GFMS
Gold Survey 2007 Philip Klapwijk Chairman, GFMS Ltd.
London, 4th April 2007
GFMS gratefully acknowledge the generous The Gold Survey Cover support from the following companies for this year’s Gold Survey and its two Updates The cover of Gold Survey 2007 features five Commerzbank Global Valcambi sa Tanaka Precious Metals Group www.pamp.com hundred 50 gramme Valcambi sa rectangular Precious Metals minted bars, twenty five 20 gramme Valcambi sa
World Gold Council Dubai Multi Commodities Barrick Gold Corporation JPMorgan Chase Bank round minted bars, five hundred 50 gramme Centre Tanaka KK minted bars and one 1 kilogramme, www.IBKCapital.com ScotiaMocatta www.standardbank.com www.newmont.com one 2 kilogramme and one 3 kilogramme Tanaka KK gold dumbbells. www.commodities.sgcib.com www.goldas.com Johnson Matthey www.goldfields.co.za
www.polyusgold.com www.natexiscm.com www.randrefinery.com www.nymex.com
40 Years of the Gold Survey GFMS Research Countries visited during the current research cycle
Gold Survey 2007 1 GFMS
The GFMS Group’s Unique Research Presentation Outline Capabilities & Programme • Gold Prices 18 Analysts + Consultants; full-time representation in UK, India, China, Australia. • Supply Not just desk-based: over 300 companies and organisations in 39 countries visited by our personnel in the last 12 months. • Demand Annual Gold, Silver and Platinum & Palladium Surveys. • Outlook Also, weekly, monthly, quarterly & bi-annual reports plus consultancy services across all the precious and base metals & steel.
US Dollar Gold Price Real and Nominal Gold Prices Weekly Averages (real price in constant 2006 terms) 740 DOLLAR 2005 2006 2007 Q1 1500 Real Price 1980’s record nominal Intra-Year 19.9% 19.2% 3.4% 640 annual average of Year-on-Year 8.6% 35.8% 17.3% 1200 $614.50 not quite matched last year but in real terms today’s prices
540 oz US$/oz 900 are still low! $/
US$/oz 440 US 600
340 300 Nominal Price 26-week moving average 240 0 Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- 02 02 03 03 04 04 05 05 06 06 07 3 6 9 2 85 8 4 7 0 03 6 197 197 197 198 19 198 1991 199 199 200 20 200 Source: GFMS Source: GFMS, Reuters EcoWin
The contango continued to grow in 2006 Euro Gold Price Weekly Averages 580 7% 12-month 12-month 40 EURO 2005 2006 2007 Q1 Contango (%) Contango (US$) Intra-Year 34.6% 8.4% 3.2% 6% 35 530 Intra-Year 34.6% 8.4% 3.2% 30 Year-on-Year 8.9% 34.1% 7.6% 5% 480 25 Euro/oz 4% 20 430
3% Euro/oz 15 380 Contango (%) Contango 2% 10 (US$) Contango 330 1% 5 26-week moving average 0% 0 280 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- 98 99 00 01 02 03 04 05 06 07 02 02 03 03 04 04 05 05 06 06 07
Source: LBMA Source: GFMS
Gold Survey 2007 2 GFMS
Gold Price Correlations (based on daily price changes)
06Q1 06Q2 06Q3 06Q4 07Q1 US$/Euro Rate 0.26 0.52 0.39 0.46 0.34 Supply US$/Yen Rate 0.13 0.46 0.21 0.36 -0.20 Silver 0.61 0.64 0.61 0.54 0.62 Oil (WTI) 0.29 0.33 0.13 0.14 0.00 GSCI 0.35 0.51 0.26 0.12 0.16 CRB 0.09 0.59 0.33 0.22 0.14
Source: GFMS, Reuters EcoWin
Mine Supply Database Gold Mine Production
