RANGE-BOUND,LOWVOLATILITYPRECIOUSMETALSPRICESISNOTL OWRISK
May 2014 David Wang Executive Director Asia Precious Metals Sales TIAL NN STRICTLYPRIVATEANDCONFIDE This presentation was prepared exclusively for the benefit and internal use of the J.P. Morgan client to whom it is directly addressed and delivered (including such client’s subsidiaries, the “Company”) in order to assist the Company in evaluating, on a preliminary basis, the feasibility of a possible transaction or transactions and does not carry any right of publication or disclosure, in whole or in part, to any other party. This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by J.P. Morgan. Neither this presentation nor any of its contents may be disclosed or used for any other purpose without the prior written consent of J.P. Morgan. The information in this presentation is based upon any management forecasts supplied to us and reflects prevailing conditions and our views as of this date, all RISK of which are accordingly subject to change. J.P. Morgan’s opinions and estimates constitute J.P. Morgan’s judgment and should be regarded as indicative, preliminary and for illustrative purposes only. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the Company or any other entity. J.P. Morgan makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax or accounting effects of consummating a transaction. Unless expressly contemplated hereby, the information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects. Notwithstanding anything herein to the contrary, the Company and each of its employees, representatives or other agents may disclose to any and all persons, without limitation of any kind, the U.S. federal and state income tax treatment and the U.S. federal and state income tax structure of the transactions contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to the Company relating to such tax treatment and tax structure insofar as such treatment and/or structure relates to a U.S. federal or state income tax strategy provided to the Company by J.P. Morgan. J.P. Morgan's policies on data privacy can be found at http://www.jpmorgan.com/pages/privacy. J.P. Morgan’s policies prohibit employees from offering, directly or indirectly, a favorable research rating or specific price target, or offering to change a rating or price target, to a subject company as consideration or inducement for the receipt of business or for compensation. J.P. Morgan also prohibits its research analysts from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to benefit investors. IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters included herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing RECIOUSMETALSPRICESISNOTLOW
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RANGE-BOUND,LOWVOLATILITY 1 Global economy lifting after a dismal first quarter. Improving growth is concentrated in the US and Europe.
Global, US and China real GDP growth Real GDP (% q/q saar) Percent change Q/Q, SAAR
4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 12.0% Global Global 1.8% 2.0% 3.3% 3.4% 3.0% 2.0% 2.5% 3.3% 3.4% Developed Markets -0.5% 1.2% 2.4% 2.4% 1.9% 1.5% 1.5% 2.5% 2.6% RISK U.S. 10.0% China US 0.1% 1.1% 2.5% 4.1% 2.6% 0.1% 3.0% 3.0% 3.0%
Euro Area -2.0% -0.8% 1.3% 0.6% 0.9% 1.5% 1.7% 2.0% 2.0%
8.0% Japan 0.1% 4.5% 4.1% 0.9% 0.7% 4.5% -4.5% 2.0% 2.0%
UK -0.9% 1.4% 3.1% 3.4% 2.7% 3.2% 3.0% 2.5% 3.0%
6.0% Emerging Markets 5.6% 3.5% 5.2% 5.0% 5.0% 2.8% 4.1% 4.8% 4.9%
Asia 7.7% 4.9% 5.9% 7.4% 6.7% 5.0% 5.7% 6.5% 6.4%
4.0% China 9.0% 6.6% 7.0% 9.2% 7.6% 5.9% 6.8% 7.6% 7.4%
India 6.1% 4.7% 2.2% 6.3% 5.7% 4.5% 5.0% 5.2% 5.7%
2.0% Latin America 4.2% 1.4% 4.8% 0.7% 2.1% 0.3% 2.5% 2.4% 2.7% Brazil 3.6% 0.0% 7.5% -2.1% 2.8% -0.1% 2.2% 2.3% 2.2% RECIOUSMETALSPRICESISNOTLOW
PP EMEA 0.2% 0.0% 1.9% 2.4% 2.6% -1.2% 0.6% 1.4% 1.8% 0.0% Russia 0.3% -0.5% 2.5% 2.9% 3.0% -3.5% 0.0% 1.5% 2.0%
-2.0% 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14
Source: J.P. Morgan Economics Research. Note: shaded area indicates forecasts. Source: J.P. Morgan Economics Research. Note: shaded area indicates forecasts.
RANGE-BOUND,LOWVOLATILITY 2 Gold: The J.P. Morgan Base Case.
