gold april 2010

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Gold Investment Digest

www.gold.org

Contributors

Juan Carlos Artigas

[email protected]

Louise Street

[email protected]

World Gold Council

55 Old Broad Street

London

EC2M 1RX

www.gold.org

[email protected]

+44 (0) 20 7826 4700

April 2010

2010 World Gold Council and GFMS Ltd

QUARTER 1 2010

Price trendsThe gold price rose modestly in Q1 2010, ending the quarter at US$1,115.50/

oz, on the London PM fix, compared with US$1,087.50/oz at the end of Q4 2009.

Gold remained one of the least volatile of the commodities monitored by WGC

with annualised average volatility falling to 17.6% from 20.0% in the previous

quarter. Gold price volatility fell further to 14.8% by the end of the quarter.

read more on page 2

Investment trendsInvestors bought 5.6 net tonnes of gold via exchange traded funds (ETFs)in Q1 2010, bringing the total amount of gold in the ETFs that we monitor

to a new record of 1,768 tonnes (worth US$63.4 billion). GFMS reports that

the over-the-counter market saw a moderate increase in net demand during

the first quarter. Meanwhile, previously existing long positions have generally

continued to be very firmly held. Net long positions on gold futures contracts,

a proxy for the more speculative investment, fell from the highs experienced in

Q4 2009, but they remain high by historical standards.

read more on page 5

Market and economic influencesA mix of large budget deficits and debt burdens in Europe started to put

pressure on European currencies. Given golds role as a dollar hedge, this

played a part in keeping gold from rising at the same rate as it had in previous

quarters. However, gold is affected by a myriad of factors which help offset

some of the short-term effects of currency appreciation. Robust fundamentals,

including evidence of both a rebounding jewellery market in India and growth

in China, plus sustained investor inflows, continued to support gold price

performance during Q1 2010. Moreover, continuing growth in other developing

economies such as China is likely to support future gold demand. In addition,

medium term concerns surrounding sovereign debt risk in some regions is

likely to favour gold.

read more on page 8

Gold market trendsPreliminary reports on first quarter demand trends in India suggest a

continuing improvement supported by seasonal festivities and a stronger

Indian rupee. Anecdotal evidence also suggests jewellery demand in China

grew as a result of a seasonally strong demand around Chinese New Year.

European net central bank sales ground to a complete halt in Q1 2010, and

they may fall short of the CBGA3 ceiling of 400 tonnes for the year. The

International Monetary Fund (IMF) has sold 212 tonnes off-market and 5.6

tonnes on-market since September 2009 (of its intended 403 tonnes).

read more on page 11

Key data

Our key data table provides you with a concise summary of gold returns,supply and demand statistics, price volatility and a correlation matrix covering

gold, silver, commodities, equities and bonds.

read more on page 14

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April 2010 2

On the other hand, however, credit woes in Europe on the

back of concerns about the finances of Portugal, Ireland,

Greece, Spain, and Italy had a negative impact on the

euro and the British pound both depreciating by 5.66%

and 6.10%, respectively, against the US dollar over the

quarter. Given the role gold plays as a hedge against

the dollar, weaker European currencies played a part on

keeping the price of the yellow metal from rising at the

same rate as it had done during previous quarters when

the US dollar outlook was put to question.

During Q1 2010, the S&P 500 rose by 3.8% and emerging

market equitiesas measured by the MSCI EM Index

moved 2.1% higher as their economies continued togradually improve and many emerging market currencies

appreciated against the dollar. On the contrary, the

MSCI World ex US Index (which is heavily weighted in

European equities) increased only by 0.7%, as concerns

about the finances of Portugal, Ireland, Greece, and

Spain dampened the economic recovery and took their

toll on equity markets. During the same period, the S&P

Goldman Sachs Commodities Spot Index (S&P GSCI)

rose by 1.0%, as agricultural commodities fell sharply as

a result of excess supply while energy and most metals

followed a more positive tone in line with the globalbusiness cycle. In particular, the price of oil increased

by 4.9% to US$81.30/bbl by the end of Q1 2009 from

US$77.20/bbl the previous quarter. Finally, US Treasuries,

%

6

5

4

3

2

1

0

Gold(US

$/oz)

BarCap

US

TsyAgg

S&P

500

MSCIW

orld

ex-U

S

MSC

IEM

S&PGS

CI

Bren

tcrude

oil

(US$

/bbl)

* For comparison purposes, gold performance was computed using 5PM EST prices.

Chart 2: Relative price performance in Q1 2010*

Source: Bloomberg, Barclays Capital

PRICE TRENDS

The gold price edged up modestly in Q1 2010, ending the

quarter at US$1,115.50/oz, on the London PM fix, compared

with US$1,087.50/oz at the end of Q4 2009. The average

gold price also rose slightly, to US$1,109.12/oz, from

US$1,099.63/oz the previous quarter. Throughout the

quarter, gold mostly traded in a range between

US$1,058.00/oz and US$1,153.00/oz, as some factors

supported the price but others kept it from rising further.

On the one hand, the first quarter tends to be a seasonally

strong source of jewellery demand in India and China,

which has been corroborated by anecdotal evidence

this year. Moreover, investment activity suggests that

gold remains a looked-after asset. First, surveys thatWGC conducted during conferences and meetings

with investors this quarter show that, of those who

participated, 42% are planning to increase their exposure

to the yellow metal and 35% to maintain it, while only 7%

are looking to reduce the size of their position. Second,

net inflows on the gold ETFs we periodically monitor were

marginally positive on the quarter. Third, whilst net long

positions on gold futures contracts, a proxy for the more

speculative end of investment demand, fell from the highs

experienced in Q4 2009, it remains high by historical

standards as participants still see value in the yellowmetal. In addition to this, European net central bank sales

were close to zero during Q1, not bringing extra supply

into the market.

