GFMS GOLD SURVEY 2017 Q4 Update & Outlook 50

50 YEARS GFMS GOLD SURVEY 2017 Q4 Update & Outlook TheThe covercover ofof thethe GFMSGFMS GoldGold Survey 2012017 6 is sponsored byby thethe followingfollowing companies:companies:

TANAKA PRECIOUS METALS

Tanaka Precious Metals is Japan’s leading precious metals refiner and manufacturer. Although best known internationally for its high specification industrial products, used in various applications ranging from semiconductors to communications, the company is also a producer and trader of a wide range of gold bullion bars and coins. Tanaka bars are acceptable “good delivery” on the London gold market.

Valcambi is a leader in precious metals refining and operates one of the world’s largest and most efficient integrated precious metals plants situated on a 33 hectare site, at Balerna, Switzerland. We are one of the world’s largest manufacturers of minted ingots. Reacting to the demands of investors in different markets around the globe we are continuously carefully developing within the size range from 0.5 g to 1000 g, gold, silver, platinum and palladium minted bars in different forms and new designs. For our clients, according to their wishes we customize individually obverse and reverse of the bars, certificates and tailored packaging solutions. GFMSGFMS GoldGold MarketMarket Research All products produced in our foundry and minting facilities are certified by our laboratory, carefully inspected by our operators, individually packed and controlled before shipment. The Hallmark is not only a guarantee for quality of Swiss workmanship, it guarantees also the fineness of the most sought after bars in the world, desired by precious and Forecasts metals connoisseurs and investors alike. and Forecasts A Valcambi manufactured bar is not only sold at an outstanding price but is synonymous with unique craftsmanship, guaranteed fineness, transparency and reliability. SEEKSEEK MORE MORE

Dig deeper into the gold market with GFMS research GFMS gold pages include: Dig deeper into the gold market with GFMS research GFMS gold pages include: and forecasts on Thomson Reuters Eikon. Use the • Historical supply and demand statistics andnew forecasts GFMS gold on Thomson pages to Reutersquickly understand Eikon. Use thethe key • • HistoricalForecasts supplyof supply, and demand demand and statistics price new GFMS gold pages to quickly understand the key drivers behind market movements. See which factors • Forecasts of supply, demand and price driversdrove behind price performance market movements. in the past, See what which will factors drive • Field research reports on key markets drovethe evolutionprice performance of these markets in the past, in the what future, will and drive what is • • FieldExclusive research analyst reports commentaries on key markets giving expert thehappening evolution inside of these various markets sectors in the of the future, industry and today.what is • Exclusiveinsight on analyst news and commentaries market developments giving expert happening inside various sectors of the industry today. insight on news and market developments

To find out more contact us on [email protected] ToFor find more out informationmore contact visit us thomsonreuterseikon.com on [email protected] Cover designed by Valcambi and executed by BtoB Creativity, Coldrerio, Switzerland. For more information visit thomsonreuterseikon.com © 2015 Thomson Reuters. S019825 03/15. © 2015 Thomson Reuters. S019825 03/15. TheThe covercover ofof thethe GFMSGFMS GoldGold Survey 2012017 6 is sponsored byby thethe followingfollowing companies:companies: The GFMS Gold Survey 2017 and its Quarterly Updates have been kindly supported by the following companies

MAJOR SPONSORS

TANAKA PRECIOUS METALS Produits Artistiques Metaux Precieux YLG Bullion

The Perth Mint Australia Italpreziosi SPA

Valcambi is a leader in precious metals refining and operates one of the world’s largest and most efficient integrated precious metals plants situated on a 33 hectare site, at Balerna, Switzerland. We are one of the world’s largest manufacturers of minted ingots. Reacting to the demands of investors in different markets around the globe we are continuously carefully developing within the size range from 0.5 g to 1000 g, gold, silver, platinum and palladium minted bars in different forms and new designs. For our clients, according to their wishes we customize individually obverse and reverse of the bars, certificates and tailored packaging solutions. GFMSGFMS GoldGold MarketMarket Research All products produced in our foundry and minting facilities are certified by our laboratory, carefully inspected by our Tanaka Precious Metals valcambi suisse operators, individually packed and controlled before shipment. The Hallmark is not only a guarantee for quality of Swiss workmanship, it guarantees also the fineness of the most sought after bars in the world, desired by precious and Forecasts metals connoisseurs and investors alike. and Forecasts A Valcambi manufactured bar is not only sold at an outstanding price but is synonymous with unique craftsmanship, guaranteed fineness, transparency and reliability. SEEKSEEK MORE MORE

• Global Review and Outlook 5-6 • China 7-8 • Jewellery Consumption Table 9 • India 11-12 • United States 13 • Retail Investment Table (bars and coins) 14 • Mine Supply & Producer Hedging 16-18 • The Federal Reserve in 2017 and Outlook for 2018 19 • Switzerland 20 • UAE 21 • Bitcoin 22-23 • Thailand 24 • Vietnam 25

PRODUCED BY

Rhona O’Connell, Head of Metals Research & Forecasts Cameron Alexander, Manager, Regional Demand Saida Litosh, Manager, Regional Demand Sudheesh Nambiath, Lead Analyst Johann Wiebe, Lead Analyst Samson Li, Senior Analyst Dante Aranda, Senior Analyst Natalie Scott-Gray, Analyst Zen Chan, Analyst GFMS GOLD SURVEY Q4 2017

GLOBAL REVIEW AND OUTLOOK

• Gold prices slipped to a near five-month low by mid-December ahead of the FOMC meeting, where the U.S. Federal Reserve raised interest rates for the third time in a move widely expected by the markets. Gold recovered most of earlier losses in the second half of the month, helped by a weaker U.S. dollar, finishing the year on an upbeat note. GFMS GOLD SURVEY

• Q4 physical demand increased over the previous quarter, although it was only slightly higher year-on-year. This, along with lower mine production, saw the physical surplus shrink to just three tonnes.

In the final quarter of 2017 the gold market’s attention shifted to the FOMC December meeting and the U.S. tax reform. Gold prices came under renewed pressure amid dollar strength in the run up to the meeting, where the Fed was widely expected to lift its benchmark interest rate, sending gold to a five-month low of $1,241/oz (based on PM fix). The final weeks of the year, however, saw gold prices recover the bulk of previous losses as the dollar weakened against other major currencies after the Fed reiterated that a gradual path of rate increases remained appropriate even in light of the new tax reform. With improving economic sentiment, sustained equity market strength and growing risk appetite investors’ interest in gold remained relatively lacklustre in 2017, and the final quarter was not an exception in that sense. Western investors reduced their gold ETF holdings by five tonnes in Q4; while this was a much better performance compared to Q4 2016, net purchases for 2017, standing at 170 tonnes, were still considerably lower compared to a year earlier.

Retail investment, comprising of coin and bar demand, slumped by 11% year-on-year in the final three months of 2017, largely driven by a sharp decrease in coin demand in the western hemisphere, particularly from the United States. Physical bar investment slipped by 6% compared to Q4 2016 on the back of lower demand from Asian retail investors, led by India, where gold bar demand recorded a double digit percentage decline due to frantic buying during the same period last year, following the government’s demonetisation policy.

WORLD GOLD SUPPLY AND DEMAND

(tonnes) Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 YoY % Supply Mine production 820 760 793 845 838 750 799 842 823 -1.8% Scrap 293 346 321 346 290 326 304 306 290 0.2% Net Hedging Supply 19 57 21 -10 -36 -17 -5 8 -17 n/a Total Supply 1,131 1,164 1,135 1,181 1,092 1,059 1,098 1,156 1,096 0.4% Demand Jewellery Consumption 640 425 408 435 604 451 497 444 583 -3.4% Jewellery Fabrication* 621 451 439 470 542 535 538 523 556 2.6% Industrial Fabrication 88 86 88 89 92 92 92 92 93 1.3% ...of which Electronics 61 61 64 63 66 67 67 66 67 1.4% ...of which Dental & Medical 8 7 7 8 7 7 7 8 7 -1.7% ...of which Other Industrial 19 17 17 18 18 18 18 18 18 2.3% Net Official Sector 120 47 37 76 98 49 85 115 132 35.7% Retail Investment 320 246 234 213 350 269 233 216 312 -10.9% ...of which Bars 244 192 174 165 256 207 174 157 241 -5.9% ...of which Coins 75 54 60 49 95 61 60 59 71 -24.4% Physical Demand 1,148 830 798 848 1,081 946 947 946 1,093 1.1% Physical Surplus/Deficit -17 334 337 334 11 114 151 210 3 -75.1% ETF Inventory Build -68 336 234 114 -158 109 36 30 -5 -96.9% Exchange Inventory Build -15 15 76 40 -45 -5 -13 3 14 n/a Net Balance 66 -16 27 180 213 10 127 176 -7 -103.2% Gold Price (London PM, US$/oz) 1,106 1,183 1,260 1,335 1,222 1,219 1,257 1,278 1,276 4.4% Source: GFMS, Thomson Reuters *Jewellery Fabrication is used in the collation of the Physical Surplus / Deficit and Net Balance Totals may not add due to independent rounding; year-on-year changes are based on absolute numbers, not on the rounded figures displayed. Net producer hedging is the change in the physical market impact of mining companies’ gold loans, forwards and options positions.

