

50

Price($)

Nov05

Feb06

May06

Aug06

Nov06

Feb07

May07

Aug07

Nov07

Feb08

May08

Aug08

Nov08

Kinross Gold (KGC) Price Chart

OW

OW $18 OW $23



Price Target ($)

06-Oct-06 OW 11.98 18.00 30-Oct-07 OW 19.19 23.00 16-Jan-08 OW 22.33 --

28




0

12

24

36

48

60

72

Price(A$)

Nov05

Feb06

May06

Aug06

Nov06

Feb07

May07

Aug07

Nov07

Feb08

May08

Aug08

Nov08

Newcrest Mining (NCM.AX) Price Chart

N A$24N A$22.5 N A$25.2N A$24.5 N A$28.5 N A$36OW A$33.8OW A$29

N A$23N A$23 N A$24N A$25 N A$24 N A$36.5OW A$34OW A$31

N A$23.64N A$23.5 N A$23 N A$24 N A$25.5 N A$28 N A$37OW A$33.72


Date Rating Share Price (A$)

Price Target (A$)

05-Jun-06 N 18.82 23.64 07-Jul-06 N 20.48 23.00 12-Jul-06 N 18.84 24.00 24-Jul-06 N 16.98 23.50 07-Aug-06 N 17.53 23.00 28-Aug-06 N 17.85 22.50 30-Oct-06 N 21.68 23.00 07-Dec-06 N 23.60 24.00 10-Jan-07 N 22.88 25.20 25-Jan-07 N 22.11 24.00 13-Feb-07 N 20.49 25.00 18-Apr-07 N 21.61 24.50 08-Jul-07 N 21.35 25.50 17-Aug-07 N 22.62 24.00 26-Oct-07 N 29.11 28.50 24-Jan-08 N 34.90 28.00 05-Feb-08 N 36.09 36.50 22-Apr-08 N 32.61 36.00 05-May-08 N 28.30 37.00 13-May-08 OW 30.85 34.00 10-Jun-08 OW 29.95 33.80 27-Jun-08 OW 25.90 33.72 24-Jul-08 OW 31.12 31.00 19-Nov-08 OW 18.99 29.00

0

18

36

54

72

90

108

Price($)

Nov05

Feb06

May06

Aug06

Nov06

Feb07

May07

Aug07

Nov07

Feb08

May08

Aug08

Nov08

Newmont Mining (NEM) Price Chart

N OW



Price Target ($)

07-Feb-06 N 60.48 -- 30-Oct-08 OW 25.90 --

29




0

670

1,340

2,010

2,680

3,350

4,020

4,690

Price(p)

Nov05

Feb06

May06

Aug06

Nov06

Feb07

May07

Aug07

Nov07

Feb08

May08

Aug08

Nov08

Randgold Resources Ltd (RRS.L) Price Chart

OW 1,500pOW 1,420p OW 1,460p OW 1,920p

OW 1,750p OW 1,490pOW 1,520p OW 1,580p OW 2,510p

OW 1,685.083p OW 1,480pOW 1,340p OW 1,430p OW 2,680pOW 2,420p


Date Rating Share Price (p)

Price Target (p)

21-Dec-05 OW 900 1685 20-May-06 OW 1014 1750 21-Jul-06 OW 1170 1500 06-Sep-06 OW 1260 1480 05-Oct-06 OW 1024 1490 23-Oct-06 OW 1121 1420 21-Nov-06 OW 1148 1340 12-Dec-06 OW 1187 1520 08-Mar-07 OW 1180 1460 17-Jul-07 OW 1143 1430 13-Sep-07 OW 1399 1580 13-Dec-07 OW 1780 1920 28-Feb-08 OW 2640 2680 20-Jun-08 OW 2001 2420 10-Nov-08 OW 1958 2510

0

9

18

27

36

Price($)

Nov05

Feb06

May06

Aug06

Nov06

Feb07

May07

Aug07

Nov07

Feb08

May08

Aug08

Nov08

Silver Wheaton (SLW) Price Chart

OW

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends.Initiated coverage Jan 29, 2007. This chart shows J.P. Morgan's continuing coverage of this stock; the current analystmay or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.


Price Target ($)

29-Jan-07 OW 10.25 -

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: John Bridges CFA, ACSM: Agnico-Eagle Mines (AEM), Arch Coal (ACI), Barrick Gold (ABX), CONSOL Energy (CNX), Coeur d'Alene (CDE), Compania de Minas Buenaventura (BVN), Gold Reserve (GRZ), Goldcorp Inc (GG), Headwaters (HW), International Coal Group (ICO), Kinross Gold (KGC), Massey Energy (MEE), Newmont Mining (NEM), Pan American Silver (PAAS), Peabody Energy (BTU), Rentech Inc. (RTK), Silver Wheaton (SLW), Stillwater Mining (SWC)

30




J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2008

Overweight (buy)

Neutral (hold)

Underweight (sell)

JPM Global Equity Research Coverage 42% 44% 15% IB clients* 53% 51% 43% JPMSI Equity Research Coverage 40% 48% 12% IB clients* 76% 70% 59%

*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative.

Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMSI, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMSI, and may not be subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

Other Disclosures

J.P. Morgan is the global brand name for J.P. Morgan Securities Inc. (JPMSI) and its non-US affiliates worldwide.

Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation’s Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC’s website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf.

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Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research

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