¢ Bottom line: Soft physical demand in India and China combined with a low inflation environment globally suggests limited potential for higher gold prices in the short term.
¢ We estimate that geopolitical fears stemming from the Ukraine/Russia conflict are driving most of the 7% price increase year-to-date. RISK ¢ For the moment, Indian gold use is constrained by import restrictions and low domestic availability yet the domestic supply environment seems to be becoming marginally better. We do not expect any changes to gold import restrictions until July at the earliest. Chinese gold imports declined by 17% mom in March and are down 10% yoy in the first quarter. Soft Chinese demand is reflected in weakening jewelry sales which were down 17% mom and 3% yoy in March.
¢ Ounces stop flowing out of gold ETFs, but do not begin to rise until late 2014.
¢ US tapering begins as planned. Investors are surprised to learn that tapering is bullish, not bearish, for commodities, because it is confirmation that both growth and inflation are increasing.
¢ We forecast average Comex prompt prices of $1,272 per troy oz in 2014 and $1,275 per troy oz in 2015 . RECIOUSMETALSPRICESISNOTLOW PP ¢ Our long-term gold price forecast is $1,400 per troy oz.
¢ Bearish price scenario: $1,000 per troy oz. in 2014.
¢ Bullish price scenario: $1,400 per troy oz. in 2014.
RANGE-BOUND,LOWVOLATILITY 3 Gold Bearish Risk Factor: all-in gold production costs continue to fall as mine production rises.
Production weighted average gold costs Total gold mine production US$ per troy oz Million troy ounces
¢ Height: 12.07cm (4.75”) ¢ Height: 12.07cm (4.75”) $1,200 -3% 110 ¢ Width: 11.01cm (4.33”) yoy -5% ¢ Width: 11.01cm (4.33”) – Horizontal: 3.38cm (1.33”) yoy? – Horizontal: 14.81cm (5.83”)
RISK – Vertical: 5.08cm (2.00”) – Vertical: 5.08cm (2.00”) +1.4 % $1,000 105 +3.3 % yoy +2% yoy +2% yoy? $800 yoy 100 +4.0% yoy
$600 95
$400 90
$200 RECIOUSMETALSPRICESISNOTLOW
PP 85
$0 2012 2013 2014F 80 All-In Sustaining Cost Cash Cost 2012 2013 2014F 2015F
Source: Company reports, Metals Focus, J.P. Morgan Commodities Research. Note: Source: Company reports, WGC, GFMS, J.P. Morgan Commodities Research 73.6% of production accounted for by company reports, 12.4% is estimated to come from co-production and resides in the first quartile, 3% are from private companies that enjoy a position in the second quartile, 4% are junior miners in the third quartile, and 7% are small marginal producers living in the fourth quartile).
RANGE-BOUND,LOWVOLATILITY 4 Gold Bearish Risk Factor: Historical Negative Correlation with IUSD
* On May 12, JPM FX strategy increased their year-end target for the trade weighted USD index by 3%. * Since Jan 1968, in months when the USD has appreciated (n=270 of 552), gold has averaged a -10.1% annualized return.
In environments where the US Dollar is appreciating
Negative returns for gold are more frequent… …and average –37% ann. across the down months. RISK
¢ Height: 12.07cm (4.75”) ¢ Height: 12.07cm (4.75”) 200 60% ¢ Width: 11.01cm (4.33”) ¢ Width: 11.01cm (4.33”)Return Volatility 63% 180 – Horizontal: 3.38cm (1.33”) – Horizontal: 14.81cm (5.83”) – Vertical: 5.08cm (2.00”) – Vertical: 5.08cm (2.00”) 40% 35.7% 160
140 20% 15.1% 11.9% 10.9% 120 37% 0% 100
RECIOUSMETALSPRICESISNOTLOW -10.1%
PP 80 -20%
60 -40% -37.2% 40
20 -60% Ann. average if Ann. average if Ann. average 0 positive negative Positive Returns Negative Returns
Source: Federal Reserve, CMX, Bloomberg, J.P. Morgan Commodities Research. Monthly data from Jan 1968 to April 2014.
RANGE-BOUND,LOWVOLATILITY 5 Gold bearish risk factor: Falling gold prices lead producers to hedge, creating further headwinds for price.
Gold producers have been de-hedging on net for 12 of the last 13 years. This has left the outstanding hedge book below 100 tonnes (3.2 mln troy oz).