• New GFMS web-based database. 2006 down 79 t 3000 Rest of World or 3.1% yoy • Over 100 companies analysed on a quarterly basis. S. Africa, USA, Australia, Canada • Level of data capture increased with throughput, grades, 2500 recoveries & cash costs all recorded on a quarterly basis. 2000 • Combined number of mines/projects currently held in database totals 785. 1500 tonnes • Summary details for projects extracted from feasibility or 1000 technical reports, including capex, sustaining capital, annual mill throughput. 500 • Calculates royalty rates internally. 0 • DCF analysis for operations/projects. 1980 1984 1988 1992 1996 2000 2004
Source: GFMS
Cash and Total Costs Mine Production (in money-of-the-day terms) • Decline of 79 tonnes or 3% y-o-y in 2006. Left output at a 650 600 2006: CC: $317/oz, up 17% yoy 10-year low. 550 TC: $401/oz, up 17% yoy • Losses in South Africa, Australia, Indonesia, the United 500 States and Canada. 450 Gold Price 400 • Latin America the only region to return a meaningful rise, US$/oz 350 Total Costs posting a 35 tonne or 7% increase. 300 250 • US dollar denominated cash costs rose by $45/oz versus 200 Cash Costs $160/oz rise in the gold price. Weighted average cash costs 150 $317/oz. Simple cash margins widened 66% y-o-y. 1996 1998 2000 2002 2004 2006 • GFMS forecast production to rise between 1%-2% in 2007.
Source: GFMS
Gold Survey 2007 3 GFMS
Above-Ground Stocks of Gold, end-2006 Change in Supply from Above-Ground Stocks Gold is not “consumed” like most commodities; stocks can be 2006 compared to 2005 available at the right price… 300 Above-ground Stocks, end 2006 = 158,000t 200
Jewellery 100 52% 0
tonnes -100
Lost & -200 Unaccounted 2% Official -300 Holdings Other 18% -400 Fabrication Official Sector Scrap 12% Private Investment Source: GFMS (Gold Survey 2007) 16% Source: GFMS
World Official Sector Gold Holdings Foreign Exchange Reserves at end-2006 at end-2006
Total: US$ 3.6 trillion Total: 30,375 tonnes CBGA 2 Japan Signatories 16% Taiwan 41% 7% United States China 27% 20%
CBGA 2 Signatories BIS 5% 1% China IMF 2% United States 11% Rest of World 1% Rest of World 18% 51% Source: IMF Source: IMF
Gold as a Percentage of Total Reserves* CBGA and Other Gold Sales Other 700 100% CBGA 90% 600 80% 75% 500 70% 400 60% 49% 50% 300
40% tonnes 30% 200
Gold % of Reserves 20% 11% 100 10% 2% 2% 1% 0 0% United CBGA 2 All Taiwan Japan China -100 States Countries** 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: IMF; *Total Reserves = Forex, Gold & Other Reserves; gold reserves valued at market prices **Excludes BIS & IMF, includes ECB; estimate based on IMF data “CBGA” refers to signatories to the Central Bank Gold Agreement “Other” refers to all other countries
Gold Survey 2007 4 GFMS
Regional Changes in Scrap Supply 2006 compared to 2005
120
100 80 Demand 60
tonnes 40
20 0
-20 Middle Europe East Asia North Other Indian SC East America
Source: GFMS
World Gold Fabrication Jewellery Fabrication: Winners and Losers Annual year-on-year change, tonnes (Figures represent year-on-year change, i.e. 2006 less 2005)
80 600 6 GDP Growth 400 30 North America 200 4 -20 Other Latin 0 America tonnes tonnes -70 -200 2 East Europe Asia -400 (%) Growth GDP Real -120 Indian S-C -600 0 -170 Middle 1991 1993 1995 1997 1999 2001 2003 2005 East Source: GFMS, IMF Source: GFMS
Fabrication Demand in 2006 GFMS’ Hedging Analysis • Collapse in jewellery offtake the key factor behind the
11% or 363 t drop in fabrication demand to 2,919 t. • GFMS enter all hedging transactions into both • Jewellery fabrication down by 428 t or nearly 16%. our hedging database and the Brady Trinity system. • Jewellery’s share of Total Demand fell to just 58%.