US$/oz

1,300

1,200

1,100

1,000

900

800

700

Jan-08

Mar

-08

May

-08

Jul-0

8

Sep-08

Nov-08

Jan-09

Mar

-09

May

-09

Jul-0

9

Sep-09

Nov-09

Jan-10

Mar

-10

Chart 1: Gold price (US$/oz), London PM fix

Source: The London Bullion Market Association

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April 2010 3

Price volatility

Market volatility has continued to ease during the first

quarter of 2010, reaching levels similar to those prior

to the Lehman Brothers collapse. Similarly, gold price

volatility fell in Q1 2010 to an annualised average of

17.6% from 20.0% in the previous quarter. Gold price

volatility reached a peak of 22.4% on 5 February 2010,

measured on a 22-day rolling basis, as the price of gold

reached the bottom of its trading range of US$1,053.50/

oz, on the London PM fix. Fluctuations in the gold price

eased thereafter and price volatility fell to 14.8% by theend of the quarter, below historical standards (golds

20-year price volatility is around 15.8%). Similarly, the

VIX index, a market estimate of future volatility based on

the weighted average of the implied volatilities of a wide

range of option strikes, eased to an average of 20.1%

in Q1 2010 down from 23.0% in the previous quarter,

trading as low as 16.3% in March (its lowest level since

May 2008). Finally, average daily volatility on the S&P

Goldman Sachs Commodity Index fell slightly to 21.3%

in Q1 2010, from 22.8% in Q4 2008 on an annual basis.

Gold remained, on average, one of the least volatile of

the commodities that we monitor, with the exception of

the S&P GS Livestock Spot Index. Lead was the most


as measured by the Barclays US Treasuries aggregate

index, rose 0.8% during the course of the quarter, as

medium and longer term rates remained relatively flata

by-product of US dollar strength against some of the

major currencies and Federal Reserve officials signalling

that rates will remain low whilst the US economy continues

to recover.

On a risk-adjusted basis, the yellow metal outperformed

compared with the broader commodity complex and

international equities, but underperformed against US

and emerging market equities, as well as US Treasuries in

the first quarter of 2010. In particular, emerging markets

benefited from economic growth and some currency

appreciation. Whilst oil tends to be considerably more

volatile than gold (almost twice as high on average),crude oil returns per unit of risk this quarter were better

than that of the yellow metal.

.

Annualised

return (%)

25

20

15

10

5

0

Gold

US Tsy

S&P 500

MSCI ex US

MSCI EM

S&P GSCI

Oil

1-to-1 ratio

0 5 10 15 20 25 30

Annualised daily return volatility (%)

Chart 3: Annualised return versus annualised daily return volatility

for various assets, 12/31/09-3/31/10

Source: Bloomberg, Barclays Capital, WGC

Demand for industrial metals continued to rise as the

global recovery gathered pace, especially in some

emerging economies, resulting in double-digit price

growth, both on a quarter-on-quarter and year-on-year

basis. In Q1 2010, nickel and palladium were the best

performing of the commodities we regularly monitor

rising by 35.0% and 17.6% respectively, while zinc fell by

8.2%. Gold and silver saw a similar rise of 2.6% and 3.0%respectively, over the quarter. Agricultural commodities

fell sharply by 16.9% as record outputs in various parts

of the world suppressed prices.

Commodities Returns

% QOQ % YOY

Gold (US$/oz) London PM fix 2.6 21.7

Silver 3.0 33.5

Palladium 17.6 122.7

Platinum 11.7 45.4

Aluminum 3.6 67.6

Copper 6.6 94.2

Lead -11.4 66.7

Nickel 35.0 165.2

Tin 9.8 76.1

Zinc -8.2 81.5

Brent oil 5.3 70.3

S&P GSCI Spot Index 1.1 47.9

S&P GS Agriculture Spot Index -16.9 -0.5

S&P GS Livestock Spot Index 15.2 15.1

R/J CRB Spot Index 2.4 34.5

DJ UBS Spot Index -3.6 37.9

Source: Global Insight, WGC

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April 2010 4

volatile commodity for the fourth consecutive quarter,

with an average volatility of 42.6% in Q1, followed by zinc

and nickel, which had volatilities of 36.1% and 34.7%

respectively. Crude oil volatility edged down slightly to an

average of 29.0% (on an annualised basis) in Q1 2010

from 30.5% in Q4 2009.

S&P GSCI (LHS) VIX Index (RHS)

Jan

-08

Mar

-08

May

-08

J

ul-08

Sep

-08

Nov

-08

Jan

-09

Mar

-09

May

-09

J

ul-09

Sep

-09

Nov

-09

Jan

-10

Mar

-10

%

90

80

70

60

50

40

30

20

10

0

level

90

80

70

60

50

40

30

20

10

0

Gold (US$/oz; LHS)

Chart 4: Gold & S&P GS Commodity Index annualised price

volatility (22-day rolling, %) and the VIX Index (level)

Source:Bloomberg, WGC

%

45

40

35

30

25

20

15

10

5

0

S&PGS

Lives

tockSpotIndex

DJUB

SSpotIndex

Gold

(US$/oz

)LondonPM

fix

S&PGS

Agricu

ltureSpotIndex

S&PG

SCISpotIndex

Platinum

Aluminum

Brentoil

Copper Tin

Silver

PalladiumNickelZinc

Lead

Chart 5: Annualised Q1 2010 volatility for selected commodities

Source:Global Insight, WGC

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April 2010 5

Exchange traded fundsInvestors bought 5.6 net tonnes of gold via exchange

traded funds (ETFs) in Q1 2010, bringing the total amount

of gold in the ETFs that we monitor to a new record of

1,768 tonnes, worth US$63.4 billion at the quarter-end

gold price. ZKB Gold ETF and Julius Baer Physical Gold

ETF, both listed on the Swiss Exchange (SWX), recorded

the strongest inflows during the first quarter, adding 10.2

and 8.1 tonnes respectively, as interest in the Swiss-

based securities continued. These funds remain small,

however, compared to SPDR Gold Shares, or GLD as

it is known, listed on the NYSE Arca and cross-listed

in Mexico, Singapore, Tokyo and Hong Kong with 1,130

tonnes (worth US$40.5 billion) in assets. GBS BullionSecurities (listed on the London Stock Exchange) shed

7.8 tonnes in Q1, the largest net outflow of the ETFs

we monitor.