5 GFMS GOLD SURVEY Q4 2017

Q4 2017 BALANCE COMPARED TO Q4 2016 2017 BALANCE COMPARED TO 2016

Increase in Surplus/Reduction in Deficit Increase in Surplus/Reduction in Deficit Reduction in Surplus/Increase in Deficit Reduction in Surplus/Increase in Deficit 300 900 +85.7 13.3 +38.1 +3.6 +0.5 800 +355.6 –13.9 250 -1.2 –76.6 -14.3 700 –86.0 200 –34.8 600 150 –123.5 -59.0 500 Tonnes Tonnes 100 400 300 50 –251.6 200 0 -152.7 100 GFMS GOLD SURVEY -50 0 Q4 Retail Miners Scrap Ind Jewellery OS Exchange ETFs Q4 2016 ETFs Exchange Retail Ind Scrap Miners OS Jewellery 2017 2016 Invest Fabrication Stocks 2017 Stocks Invest Fabrication Source: GFMS, Thomson Reuters Source: GFMS, Thomson Reuters

It is worth stressing that not everything looked gloomy; the final quarter of 2017 saw a strong rebound in buying from the official sector, as Russia bought strongly on lower prices, particularly in the final two months, further supported by steady purchases from the Turkish central bank. Net central bank purchases recorded a gain of 36% year-on-year and, at 132 tonnes, it was the highest quarterly result since Q3 2015. For 2017 as a whole, the official sector remained an important source of demand for gold and was considerably higher year-on-year, although in absolute terms it was still below the unprecedented levels of previous years.

Jewellery fabrication was up by 3% compared to Q4 2016, with all the major regions recording year-on-year gains. However, if we strip out exceptionally low offtake in 2016, it marked the lowest Q4 outcome since 2012. Among the largest consumers, jewellery demand in India increased by 8% in the final quarter, helped by a surge in sales during auspicious Dhanteras and lower prices later in the year, resulting in fresh restocking by jewellery fabricators. That said, this was a comparison against a very low base in 2016 and Q4 offtake was in fact down by some 12% when compared to Q4 2015. Chinese demand slipped by 2% year-on-year, with ongoing losses in the pure gold segment as consumer preferences continued to shift towards more fashionable, but lower gold content pieces. It is worth adding that after posting double-digit percentage declines on average since its 2013 peak, China’s jewellery offtake appears to have finally stabilised in 2017. Physical demand was up 16% from the prior quarter and slightly higher year-on-year; however, if we keep out the exceptional situation in 2016, it was the lowest Q4 result since 2011. Meanwhile, supply was broadly unchanged for the quarter as lower mine production was offset by reduced hedging activity, while scrap volumes remained flat year-on-year.

OUTLOOK

Gold prices started 2018 on an upbeat note, benefiting QUARTERLY PHYSICAL DEMAND & INVERTED ETF BUILD from a sinking dollar on softer economic data and Turkish vs US gold price concerns that the United States may pull out of NAFTA. ETF Inventory Build Inverted, LHS 1,750 We believe that the geopolitical climate and equity 500 Physical Demand, RHS markets will continue to support gold’s role as a risk hedge. In the physical markets, Indian demand is 1,500 250 set to remain at levels similar to 2017, while Chinese

investment demand will likely to pick up if we see 1,250 Tonnes gold’s price momentum going forward. We expect gold 0 Tonnes prices to average $1,360/oz and hit a 2018 peak of 1,000

over $1,500/oz later in the year. Our forecast discounts -250 three Fed rate hikes, although a potential overheating 750 from the effect of the new tax reform could lead to more -500 500 aggressive tightening, limiting gold’s upside. Further Q1-2010 Q1-2012 Q1-2014 Q1-2016 details and GFMS one and three year forecasts are Source: GFMS, Thomson Reuters available on Thomson Reuters Eikon.

6 GFMS GOLD SURVEY Q4 2017

CHINA

• Gold demand from the jewellery sector retreated by a marginal 2.1% in the final quarter, to a total of 167 tonnes. Total fabrication volume amounted to 615 tonnes for the 2017 full year, a 3.4% annual decline from the 2016 volume, and 57% of its peak level in 2013. GFMS GOLD SURVEY

• While gold bar investment has been expanding from the traditional channels to online trading platforms in the last two years, the higher convenience in buying also met with convenient selling. Therefore we estimate that total net investment on these platforms remained relatively small scale in 2017.

China’s total fabrication volume amounted to 615 tonnes for the 2017 full year, compared to the annual average of 589 tonnes in the last decade. After falling at a compound annual return of -16% from 2013 to 2016 since it reached its peak in 2013, it seems that China’s jewellery sector may finally have stabilised in 2017, with our initial estimates suggesting a fall of just 3.4% from the 2016 level. While demand for gold from the domestic jewellery market only fell by a marginal 2.1% in the final quarter, we believe the relatively encouraging number was mainly due to the optimism of the retailers towards the consumption sentiment in the final quarter, and they decided to stock up inventories. This is a sensible business strategy, especially given that sales in the third quarter recorded year-on-year growth, so retailers were banking on the strong momentum being able to carry forward to the fourth quarter. However, retail sales disappointed somewhat, and jewellery consumption fell 8.8% in the final quarter, demonstrating that while fabrication was relatively strong, consumption lagged and retailers were stuck with higher level of inventories than they would have liked.

As expected, the pure gold segment continued to suffer as consumers continued shifting their tastes, looking for more fashionable designs. Therefore, the non-pure gold pieces (carat) continued to experience strong growth, particularly in the fourth quarter. We estimate that in the first three quarters fabrication volume of non-pure gold pieces grew approximately 25% on an annual basis. This growth further accelerated in the fourth quarter, growing by an estimated rate of over 30% year-on-year. However, we estimate that the non-pure gold pieces only made up 13% of the whole gold industry in 2017. The pure gold segment, which has the lion share of the market, continued to suffer.

While yellow gold continued to be the most popular item in the carat segment, the production has been shifting from the 18 carat to the 22 carat purity. There are always quality problems in the 18 carat yellow gold pieces, in that the yellow colour would easily fade. With higher gold purity in the 22 carat, it seems the colouring issue has been tackled accordingly. As a result, rose gold has been becoming an important segment in the 18 carat sector, while white gold hardly gained any traction because the general taste of consumers who still do not like white colour jewellery.

CHINA JEWELLERY CONSUMPTION & RETAIL INVESTMENT SGE WITHDRAWALS

SGE Monthly Withdrawal 350 300 40 Jewellery Consumption Au(T+D) Monthly Average Premia Retail Investment 300 35 250 30 250 200 25

200 US$/oz 20 150 Tonnes 150 Tonnes 15 100 100 10 5 50 50 0 0 0 -5 Q1-12 Q1-13 Q1-14 Q1-15 Q1-16 Q1-17 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Source: GFMS, Thomson Reuters Source: GFMS, Thomson Reuters

7 GFMS GOLD SURVEY Q4 2017

After somewhat sluggish demand for gold bars in the first three quarters, demand finally picked up in the fourth quarter, especially after the Federal Reserve raised interest rates in December. The public consensus was that the gold price would likely bottom after the event, and thus there was a small scale gold rush in the market, leaving some retailers’ cupboards empty. It was probably too late to make a real significant impact for the year as a whole, however. According to our initial estimates, the country’s bar demand amounted to 215 tonnes in 2017, a 9% year-on-year decrease.

Chinese gold imports from Hong Kong and Switzerland, which typically contribute over 85% of total imports in any month, amounted to 81 and 75 tonnes respectively in October and November. In the first eleven months of 2017, only three months (March, April and June) recorded year-on-year increases in import volumes from these two regions, with the rest all recording annual declines. Accumulatively, China imported a total of 894 tonnes of gold from Hong Kong and Switzerland, an 8.5% decline from the 978 tonnes imported in 2016. GFMS GOLD SURVEY

The annual average of these Chinese gold premia was $9.8/oz in 2017, compared to $6.4/oz in 2016. Outside November ($13/oz) and December ($32.5/oz), Chinese gold premia averaged only $2.7/oz in the first ten months of 2016, dragging down the yearly average. The sudden surge in the gold premia in the last two months of 2016 was mainly due to the sudden depreciation of the yuan, which lost 2.5% of value against the dollar during that period. The People’s Bank of China (PBOC) was certainly nervous at that time, as they knew that high premia would attract high import volumes, meaning further yuan outflows.

However, 2017 was another story. Contrary to expectations, the yuan managed to appreciate against the dollar by 6.3% during 2017 despite the United States raising interest rates three times during the year. The appreciation of the yuan was notable from the end of May until the first week of September, and resumed again as of the 15th December. The market expectation that yuan would continue to depreciate in 2017 has been crushed.

CHINA MARKET OUTLOOK

Barring any unforeseen circumstances that would cause huge market panic, China’s gold demand is likely to have already peaked in 2013, and is very unlikely to re-reach that levels in the future, regardless of the state of the domestic economy (it is worth remembering that the over-purchasing in 2013 furnished a good chunk of demand in 2014 and arguably some in 2015). The reality is that the Chinese community is shifting from treating gold jewellery as a safe haven asset to a fashionable complementary, especially to the younger generations. The carat gold segment will continue taking market share away from the pure gold segment, both from the supply and demand perspective. Suppliers are more eager to promote non-pure gold jewellery, simply because of higher margins. Consumers also like non-pure gold items because of their more sophisticated designs, and likely come with a cheaper price tag. Therefore, even if China’s economy continues to improve and the consumption sentiment stimulates more sales in the jewellery sector, the use of gold will continue to fall. As a result, while gold demand in China stabilised in the final quarter of the year, we expect further downward pressure (in terms of volume) in 2018.

