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Trading futures contracts and commodity options involves substantial risk of loss, and thus is not appropriate for all investors. Investors should carefully consider the inherent risks of such an investment in light of their fi nancial condition. 1Page

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May 1, 2015

• Indian gold demand trending upward due economic growth & Rupee strength.

• Reduced exploration & capital investment to reverse world production trend.

• Investment prospects to improve as the US dollar wanes and defl ationary concerns subside.

• Central bank gold buying by China.

Gold: A Long-Term Buy off of Classic Physical Fundamentals!

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For the better part of two decades, the gold trade has been obsessed over the potential for safe haven and fl ight to quality buying, and in the process it has largely discounted classic physical fundamentals. Consequently, investment and safe haven interest basically became all-encompassing, with most of the long interest ending up in a hunt for anxiety and fear.

Clearly, the safe haven bulls had plenty of reason to crow between 2007 and 2011, as that period saw some of the most anxious economic times since the Great Depression. Add to that the concerns over default in Greece, Italy and Spain, and the argument for gold as a safe haven instrument seems to justify the run-up to $1,900 in 2011.

Prices have fallen by a surprising $730 per ounce since that peak, primarily off what appeared to be a retrenchment in physical demand from India and China but also because of an exodus of investment holdings held throughout the rest of the world. Some of the declines were also the result of slumping jewelry and industrial demand in the wake of the failed global recovery of the last three years. For gold holdings in exchange-traded funds, aggressive liquidation began in earnest at the beginning of 2013. Th at liquidation appeared to run its course by the end of 2014. However, in order to indicate a reversal in the liquidation trend, it might require a series of readings back above 49.2 million ounces!

One can hardly blame investors for dumping gold following the 2011 peak, as the trade was facing defl ationary expectations, rising production, negative investment demand, and dismal economic expectations. But now the Dollar appears to be reversing, physical supply could be declining, Indian demand could be on the increase, and China could be in the process of adding signifi cantly to its central bank reserves.

Declining Physical Supply Already Baked into the Cake with Sub $1,160 Pricing!

Rising wage costs, maturing mines, deeper (and more expensive) mining operations and a dramatic reduction in capital expenditures and exploration by key mining companies has already set the tone for a retrenchment in global gold supply before the end of this year. Th e decline in South African gold production is already well known, and the industry could see wage costs go up further. Th e current contract between the mining industry and the trade unions will expire in June, and given last year’s sharp jump in platinum wages, we suspect gold mine workers will be fi rm in their demands for an increase as well.

It would be an amazing feat to resurrect South African production without a significant increase in prices. South African gold

THE HIGHTOWER REPORT SPECIAL REPORTMay 1, 2015

Futures Analysis & Forcasting

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World Total Consumer Jewelry Gold Demand

Source: GFSM

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Major Global Gold Producers

From being the world's largest gold producer 10 years ago, South Africa is

now well behind the pace!

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South African Gold Production

Rising Production Costs With Mines That Are Going Deeper and Deeper

Underground Have Led To A Steady Longer-Term Decline In Production





production has not seen a single annual increase since 2000, and gold prices have been periodically trading within striking distance of fi ve-year lows. And with South African government offi cials working toward forced divestitures of mining ownership from non-indigenous peoples, the incentive to pour investment capital into mining operations could further diminish.

Th e trade also won’t be able to bank on scrap supply, which fell to its lowest level in seven years in 2014. Even lower prices this year would insure a continuation of that trend.

We also expect to see less supply coming from forward hedge contracts (known as implied supply), as high-cost miners won’t be interested in locking-in losses or the minimal profi ts that would come with gold trading around $1,200 per ounce.

Given the reduction in defl ationary concerns, a possible reversal in the dollar, reduced production and more of it being unhedged, gold prices could become more responsive to bullish factors. Gold industry forecasts generally predict that production will start to decline later this year. However the impact on gold prices will likely be determined by what happens from the demand side of the equation.

Demand Prospects Uneven but Generally Tilted toward Improvement

Jewelry fabrication represents a very signifi cant, 57% of world demand for gold, which suggests that an improvement in the global economy is needed for demand to show a signifi cant increase. However, the 2015 outlook is slightly more complex than might appear. For instance, the turn in the Dollar has improved the purchasing power of non-dollar consumers, even if global economic growth hasn’t been too impressive. On the other hand, the most important factor could be where the strongest growth is seen.

India was at one time and might soon be the world’s largest gold consumer, as the economy there claws its way towards a 10% growth rate, which is stellar when compared to the US and China. Also of importance is a national eff ort to use the Indian peoples’ appetite for gold to foster investment into normal channels. Indian leadership appears to have given up trying to discourage gold ownership and is instead considering allowing banks to hold gold and count it as reserves. We have to wonder what would happen to Indian demand if the government were to facilitate gold-investment instruments. Th at could remove the domestic premium to obtaining gold, which in turn could push demand upward.

Going into the 2014 and 2015 lows, the trade was decidedly downbeat on Chinese gold demand, as consumption fi gures from that nation

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World Old Gold Scrap Supply

Source: GFSM

Sharp drop in last 2 years may put pressure in mining production to

match global demand!

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World Total Gold Mining Production

Source: GFSM

Rising costs, deeper mines and lower capex could leave 2014 as a "top" for

gold mining output!