Tonnes

1,800

1,600

1,400

1,200

1,000

800

600

400

200

0

US$/oz

1,200

1,100

1,000

900

800

700

600

500

400

300

Apr-0

3

Jan-0

4

Oct-0

4

Jul-0

5

Apr-0

6

Jan-0

7

Oct-0

7

Jul-0

8

Apr-0

9

Jan-1

0

ETFS Physical Swiss Gold Shares (LSE)

ETFS Physical Swiss Gold Shares (NYSE)

Julius Baer Physical Gold - SWX

XETRA-GOLD (Deutsche Berse)

ETFS Physical Gold (LSE)

GOLDIST (Istanbul Stock Exchange)ZKB Gold ETF (SWX)

IAU (Amex)

GLD (NYSE)

NewGold (JSE)

GBS (LSE)

GBS (ASX)

Gold PM Fix (US$)

Chart 6: Gold ETF holdings in tonnes and the gold price (US$/oz)

Data: www.ishares.com; www.exchangetradedgold.com;

www.etfsecurities.com; Zurich Kantonalbank; Finans Portfy;

www.Deutsche-Boerse.com; www.juliusbaer.com; Global Insight

Chart: WGC, www.gold.org

GLD optionsTrading in GLD options fell in the first quarter of 2010 to a

total of 11.5 million contracts from 13.7 million in Q4 2009,

but remained high relative to the historical average of 7.5

million contracts (from Q3 2008 to Q1 2010). Volumes

sharply decreased from an average high of 283,072contracts per day in December 2009 to a daily average

of 143,168 contracts by March 2010. After retreating for

most of January, call and put volumes spiked again on

5 February at 215,324 and 132,922 contracts respectively,

the same day the yellow metal fell by more than 4.0%

and reached the quarters low of US$1,058.00/oz, on the

London PM fix. Subsequently, option volumes started to

fall coinciding with the downward trend in gold volatility.

At-the-money implied volatilities on the 3-month call and

put options trended downwards during the quarter;

implied volatility reached the high for the quarter on

4 February trading at 25.7%, finally retrenching back to

17.4% by the end of the quarter.

Gold futuresCOMEX total non-commercial and non-reportable net

long positions, a proxy for the more speculative endof investment demand, gradually fell over the quarter.

The net long ultimately shed 7.1 million ounces to 20.8

million ounces by the end of Q1 2010, compared to

the end of Q4 2009. On average, net long positions in

the first quarter of 2010 decreased by 13.8% from 29.2

million ounces in Q4 2009. The net long fell for most of

January and February, to later spike up back to 25.2

million ounces in March, as the trade-weighted dollar lost

some ground from its peak in late February. This peak

was short-lived, as the trade-weighted dollar gained

momentum again (primarily on the back of continuingconcerns surrounding fiscal and credit woes in Europe)

and the net long position in gold fell back again. Overall,

Million oz; LHS

35

30

25

20

15

10

5

0

US$/oz; RHS

1,200

1,100

1,000

900

800

700

600

500

Jan

-07

May

-07

Sep

-07

Jan

-08

May

-08

Sep

-08

Jan

-09

May

-09

Sep

-09

Jan

-10

Gold active net-long positions (million oz) Gold (US$/oz)

Chart 7: COMEX net long on non-commercial & non-reportable

positions on the active gold futures contract (million oz) versus

the gold price (US$/oz)

Source:COMEX, Bloomberg

INVESTMENT TRENDS

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April 2010 6


both long-only and short-only positions decreased

over the quarter. Long-only positions fell by 13.7%

on average during Q1 2010 relative to the previous

quarter, more than offsetting a 3.0% reduction in short-

only contracts during the same period. Whilst net long

positions decreased on average during Q1 2010, the

price of gold remained well supported throughout the

quarter, as physical demand flows for gold appeared not

to be driven by speculative trading. Nevertheless, net long

positions on gold remain high by historical standards, as

these kinds of investors also continue to see value in the

gold trade.

Over-the-counter marketAccording to research carried out by GFMS on behalf

of the World Gold Council, investor activity in the over-the-counter (OTC) market saw a moderate increase in

long positions during the first quarter. Anecdotal

evidence and preliminary analysis by GFMS suggest

that this moderate increase reflects slower than

expected commitment to gold from so-called real money

funds, partly on the back of dynamics between the

gold market and global economic developments

including the sovereign debt crisis in Europe. Meanwhile,

GFMS believes previously existing long positions have

generally continued to be very firmly held, with very little

in the way of liquidations in recent months. Moreover,golds strong performance in 2009 coupled with other

considerations such as its portfolio diversification and

inflation hedge characteristics were likely behind the

fresh wave of allocations that occurred at the beginning

of 2010. Finally, GFMS finds evidence that most of the

OTC activity has been on the form of plain vanilla rather

than structured products, in particular in the form of

allocated gold positions.