Gold producer hedging (net) Estimated size of the outstanding hedge book for global Million troy ounces gold producers Million troy ounces RISK ¢ Height: 12.07cm (4.75”) ¢ Height: 12.07cm (4.75”) 20 120 ¢ Width:Hedging 11.01cm (4.33”) ¢ Width: 11.01cm (4.33”) – Horizontal: 3.38cm (1.33”) – Horizontal: 14.81cm (5.83”) 15 – Vertical: 5.08cm (2.00”) – Vertical: 5.08cm (2.00”) 100 10 80 5
0 60
RECIOUSMETALSPRICESISNOTLOW-5 PP 40
-10 De-hedging 20 -15
-20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Source: GFMS, WCG, J.P. Morgan Commodities Research Source: GFMS, WCG, J.P. Morgan Commodities Research
RANGE-BOUND,LOWVOLATILITY 6 Gold bearish risk factor: investors continue to move money away from ETFs and central banks become net sellers.
Global gold ETF holdings Gold inventories begin to rise and ounces in gold Million troy ounces ETFs remain flat or begin to decline again. 90 ¢ Height: 5.08cm (2.00”) ¢ Global gold ETF holdings started to increase gradually 80 ¢ Width: 11.01cm (4.33”) at the end of February from 55.8 mn troy ounces to 70 – Horizontal: 3.38cm (1.33”) 56.9 mn oz by the end of March. Since then, gold
RISK – Vertical: 5.08cm (2.00”) 60 ETFs have been losing ounces and currently stand at 50 55.4 mn oz., the lowest level since 2009. 40 Jul-13 Jan-13 Jan-14 Mar-13 Mar-14 Sep-13 Nov-13 May-13 May-14
Source: Bloomberg World gold reserves Central Banks become net sellers again. Million troy ounces ¢ According to IMF data, world gold reserves decreased 1,300 ¢ Height: 5.08cm (2.00”) by 2.23 mn troy oz (–0.2%) in the first two months of 1,250 ¢ Width: 11.01cm (4.33”) 2014, with Turkey and Russia selling an addition 460 1,200 – Horizontal: 3.38cm (1.33”) 1,150 and 39 thousand troy oz, respectively, in March.
RECIOUSMETALSPRICESISNOTLOW – Vertical: 12.07cm (4.75”)
PP 1,100 1,050 1,000 950 900 60 64 68 72 76 80 84 88 92 96 00 04 08 12
Source: IMF, J.P. Morgan Commodities Research
RANGE-BOUND,LOWVOLATILITY 7 Gold bullish risk factor: since Jan 1968, in the months in which the US dollar has depreciated (n=282 of 552), gold has averaged a +25.0% annualized return.
In environments where the US dollar is depreciating
Positive returns for gold are more frequent… …and average above 50% ann. in positive return months.
200¢ Height: 12.07cm (4.75”) ¢ Height: 12.07cm (4.75”) 67% 60% ¢ Width: 11.01cm (4.33”) ¢ Width:51.7% 11.01cm (4.33”)Return Volatility RISK 180 – Horizontal: 3.38cm (1.33”) – Horizontal: 14.81cm (5.83”) – Vertical: 5.08cm (2.00”) – Vertical: 5.08cm (2.00”) 40% 160 25.0% 140 20% 15.5% 17.2% 7.0% 120 33% 0% 100
80 -20%
60 -29.0%
RECIOUSMETALSPRICESISNOTLOW -40% PP 40
20 -60% Ann. average if Ann. average if Ann. average 0 positive negative Positive Returns Negative Returns
Source: Federal Reserve, CMX, Bloomberg, J.P. Morgan Commodities Research. Monthly data from Jan 1968 to April 2014.
RANGE-BOUND,LOWVOLATILITY 8 Gold bullish risk factor: geopolitical tensions in Ukraine continue to buoy the gold price.
Rebels declare victory in east Ukraine vote on self-rule The propensity for geopolitical tension is rising and lending support to gold prices.
¢ The situation in Ukraine has been
RISK deteriorating with escalating risk of territorial loss in eastern Ukraine.
¢ We estimate that geopolitical fears stemming from the Ukraine/Russia conflict are driving most of the 7% price increase year-to-date.
Source: Reuters, Marko Djurica RECIOUSMETALSPRICESISNOTLOW PP
RANGE-BOUND,LOWVOLATILITY 9 Gold bullish risk factor: Indian export restrictions are relaxed in 2H2014 as Chinese demand strengthens simultaneously.
India's gold imports The 80:20 export restriction in India is significantly Million troy ounces relaxed.