• Jewellery hard hit by dramatic rise in gold price plus • Trades are input on a quarterly basis by company, instrument, year of expiry and high volatility recorded in first half of the year. currency. Demand in second half was essentially flat y-o-y.
• Rising electronics and coin offtake the main drivers of • Using detailed market data provided by Société Générale, accurate deltas and other sensitivities the 11% increase in other fabrication. Générale, accurate deltas and other sensitivities are calculated.
Gold Survey 2007 5 GFMS
Net Market Impact of Producer Hedging Total Accelerated Supply from Producer Hedging
4 35 Delta adjusted book 450 Annual average of estimated at 1,364 tonnes 30 350 12-month contango at end-2006 Supply 3 250 25 150 20 50 2 tonnes -50 15 -150 10 contango US$/oz 1 -250 Demand (1000s) tonnes, end-year 5 -350 1 2 1 2 1 2 2 0 0 .H1 .H1 H1 9.H1 1 3 9 99.H200.H 00.H 0 01.H202.H 02.H 0 03.H204.H 04.H 05. 05.H206.H106.H 1994 1996 1998 2000 2002 2004 2006
* outstanding forward sales, loans and net delta hedge against positions Source: GFMS Source: GFMS
Producer Hedging in 2006 Investment in 2006
• Pace of de-hedging accelerated in 2006 with a 373 t reduction in
the delta-adjusted book. Figure represented 10% of total gold • Investor interest in gold rose markedly.
demand versus 2% in 2005. • A shift from a primarily buy-sided market in 2005 to healthy activity on both the buy and sell sides last year, drove implied • Gross basis – 438 t of de-hedging versus 65 t of new hedging. net investment down by 19% to 388 tonnes. Barrick’s buy back of the Placer Dome book in the first half • Speculative activity on the main commodity exchanges accounted for 62% of gross de-hedging. declined over the year.
• Noteworthy contributions also made by Newcrest, AngloGold • In contrast, activity in the OTC and physical markets as well Ashanti and Gold Fields. as in the gold ETFs grew. • Following low levels of de-hedging in the second half activity has • A significant portion of investor activity in gold came through picked up again. Key developments in Q1 2007 include the commodity basket products. Western Areas buy back completed by Gold Fields, Barrick’s announcement of the elimination of its fixed price corporate sales • The bulk of interest came from institutional players and high contracts and more recently, news that Buenaventura had bought net worth individuals, while the impact of small retail back 25% of its outstanding book. investors’ activity remained marginal.
Gold Exchange Traded Funds Fund involvement in Comex & CBOT futures declined over the year Gold Exchange Traded Funds (non-commercial & non-reportable positions in Comex & CBOT futures) Net 260 tonnes 700 added in 2006 250 750 Goldist ) Average size of net “fund” long. ZKB Gold 2002 65k contracts 600 iShares COMEX Gold Trust 2003 104k contracts streetTRACKS Gold Shares 200 Gold Price 500 NewGold Gold Debentures 2004 117k contracts 650 GBS LSE 2005 132k contracts 400 GBS ASX Central Gold Trust 150 2006 135k contracts Central Fund of Canada 2007 Q1 150k contracts tonnes 300 550
200 100 US$/oz 100 450 0 50
Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Netpositions (contracts, thousands 03 03 04 04 05 05 06 06 07 0 350 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Source: Respective ETF issuers Source: CFTC
Gold Survey 2007 6 GFMS
While OTC activity in 2006 was markedly higher y-o-y US Mint Bullion Coin Sales (average daily LBMA clearing turnover) The launch of the US Mint’s new 9999 Buffalo coin last summer 30 Surge in turnover during April to July period. provided some boost to coin offtake. Nevertheless, demand remained far short of its late-1990s highs. 25 25 650 600 illions) 20 20 550 500 15 15 450 Gold Price
tonnes 400 10 US$/oz 10 350 5 300 250 Ounces Transferred(m 5 0 200 0 Q1- Q1- Q1- Q1- Q1- Q1- Q1- Q1- Q1- Q1- Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 97 98 99 00 01 02 03 04 05 06 Source: LBMA Source: US Mint
Supply Forecast
• Mine Production expected to rise by 1%-2%. Losses in the Americas partly offsetting gains in Africa, Oceania and the CIS. Price Outlook • Official Sales expected to continue at relatively low levels, due to CBGA signatories underselling their quota and small scale purchases outside the group.