Bars and coinsThe latest available data on coin and bar sales

corresponds to Q4 2009 (comprehensive Q1 2010data will be released in mid-May). Net retail demand

for gold, which includes demand for coins, small bars,

medals and imitation coins and other retail investment,

remained strong during the fourth quarter. It rose by

14.0 tonnes to 187.9 tonnes in Q4 2009, an increase

of 8.0% on the previous quarter. This largely reflected

a recovery in investment demand primarily in the US

which experienced the single biggest inflow during the

quarter from 19.0 tonnes in Q3 to 37.3 tonnes in Q4

2009followed closely by India, which increased by 15.6

tonnes. Overall, European investment flows also enjoyedsolid gains during Q4 2009 adding 7.2 tonnes. Whilst

bar and coin demand in Q4 2009 was not as strong

for China relative to Q3, anecdotal evidence suggests

that Q1 2010 experienced strong demand for physical

bars which kept suppliers (including importers to

SGE) fabricating gold bars till the last day before the

Chinese New Year holiday (14 February 2010)a peak

season for both gold bars and jewellery demand. In the

US, first quarter data on American Eagle bullion coin sales

from the US Mint shows a more modest picture relative

to a very strong Q4 2009. Demand for 1-ounce coins in

Q1 2010 was 271,000 ounces (8.4 tonnes), compared

to 362,000 ounces (11.2 tonnes) in Q4 2009. Overall

demand, however, remains high by historical standards.

Investors wishing to purchase gold coins or small bars

can find a list of retail dealers on our website at: http://

www.invest.gold.org/sites/en/where_to_invest/directory.

000 oz

500

450

400

350

300

250

200

150

100

50

0

Q107

Q207

Q307

Q407

Q10

8

Q20

8

Q30

8

Q40

8

Q10

9

Q20

9

Q30

9

Q40

9

Q11

0

Total sales*1-oz coin sales

*Includes 1-, 1/2-, 1/4-, and 1/10th-ounce coin sales

Chart 8: American Eagle bullion sales

Source:The United States Mint

Lease ratesThe implied gold lease rate is the difference between

the dollar interest rate and the equivalent duration gold

forward ratethe rate at which gold holders are willing

to lend gold in exchange for dollars (also known as the

swap rate). Of the two components, the 3-month US Libor

started to rise to 0.30% by the end of the quarter from

around 0.25% in early January. The second component,

the 3-month gold swap rate, fell to a low of 0.16% by

the end of January from 0.39% in end-December 2009,

before rising modestly back to 0.22% by the end of thequarter. Consequently, the implied gold lease rate turned

slightly positive in Q1 after being negative for most of

Q4 2009.

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April 2010 7

%

3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

Jan-07

May

-07

Sep-07

Jan-08

May

-08

Sep-08

Jan-09

May

-09

Sep-09

Jan-10

Chart 9: Implied 3-month gold lease rate

Source:Bloomberg, WGC

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April 2010 8


MARKET AND ECONOMIC INFLUENCES

Global economic data continued to show signs of

growth during Q1 2010, as the world emerges from

the so-called Great Recession. It was not, however, a

homogenous picture. Whilst the optimism of economic

growth has been reflected in higher equity prices,

especially in the US and in many emerging economies,

the first quarter of 2010 was also marked by concerns

that some European countries would not be able to meet

their debt obligations.

By the end of 2009, a mix of large budget deficits and

debt burdens in Portugal, Ireland, Greece, Spain and

Italy started to put pressure on European currencies.

Indeed, the euro had fallen by 5.4% against the dollar(US$) in December alone, and the British pound did

not fare much better, depreciating by 3.9% against the

dollar over the same period. That same trend continued

in Q1 2010, as the Greek borrowing rate continued to

rise and the European Union had to confront the risk of a

default amongst its members. This, in turn, caused many

market participants to question the soundness of the euro

and its role as an alternative currency for international

trade. During the first quarter, the euro and the British

pound lost 5.7% and 5.9% respectively against the dollar

and it was not until the end of the quarter that they startedto stabilise, following an offer from the IMF to open an

emergency line to Greece and talks amongst European

Debt as % of GDP (LHS) Budget deficit as % of GDP (RHS)

%

140

120

100

80

60

40

20

0

%

14

12

10

8

6

4

2

0

Portugal

Irela

nd Italy

Greec

e

Spain

Unite

d

King

dom

German

y

Unite

d

States

Chart 10: Debt and budget deficit as a percentage of GDP

in 2009

Source:CIA World Factbook, Eurostat, Bloomberg

Union members of implementing a similar measure.

Although some economic indicators in Europe such

as exports and IP have recovered, a weaker currency

coupled with high unemployment rates, especially in

those distressed European countries, caused the MSCI

Europe Equity Index to fall by 2.3% in dollar terms over

the quarter.

In the US, the economy appears strong enough to

generate jobs and while unemployment remains high,

non-farm payrolls added 162,000 jobs in March, the

most since December 2007. Inflation, on the other hand,

remains low but its evolution will depend on how long it

takes for interest rates to be normalised. Federal Reserveofficials have expressed some concerns regarding the

risk of tightening monetary policy too early, signalling that

the Federal Reserve funds rate may remain low for some

time. This view is shared by Wall Street as analysts predict

that the Federal Reserve will not lift rates until sometime in

the autumn. Nevertheless, the Federal Reserve also has

to manage the risk that leaving rates at historically low

levels for too long may increase the likelihood of higher

inflation in the longer term. In all, an optimistic view on

the future of the US economy kept equity prices rising

and the dollar strengthening against some of the majorcurrencies over the quarter (namely the euro, the pound,

and the yen).

Change in nonfarm

payrolls (RHS)

Unemployment rate

(inverted; LHS)

J

an-00

N

ov-00

Sep

-01

Jul09

2

M

ay-03

M

ar-04

J

an-05

N

ov-05

S

ep-06

Jul-0

7

M

ay-08

M

ar-09

J

an-10

000s

600

400

200

0

-200

-400

-600

-800

-1000

%

0

2

4

6

8

10

12

Chart 11: Change in US nonfarm payrolls (month-over-month) and

US total unemployment rate (% sa, inverted)

Source:Bureau of Labor Statistics

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April 2010 9

Luckily for the gold market, a stronger dollar against

the euro or the pound does not necessarily mean lower

prices. In fact, gold is affected by a myriad of factors and

fundamental drivers of demand and supply help offset

some of the short-term effects of currency appreciation.

Many developing economies are 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.