GOLD IMPORTS FROM HONG KONG & SWITZERLAND Investment demand is always less predictable than the

250 fabrication demand, as market sentiment changes from Switzerland time to time. The Chinese were bearish on the gold price Hong Kong 200 starting in 2017, as most of them thought the increment in interest rates in the United States would provide support

150 to the dollar, thus creating pressures on commodities. Ironically the dollar plummeted and gold price ended the

Tonnes 100 year 13% higher. Gold price has started out from the gate strongly in 2018 and if the momentum can carry forward,

50 than we expect investment demand will likely pick up.

0 2013 2014 2015 2016 2017

Source: GFMS, Thomson Reuters

8 GFMS GOLD SURVEY Q4 2017

QUARTERLY JEWELLERY CONSUMPTION

(tonnes) Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 YoY% Europe change United Kingdom 15.7 3.8 3.7 4.4 13.3 3.0 2.8 3.8 12.1 -9% Turkey 11.2 9.7 10.9 10.1 9.0 8.8 10.3 11.1 10.0 12%

Russian Federation 8.6 7.5 7.3 7.1 8.3 7.4 8.3 8.7 9.9 20% GFMS GOLD SURVEY Italy 9.3 2.5 3.5 2.4 9.2 2.4 3.4 2.3 9.1 -1% France 6.0 2.4 2.1 1.5 5.8 2.3 2.0 1.5 5.9 2% Germany 5.8 1.6 1.8 1.3 5.7 1.6 1.8 1.3 5.8 3% Spain 2.6 1.5 1.8 1.7 2.5 1.5 1.8 1.7 2.5 -2% Europe Total 59.2 28.9 31.1 28.4 53.7 26.9 30.6 30.4 55.4 3%

North America United States 58.3 18.4 31.4 31.7 54.5 21.6 29.7 34.0 57.1 5% Canada 5.8 3.3 4.3 3.8 4.9 3.2 3.8 3.7 4.7 -4% Mexico 1.6 2.1 1.9 1.7 1.6 2.1 1.9 1.6 1.7 4% North America Total 65.6 23.8 37.5 37.1 61.0 26.8 35.4 39.4 63.4 4%

Asia India 186.7 72.9 74.2 120.4 195.6 109.6 183.4 130.9 187.3 -4% China 188.7 170.2 146.4 138.5 166.4 160.3 129.2 134.3 151.7 -9% UAE 12.1 16.8 10.5 7.6 11.3 15.8 11.1 7.4 16.3 45% Iran 9.3 9.0 9.6 10.6 10.6 11.5 11.1 11.7 11.5 9% Indonesia 11.6 10.0 6.5 7.2 10.5 9.9 7.2 7.6 10.9 3% S Korea 9.5 9.1 9.1 9.1 8.9 9.0 8.9 8.8 8.7 -2% Hong Kong 8.2 6.0 6.4 6.4 8.1 7.0 6.7 6.7 7.1 -12% Saudi Arabia 12.6 9.1 10.7 9.0 9.3 7.2 8.3 6.7 6.8 -27% Israel 6.2 4.8 5.0 5.3 5.1 4.7 4.9 4.8 4.9 -5% Japan 4.6 5.7 4.6 4.8 4.7 5.2 4.4 4.8 4.8 3% Kuwait 5.5 5.1 5.0 5.1 5.0 4.4 4.5 4.6 4.5 -10% Bangladesh 4.9 4.9 3.8 4.1 5.3 5.3 4.9 5.4 4.2 -21% Pakistan 6.8 2.1 3.8 3.2 5.1 3.8 4.2 3.1 4.2 -18% Viet Nam 3.1 5.3 4.6 3.0 3.4 5.2 4.7 3.4 3.8 11% Iraq 4.6 3.6 3.3 3.7 3.8 3.3 3.1 3.3 3.7 -3% Jordan 3.7 3.1 3.6 3.5 3.7 2.9 3.4 3.1 3.4 -7% Thailand 4.1 4.6 4.0 3.1 3.2 4.5 4.0 3.2 3.3 5% Lebanon 4.1 2.6 2.9 2.7 3.0 2.5 2.6 2.4 2.8 -7% Singapore 3.0 2.2 2.6 1.9 2.7 1.9 2.3 1.9 2.5 -6% Malaysia 2.4 1.3 1.2 2.1 2.3 1.1 1.3 2.0 2.4 6% Bahrain 2.5 2.1 1.7 1.9 2.1 1.8 1.5 1.4 1.7 -19% Taiwan 1.7 1.5 1.7 0.8 1.5 1.4 1.2 0.9 1.4 -4% Sri Lanka 0.3 0.8 0.7 0.8 1.4 1.2 1.1 1.2 1.2 -14% Other 5.1 4.2 3.9 3.8 5.2 3.9 3.7 3.7 3.9 -24% Asia Total 501.3 356.8 325.7 358.3 477.8 383.1 417.5 363.1 452.8 -5%

Africa Total 9.1 8.7 6.4 6.5 6.3 6.7 5.5 5.5 5.6 -11%

South America Brazil 2.1 4.0 4.7 2.0 2.2 4.1 4.6 3.1 3.2 48% Other 3.0 2.9 3.1 2.9 2.9 3.0 3.0 2.9 2.9 0% South America Total 5.2 6.9 7.8 5.0 5.1 7.1 7.6 6.1 6.2 20%

World Total 640.5 425.0 408.4 435.3 603.9 450.6 496.5 444.4 583.4 -3%

Source: GFMS, Thomson Reuters

GFMS GOLD SURVEY Q4 2017

INDIA

• Indian gold demand in Q4 2017 decreased by 9% year-on-year to 246.8 tonnes, but was the highest in four quarters. GFMS GOLD SURVEY • India imported 216 tonnes of gold in Q4 2017; down 8% year-on-year.

• Investment demand decreased by 22% year-on-year in Q4; the decline was primarily due to frantic buying last year following demonetisation during the same period

• Jewellery consumption was down by 4%, however was the volume was the highest for the year.

The fourth quarter ended negative year-on-year, although it was the highest for the year. Last year the same period was the best since Q2 2013, driven largely by demonetisation which triggered an unexpected demand. .

FESTIVE SEASON DEMAND HOLDS FIRM; TURNS SOUTH IN NOVEMBER BUT IMPROVES IN DECEMBER; RETAILERS’ RESTOCKING AT LOWER PRICES WAS THE KEY THEME.

Jewellery fabrication and consumption were strong until early November. Thereafter the markets moved back into a discount to trade two dollars lower than the landed price. Demand during Dhanteras, a day considered very auspicious, posted solid growth in the Southern and Western regions; these two regions together contribute 65% to 70% of total Indian demand. Year-on-year the sales for these provinces were higher by 20% to 30% where as in other regions they were in a range of negative 10% to 5% on a yearly comparison. The momentum could not be sustained leading into November, a trend reflected in bullion imports, which slowed considerably. Fabrication was down by 10% to 15% compared to the same period of the previous year. However with the fall in price from the fourth week of November demand started slowly returning in price range of Rs. 28,000 to Rs. 28,800 per 10 grammes, and there was high volume of restocking or demand from retailers and consumers as well. This continued until mid-December when demand started tapering off at levels over Rs. 28, 800/- eventually moving the market to a discount of $5 by end of the quarter as against premia of $2 in early December.

Post demonetisation there has been a significant capacity build up from the retailers in the organised segment. It is interesting to note that according to GFMS estimates total gold demand by the top 18 retailers in India contribute to one-third of the jewellery demand. The demand from the retailers who have moved their business to formal transactions and have been expanding their presence this year has resulted in higher fabrication volumes and thus it is not a surprise to notice that the full-year fabrication has increased by 56%, while the consumption has increased at a relatively slower pace at 32%.

INDIAN JEWELLERY CONSUMPTION & RETAIL INVESTMENT INDIAN GOLD PRICE

220 Retail Investment Jewellery Consumption Gold Price in India 200 200 35,000 Premia/Discount in $/oz 180 Monthly Average (Rs./10 grammes) 160 150

140 30,000 120 100

Tonnes 100 80 50 25,000 60 40 0

20 Domestic Premia /Discount (US$/oz)

0 -50 20,000 Q4-2013 Q4-2014 Q4-2015 Q4-2016 Q4-2017 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 June-17 Dec-17 Source: GFMS, Thomson Reuters Source: GFMS, Thomson Reuters; NCDEX; IBJA

11 GFMS GOLD SURVEY Q4 2017

INVESTMENT DEMAND

Bar hoarding declined last quarter by 29% year-on-year, while that of coins decreased by 5% for same time frame. Declines were a surprise despite the festive lead purchase; this was due to the increase in demand for jewellery during Dhanteras, which was primarily a reflection of consumption behaviour visible across various sectors. That said, total investment demand in Q4 was the highest for the year and second highest since Q4 2013.