Jewelry Fabrication 57%

Electronics 7%

Other Industrial / Medical 3%

Net Official Sector 9%

Bars 19%

Coins 5%

World Gold Demand by Sector

Source: GFSM





peaked at 1,356 tons in 2013 and had fallen sharply to just 820 tons by 2014. Economic slowing and unattractive prices had justifi ed the sharp slide. While China’s demand for most physical commodities has slowed along with their economy, there have been signs that activity and offt ake associated with the Shanghai Gold Exchange is already signaling a revival. We have to wonder if some of the activity is associated with an ongoing build-up of gold reserves by the Peoples Bank of China.

For those that ask why China’s central bank would want to build it reserves, the reasons are numerous:

1) China wants to be world-class in all measures, and its gold holdings in both tonnage and percentage of overall reserves are embarrassingly low. While no one knows China’s actual holdings, the last offi cial acknowledgement put them at only 1,800 tons, which pales in comparison to the US holdings 8,100 tons.

2) China is moving to become a major player in global fi nancial circles and has applied for the Yuan to be included in the IMF’s basket of reserve currencies. In order to become a reserve currency, China will have to provide proof of its central bank holdings, and that might uncover their reserve building eff orts.

3) China also wants to play a major role in the Asian Development Bank, and would also call for an audit of Chinese reserve holdings.

Gold demand from China is expected to make a cyclical recovery, even if it fails to quickly reach its 2013 peak. More importantly, seeing confi rmation that the world’s fl uid gold supply has been reduced by 1,800 tons due to Chinese central bank buying might give way to expectations that their reserves need to climb to the levels held by the US for them to gain the “top step” in fi nancial market circles.

Key Fundamental Infl ection Points to Watch for

• Gold ETF holdings rising above 49.2 million ounces.

• Two straight months of rising Chinese gold imports.

• An increase in the value of the Rupee to 62 per US dollar (from the current 63.5) would signal a robust return of purchasing power for Indian gold buyers.

• Oil prices back above $65 could spark a shift in viewpoint from defl ation back towards at least a minor infl ationary pattern.

• A decline in the US Dollar Index below 90 would improve global purchasing capacity.

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China vs. India Annual Physical Gold Demand

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World Central Bank Net Gold Purchases

A major shift in central bank behavior during the past few years.

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Central Bank Gold Holdings - Top 10

Data Updated: Apr 2015Source: World Gold Council

If the Yuan is to become a major global currency, Chinese central bank gold

holdings will need substantial growth!



Technical Signs of a Long Term Low in Gold

Th e gold market appears to have put in a major low (at $1130.40 on the weekly charts) in November 2014. Th is received further confi rmation when the subsequent break into the March low held above that level and when the market exhibited weekly reversal on an outside range for the week ending March 20th.

Key retracement support for the November 2008 to September 2011 bull trend comes in at $1,161.10, with resistance at $1,235.00 and then $1,264.30. A move back through those levels would turn the trend up. Another bullish indicator would come with a move through downtrend channel resistance, which would occur at $1,246.90 for the week of May 4th, $1,242.80 for the week of May 11th, $1,238.80 for the week of May 18th and $1,234.70 for the week of May 25th.

For August Gold, the market has consolidated in the $1,224 to $1,145 zone, and the 100-day moving average has fl at-lined for much of the year in the $1,209 to $1,217 range. A move above the 100-day moving average, above $1,230.50 and especially above $1,259.90 (50% of the 2014 range) would all be considered bullish and would help shift the trend from down to up. Support seems to be developing at $1,174.80 and $1,165.70.

The gold market appears in the process of setting up another signifi cant move higher. Signs of accumulation occurred from early December 2014 into the late January high, with open interest during that time frame climbing 23%. Th e boost in buying activity lift ed the August contract above $1300.00.

Th e speculator position as reported in the weekly Commitments of Traders reports is a good barometer of trader sentiment and can be used to determine whether the market is nearing a liquidated status. In the April 21st report, the combined large and small speculator net position in gold came to 115,936 contracts. We would recommend buying the market once liquidation that brings the net long positioning down to the 50,000-100,000 contract range. A net long positon down near 100,000, as opposed to recent levels around 150,000, would also reduce the stop-loss selling threat.

Price momentum indicators became technically oversold during the February/March downdraft , with the RSI falling to its most oversold level since April 2014. Th e monthly nearby gold chart shows possible upside targets of $1433.70 and $1524.40.



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Gold ETF Daily HoldingsMillion Troy Ounces

The 49 Million Ounce Level Will Be A Key Pivot Point For Investor Interest.

Suggested Trading Strategies:

1) BUY August gold futures at $1,159, with an initial objective of $1,306. Risk the trade to a close below $1,132.

2) BUY a September Gold $1,185 call for $36.00. Use an objective of $79.00 and risk the trade to a close below $18.00.

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Gold - COT - Futures and OptionsNon-Commercial & Non-Reportable Combined Net Position

Number Of Contracts



Th e information in this report may be considered dated upon its release and should not be considered interpersonal advice. Th is report is merely an opinion on the market and is a refl ection of conditions as of its publication. Market conditions change! Traders should not consider entering posi-tions without their own independent analysis of the market’s current situation, nor without further consideration of any changes to the information contained herein that may have occurred since this report was written. Th e authors are not responsible for any verbal or written claims and opinions that might be provided in conjunction with this report. Th e trading suggestions contained herein have been provided merely as a general guide and only for the purpose of quantifying the authors’ opinions.

Th is report includes information from sources believed to be reliable but no independent verifi cation has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. Th is report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon. Th e risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their fi nancial condition. Any reproduction or retransmission of this report without the express written consent of Th e Hightower Report is strictly prohibited.

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