Historically gold has served as a hedge against the

dollar. This characteristic, however, needs to be put in the

context of global markets. For example, given that gold is

transacted globally in dollar terms, when the Indian rupee

strengthens against the dollar, Indian consumers benefitfrom the lower gold price in local currency terms. During

the first quarter, whilst the dollar appreciated against the

euro, the pound, and the yen, it lost ground against the

Indian rupee, which gained 4.6% against the greenback,

thus counteracting some of the negative effect the dollar-

euro appreciation could have had on gold.

To put this in context, the 3-year correlation of weekly

gold returns versus the trade weighted dollar was about

-0.51, by the end of Q1 2010. However, if one adjusts

the trade-weighted dollar index by increasing the weightof countries that tend to be large consumers of gold

(such as India, China, the Middle East, etc.), the 3-year

rolling correlation would stand at about -0.57. This can

partly explain why gold had a 2.6% positive return over

the quarter while the trade-weighted dollar gained about

1.5% over the same period. The adjusted dollar index,

in turn, remained largely flat during that time. In other

words, the dollar did not substantially rise once currency

appreciation in traditional gold-consuming countries is

taken into account.

Moreover, continuing growth in other developingeconomies such as China is likely to support future gold

demand. In a recent research note China Gold Report:

Gold in the Year of the Tigerpublished 29 March 2010,

WGC discusses the role of China in the gold market.

China, the second largest consumer of the yellow metal

in the world (around US$14billion in 2009 alone), is

expected to double its gold consumption over the next

decade. Domestic supply is expected to be unable to

keep pace with demand resulting in an imbalance which

may have implications for the global gold market.

The report notes that over the past five years, demand

for gold has increased at an average rate of 13% per

annum in China. At the same time, Chinese consumption

per capita lags other major markets substantially given

that, prior to 2002, the gold market in China was tightly

regulated from production through to retail distribution.

Gold prices and quotas were dictated by the Peoples

Bank of China (PBoC) jointly with other central authorities

and export barriers and import tariffs made it very

difficult to enter the market. Since then, the gold market

has opened up and its potential for growth remains high.

According to the report, if gold were consumed in China

at the same per capita rate as in India, Hong Kong or

Saudi Arabia, annual Chinese demand could increase by

at least 100 to as much as 4,000 tonnes in the jewellery

sector alone.

Cumulative supply(LHS)

Cumulative demand(LHS)

Gold price(RHS)

Tonnes

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

Yuan/oz

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Chart 12: Chinese cumulative gold supply and demand in tonnes

and the gold price (Yuan/oz)

Source:GFMS, Bloomberg, WGC

The report shows that total gold investment demandin China has grown in line with the countrys GDP and

population since the establishment of the Shanghai

Gold Exchange in 2002 and, more importantly, WGC

expects this trend to continue going forward. In 2009, for

example, Chinas net retail investment in gold reached

80.5 tonnes, up 22% on 2008. It also notes that Chinese

consumers are high savers and gold investment amongst

private individuals in China is developing rapidly.

Golds role as a monetary asset, a global currency and

an insurance policy providing protection against the

unknown, certainly seem to be working in its favour.Near-term inflationary expectations and rising income

levels are likely to provide further support to the local

market for gold.

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April 2010 10

Moreover, while China is currently the worlds sixth largest

official holder of gold, its gold reserves currently account

for less than 2% of total reserves and, therefore, remain

low by international standards. The research shows that

even adding 10% to its current level would translate to

an additional 100 tonnes of gold off-take, and if it

rebalances its books to earlier holdings of 2.2% as a

proportion of reserves (as in Q4 2002) it could account

for a total incremental demand of 400 tonnes at the

current gold price.

Finally, the report discusses the role of China in mine

production and notes that, during the last decade,

Chinese gold mining producers have stepped up gold

production by 84%, but its known reserves account for

just 4% of total known global gold reserves. While futureexploration could rise that percentage, demand is still

expected to outpace production.

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April 2010 11

the rest of the world showed some signs of improvement

relative to previous quarters, jewellery demand remained

weak relative to 2008. In particular, Turkey was the worst

performer during Q4 2009, where a sharp rise in the local

gold price during H1 2009 (as the Turkish lira depreciated)

and extreme weakness in the local economy, had a severe

impact on jewellery off-take.

Preliminary reports on Q1 2010 demand trends in India

suggest a continuing improvement, as witnessed in

Q4 2009, and supported by seasonal festivities whichinclude a number of Hindu New Year festivals. Moreover,

the average price of gold in Indian rupees during the

quarter was significantly lower and more stable than

the previous quarter, on the back of a stronger rupee,

further supporting demand. This coupled with local pawn

programs is likely to continue to tame recycled gold

supply relative to 2009. Anecdotal evidence suggests

jewellery demand in China continued to grow as a result

of a seasonally strong period. In the US, retail activity

appears to be improving as the overall economy picks

up some speed which may induce higher levels of gold jewellery purchasing than in previous quarters; higher

gold prices, however, have resulted in some evidence of

demand for lighter weight pieces.


GOLD MARKET TRENDS Please note that data on jewellery and industrial demandare released with a lag; the latest data is for Q4 2009.Data for the first quarter of 2010 will be released inmid-May 2010.Jewellery

Global jewellery demand picked up in the fourth quarter of

2009 relative to the previous quarter, despite the international

gold price hitting record levels during the period. In fact,

jewellery demand enjoyed three consecutive quarter-on-

quarter gains on the back of a rebound in the Indian market.

Fourth quarter demand of 500.4 tonnes in 2009 was 8%

below year-earlier levels, the smallest decline since Q4 2008.

At the same time, the average gold price during Q4 2009

rose by 38% compared to the same period the previous

year, implying that consumers are gradually becoming

accustomed to higher prices. The annual tonnage declinein jewellery demand during 2009 was considerably larger

at 20% relative to 2008, influenced significantly by an

extremely weak first quarter. Economic conditions continued

to take their toll on jewellery demand as the global economic

recovery has been gradual. Crucially, with its implications

for earnings and disposable income, unemployment

remains a concern in a number of key markets.