CHANGE IN DYNAMICS IN BULLION TRADE

The notification by the Directorate General of Foreign Trade on 18th October that cancelled the licence of nominated agencies was a bounty for the rest of the importers, as the import volumes shifted to them. The result of this was GFMS GOLD SURVEY that the banks’ share of total imports supplied for domestic consumption increased to 90% in Q4 2017 as against the previous nine month average of 62%. The market traded at a premium through most of October and in early November following this development, quoted at upwards of $2 an ounce. However, it was followed by higher volumes being imported through the Merchandise Export Import Scheme (MEIS), which in November and December contributed to one-third of the total official supply for domestic sale, eventually weighing down the premia. Further the incidence of unofficial imports has been holding strong and is entering the official market; recorded as scrap jewellery received from customers.

FINE GOLD FROM DORÉ HIT RECORD HIGH IN 2017

Supply of fine gold from imported doré hit a record high of 212.4 tonnes in 2017, crossing 2015 high of 207.3 tonnes. Also the share of fine gold refined from doré to that of the total supply of gold to domestic demand has increased from 29% to 34% from 2015. The gains were indeed an achievement given the supply constraints from Ghana and that the margins in 2017 were smaller than in 2015 when the duty differential with bullion was in range of 1% to 1.25%, while in 2017 it was only 0.65%. This could be largely attributed to stocking ahead of GST in 2Q 2017 and higher imports of doré by using the MEIS certificates in 4Q 2017.

Jewellery fabrication for this quarter should be tepid on higher stocking towards December and due to lacklustre sales in January following higher prices. For rest of the year we expect the trend to continue firm if not for any policy surprise, which is less likely.

INDIAN GOLD IMPORT ESTIMATES BY SOURCE PRODUCT

Imports (tonnes) Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Banks Duty paid 20.8 81.6 83.6 87.1 29.8 90.3 Duty free 9.3 13.9 12.0 11.4 12.3 13.4 Nominated agencies Duty paid 5.3 34.3 48.4 55.6 16.7 10.9 Duty free 33.1 37.5 39.6 48.1 39.9 7.4 Fine gold from doré 9.4 65.3 51.1 68.3 32.3 58.6 Direct import by exporters 2 1.3 1.2 1.4 1.5 35.7* Total 79.9 233.9 236.1 271.9 132.7 216.3 Net import 35.6 181.2 183.1 163.8 78.9 159.8 Unofficial Imports 25.2 23.3 15.6 26.8 43.5 47.2 Average price (Rs/10 grammes)* 31,285 29,090 29,056 28,902 28,989 29,144 Average premia/(discount) in domestic (25.1) (1) 0.3 0.8 (7) 0.6 in $/ounce ** Source: GFMS, Thomson Reuters; IBJA*, NCDEX**, Various Sources

12 GFMS GOLD SURVEY Q4 2017

UNITED STATES

• Retail investment fell 55% in Q4 2017, reducing demand to ten tonnes. Coin fabrication as well as bar demand were both weak, hindered by an abundance of available metal and the rise of cryptocurrency enthusiasm. GFMS GOLD SURVEY • Jewellery consumption, on the other hand, showed resilience and rose by an estimated 5% year-on-year in Q4 2017.

Gold retail demand continued to disappoint in the final quarter of the year, contracting by 55% year-on-year to 10.1 tonnes. The biggest contributor to the decline was coin fabrication which fell an estimated 75%. Sales at the U.S. Mint started the year off reasonably promising with volumes in January only 6% below those recorded last year. However, after that, coin sales collapsed and did not reach the average of around 70,000 ounces over the 2015-2017 period for a single month for the rest of the year. In fact, last year will be the weakest year in coin sales for the U.S. Mint in a decade, as the chart below illustrates, as it was 2007, one year before the GFC unfolded when coin sales really took off.

Some might argue that the U.S. Mint has become a victim of its own success and that every coin it sold in its GFC glory days was in fact a golden nail in its own coffin. We don’t want to take it that far, but do acknowledge the unwillingness of the North American retail market to absorb more newly fabricated metal. Demand for physical precious metals products is still present but a lot of trading has shifted to the secondary market, where discounts to newly fabricated products retreated to unprecedented lows of around 50 basis points during the beginning of the year.

Net-physical bar demand also contracted by an estimated 35% year-on-year in Q4 2017 to 7.2 tonnes, which brings the total for the year to 21.5 tonnes, 25% lower than 2016. A lot of the reasons are similar to those for coins. However, the extra complication bar demand had to deal with was the rapidly accelerating popularity and price in cryptocurrencies, such as Bitcoin, which diverted substantial amounts of capital away from precious metals last year. Retail investors tend to have a shorter investment horizon these days and with cryptocurrencies recording parabolic increases over the year, many consumers were not able to withstand the temptation to get on board.

On the jewellery side, things look a little better. We estimate jewellery fabrication rose another 2.7% year-on-year to 17.9 tonnes and also jewellery consumption continued to show resilience. The 5% estimated increase over the year as a whole to 142.3 tonnes is a fifth consecutive annual rise. The jewellery sector as a whole seems to have done better than the overall retail market in the United States last year. The rate of store closures is declining and revenue for the sector is on the rise, which indicates there is more of the pie for fewer participants. Jewellery industry sales recorded their 46th consecutive month increase in November rising by 6.3%. The bridal sector has continued to demonstrate strength and seen a rapid rise in demand for synthetic diamonds too. As the jewellery sector generally competes with fancy electric gadgets and exotic holiday destinations, retailers have adopted to the new age by having a stronger presence online and providing more customised options for their customers so they can have something unique. That seems to work well.

U.S. OFFICIAL COIN FABRICATION CHANGE IN U.S. RETAIL DEMAND & JEWELLERY CONSUMPTION

40 Jewellery Consumption 30 Retail Investment 20

-10

Tonnes, y-o-y change -20

-30

-40 2007 2009 2011 2013 2015 2017

Source: GFMS, Thomson Reuters

13 GFMS GOLD SURVEY Q4 2017

QUARTERLY RETAIL INVESTMENT

(tonnes) Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 YoY % Europe change Germany 26.5 23.0 23.7 20.4 37.3 28.1 19.7 20.8 39.1 5% Switzerland 9.9 12.0 9.7 8.1 11.5 12.4 8.0 7.4 10.9 -5% Belgium 5.4 2.8 5.8 2.8 5.9 3.0 4.5 2.6 6.2 5% Austria 8.1 5.5 4.2 2.8 8.5 3.7 2.7 4.8 4.9 -42% Turkey 4.6 5.4 4.2 5.2 11.7 8.0 17.7 12.0 4.7 -60% United Kingdom 6.1 5.3 5.5 3.2 5.3 4.9 5.6 3.1 4.5 -14% Netherlands 1.9 1.0 1.0 1.0 1.9 1.1 0.9 1.0 2.0 5% Luxembourg 1.6 1.3 1.4 0.7 1.8 1.4 1.1 0.7 1.9 3%

GFMS GOLD SURVEY Italy 1.2 0.6 0.5 0.5 1.5 0.6 0.4 0.5 1.4 -10% Spain 1.1 0.9 0.9 0.9 1.0 0.9 0.8 0.8 1.1 5% Czech Republic 0.9 1.2 1.1 0.7 1.0 1.1 1.0 0.7 0.9 -7% Other 4.3 4.1 4.2 3.5 4.4 3.5 3.4 2.7 3.3 -24% Europe Total 71.6 63.1 62.3 49.9 91.8 68.6 65.8 57.3 80.9 -12%

North America United States 14.4 15.8 15.3 13.4 22.6 13.0 5.5 5.8 10.1 -55% Canada 9.2 7.1 7.1 6.1 11.9 12.0 3.9 4.0 9.0 -24% Mexico 0.3 0.4 0.2 0.4 0.1 0.5 0.3 0.4 0.3 468% North America Total 24.0 23.2 22.7 19.9 34.5 25.5 9.7 10.3 19.5 -44%

Asia China 71.5 80.4 51.0 64.6 71.9 71.7 45.5 52.1 71.5 -1% India 55.5 7.1 29.6 22.0 74.7 29.6 38.7 24.3 58.2 -22% Thailand 22.3 13.5 12.3 12.1 17.1 19.5 17.0 21.0 20.0 17% Viet Nam 10.5 9.5 11.1 9.5 12.2 10.3 10.7 9.8 9.5 -22% S Korea 5.1 3.9 3.6 3.8 4.3 4.4 4.2 4.0 4.2 -2% UAE 2.6 1.4 1.9 1.8 2.9 1.5 1.7 1.9 3.8 31% Iran 11.5 4.9 0.9 -2.1 -1.2 3.5 3.3 2.7 2.8 -339% Indonesia 3.1 3.8 3.8 3.5 3.6 3.7 3.5 3.1 2.4 -33% Pakistan 3.8 1.8 3.1 1.8 3.8 2.1 3.2 2.1 2.3 -39% Saudi Arabia 3.7 3.4 2.7 2.5 2.6 2.8 2.2 2.0 2.3 -12% Japan 6.3 2.6 4.6 2.0 3.0 -2.4 0.8 -3.6 2.0 -32% Singapore 2.2 2.2 1.7 1.7 1.9 2.0 1.8 1.7 1.8 -5% Taiwan 1.2 1.7 1.6 1.5 1.5 1.6 1.5 1.5 1.5 3% Kuwait 1.5 1.1 1.1 1.1 1.3 1.2 1.1 1.3 1.5 15% Malaysia 1.3 1.1 1.3 1.2 1.3 1.2 1.7 1.3 1.4 8% Other 4.4 4.1 3.7 3.5 4.4 4.0 3.8 3.4 3.6 -16% Asia Total 206.5 142.4 134.0 130.6 205.3 156.7 140.7 128.6 188.8 -8%

Oceania Total 7.7 7.1 5.8 5.0 7.9 6.1 4.6 5.5 6.9 -13%

Africa South Africa 7.7 7.9 7.8 6.8 12.7 10.5 11.2 12.7 14.6 15% Egypt 1.6 1.4 0.7 0.8 -2.5 0.9 0.7 0.7 0.7 -127% Africa Total 9.3 9.3 8.5 7.5 10.1 11.4 11.9 13.4 15.3 51%

South America Total 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 9%

World Total 319.7 245.6 233.8 213.4 350.2 268.9 233.3 215.7 312.0 -11%

Source: GFMS, Thomson Reuters

GFMS GOLD SURVEY Q4 2017

MINE SUPPLY

• Global mine production fell by eight tonnes or 0.3% year-on-year in the first nine months of 2017. The largest decrease was posted in Asia and South America, which fell by a combined 5% with China, Indonesia, and Peru leading the change. At the global level, environmental concerns and a crackdown on illegal mining were the driving force behind the drop in output in 2017.

