gold future.pdf
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Gold Bullion International
The Price and Future of Gold
November 2010
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Gold Bullion International2
Historical Perspective
Precious Metals are a rare, naturally occurring metallic chemical
elements of high economic value.
Historically, precious metals were important as currency, but arenow regarded as investment and industrial commodities
Gold, Silver, Platinum and Palladium have an ISO 4217currency code
The best known precious metals are the coinage precious
metals Gold and Silver; they are better known for their usesin art, jewellery and coinage
Platinum and Palladium are primarily known for theirindustrial use in catalytic converters
The demand for precious metals is driven not by their practical
use, but also by their role as investments and a store of value
Historically, precious metals have been an important part of adiversified portfolio because its price increases in response toevents that cause the value of paper investments, such as stocksand bonds, to decline
Gold and silverare money.Everything else iscredit- J.P. Morgan
http://webapplications.acs.org/portaltools/shopper/productDetail.cfm?prod_cd=1-PT6449http://webapplications.acs.org/portaltools/shopper/productDetail.cfm?prod_cd=1-PT6416http://webapplications.acs.org/portaltools/shopper/productDetail.cfm?prod_cd=1-PT6415http://webapplications.acs.org/portaltools/shopper/productDetail.cfm?prod_cd=1-PT6417 -
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What is Gold?
Gold was one of the first metals to be discovered by man
Gold was discovered in Ancient times and used by the ancient SouthAmericans, Asians, Egyptians, Greeks, Romans and ChineseCivilizations
Gold is the oldest financial asset known to man
The first Gold bars were made as early as 4000 BC
The symbol origin is from the Latin word aurum meaning gold
While being the oldest asset class, physical gold bullion still trades
over the counter
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Gold does not oxidize, rust, tarnish, corrode, decay or deteriorate
Gold is so malleable that an ounce of gold can be stretched into awire over fifty miles long or beaten into a sheet to cover a hundredsquare feet.
Gold has universal value across continents and cultures
It has been estimated that all the gold in the world that has everbeen refined would form a single cube 20 m (66 ft) a side
All the gold that has ever been mined throughout history is still inexistence today
What makes Gold intriguing?
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Rationale for Investing in Gold
Store of Value
Portfolio Diversification (correlation & volatility)
Inflation Hedge
Dollar Hedge
Geopolitical Uncertainty
Performance
Supply Constraints
Increasing Demand
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Gold has no yield (unlike equities, bonds, mutual funds etc.)
Gold has minimal utility outside of jeweler
Gold is extremely dense and therefore heavy
Gold is not a consumable
High costs to store and insure
Difficulty in acquiring gold
Newer investment options for investors to protect against inflation (TIPS, ETFs etc.)
The other side of the coin
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Gold / S&P / MSCI World (1970 2010)
Gold out-performed equities in two decades (1970-1980 and 2000-2010)
Gold under-performed equities in two decades (1980-1990 and 1990-2000)
Gold has had its time and place as a preferred asset class
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The World Today
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The housing crisis of the 2007, driven by excessive leverage and irresponsible
lending practices, led to the worst financial crisis since the great depression
The resulting deflationary / deleveraging environment has had a devastating
impact on capital markets and asset prices
To prevent another Great Depression, the actions of governments and centralbanks incurred:
Very large fiscal deficits
Dramatic increases in outstanding government debts
Expansion of balance sheets of many major central banks as aconsequence of purchases of government debt or distressed assets
Historically, such an unprecedented expansion of monetary policy has led to:
Loss of faith in paper currencies
Substantially higher inflation over the medium term
Recent Events
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Money is being Printed
We have tried spending money. We are spending more than we have ever spent before and it doesnot work... We have never made good on our promises.... I say after 8 years of the Administrationwe have just as much unemployment as when we started, and an enormous debt to boot!