At the country level, India delivered the strongest

performance in Q4 2009, improving 27% on year-earlier

levels to 137.8 tonnes. It was followed by mainland China,which saw a 2% increase in jewellery demand to 86.5

tonnes in Q4China was the only country to observe

positive jewellery demand growth (6%) in 2009. While

Tonnes (LHS) US$ bn (RHS)

Tonnes

800

700

600

500

400

300

200

100

0

US$ bn

20

18

16

14

12

10

8

6

4

2

0

Q10

5

Q30

5

Q10

6

Q30

6

Q10

7

Q30

7

Q10

8

Q30

8

Q10

9

Q309

Chart 13: Jewellery demand in tonnes and US$ billions

Source:GFMS

%

40

30

20

10

0

-10

-20

-30

-40

-50

-60

Italy

US

A

Taiwa

n

SaudiArab

ia

Vietna

m

Mid

dleEa

st

UAE

Egypt

Russia

Turkey

Ind

ia

China

Japan

UK

Indo

nesia

Hong

Kong

Chart 14: Tonnage growth in jewellery demand by country

(Q4 09 vs. Q4 08, % change)

Source:GFMS

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April 2010 12

Industrial applications

Gold demand for industrial and dental applications

recorded its third consecutive quarter-on-quarter

improvement during Q4 2009 and its first year-over-year

gain in more than two years. Demand totalled 99.7 tonnes,

11% higher than Q4 2008. Demand in 2009, however,

was down 16% on 2008 levels. Electronics demand

(usually 70% of total industrial off-take) rebounded

strongly in Q4 2009 jumping 25% relative to year-earlier

levels. Elsewhere, the other industrial and decorative

sector fell by 13%, as well as gold used in dental

applications which fell by 5% relative to Q4 2008. With

the outlook for the global economy improving, industrial

demand is expected to recover further in 2010. Whilean increasing gold price can prove challenging, a

recent survey conducted on behalf of WGC found that

although a majority of global semiconductor companies

are considering the use of copper in some applications,

almost all the companies surveyed identified important

advantages of gold over copper and expressed concerns

with coppers reliability, process yield (relative to gold)

and unproven performance.

Mine production andrecycled gold

Annual gold supply data revealed that a sharp increase

in recycling activity in Q1 2009 was the primary reason

behind an 11% year-on-year increase in 2009 supply,

while mine also made a sizeable positive contribution.

A 6% increase in annual mine production over 2008 to

2,554 tonnes reflected a number of new projects

coming on stream during the year (notably in Tanzania

and Senegal) as well as improvements in production at

existing mines.

Producer de-hedging, which had slowed to negligible

levels in the first half of the year, picked up strongly in

H2 2009. There was a 125-tonne reduction in supply in

Q4 2009. Barrick was the main contributor in the fourth

quarter, following the announcement in September of its

intention to eliminate its entire hedge position. The global

hedge book as at the end of 2009 stood at about 235

tonnes (around half the level of one year earlier) with

numerous gold producers removing hedge positions.

Recycled gold spiked to a record level of 584 tonnes in

Q1 2009 as the gold price in many countries hit record

highs, but it subsided during the following quarters. The

Please note that data on mine production and recycledgold are released with a lag; the latest data is for Q4 2009.Data for the first quarter of 2010 will be released inmid-May 2010.

Q10

6

Q30

6

Q107

Q307

Q10

8

Q30

8

Q10

9

Q30

9

Tonnes

600

500

400

300

200

100

0

Chart 16: Recycled gold supply in tonnes

Source:GFMS

Electronics DentistryOther industrial

Tonnes

120

100

80

60

40

20

0

Q10

6

Q30

6

Q107

Q307

Q10

8

Q30

8

Q10

9

Q30

9

Chart 15: Industrial demand by category in tonnes

Source:GFMS

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April 2010 13


The official sector

European net central bank sales ground to a complete

halt in the first quarter of this year. Between September2009, when the third Central Bank Gold Agreement

(CBGA3) began and the end of Q1 2010, signatories

sold a cumulative 1.6 tonnes of gold, unchanged from

the level at the end of last year. This mainly reflects the

small amount of gold sold by Germany to mint gold coins

for its population.

CBGA3 caps annual sales at 400 tonnes until September

2014. Given the clear downturn in central banks appetite

for gold sales, aggregate sales look set to fall well short

of this ceiling. However, some of the European centralbanks unused quota has been negated by planned sales

from the International Monetary Fund (IMF).

The IMFs Executive Board announced in September 2009

that it intended to sell 403 tonnes of gold, the proceeds

of which would be used to set up an endowment fund.

The IMF indicated its preference would be for a series of

off-market deals, failing which it would conduct phased

on-market sales via CBGA3 so as not to disrupt the

market. The Fund initially reached three off-market deals:

200 tonnes of gold was sold to the Reserve Bank of India,

10 tonnes to the Central Bank of Sri Lanka and 2 tonnesto the Central Bank of Mauritius. It has now commenced

phased on-market sales, selling 5.6 tonnes of gold during

February 2010. It should be noted that the fact that the

IMF has started on-market sales does not preclude

further off-market deals being reached at a later date.

Elsewhere, Russia bought a total of 8.3 tonnes of gold

in January and February 2010, continuing its now well-

established gold purchasing programme, and bringing

its total gold holdings to 645.5 tonnes or 5.1% of total

reserves. Separately, Jose Khan, a director of the CentralBank of Venezuela, was quoted by Bloomberg saying

that the bank would buy more than half the countrys

estimated 20 tonnes of domestic production this year.