• Average Total Cash Costs rose by 1.9% in Q3 2017 to $659/oz, while the average All-In-Sustaining-Costs (AISC) rose 1.5% year-on-year to $876/oz.

• The global producer hedge book expanded by 7.9 t on a delta-adjusted basis, in line with our expectations once GFMS GOLD SURVEY again. Overall, 23 companies increased the size of their hedge book (+34.6 tonnes), while 35 saw net decreases in their hedge position (-27.6 tonnes).

MINE PRODUCTION

Global mine supply in the first nine months of 2017 reached a total of 2,391 tonnes, eight tonnes below the same period last year driven by environmental concerns in China and a crackdown on illegal mining in Indonesia. Chinese mine production extended losses in Q3 2017 as production from non-ferrous smelters dropped by seven tonnes, or 30%, on output cutbacks to reduce pollution. Environmental protection laws also impacted domestic gold miners, particularly in provinces with a long history of mining such as Henan and Fujian, which account for 12% of the country’s total production.

The introduction of a nine-month tax amnesty programme by the Indonesian government, which hoped to repatriate billions of dollars from overseas, saw production from Kalimantan and Sumatra fall sharply as many traders were reluctant to remain in the industry. GFMS estimates that this supply topped 100 tonnes in 2016, and will struggle to exceed 50 tonnes in 2017. In addition, tighter environmental controls on mercury and cyanide caused artisanal and illegal mine production to fall. Although illegal mine production will prove difficult to eradicate altogether, jewellery fabricators have noted a drop in output from a number of artisanal fields. Meanwhile, higher output at Grasberg and Gosowong provided a partial offset year-on-year.

Elsewhere, higher supply from the United States was led by a ramp-up at Long Canyon, and higher grades at Bald Mountain and Round Mountain.

For the year as a whole, we expect mine production to post the first annual drop in almost ten years. We expect losses in China to accelerate as capacity is curtailed further, along with lower output from Indonesia and a number of South American producers (Dominican Republic, Chile, Brazil, and Peru).

GLOBAL GOLD PRODUCTION YEAR-ON-YEAR VARIANCE - 9M 2016 VS 9M 2017

900 % Growth year-on-year, RHS 12 2,450 Rise Fall +5.5 10 2,440 +8.7 +4.4 Mine Production yoy(%) Growth +11.3 800 8 2,430

6 2,420 +19.6 700 4 Tonnes 2,410 -34.7 2 2,400 -9.0 600 0

Global Mine Production (Tonnes) Mine Production Global 2,390 -7.2 -2 2,380 500 -4 9M 2016 USA RUS SUR RoW PERINDCHN 9M 2017 Q3-12 Q3-13 Q3-14 Q3-15 Q3-16 Q3-17E Source: GFMS, Thomson Reuters Source: GFMS, Thomson Reuters

16 GFMS GOLD SURVEY Q4 2017

PRODUCER COSTS COST OF PRODUCTION AND GRADES

(US$/oz) Q3 2016 Q3 2017 Total Cash Costs (TCCs) net of by-product credits rose North America Total cash costs 630 661 year-on-year in Q3 2017 from $647/oz to $659/oz led by All-in Sustaining costs 798 846 higher fuel costs, lower grades and a weaker U.S. dollar. Processed grade, g/t 1.64 1.60 Higher production costs were posted predominantly in

South America Total cash costs 604 658 GFMS GOLD SURVEY South Africa, where despite a 12% increase in processed All-in Sustaining costs 832 866 grades, costs rose by 6% to $998/oz. As a result, the Processed grade, g/t 1.56 1.44 global dollar gross margin contracted by 4% to $608/ oz. Australia Total cash costs 594 620 In tandem with this net change, the average All-In- All-in Sustaining costs 792 810 Sustaining-Cost (AISC) posted another quarterly net Processed grade, g/t 1.70 1.63 increase, rising by $20/oz to $884/ oz. Under this cost South Africa Total cash costs 943 998 metric, we estimate that 8% of global production was All-in Sustaining costs 1,126 1,184 underwater by end-September 2017. Processed grade, g/t 1.42 1.60 Other Total cash costs 615 610 Amongst the operations with the highest production All-in Sustaining costs 872 865 costs, TCCs at the Kloof Driefontein Complex rose by Processed grade, g/t 2.00 1.96 World Total cash costs 650 670 9% to $880/oz due to a 6% drop in processed grades All-in Sustaining costs 864 884 and a stronger rand. The change was mainly driven by Processed grade, g/t 1.71 1.67 higher unit costs at the Driefontein operations, which saw Source: GFMS, Thomson Reuters production drop by 5% due to a higher proportion of lower grade ore processed. Higher fixed costs on lower output were also registered at Beatrix, where TCCs surged by 15% to $986/oz due to lower throughput from the depletion of available surface reserves. The closure of Cooke 4 shaft in Q3 2016 resulted in a 14,100 oz drop in production from the Cooke operations, and led to a $119/oz increase in TCCs to $1,472/oz after accounting for a weaker U.S. dollar, above inflation wage increases and increased electricity tariffs. Against this trend, two operations in particular, Tshepong and Target, provided a partial offset to the increase in TCCs on the back of operational efficiencies and higher grades respectively. The integration of Tshepong and Phakisa to form the combined Tshepong operation, led to a 5% drop in costs to $864/oz. We estimate that the combined effect from both operations resulted in a $25/oz drop in TCCs at the country level.

Going forward we expect costs to continue to rise as higher grade resources are depleted and the U.S. dollar continues to weaken. A partial offset, however, is expected by higher base metal by-product credits in the Americas.

WORLD TOTAL CASH AND ALL-IN SUSTAINING COST CURVES

1,600 1,600

1,400 Q3 2016 Average Gold Price ($1,335/oz) 1,400

1,200 Q3 2017 Average Gold Price ($1,278/oz) 1,200

1,000 1,000 US$/oz

800 800 US$/oz

600 600

400 400 Q3 2017 All-In-Sustaining-Cost Q3 2016 All-In-Sustaining-Cost 200 Q3 2017 Total Cash Cost 200 Q3 2016 Total Cash Cost

0 0 0 10 20 30 40 50 60 70 80 90 100 Cumulative Production % Source: Company Reports; GFMS, Thomson Reuters

17 GFMS GOLD SURVEY Q4 2017

ACTIVE HEDGE BOOK HOLDERS PRODUCER HEDGING 100 Delta De-Hedgers, Tonnes 80 Number of Active Holders Book Hedge The global producer hedge book expanded by 7.9 t on Delta Hedgers, Tonnes 70 a delta-adjusted basis during the third quarter of 2017, 60 representing a 3% increase on the hedge book total at 60 end-Q2 2017. As a result, the hedge book stood at a 20 total of 237 t at end-September. Over the third quarter, 50 Australian based operators accounted for 31% of the gross hedging, with the majority of the net hedging -20 40 coming from Newcrest Mining (5.7 t) and Resolute Delta Adjusted Hedge Book Effect, Tonnes Hedge Book Effect, Adjusted Delta Mining (2.5 t). However, unlike previous periods, on a -60 30 GFMS GOLD SURVEY net basis the Aussie dollar hedge book only posted a Q1-14 Q3-14 Q1-15 Q3-15 Q1-16 Q3-16 Q1-17 Q3-17 0.35 t gain after accounting for the largest delivery of Source: GFMS, Thomson Reuters

ounces by Gold Fields (4.3 t), and others. COMPOSITION OF THE DELTA-ADJUSTED HEDGE BOOK

Overall, 23 companies increased their hedge position, (tonnes, end-period) while 36 companies decreased the size of their hedge Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 QoQ book. Of the net de-hedgers, PJSC Polyus saw the second Forward Sales 181 164 168 169 172 +2% Options 106 87 67 60 65 +8% largest hedge book reduction as the company exercised Total 287 252 235 229 237 +3% 3.9 t of barrier options, followed by Harmony Gold and Source: GFMS, Thomson Reuters Petropavlovsk with a combined 3.4 tonnes.