8¢ Height: 5.08cm (2.00”) India gold imports ¢ Some additional Indian banks have been granted 7 ¢ Width: 11.01cm (4.33”) 2012 avg monthly import 6 licenses to import gold, which will likely limit the rise in 5 – Horizontal: 3.38cm (1.33”) 2013 avg monthly import premium. This move to allow more banks to import
RISK 4 – Vertical: 5.08cm (2.00”) 3 gold may double average monthly shipments from 20 2 tonnes (0.64 mn t oz) per month in 4Q2013 to 40 1 tonnes (1.29 mn t oz), according to our estimates. 0 Jul-13 Apr-13 Oct-13 Jan-13 Jan-14 Jun-13 Mar-13 Mar-14 Feb-13 Feb-14 Aug-13 Sep-13 Nov-13 Dec-13 May-13 Source: Newswire, J.P. Morgan Commodities Research China's gold imports from Hong Kong Chinese gold demand picks up stronger than Million troy ounces expected in 2H2014. ¢8 Height: 5.08cm (2.00”) 7 ¢ Gold demand is likely to pick up seasonally in the 6 ¢ Width: 11.01cm (4.33”) fourth quarter in preparation for the Chinese New 5 – Horizontal: 3.38cm (1.33”) 4 Year. Our China-focused economists forecast a 3%
RECIOUSMETALSPRICESISNOTLOW – Vertical: 12.07cm (4.75”) 3 PP appreciation in Yuan by the end of the year, which will 2 1 also likely provide support to gold imports. 0 Jul-12 Jul-13 Jan-12 Jan-13 Jan-14 Mar-12 Mar-13 Mar-14 Sep-12 Nov-12 Sep-13 Nov-13 May-12 May-13
Source: Hong Kong Statistics, J.P. Morgan Commodities Research
RANGE-BOUND,LOWVOLATILITY 10 Gold bullish risk factor: inflation picks up much stronger than expected reviving the classic investment thesis for gold.
Consumer prices, % yoy Inflation in both EM and DM economies increases quicker than is expected. 10%¢ Height: 5.08cm (2.00”) 8% World China US DM EM ¢ 6% Width: 11.01cm (4.33”) ¢ Economists at the European Commission expect 4% – Horizontal: 3.38cm (1.33”) euro-zone inflation to average 0.8% this year and
RISK 2% – Vertical: 5.08cm (2.00”) 1.2% next year. This compares to the February 0% forecast of 1.0% and 1.3%, respectively. -2% -4% 1Q2000 4Q2000 3Q2001 2Q2002 1Q2003 4Q2003 3Q2004 2Q2005 1Q2006 4Q2006 3Q2007 2Q2008 1Q2009 4Q2009 3Q2010 2Q2011 1Q2012 4Q2012 3Q2013 2Q2014 1Q2015 4Q2015 Source: J.P. Morgan Research. Note: shading indicates forecast. The University of Michigan 1 year ahead inflation US inflation breaks above the 1.0% to 1.5% range. expectation, %yoy ¢ Year ahead inflation expectations from the University 6%¢ Height: 5.08cm (2.00”) of Michigan survey are at 3.2%, more than 2x the 5% ¢ Width: 11.01cm (4.33”) current rate. 4% – Horizontal: 3.38cm (1.33”)
RECIOUSMETALSPRICESISNOTLOW3% – Vertical: 12.07cm (4.75”) PP 2% 1% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: University of Michigan
RANGE-BOUND,LOWVOLATILITY 11 Gold bullish risk factor: gold and commodities in general outperform financial assets when US CPI is rising, raising the question of ‘when’ does inflation return?
Annualized total returns and volatility for various asset classes by stage of US business cycle
US CPI rate is above average and rising US CPI rate is above average and falling
30% 30% 25% 23% 25% 21% 23% 25% 22% 20% 17% 20% 15% 15% RISK 15% 15% 12% 11% 9% 11% 10% 5% 10% 3% 5% 5% 0% 0% -5% -5% -10% -5% -10% -8% CMX Gold S&P GSCI Large Cap US US Corporate CMX Gold S&P GSCI Large Cap US US Corporate Equities Bonds Equities Bonds Ann. total return Ann. volatility Ann. total return Ann. volatility
US CPI rate is below average and rising US CPI rate is below average and falling
30% 30% 25% 22% 25% 18% 20% 16% 15% 20% 13% 15% 14% 14% 15% 15%
RECIOUSMETALSPRICESISNOTLOW15% 15%
PP 9% 10% 7% 6% 10% 8% 4% 4% 5% 5% 0% 0% -5% -5% -10% -10% CMX Gold S&P GSCI Large Cap US US Corporate CMX Gold S&P GSCI Large Cap US US Corporate Equities Bonds Equities Bonds Ann. total return Ann. volatility Current Ann. total return Ann. volatility
Source: Federal Reserve, S&P, Ibbotson, FINRA, Dow Jones, CMX, J.P. Morgan Commodities Research. Note: “rising” and “falling” refer to the path of US CPI. Above” and “below” refer to the average level of US CPI (2.3% since July 2001). Data from Jan 1971 through Apr 2014.