Top 40 Official Gold Holdings*Tonnes % of reserves**

1 United States 8,134 70.4%

2 Germany 3,407 66.1%3 IMF 3,005 1)

4 Italy 2,452 64.9%

5 France 2,435 65.7%

6 China 1,054 1.6%

7 Switzerland 1,040 27.0%

8 Japan 765 3.0%

9 Russia 641 5.0%

10 Netherlands 613 53.4%

11 India 558 6.9%

12 ECB 501 25.2%

13 Taiwan 424 4.1%

14 Portugal 383 84.9%

15 Venezuela 361 36.8%

16 United Kingdom 310 16.5%

17 Lebanon 287 25.6%

18 Spain 282 35.7%

19 Austria 280 54.6%

20 Belgium 228 33.7%

21 Algeria 174 3.9%

22 Philippines 154 12.5%

23 Libya 144 4.8%

24 Saudi Arabia 143 1.2%

25 Singapore 127 2.3%

26 Sweden 126 9.3%

27 South Africa 125 11.0%28 BIS 120 1)

29 Turkey 116 5.4%

30 Greece 112 73.2%

31 Romania 104 8.1%

32 Poland 103 4.2%

33 Thailand 84 2.0%

34 Australia 80 6.7%

35 Kuwait 79 11.9%

36 Egypt 76 7.8%

37 Indonesia 73 3.9%

38 Kazakhstan 71 9.3%

39 Denmark 67 3.0%

40 Pakistan 65 16.2%

Source: IMF, national data, WGC

* This table was updated in March 2010 and reports data available at that time.

Data are taken from the International Monetary Funds International Financial

Statistics (IFS), March 2010 edition, and other sources where applicable. IFS

data are two months in arrears, so holdings are as of January 2010 for most

countries, September 2009 or earlier for late reporters. The table does not list

all gold holders: countries which have not reported their gold holdings to the

IMF in the last six months are not included, while other countries are known to

hold gold but they do not report their holdings publicly. Where the WGC knows

of movements that are not reported to the IMF or misprints, changes have

been made. The countries showing as having 0.0 tonnes of gold report some

gold but less than 0.05 tonnes to the IMF.

** The percentage share held in gold of total foreign reserves, as calculated by

the World Gold Council. The value of gold holdings is calculated using the

end-January gold price of $1,078.50 per troy ounce (there are 32,151 troy

ounces in a metric tonne). Data for the value of other reserves are taken from

IFS, table Total Reserves minus Gold.1) BIS and IMF balance sheets do not allow this percentage to be calculated. In

the case of any countries, up to date data for other reserves are not available.

strong rise in the gold price during Q4 2009 coincided

with an increase in recycled gold relative to Q3 2009, but

a comparison with Q4 2008 reveals a very modest 3%

increase, despite a 38% rise in the average gold price

over the same period. Overall, recycled gold was up 27%

in 2009 to 1,549 tonnes, primarily due to weak global

economic conditions especially at the beginning of 2009.

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April 2010 14

Gold price

Q2 09 Q3 09 Q4 09 Q1 10Gold (US$/oz);London PM fix average 922.18 960.00 1,099.63 1,109.12

% QOQ 1.5% 4.1% 14.5% 0.9%

% YOY 2.9% 10.1% 38.4% 22.1%

Source: The London Bullion Market Association, WGC

Volatility2 (%) to end-March 20101-month 3-month 6-month 1-year

Gold (US$/oz) 15.7% 18.6% 19.2% 17.7%

Source: The London Bullion Market Association, WGC

Market capitalisationValue (US$ bn)

Above-ground stocks of gold 3 5,914.4

ETFs (as at 31 March 2010) 4 63.4

Notional value of net long non-commercial and non-reportablepositions as reported by CFTC gold futures (at 31 March 2010) 22.9

Source: GFMS, LBMA, CFTC, WGC

Demand (cumulative Q1-Q4 2009)

% % Value %Tonnes QOQ1 YOY ($ bn) YOY

Jewellery 1,747 -3% -20% 55.1 -10%

Identifiable investment 1,271 -15% 7% 38.9 20%

of which ETFsand similar products 595 -10% 85% 17.7 99%

Industrial and Dental 368 3% -16% 11.5 -6%

Source: GFMS, WGC

Supply (cumulative Q1-Q4 2009)

% % Value %Tonnes QOQ1 YOY ($ bn) YOY

Mining output 2,554 0% 6% 80.0 19%

Net producer hedging -257

Total mine supply 2,296 -3% 11% 71.6 25%

Official sales 44 -28% -81% 1.2 -82%

Recycled gold 1,549 1% 28% 48.1 42%

Source: GFMS, WGC

1 Quarter-on-quarter % change in rolling 4-quarter totals.2 Annualised daily return volatility.3 Based on 2009 volume and Q1 2010 average gold price4 Data: www.exchangetradedgold.com; www.etfsecurities.com; www.ishares.com;

Zurich Kantonalbank; Finans Portfy; www.Deutsche-Boerse.com; www.juliusbaer.com.

KEY DATA

Correlations (3 years ending 26 March 2010, weekly returns)

BarCap BarCap BarCap DJ/Brent S&P GS R/J DJ UBS BarCap US US US High DJ MSCI Wilshire

Gold Silver crude oil Commodity CRB Commodity 1-3 month Treasury Credit Yield Industrial Russell World REITs

(US$/oz) (US$/oz) (US$/bbl) Index Index Index T-bills Index Index Index S&P 500 Average 3000 ex-US Index