Henry Morgenthau, Secretary of the Treasury during the New Deal, May 1939
Y2K
9/11
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Federal Reserve and Public Debt Securities
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U.S. Gold Reserves vs. Federal andAgency Debt Held By Foreigners
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Budget
The Long Term Budget Outlook Report for the period of 2010 to 2080 from the
Congressional Budge Office (CBO) states Under current law, the federal budget is on anunsustainable path
According to the report the U.S. will not be able to produce a budget surplus in 70 years
The current US debt total equates to almost $45,000 per person
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Potential outcomes of anAggressive Monetary Policy
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History Can Be Repetitive
In the Roman empire the silver content of the denarius coin was reduced over time
Production of goods gradually moved further and further into the peripheral areas
Tax ratios increased to 2/3rds of income
The size and complexity of the administrative organizations grew constantly
Gradually the silver content in the Roman denarius decreased from 95% to 0.5%
The Budget should be balanced,
the Treasury should be refilled,public debt should be reduced, thearrogance of officialdom should betempered and controlled, and theassistance of foreign lands shouldbe curtailed lest the Republicbecome bankrupt. People mustagain learn to work, instead ofliving on public assistance.
-Marcus Tullius Cicero, 55 BC
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Sovereign Risk
For the first time since 1970s, there is the possibility that a major
industrialized country will default (Ireland, Greece). Others might follow(Portugal, Spain)
10 Year CDS
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Inflation vs. Deflation
In periods of inflation, tangible assets are the preferred asset class
In times of deflation, cash is king
Gold is liquid, divisible, indestructible, and can be easily transported. It has a worldwidemarket and there is no default risk associated with it, which means it is cash of thehighest quality
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Inflation
You often hear that gold does not a hedge against inflation and that the CPI has outrun
gold since 1980 This is a cherry picked statistic, as seen below gold has outrun the CPI in all periods other
than the 1980 peak
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Inflation
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Deflation
During deflationary periods, governments usually need to increase their deficits by
escalating their borrowings to support the economy. Interest earned on 90-day Treasury bills below the inflation rate is a signal for
governments to try to stop deflation and reflate the economy
The twin engines of negative real interest rates and government deficits tend to makegold a very attractive investment
The decline in core inflation from 2.5 percent two years ago to under 1 percent today willsustain market fears of deflation and hence a more rapid depreciation of the U.S. dollar toarrest any deflationary pressures
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Rates of Return
Gold Shows a strong relationship with Real Rates of Return
Investors must take into account interest rates, not just inflation expectations
Interest rates take into account economic growth
Gold performs well in times of low real rates of return
In these environment the carrying cost of holding gold is very low
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Gold in a Diversified Portfolio
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Correlation
0.01
(0.11)
(0.08)
(0.06)
(0.13)
-1.00 -0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00
MSCI World excl. US
DJ Industrial Average
S&P 500
Wilshire 5000
3-Month T- Bill Yields
20 Year Correlation of Weekly Returns on Key Asset Classes and Gold (USD)
Last revised:
25 December 2009
Data: Global Insight,World Gold Council, Barclays
Capital
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Volatility
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Portfolio Insurance
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0
20
40
60
80
100
1900 1920 1940 1960 1980 2000
U.S. Dollar Euro (DM B efore 1999) Yen S terling Gold
Purchasing Power
Dollar Devaluation
0
20
40
60
80
100
1971 1976 1981 1987 1992 1997 2003 2008
0
100
200
300
400
500
600
700
800
900
Purchasing Power (1971=100)
Currency in Circulation
(billions)
Source: FactSet & US Geological Survey
Purchasing Power of Various Currencies
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Supply/Demand Dynamics of Gold
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Above Ground Stocks of Gold
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Major Gold Discoveries: 1997-2008
Source: Metals Economic Group; Kinross
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Discovery Quality is Declining
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Gold Mine Production Is Declining
Source: GFMS World Gold Survey 2010
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and Expected to continue
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Gold Demand
Source: GFMS World Gold Survey 2010
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Gold Demand by Sector
Jewelry
Industrial
Retail
ETF
InferredInvestment*
De-hedging
Investment
Consumption
* Inferred investment denotes the supply-demand residual and includes physical metal, OTC transactions, andspeculative flows. Reliable indicator of overall investor activity.