RANGE-BOUND,LOWVOLATILITY 12 Baseline global gold supply and demand balance (million troy ounces).
Supply 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F
Asia 18.2 16.7 18.8 17.5 20.8 21.2 20.4 21.0 22.7 23.1 22.6 China 7.4 7.9 9.0 9.4 10.4 11.3 11.9 13.0 14.0 13.8 13.3 North America 13.3 12.8 12.4 12.3 12.2 13.3 13.7 14.7 15.2 16.4 16.7 Central & South America 14.2 15.0 14.3 14.6 15.5 15.9 16.3 16.6 17.1 17.4 17.7 Europe 0.6 0.8 0.8 0.8 1.0 1.1 1.4 1.6 1.6 1.7 1.7 Eurasia 9.4 9.2 9.0 9.8 10.3 10.7 11.2 11.8 12.1 12.8 13.3 Middle East 0.2 0.2 0.1 0.1 0.2 0.1 0.1 0.2 0.2 0.2 0.2 Africa 17.6 17.3 16.5 15.6 16.4 17.1 18.7 18.8 19.0 19.7 20.8 RISK Oceania 8.8 8.3 8.3 7.3 7.6 8.8 8.7 8.6 9.1 9.2 9.3 Total Mine Production 82.3 80.2 80.3 78.1 83.9 88.1 90.6 93.3 97.1 100.4 102.3 Percentage growth YoY 2.3% -2.6% 0.1% -2.7% 7.5% 5.0% 2.8% 3.0% 4.0% 3.3% 1.4% Official Sector Sales 21.2 12.9 16.1 7.6 2.0 0.6 0.0 0.0 0.0 0.0 0.0 Scrap 28.6 37.6 30.9 38.9 54.4 54.9 53.5 51.1 44.1 45.0 46.6 Total Supply 132.1 130.7 127.3 124.6 140.3 143.6 144.1 144.4 141.1 145.4 148.9
Demand 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F
Jewelry 87.2 73.6 77.6 74.1 58.4 65.0 63.5 60.9 71.0 73.3 75.2 Other Fabrication 13.9 14.8 14.9 14.8 13.2 15.0 14.5 13.1 13.0 13.2 13.2 Official Sector Purchases 0.0 0.0 0.0 0.0 0.9 3.0 14.7 17.5 11.9 10.4 8.8 Bar and Coin Investment 12.6 13.4 13.8 28.3 25.0 39.0 48.9 41.4 53.2 47.3 41.8 Other Physical Investment 18.4 29.0 21.0 7.4 42.8 21.6 2.5 11.5 -7.9 1.2 9.9 Total Demand 132.1 130.7 127.3 124.6 140.3 143.6 144.1 144.4 141.1 145.4 148.9
Price and volatility forecasts 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F
CMX average cash price ($/troy oz.) $446 $605 $697 $872 $973 $1,226 $1,571 $1,669 $1,412 $1,272 $1,275 RECIOUSMETALSPRICESISNOTLOW
PP Realized cash price volatility (%-ann) 13.6 19.8 20.0 22.0 30.3 17.9 16.7 21.2 24.0 30.0 21.0
Source: Company reports, WGC, GFMS, CMX, J.P. Morgan Commodities Research
RANGE-BOUND,LOWVOLATILITY 13 Macro Indices & Gold Prices
Historical Chat of S&P 500, Gold and US 10yr Bond Yield
1700 ($/oz)
1600
1500
1400
RISK 1300
1200
1100
2000 ($/oz) 4.5 (%) 4 1800 3.5
1600 3
2.5 1400 RECIOUSMETALSPRICESISNOTLOW
PP 2
1200 1.5
1 1000 0.5 S&P 500(LH) Gold(LH) US 10yr Bond yield (RH) 800 0 09 09 10 10 10 11 11 11 12 12 12 13 13 13 14 09 09 10 10 10 11 11 11 12 12 12 13 13 13 14 ------Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Mar Mar Mar Mar Mar Sep Nov Sep Nov Sep Nov Sep Nov Sep Nov May May May May May
Source: Bloomberg
RANGE-BOUND,LOWVOLATILITY 14 Major Commodities Underlying Implied Volatility Overview
Across the Commodities and Macro Indices Volatility is Low
35 (%)
30
25 RISK
20 100 (%) Brent Vol 15 90 10 Copper vol 80
70 Gold Vol
60 Wheat vol
50
RECIOUSMETALSPRICESISNOTLOW40 PP
30
20
10
Source: Bloomberg
RANGE-BOUND,LOWVOLATILITY 15 Option Market – Implied Volatility vs Historical Volatility
Gold Implied Volatility vs Historical volatility
35 (%) 3m implied vol 90d realized vol 24m implied vol RISK
30
25
20 RECIOUSMETALSPRICESISNOTLOW PP 15
10
Source JPMorgan
RANGE-BOUND,LOWVOLATILITY 16 Option – 25delta Call & Put Skews
Call and Put skews are fairly balanced, implying a fairly even split between the bulls and bears… or just undecided!