In the third quarter, Yamana entered into a hedging agreement to provide greater certainty of cash flows during the development period of Cerro Morro. The contracts cover nine tonnes of production between Q4 2017 and Q1 2018 using a collar option structure. We calculate that the delta-hedge against these contracts at end-September was 4.8 tonnes, leading the net 8% growth in the option book quarter-on-quarter. While the hedge book has more than doubled since the low of 91 tonnes at end-2013, it nevertheless represents only 8% of the total of just under 3,100 tonnes at end 1999, when producer hedging peaked with the implementation of the Central Bank Gold Agreement.

With producers drawing up plans for FY18, and Australian producers having shaken off signs of ‘hedging fatigue’, we expect to see gold miners take a tactical stance on hedging using intra-year forward contracts as key technical levels are broken above U$1,300/oz. Although the appetite for hedging by investors and producers will extend into 2018, we expect to see the number of producers carrying a hedge book balance to drop as the weighted time to maturity of these contracts continues to trend lower. Furthermore, non-U.S. dollar denominated activity will subside as further U.S. dollar weakness erodes much of the appetite for protection in Australia and Canada. On balance, gold’s positive outlook should see the global hedge book contract as miners wish to be exposed to the upside, yet if a tail risk does crystalise this will generate short term periods of high volatility that will be accompanied by new option positions. As a result, GFMS forecasts that a modest 19 tonnes of de-hedging will emerge in 2018.

CORPORATE HEDGE BOOKS (BY # OF CONTRACTS) HISTORICAL WEIGHTED AVERAGE STRIKE PRICES

1,600 Forwards (RHS) 1,600 30% PJSC Polyus Vanilla Call Options (LHS) W.A. Strike US$/oz Price - Forwards, Vanilla Put Options (LHS) 11% Fresnillo plc 1,480 1,480 4% Newcrest Mining 4% Yamana Gold 1,360 1,360 3% Petropavlovsk PLC 3% Evolution Mining 3% Sumitomo Metal M. 1,240 1,240 3% Regis Resources 3% OceanaGold Corp. 1,120 1,120 2% Harmony Gold

34% Others US$/oz Options, Vanilla - Price Strike W.A. 1,000 1,000 Q1 15 Q3 15 Q1 16 Q3 16 Q1 17

Source: GFMS, Thomson Reuters Source: GFMS, Thomson Reuters

18 GFMS GOLD SURVEY Q4 2017

THE FEDERAL RESERVE IN 2017 AND OUTLOOK FOR 2018

December rate hike: no surprise from the Fed In a move widely expected by the markets, the Federal Reserve raised its benchmark interest rate by a quarter of a percentage point, to a range of 1.25% to 1.5%, at the December FOMC meeting. This marked the third interest GFMS GOLD SURVEY rate increase in 2017 and for the fifth time since the 2008/09 financial crisis, underpinning the Fed’s commitment to interest rate policy normalisation, albeit a gradual one. The overall tone of the meeting appeared to be positive, with the economic activity expanding at a solid rate, robust gains in the labour market and impending tax reform. The Committee noted that while hurricane-related disruptions have affected key economic indicators in recent months, these have not materially changed the outlook for the economy, and with further gradual adjustments to the monetary policy, the economy and labour conditions are expected to remain strong.

A close watch on inflation developments While the GDP data has been encouraging for 2017, there have been some concerns around low inflation in recent months. Whereas the headline CPI inflation recovered in the second half of the year, with the December figure standing at the yearly rate of 2.1%, inflation readings in the past few months fell short of those seen earlier in the year. What is more concerning is that inflation excluding the volatile food and energy components declined in 2017 and continued to surprise on the downside, with the latest reading for December standing at an annual rate of 1.8%. Continued soft readings of the Fed’s preferred measure of inflation, despite a strengthening economy and tightening labour market, led to concerns among some policymakers that factors restraining price pressures could prove more persistent. At the last policy meeting of the year, the Committee cautioned that inflation is expected to remain below the 2% objective in the near term, before stabilising over the medium term, and reiterated that it will monitor future inflation developments closely.

So, what to expect in 2018? It seems clear that the Fed is keen to continue its gradual policy normalisation, with polls anticipating three interest rate increases in 2018. That said, the overall stance of monetary policy is expected to remain accommodative and, as the Fed reiterated during its latest FOMC meeting, the federal funds rate in the medium term is likely to stay below levels expected to prevail in the longer run. Having said that, tax policy changes, the lack of a sustained uptick in core CPI and the new nomination for the next Chairman of the Fed add towards uncertainty around the pace of monetary policy tightening this year. Fed officials concluded that the prospects for significant tax cuts could give additional impetus to the economy; however, the new tax reform is unlikely to lead to overheating and a gradual path of rate increases remains appropriate. That said, should we see growth rate and inflation accelerating to unsustainable levels, the Fed is likely to respond by raising interest rates more quickly. Indeed, in the minutes to the FOMC December meeting released early this year, the Fed raised modestly its growth projections for 2018-19 in light of the federal tax reform and hinted that proposed changes may lead to faster rate hikes. On the other hand, if inflation readings in the coming months continue to disappoint, the Fed could take a more cautious stance with regards to its policy tightening. U.S. CONSUMER PRICE INDEX VS. CORE INFLATION US Consumer Price Index vs. Core Inﬂation A continuation of U.S. monetary policy tightening will 3.0 CPI excl. food and energy 3.0 undoubtedly weigh on gold, and the rest of precious 2.5 2.5

metals for that matter, however the fact of tightening CPI excl. food and energy itself has long been absorbed by the markets and it is 2.0 2.0 the tone of future meetings and conferences and the 1.5 1.5 pace of rate increases that will play a more pivotal CPI role. Should the Fed appear more concerned about 1.0 1.0 tepid inflation and take on a more gradual path of 0.5 0.5 rate increases, the yellow metal is likely to benefit. On 0.0 the other hand, a bolder approach to tightening could 0.0 present a bigger drag for the precious metal. -0.5 -0.5 Jan-14 Jan-15 Jan-17 Jan-17

Source: GFMS, Thomson Reuters

19 GFMS GOLD SURVEY Q4 2017

SWITZERLAND

• Swiss gold imports eased by 4% in the period from January to November 2017, largely on the back of a sharp drop in shipments to the United Arab Emirates, which lost its status as the biggest source of Swiss imported gold.

• Gold bullion exports fell by 17% over the eleven-month period, with markedly lower flows heading to the West, in particular the United Kingdom and the United States. Shipments to Asia remained relatively strong, with India regaining its status as the major destination for Swiss gold exports.

Switzerland imported 2,180 tonnes of gold in the period from January to November 2017, according to the latest data from the Swiss Federal Customs Administration, down by 4% from the same period in 2016, and is on track to record GFMS GOLD SURVEY the lowest annual volume in the past three years. Much of the decline can be attributed to lower shipments from the United Arab Emirates (UAE), which was the top gold supplier into Switzerland in 2016, but saw its gold exports to Zurich drop by 56% from January to November, putting the country down to the fifth place. On the other hand, imports of silver-containing doré from Argentina were particularly strong in 2017, standing at over 300 tonnes for the eleven- month period and up 18% year-on-year. Stronger inflows followed a double-digit decline in 2016 and helped to place Argentina as the biggest source of Swiss imported gold, surpassing the UAE. The United Kingdom retained its second place in the list of top suppliers of gold into Switzerland, with volumes for the eleven-month period rising by 62% year- on-year, although in absolute terms they more than halved compared to levels recorded back in 2014-15. Among other top suppliers, shipments from the United States were up by 12%, standing at just over 200 tonnes, while supply from Hong Kong increased for the second year in a row, contributing 183 tonnes of gold bullion.

Swiss gold bullion exports decreased by 17% year-on-year from January to November on the back of a sharp drop in shipments to the West, in particular the United Kingdom, which was a major destination for Swiss gold exports in 2016, but posted a near 80% drop over the eleven-month period. The drop was largely attributed to a very high base in 2016 and when compared with 2015, exports recorded another impressive increase. Similarly, outflows to the United States registered a sharp 84% year-on-year drop over the same period, following a stellar increase in the previous year, but registered double-digit percentage growth when compared to 2015. While shipments to key Asian markets remained generally strong in 2017, volumes to Hong Kong slipped by 21% in January-November. Historically, Hong Kong was the major route of Swiss gold exports to China, but we are now seeing more bullion going directly to the mainland. Indeed, while outflows to Hong Kong continued to ease, direct shipments to China rose for the second year in a row, up by 4% for the eleven-month period, although at a much smaller rate than in 2016. Improving demand in India and sharply lower exports to the United Kingdom saw India regaining its status as the largest export destination for Swiss gold bullion, with volumes for January-November rising by 23% year-on-year. In addition, exports to Turkey surged by 717% over the eleven-month period, surpassing full-year volumes seen in the past three years and placing the country as the fifth largest export destination. This was stimulated by strong jewellery and investment demand, as well as gold-friendly legislation introduced by the central bank of Turkey in recent years.