Source: GFMS, World Gold Council, VM Group
Secular increase in investment demand driven partly by ETFs
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ETF Demand
0
10
20
30
40
50
60
70
2004 2005 2006 2007 2008 2009 2010
GLD Asset Growth 2004-2010 ($bn)
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Gold is under-owned
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Extremely Low Penetration
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Gold is a Small % of GlobalFinancial Assets
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Reserve Assets
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Reserve Dollar Diversification
China Takes Aim atDollar- WSJ
China Set to Reduce
Exposure to Dollar- Washington Post
China Urges NewMoney Reserve toReplace Dollar- New York Times
Indian Joins Russia,China in QuestioningU.S. Dollar Dominance- New York Times
Medvedev PromotesRuble to Lessen DollarDominance- New York Times
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Reserve Dollar Diversification
Source: GFMS World Gold Survey 2010
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Chinese Demand is Twofold
Chinese gold demand increased 26% inthe second quarter amid boominginterest in retail investment demand forgold. - World Gold Council
China said it will let more banks importand export gold, the government'sclearest signal yet that it plans to loosenrestrictions on trading of the yellow metal.- Wall Street Journal
The international gold market is nowpaying a lot more attention to China's
gold demand, not just from an officialreserve asset perspective, but also
private demand. Behind India, China isthe second-largest physical consumer.Therefore any step to integrate,liberalize, and expand this marketshould, in time, foster a rising appetitefor gold. - UBS
The liberalized trading rules willeventually give hundreds of millions ofChinese citizens new access to gold-linked investment products.- Wealth Daily
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New Central Bank Buying
(250)
(200)
(150)
(100)
(50)
0
50
100
150
200
250
Q2 2000 Q2 2001 Q2 2002 Q2 2003 Q2 2004 Q2 2005 Q2 2006 Q2 2007 Q2 2008 Q2 2009
Quarterly Change in Central Bank Gold Holdings (tonnes)
- Net official sector salesevery year 1989-2009
1989-2009 net salestotaled nearly 8,000tonnes; declineof 1/5th in official goldreserves and 10% totalgold supply
Central Bank GoldAgreements since
September 1999
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New Central Bank Buying
Selling pressure by the Central Bankswas supposed to decrease the price ofgold
The effects of Central Bank buyingcould be exponential
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Producers are No Longer Hedging
0
500
1000
1500
2000
2500
3000
3500
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Tonnes
Outstanding Delta Adjusted Producer Hedge Positions
Source: GFMS World Gold Survey 2010
Barrick shutshedge book as worldgold supply runsout- The Telegraph
Brigus Gold toEliminate 100% ofGold HedgeCommitments
- Business Wire
AngloGold Ashantieliminates gold
hedge book- WSJ.com
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How can I invest in Gold?
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Gold Investment Options
Bullion
Easy to buy/sell
Easily transported, stored, highly liquid
Tangible asset / inherently valuable
Competitive prices that are widely quoted
Accurately assayed and 99.5%+ pure gold
Requires secure storage
Manufacturing premiums added to price
Typically have higher minimums forinvestment
No dividend / interest yield
Mining Stocks
Current prices widely quoted
Highly liquid
May yield dividends
Price more volatile than bullion
Geopolitical risk
Industry / exploration risk
Corporate governance risk Limited transparency into reserve base
Exchange TradedFunds (ETFs)
Prices widely quoted / highly liquid
Relatively cost efficient
ETFs may not track the price of goldaccurately
Limited track record (started in earnest in2003)
Subject to price manipulation by hedge fundmanagers
Gold weight backing each unit declinesthrough management fee
Not necessarily 100% gold bullion backed
Trust may include other collateral besidesgold bullion
Advantages DisadvantagesOption
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Physical Metal Value Proposition
Physical Ownership investors retain full title to underlying assets
No Counterparty/Default Risk investors are not exposed to risks related to thefinancial solvency of banks, exchanges and investment trusts
No Tracking Error unlike precious metals ETFs, physical precious metals provideinvestors with zero tracking error
Liquidity bullion is highly liquid and is traded in the OTC market amongst
broker/dealers, refiners and miners
Collateral Precious metals are universally accepted as collateral for loans throughbanks/institutions
Fully Insured all stored bullion is usually 100% insured
Physical Audits investors can request to complete a physical verification of every
bar stored
Physical Delivery investors can elect physical delivery of bullion
Betting against gold is the same as betting on governments. He who bets on governments andgovernment money bets against 6,000 years of recorded human history- Charles de Gaulle
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