5 (%) Put25d Call 25d
RISK 4
3
2
1
0 RECIOUSMETALSPRICESISNOTLOW PP
-1
-2
-3
Source: JPMorgan
RANGE-BOUND,LOWVOLATILITY 17 Correlation between Gold and Macro Indices
Correlation with other assets
80% (%) XAU vs U.S. 10yr bond yield XAU vs S&P 500 XAU vs USD Index XAU vs U.S. 10yr bond yield (Aevrage)
60% XAU vs S&P 500 (Average) XAU vs USD Index (Average) RISK
40%
20%
0%
-20% RECIOUSMETALSPRICESISNOTLOW PP
-40%
-60%
-80%
Source: Bloomberg
RANGE-BOUND,LOWVOLATILITY 18 Historical Mean Reversion Matrices
Gold vs Silver Gold vs Platinum
90 Gold/Silver Ratio Average 2.8 Platinum/Gold Ratio Average 2.6 80 2.4 70 2.2
RISK 60 2 1.8 50 1.6 40 1.4 1.2 30 1 20 0.8 Source:
Source: Bloomebrg Source: Bloomebrg
Copper vs Gold
14 Copper/Gold Ratio Average RECIOUSMETALSPRICESISNOTLOW
PP 12 10 8 6 4 2 0
Source: Bloomebrg
RANGE-BOUND,LOWVOLATILITY 19 Geo-political Risks and Gold as “Safe-haven”
Is Russia risk already over?
1950 MICEX Index (Russia Equity) (LH) 475 Gold (LH) 1850
RISK MSCI Emerging Europe,Middle East & Africa Index (RH) 425 1750
1650 375 Russia/Ukraine 1550
325 1450
1350
RECIOUSMETALSPRICESISNOTLOW 275 PP
1250 Arab Spring
1150 225 13 13 13 13 13 14 14 11 11 11 11 11 12 12 12 12 12 12 12 13 13 13 13 13 13 14 14 11 11 11 11 11 11 12 12 12 12 13 14 11 12 ------Jul Jul Jul Apr Oct Apr Apr Oct Apr Oct Jan Jun Jan Jan Jun Jan Jun Mar Mar Mar Mar Feb Feb Feb Feb Nov Nov Nov Dec Aug Sep Dec Aug Sep Dec Aug Sep May May May May
Source: Bloomberg
RANGE-BOUND,LOWVOLATILITY 20 Euro Risk is another factor to watch
Euro/USD vs Greece/German 5yr CDS Spread
1400 Euro/USD Greece-German CDS Spread 1.39
1200 RISK
1.37
1000
1.35 800
1.33 600
1.31 400 RECIOUSMETALSPRICESISNOTLOW PP
1.29 200
1.27 0 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14
Source: Bloomberg
RANGE-BOUND,LOWVOLATILITY 21 Gold inflation hedge? How risky is the inflation risk?
CPI (YoY) vs U.S. House Hold income (YoY) CPI (YoY) vs US M2 Supply (YoY)
CPI (YoY) CPI (YoY) 14% 14% U.S. House Hold Income (YoY) US M2 Supply (YoY) RISK
12% 12%
10% 10%
8% 8%
6% 6%
4% 4% RECIOUSMETALSPRICESISNOTLOW PP 2% 2%
0% 0% 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 -2%
Source: Bloomberg Source: Bloomberg
RANGE-BOUND,LOWVOLATILITY 22