• Due to much of the “loose” jewellery having already been mobilised, as well as increasing price acceptance, scrap is expected to be significantly less responsive to rising gold prices.
• In spite of higher prices, Total Supply expected to fall again, albeit at much lower rate than the 5% in 2006.
Demand Forecast Investment Issues
• Investor interest in gold is expected to remain strong • Outlook for the US dollar remains poor.
throughout this year and probably through into 2008. • Unwinding of the “twin deficits” unlikely in the medium term. • Jewellery expected to fall y-o-y but by smaller amount than in 2006. Demand will continue to be stronger on price dips; as a result price floor has moved up from $580s to comfortably above $600.
• Other fabrication expected to continue growing, albeit at a slower rate.
• De-hedging expected to be concentrated in H1 (again) with a return to (lower) levels closer to the run rate in H2. Base case 210-260 t but scope for higher figure if further buy- backs.
Gold Survey 2007 7 GFMS
US$ Exchange Rate and the “Twin” Deficits Investment Issues
120 2% • Outlook for the US dollar remains poor. • Unwinding of the “twin deficits” unlikely in the medium term. 0% 110 Federal Budget • US economy highly leveraged on an increasingly problematic housing Deficit/Surplus** market (severe downturn likely in GDP growth ). -2% 100 -4% Index 90 Current Account
-6% % of nominalGDP Deficit/Surplus* 80 Nominal Effective -8% Exchange Rate 70 -10% 2001-Q1 2002-Q1 2003-Q1 2004-Q1 2005-Q1 2006-Q1
*As the actual quarterly GDP data for 2006 was not available at the time of preparation, annualised seasonally adjusted data was used for 2006 figures. **Federal budget deficit is shown on an annual basis. Source: Reuters EcoWin
US Consumers’ Leverage to the Investment Issues Housing Market at Historical High • Outlook for the US dollar remains poor.
14 80% • Unwinding of the “twin deficits” unlikely in the medium term.
12 Consumer Credit • US economy highly leveraged on an increasingly problematic housing 75% market (severe downturn likely in GDP growth). 10 % of Total Household Debt • Interest rate spread between the US Dollar and the Euro has fallen $ Accounted for by Home Mortgages 8 over the last few months (and expected to narrow further). 70%
trillion trillion 6
4 65% 2 Home Mortgages 0 60% 1980 1984 1988 1992 1996 2000 2004
Source: Reuters EcoWin
Short term interest rates: US Dollar & Euro Investment Issues
• Outlook for the US dollar remains poor: 200 • Unwinding of the “twin deficits” unlikely in the medium term.
• US economy highly leveraged on an increasingly problematic housing 100 US economy highly leveraged on an increasingly problematic housing market (severe downturn likely in GDP growth).
• Interest rate spread between the US dollar and the Euro has fallen 0 over the last few months (and expected to narrow further).
• Growing investor appetite for “safe haven” assets due to the -100 Spread between the worsening general economic and political backdrop: Federal Reserve and ECB short term rates • US, and potentially also, global economic slow-down is looking more Spread (basis points) (basis Spread -200 probable.