SWISS BULLION IMPORTS SWISS BULLION EXPORTS

900 800 Argentina United States UAE India Hong Kong Turkey 800 United Kingdom Hong Kong Other 700 China United Kingdom Other 700 600 600 500 500 400 Tonnes

400 Tonnes * 300 * 300

200 200

100 100

0 0 Q3-15 Q1-16 Q3-16 Q1-17 Q3-17 Q3-15 Q1-16 Q3-16 Q1-17 Q3-17 Source: Swiss Impex; GFMS, Thomson Reuters Source: Swiss Impex; GFMS, Thomson Reuters *January-November 2017 *January-November 2017

20 GFMS GOLD SURVEY Q4 2017

UAE

• UAE’s jewellery consumption in 4Q 2017 increased year-on-year by 44%, triggered by advance purchase ahead of a 5% VAT that came into effect from 1st January 2018. GFMS GOLD SURVEY DUBAI LOSING BUSINESS DUE TO EXTERNAL FACTORS

Post the Arab Spring the UAE has been gradually raising the bar with regard to forex transactions and KYC requirements. It has been more cautious of the funds flowing in and out of the country, specifically with respect to forex transactions in that they don’t want to be seen assisting helping Iranian firms. As a result jewellery wholesalers have also been careful about onboarding new customers.

A middle income Arab family typically buys three kilogrammes of gold jewellery for weddings. At $1,280 gold this is equivalent to just over $123,450. However, this tradition doesn’t seem to have held up in the last five years and is instead defined by the amount that one should spend rather than measuring it on a grammage basis. Moreover, due to the rise in unemployment and drop in disposable income, this too is eventually leading to a drop in jewellery sales in Dubai. Another core contributor has been tourism but the actual number of tourists for shopping has seen a sharp drop over five years as evident from dropping footfall to stores. Further with the price in India at 13% higher than that of Dubai it has been a hub for carriers of jewellery back to India or any other South Asian country before routing it back to India. The arbitrage has however now reduced to 8% due to 5% VAT effective this year.

A JEWELLERY TRADING HUB

The value of the jewellery trade in the UAE is estimated at close to $15 billion annually which includes imported jewellery and that manufactured in the UAE. Large volumes are also sourced from Turkey, India, Italy, Malaysia, Hong Kong, Singapore, Thailand, China and Indonesia. These import numbers are a proxy for the health of the UAE jewellery business as the contribution of domestic manufacturing to total trade is estimated to be less than 30%. These are then traded across the Middle East and Africa (MEA) and the UAE’s share of the total consumption is approximately 25%. The strained geopolitical relationship with Qatar has seen exports to this GCC country stopped from the UAE. On the other hand, this gives an advantage to the Indian and Turkish manufacturers who are eyeing the Qatar market to supply directly.

In addition to these risks the trading hub was anxious about the impact of VAT. Out of the complete value chain it was the wholesalers which were feared to be going to be hit the most at their top line sales. Since the import duty on gold came into effect, the consignments for exports are being shipped straight from the airport. And with most of the imports being cleared from Sharjah at a relatively lower tariff, trading gold bars against jewellery is still active. However, as the VAT comes into effect this purchase of jewellery from other MEA regions was feared to end, thus reducing the role of wholesalers. As a result wholesalers were running low inventory in last quarter of 2017. However, UAE JEWELLERY CONSUMPTION AND INVESTMENT this fear apparently has come to rest after a national daily 30 reported that 20 free zones will be exempt from VAT which Retail Investment Jewellery Consumption would mean, trading would shift to free zones while the souk 25 would operate primarily for domestic retailing business. 20

We believe the impact of the VAT may be only temporary as 15 Tonnes consumers become accustomed to the new tax structure, but in the short term demand could drop by as much as 10 30%. On the other hand, should oil prices trend higher, 5 bringing back the spending culture as it was until 2012, an event such as the introduction of a VAT may not dent 0 demand even for a temporary period. Q4-2013 Q4-2014 Q4-2015 Q4-2016 Q4-2017 Source: GFMS, Thomson Reuters

21 GFMS GOLD SURVEY Q4 2017 21 20 19 Jan-18 18 17 15 16 14 Dec 13 12 Jan-02-18: News breakout of Peter News breakout Jan-02-18: US$15M-US$20M investment Thiel’s in mid-2017. in bitcoin Security ﬂaws in chip Jan-07-18: exposed. are manufacturers calling Jamie Dimon regrets Jan-09-18: of highlights the value a fraud, bitcoin technology. blockchain 19 11 21 20 Nov GFMS GOLD SURVEY 10 9 Oct 8 7 6 Sep Dec-08: JPMorgan and Citigroup are are Dec-08: and Citigroup JPMorgan trades bitcoin clear willing to not launch next week. of futures ahead begin futures Cboe bitcoin Dec-10: trading. futures US$80M in bitcoin Dec-18: of trading day change hands on ﬁrst of higher activity in CME. Reports at short position exchanges. Net cash on the rise. Dec-05: Lloyds and Mastercard back and Mastercard Dec-05: Lloyds payments a british digital Revolut, cryptocurrencies. trade to company, 17 15 16 18 5 Aug Jul 4 Jun Oct-31: CME Group announces launch CME Group Oct-31: futures. of bitcoin app Cash payment Square’s Nov-15: support. tests payment Nov-10: SegWit2x upgrade called off, SegWit2x called upgrade Nov-10: 50% jumps nearly cash’ but ‘bitcoin fails. fork hard after Nov-29: Coinbase’s GDAX exchange exchange GDAX Nov-29: Coinbase’s issues and “performance reports plummets. Nasdaq Price downtime.” announces launch bitcoin plans to in Q2-2018. futures 3 11 13 12 14 May Apr Oct-13: Larry says CEO, Fink, BlackRock Oct-13: is an “index bitcoin of money laundering.” Aug 29:Aug Number of crypto-related funds rises 55. to Sep-04: using funds China bans raising ICO’s. initial coin offerings, CEO, Jamie Dimon, JPMorgan Sep-15: than worst “It’s is a fraud. says bitcoin bulbs.” tulip US$5,000. above breaks Bitcoin Oct-12: 7 8 6 9 Mar 10 2 News leads to support for bitcoin support for to News leads News leads to pressure for bitcoin for pressure to News leads Feb 1 0 Jan-17

1,000 7,000 May-20: Bitcoin breaks above US$2,000. above breaks Bitcoin May-20: Jan-11: China announces investigation on China announces investigation Jan-11: exchanges in Beijing and bitcoin Shanghai. 3,000 2,000 5,000 9,000 6,000 4,000 8,000 Feb-10: Chinese exchanges bitcoin Feb-10: of the cryptocurrency. withdrawals disable high hits record Ethereum Jun-12: YTD) higher. and drives bitcoin (5,000% two, splits bitcoin Bitcoin into Aug-01: disagreements over cash’ and ‘bitcoin backers. between leading

11,000 17,000 13,000 12,000 15,000 16,000 19,000 14,000 18,000 10,000 US$ 1 3 4 5 2 Source: GFMS, Thomson Reuters Source: GFMS, BITCOIN PRICE CHART - KEY EVENTS PRICE CHART BITCOIN

22 GFMS GOLD SURVEY Q4 2017

BITCOIN FOCUS BOX

In 2017, one of the best investments with the greatest gain in price was among the cryptocurrencies. Bitcoin ended 2017 at $13,170.18, a 12.6x gain from $966.3 at the end of 2016. Globally close to $4 billion of capital was raised through Initial Coin Offering (ICO) in 2017. While it is only a drop in the ocean compared to the $33 billion raised GFMS GOLD SURVEY from IPOs through the New York Stock Exchange in 2017, Snapchat parent Snap (SNAP), the largest tech IPO in the U.S. history since Alibaba’s listing in 2014, raised ‘only’ $3.9 billion last year.

Most cryptocurrencies rely on a technology called blockchain that makes transactions secure and that even experts consider unhackable. Every cryptocurrency has its own blockchain technology, and people are able to use cryptocurrencies in some monetary transactions (there was a rumour that someone used bitcoins to pay for a pizza meal years ago). Many tech-savvy experts believe that the blockchain technology will become a powerful tool shifting the future of the global financial system. One potential application of the technology is that blockchain is so secure that it reduces the cost of verifying transactions, and banks, even central banks may be looking to implement this technology. In addition, the future of the global monetary transactions may shift from paper money towards digital money anyway (see China), which would make blockchain technology an important element of our financial future.

Is cryptocurrencies money?

Basically, there are certain minimum aspects that an item must meet in order to have a chance of becoming money. It has to be divisible, portable, and widely accepted. While cryptocurrencies may eventually fit the bill on these three requirements, another important aspect that few people failed to mention is a (relatively) stable purchasing power – and stability is not currently a feature of this sector. Ripple’s market capitalisation reached $82 billion at the end of 2017, thanks to signing an agreement with Japan’s big credit card companies using Ripple’s technology . That placed Ripple’s market value among the world’s 30 biggest banks, ahead of the UK’s Lloyds Banking Group or China’s Shanghai Pudong Development Bank. Then, in just 11 days in January 2018, Ripple’s market value fell to $68 billion. With the exception of periods of hyperinflation it is hard to identify any currency with that degree of volatility.