Gold (US$/oz) 1.00

Silver (US$/oz) 0.80 1.00

Brent crude oil (US$/bbl) 0.40 0.54 1.00

S&P GS Commodity Index 0.43 0.58 0.92 1.00

R/J CRB Index 0.49 0.64 0.86 0.97 1.00

DJ UBS Commodity Index 0.51 0.66 0.77 0.93 0.98 1.00

BarCap 1-3 month T-bills 0.05 -0.04 0.08 0.12 0.05 0.04 1.00

BarCap US Treasury Index 0.10 -0.01 -0.26 -0.24 -0.26 -0.22 0.12 1.00

BarCap US Credit Index -0.07 0.00 -0.06 0.01 0.03 0.07 0.03 0.66 1.00

BarCap US High Yield Index -0.09 0.19 0.29 0.38 0.40 0.42 -0.08 -0.24 0.40 1.00

S&P 500 -0.11 0.17 0.35 0.40 0.43 0.40 -0.06 -0.36 0.05 0.64 1.00

DJ Industrial Average -0.14 0.13 0.31 0.35 0.37 0.35 -0.04 -0.35 0.03 0.60 0.98 1.00

Russell 3000 -0.09 0.19 0.37 0.41 0.44 0.41 -0.07 -0.36 0.06 0.65 1.00 0.97 1.00MSCI World ex-US 0.13 0.39 0.46 0.57 0.61 0.60 -0.10 -0.19 0.21 0.67 0.84 0.81 0.85 1.00

DJ/Wilshire REITs Index -0.01 0.16 0.22 0.24 0.26 0.24 0.02 -0.26 0.04 0.50 0.78 0.72 0.80 0.63 1.00

Source: Global Insight, Barclays Capital, WGC; performance calculations based on total return indices unless otherwise noted.

Performance

Gold BarCap US MSCI World DJ UBS S&P GS Trade-weighted Dow Jones/Wilshire(US$/oz) Treasury Aggregate S&P 500 ex-US Commodity Index Commodity Index US$ REITs Index

1 month -0.4% -0.8% 6.0% 6.5% -1.2% 1.9% 0.1% 10.2%

3 months 1.5% 0.8% 4.3% 1.4% -5.2% -1.0% 1.6% 9.8%

6 months 10.5% -0.2% 11.8% 4.0% 3.5% 7.4% 2.4% 19.9%

1 year 21.1% -1.2% 49.8% 56.8% 20.5% 25.9% -8.6% 113.5%

Volatility2 (1-year) 17.7% 5.1% 19.1% 19.6% 21.7% 26.9% 8.8% 49.7%

Source: Global Insight, Barclays Capital, WGC; performance calculations based on total return indices unless otherwise noted.

8/8/2019 Gold April 2010

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A WEALTH OF INFORMATION

The indispensable source of information for investing in goldwww.marketintelligence.gold.orgThe World Gold Council invites you to explore the Market

Intelligence section of its website, one of the most

comprehensive sources of information about the gold

market and golds strategic investment properties. The

information is housed in four sections of the site: Market

Knowledge, Investing in Gold, Research & Statistics, and

Gold as a Reserve Asset.

Market Knowledge

Investors new to gold are encouraged to read theoverviews of how the gold market functions and the

principal components of supply and demand: Central

banks, derivatives markets, industrial users, investors,

jewellery consumers, mining companies and recyclers of

gold scrap.

Investing in Gold

Learn about golds unique properties that enable

investors to employ this asset to manage portfolio risk

and preserve capital.

Gold Research & Statistics

Access a vast library of research and information,

including golds historical prices, central bank reserve

statistics, quarterly supply and demand data for gold,

as well as correlation and volatility charts and tables.

Academic and private sector research addresses avariety of subjects related to gold, such as inflation and

the US dollar.

Gold as a Reserve Asset

Learn why central banks and multilateral organisations

such as the IMF hold gold as a reserve asset.

DisclaimerThis report is published by the World Gold Council (WGC), 55 Old Broad Street, London EC2M 1RX, United Kingdom. Copyright 2010. All rights reserved. This report is the property of WGCand is protected by U.S. and international laws of copyright, trademark and other intellectual property laws. This report is provided solely for general information and educational purposes. Theinformation in this report is based upon information generally available to the public from sources believed to be reliable. WGC does not undertake to update or advise of changes to the informationin this report. Expression of opinion are those of the author and are subject to change without notice. The information in this report is provided as an as is basis. WGC makes no express or impliedrepresentation or warranty of any kind concerning the information in this report, including, without limitation, (i) any representation or warranty of merchantability or fitness for a particular purposeor use, or (ii) any representation or warranty as to accuracy, completeness, reliability or timeliness. Without limiting any of the foregoing, in no event will WGC or its affiliates be liable for any decisionmade or action taken in reliance on the information in this report and, in any event, WGC and its affiliates shall not be liable for any consequential, special, punitive, incidental, indirect or similardamages arising from, related or connected with this report, even if notified of the possibility of such damages.

No part of this report may be copied, reproduced, republished, sold, distributed, transmitted, circulated, modified, displayed or otherwise used for any purpose whatsoever, including, withoutlimitation, as a basis for preparing derivative works, without the prior written authorisation of WGC. To request such authorisation, contact [email protected]. In no event may WGC trademarks,artwork or other proprietary elements in this report be reproduced separately from the textual content associated with them; use of these may be requested from [email protected]. This report is not,and should not be construed as, an offer to buy or sell, or as a solicitation of an offer to buy or sell, gold, any gold related products or any other products, securities or investments. This report doesnot, and should not be construed as acting to, sponsor, advocate, endorse or promote gold, any gold related products or any other products, securities or investments.

This report does not purport to make any recommendations or provide any investment or other advice with respect to the purchase, sale or other disposition of gold, any gold related products orany other products, securities or investments, including, without limitation, any advice to the effect that any gold related transaction is appropriate for any investment objective or financial situation ofa prospective investor. A decision to invest in gold, any gold related products or any other products, securities or investments should not be made in reliance on any of the statements in this report.Before making any investment decision, prospective investors should seek advice from their financial advisers, take into account their individual financial needs and circumstances and carefullyconsider the risks associated with such investment decision.

Issued by:

World Gold Council55 Old Broad StreetLondonEC2M 1RXUnited Kingdom

www.gold.org

Tel: +44 (0)20 7826 4700Fax: +44 (0)20 7826 4799

gold april 2010

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