• Financial markets expected to become increasingly volatile; stock -300 prices to decline and risk premia to rise. Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 • Tensions in the Middle East are likely to grow rather than ease. Source: Reuters EcoWin
Gold Survey 2007 8 GFMS
Investment Issues 2 End-Year Value of Non-Commercial & Non-Reportable • Investments in commodities remain in the focus of investors. Positions in 13 Commodity Futures 160 Tremendous growth in investment in 140 commodities in recent years BUT the 120 absolute level still is tiny compared to 100 holdings of stocks, bonds and cash. 80
US$ Billions 60 40 20 0 1986 1990 1994 1998 2002 2006
Source: CFTC, Reuters EcoWin
Investment Issues 2 Equity Prices Could Fall Further Investment Issues 2 Economic downturn should see the S&P 500 P-E ratio fall • Investments in commodities remain in the focus of investors. to well below its long-term average
• Outlook for “traditional” investments is questionable. 50 45 40 35 30 25 20 15 10 5 1954 - to date (March 2007) average = 17.3 0 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004
Source: Reuters EcoWin
30-year Government Bond Yields Investment Issues 2 Yields remain low, despite signs of inflationary pressure – could bond prices fall in the months to come? • Investments in commodities remain in the focus of investors. 7 • Outlook for “traditional” investments is questionable. 6 • In contrast, commodity prices remain strong.
) US 5
4 Euro Area
3
30-year bond yield (% yield bond 30-year 2
1 Japan
0 Jan-00 Jan-02 Jan-04 Jan-06 Source: Reuters EcoWin
Gold Survey 2007 9 GFMS
GSCI and CRB Indices: Monthly Averages Investment Issues 2
600 • Investments in commodities remain in the focus of investors.
• Outlook for “traditional” investments is questionable. 500 GSCI • In contrast, commodity prices remains strong. 400 • Investor involvement in the sector is still marginal Æ potential CRB for further inflows is significant. 300
• This would most likely be beneficial to gold investment 200 demand. GSCI & CRB Indices
100
0 Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07
Source: Reuters EcoWin
Investment Issues 2 Price Outlook • Investments in commodities remain in the focus of investors. • Low-field official sector sales, continued producer de-hedging and sustained investment demand create a positive environment for the • Outlook for “traditional” investments is questionable. gold price.
• In contrast, commodity prices remains strong. • Demand from the jewellery industry will soften but perhaps not by too much and be concentrated on price dips. This will provide • Investor involvement in the sector is still marginal Æ potential support, especially during periods of investor liquidations. for further inflows is significant. • Scrap supply expected to be less responsive to a rising gold price. • This would most likely be beneficial to gold investment demand. • A jump in investor interest, triggered by geopolitical or global economic events could see the yellow metal move towards last • Possible caveat: a global economic slow down could hurt year’s high in the second half of 2007. Should the rally continue in commodity prices and cause liquidations in gold. 2008, a new all time high is not improbable. • Eventually prices are expected to retrace down towards the metal’s • In the longer term, gold is expected to escape any such trend, marginal cost of production, although this is not expected in the driven by safe haven buying. short or medium term.
GFMS Forthcoming Events Disclaimer
The information and opinions contained in this presentation have Q 25 Apr. 2007: Platinum & Palladium been obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made that such Survey 2007 information is accurate or complete and it should not be relied upon as such. This presentation does not purport to make any recommendation or provide investment advice to the effect that Q 23 May 2007: World Silver Survey 2007 any gold related transaction is appropriate for all investment objectives, financial situations or particular needs. Prior to making any investment decisions investors should seek advice from their Q 13 Sept. 2007: GFMS Precious & Base advisers on whether any part of this presentation is appropriate to their specific circumstances. This presentation is not, and should Metals Seminar not be construed as, an offer or solicitation to buy or sell gold or any gold related products. Expressions of opinion are those of GFMS Ltd only and are subject to change without notice.
Gold Survey 2007 10