Why cryptocurrencies is in a bubble

According to coinmarketcap.com, the digital currency market rose to $572 billion by the end of 2017 with 1,335 different cryptocurrencies. On 9th January, the total market reached $761 billion with 1,386 different names, gaining $189 billion or 33% in just nine days! If this does not ring the alarm bells within the mind of a sensible investor then nothing will. On the other hand, GFMS numbers put global gold supply at 4,418 tonnes in 2017, at approximately $178 billion basis gold at $1,250. So yes, in just nine days in 2018 the growth of market capitalisation in cryptocurrencies is already bigger than one year’s global gold supply. It is not difficult to figure out which asset is in a bubble.

It is arguable that the whole blockchain mania is already in a bubble, similar to the dot com situation, whereby when a company changed its name to xx dot com this almost invariably resulted in a substantial price gain. Even if there is a technology which is important to the development of the human race, this does not mean that every single entity using that technology will succeed. History repeats itself, largely because its lessons are not readily learned. Remember the Tulip Mania, the South Sea Bubble, and the Mississippi Scheme?

Many people do understand that they are speculating on cryptocurrencies, hoping that there will be someone willing to pay a higher price for their coins. While there is a bubble in the cryptocurrencies it does not mean the danger of bursting is imminent. Therefore, people may continue making money speculating on cryptocurrencies for the time being. A clear and present danger is the bullish sentiment in the current cryptocurrencies market, and at this rate this bubble could burst at any time. Already some owners are finding that they cannot exit their positions. It will be interesting to see how the futures market develops.

23 GFMS GOLD SURVEY Q4 2017

THAILAND

• Thai gold jewellery market finally surges in December after a challenging year.

The Thai gold market faced several challenges in 2016 with the death of their much loved King in particular dragging consumer spending lower in the latter months of the year as the country began a year-long mourning period. While demand did pick up in early 2017, and again midyear, on weaker gold prices, jewellery offtake was again softer in the lead up to the King’s funeral in late October as consumers once again focused on the death of the long standing monarch and restricted spending on luxury goods. Following the funeral, and coupled with a drop in the gold price, demand picked up with a surge in December giving hope to many retailers that the market has finally turned a corner.

GFMS GOLD SURVEY Following a twelve month period of mourning when most locals wore black daily and it was frowned upon to be seen having any celebrations, Thai consumers have started to come out of their shells. Consumer spending has picked up and the mood has lifted. Chinatown traders in Bangkok suggested recently during a research visit that there has been a notable difference in spending prior to and post the extravagant funeral. Finally it was ok to be seen shopping and spending on luxury items.

Following a weak October, demand in November was solid without being spectacular, but the market really stated to boil in the first week of December when the local gold price dipped below the psychological level of 20,000 baht per baht bar (15.16 grammes), the first time since December 2016. The drop below this level was a clear buy signal to many investors and to those consumers wishing to prop up their precious metals holdings. Lines were four and five deep along the Yaowarat road Chinatown stores in Bangkok, the heart of the Thai jewellery sector. Such was the instant drag on store inventory that the larger traders struggled to lock in supply from abroad to meet demand.

It was not just jewellery (or ornaments as it is known there) but investment demand that also shot up during this period. Indeed, several traders reported selling 49s bars into the market instead of waiting to convert the gold to the locally traded 965 purity as investors didn’t want to wait for the conversion. The stronger baht (the local currency has risen 9% this year against the green back) has also helped in lowering the local gold price. While demand rocketed in December offtake during October and November was more moderate, but the sheer volume of sales in the final month pushed total investment demand for the quarter to an estimated 20 tonnes, a 17% jump on last year, which was negatively impacted by the passing of the king, to the highest quarter for the year. Overall investment demand for the full year looks set to reach close to 78 tonnes, a three-year high but well short of the near 150 tonnes recorded in 2013.

In a reflection of the stronger demand base this year bullion imports have recovered significantly from the seven-year low seen in 2016. Imports to the end September (the latest customs data available), at 175 tonnes, were 135% higher than the corresponding period in 2016. Flows in October and November are likely to show more sedate growth but shipments in December may test the 37 tonnes imported in July.

THAILAND INVESTMENT AND JEWELLERY FABRICATION THAILAND MARKET OUTLOOK

35 Retail Investment Jewellery and retail investment demand picked up 30 Jewellery Fabrication sharply in early December as gold traded below $1,250 25 but eased considerably at years’ end due to higher prices. Another retracement in price would certainly 20 encourage renewed retail activity as would a push above

Tonnes 15 $1,320 drive liquidation. Traders are hoping for greater

10 volatility to encourage two-way trade as in recent months it has been heavily weighted to the buy-side of 5 the market. A modest rise in price would see this reversed 0 but the strength in the currency is currently suppressing Q4 2013 Q4 2014 Q4 2015 Q4 2016 Q4 2017 Source: GFMS, Thomson Reuters any upward movements.

24 GFMS GOLD SURVEY Q4 2017

VIETNAM

• Jewellery demand was stronger in Q4, rising 11% year-on-year, but investment demand continues to decline as consumers look elsewhere. GFMS GOLD SURVEY The Vietnam gold market has been in a partial lock down for the past five years following the government’s decision to suspend gold imports and tightly control consumer access to the precious metal through a series of legislative changes that limited the sale and distribution of investment bars. Rumours have been circulating for the past 12 months that the end of this hibernation is imminent with several banks and traders once again focusing on this market in the hope that the doors will again be thrown open.

In May 2012 the government of Vietnam introduced new legislation (Decree No.24) on the management of gold trading activities which essentially placed production, import and export of gold, and trading of gold bars/bullion in the hands of state-appointed organizations. Since then flows of gold into the country with a population of nearly 93 million have been almost entirely from unofficial sources. In recent years these flows have reached as much as 85 tonnes in a single year with the bulk emanating from Cambodia and to a lesser extend mainland China. This year investment demand in Vietnam has eased considerably, in the order of 15-20%, due to several factors that are common in the region. The growth of the domestic equities and property markets has seen available funds directed to higher yielding assets, while the lack of volatility in the gold price has significantly reduced the two-way trade. As a result of this weakness in the market unofficial imports have eased this year with our field research suggesting cross border flows will be close to 50 tonnes in 2017.

While investment demand has been waning Vietnam’s jewellery market has seen another year of expansion with fabrication stronger by close to 6% year-on-year. The domestic economy is chugging along nicely with annual GDP growth forecast to exceed 6% this year with this expansion leading to higher earnings and improved consumer spending. Fine gold consumption has been bolstered in recent years by the move to higher purity jewellery, a segment that was first introduced when the availability of gold bars were restricted in 2012. Consumers, especially in rural areas where the proceeds from the harvest were often held in gold bars, turned to 24ct jewellery as means of savings. The low mark-ups were attractive as the losses were minimal when it became time to liquidate their holdings – this has been common practice for many years in a number of Asian countries and is one of the major reasons why scrap flows can be so fluid. These days this segment has expanded to urban centres and is now well organised with the 24ct jewellery (primarily rings and medallions) encapsulated for protection like a small investment bar and sold in most retail outlets. While the premium on this product is slightly higher than the equivalent weighted bar the availability and ease of reselling as made it attractive to many investors. Indeed the growth of this sector may also partially explain the decline in traditional bar sales.

VIETNAM MARKET OUTLOOK

VIETNAM JEWELLERY CONSUMPTION AND INVESTMENT The international bullion market is hoping that 2018 will see Vietnam once again start importing bullion to Investment Price in Dong per kg (Mn) supplement the local supply. Several of these traders have 35 Consumption 1,200 been readying themselves for such an eventuation with 30 Price million dong/kilogramme most of the preliminary work already done. Rumours

25 started circulating in the middle of the year that changes 1,000 were imminent but as of yet there is no word from the State 20 Bank of Vietnam as to when this may occur. A renewed Tonnes 15 draft of decree 24 is said to be currently being worked on by 800 the government which will be released in due course. As to 10 what this may entail it is still unknown but hopefully it is a 5 step towards greater transparency and an open market. A

0 600 fully open market is likely way down the track but allowing Q1-13 Q1-14 Q1-15 Q1-16 Q1-17 bullion imports would be a great first step. Source: GFMS, Thomson Reuters

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PUBLISHED January 2018 BY THOMSON REUTERS The Thomson Reuters Building, 30 South Colonnade London, E14 5EP, UK E-mail: [email protected] Web: http://financial.thomsonreuters.com/en/products/tools-applications/trading-investment-tools/eikon-trading-software/ metal-trading.html UNITS USED

troy ounce (oz) = 31.1035 grammes tonne = 1 metric tonne, 32,151 troy ounces carat = gold purity in parts per 24

• Unless otherwise stated, U.S. dollar prices and their equivalents are for the LBMA Gold Price PM. • Unless otherwise stated, all statistics on gold supply and demand are expressed in terms of fine gold content. • Throughout the tables, totals may not add due to independent rounding; year-on-year changes are based on absolute numbers, not on the rounded figures displayed. ACKNOWLEDGEMENTS

The estimates shown in the GFMS Gold Survey and its quarterly updates for the main components of mine production, scrap, fabrication and investment demand are calculated on the basis of a detailed supply/demand analysis for each of the markets listed in the main tables. In the vast majority of cases, the information used in these analyses has been derived from visits to the countries concerned and discussions with local traders, producers, refiners, fabricators and central bankers. Although we also make use of public domain data where this is relevant, it is the information provided by our contacts which ultimately makes this GFMS Gold Survey unique. We are grateful to all of them. © 2017 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. Thomson Reuters and the Kinesis logo are trademarks of Thomson Reuters.