The Strategic Case for Gold AAIN. David Badham, Investment. October 15 th 2012

Transcription

1 The Strategic Case for Gold AAIN David Badham, Investment October 15 th 2012

2 Introducing World Gold Council Funded by the world s leading gold mining companies. We promote the use of gold through marketing and market development activities in major international markets. Offices in key consuming countries: India China United States Combined market capitalisation $250bn+, revenue $80bn Members African Barrick Agnico Eagle Alamos Gold AngloGold Ashanti Barrick Gold Corporation Buenaventura Centerra Gold Inc Eldorado Gold Franco-Nevada Corporation Goldcorp Golden Star Resources Gold Fields Limited IAMGOLD Corporation Kinross Gold Corporation Newcrest Mining Ltd New Gold Newmont Mining Corporation Primero Mining Corp Yamana Gold Associates China Gold Group Corporation The Hutti Gold Mines Company Mitsubishi Materials Corporation Royal Gold Inc. 2

3 Agenda 1. Basic properties of gold investment Demand & Supply dynamics, return Risk management: volatility and correlation 2. Risk hedging properties of gold Tail risk properties Capital preservation: currency and inflation hedging 3. Gold in a portfolio context Optimal allocations Reduction of cross-correlation and portfolio risk 4. Gold in the new financial architecture 3

4 Basic properties of gold investment 4

5 Gold has outperformed most asset classes over the past decade 5

6 The current bull market in perspective 6

7 Drivers of gold demand growth Asian driver, Great Rebalancing -China and India, 50% of total gold demand today, by % of global middle-class consumer spending -Cultural affinity for gold and economic development will support demand by 2020, 300 million new middle class households Central banks -Central banks are net buyers led by emerging markets; trend will continue, diversification from US$ and Euro Investment demand -Economic uncertainty is conducive for gold investment: low/negative real rates, currency wars, potential inflation, heightened risks Gold is becoming a foundation asset in portfolio construction -Diversification and risk management are key in portfolio construction -Capital preservation makes gold a strategic asset 7

8 Physical above ground stock breakdown 68ft Total above ground stocks = 171,300 tonnes (US$8.7 trillion) 1 68ft 1 Based on end-2011 volume and 2011 average gold price. 2 Includes other fabrication (12.1%) and unaccounted for (2.1%) Source: Thomson Reuters GFMS, US Geological Survey, World Gold Council 8

9 Diversity of supply and demand 9

10 The gold market has experienced structural changes in demand 10

11 The evolving structure of gold supply mine production World Gold Council Presentation title Date 11

12 The Great Leveraging? 12

13 New finds are proving increasingly elusive... Represents 189 gold deposits discovered since 1990, each with at least 2m oz of gold in total reserves, resources and past production (or at least 1m oz in reserves) Data sources: Metals Economics Group Strategies for Gold Reserves Replacement

14 Risk hedging properties of gold 14

15 Gold s volatility tends to be lower than equity and commodity indices 15

16 Precious metals during the recent crisis Retracement from peaks Source: Bloomberg, World Gold Council 16

17 Gold is negatively correlated in tail risk events 17

18 Gold s volatility is positively skewed 18

19 Gold outperforms other alternative assets during period of turmoil 19

20 Gold tends to reduce losses when tail events occur 20

21 Following recent European policy events, also QE3 in the US, which statement best represents your view? 1. The foundations for sustainable recovery are in place; tail risks much reduced 4% 2. We are merely postponing deflation and restructuring; tail risks continue to be elevated 3. Too soon / difficult to judge 30% 66% Source: FT Family Office conference, 25 th Sept 2012

22 Gold s performance in a deflationary environment Oxford Economics in the study entitled The impact of inflation and deflation on the case for gold found: -Deflation might lead to a stronger dollar but gold benefits anyway due to the destructive impact on other assets -Gold performs better than equities and housing in deflationary environments 22

23 Gold in a portfolio context 23

24 The case for strategic allocation to gold Risk management - True portfolio diversification Lack of correlation to most other asset classes Tail-risk hedging -Moderate volatility -Deep and liquid market -No credit or counterparty risk Capital preservation -Inflation/deflation hedging -Currency hedging 24

25 Gold reduces portfolio value at risk 25

26 An allocation to gold over the past 12 years has resulted in higher risk-adjusted returns 26

27 Gold has a positive effect on portfolio performance Higher risk-adjusted returns -In the long-run, portfolios with modest allocations to gold (2%-10%) tend to outperform those without -From a tactical/short-term perspective, gold allocations can be adjusted higher to reflect particular macroeconomic views Lower Value at Risk (VaR) -Gold acts as a hedge against tail risks -On average, VaR is reduced when gold is added to a portfolio, especially during periods of market turmoil 27

28 Optimal allocations to gold range from 2% - 10% 28

29 Global allocations to gold remain small Total above ground stocks of gold in private hands ~ 32,000 tonnes by June Gold holdings as a % of total global assets were about 1% by June

30 Gold in the new financial architecture 30

31 New financial architecture Gold s growing role in the financial system 1. Exchanges (LCH, ICE, CME) are accepting gold as collateral Gold investors can earn yield on long term positions 2. Commercial banks can use gold: To raise cheaper funding (Gold used during credit crisis) As part of liquidity buffers As a reserve requirement (Turkey) 3. Central banks are: Building gold reserves Providing secured loan facilities backed by gold (Russia) 4. BASEL III: Deterioration of high quality liquid assets promotes gold s role CRD IV bank s liquidity buffers 31

32 Central banks have become net buyers of gold 32

33 In conclusion Gold is a top performer, real returns since it was freely traded are above long term average of zero AND it is a unique diversifier Demand and supply are diverse resulting in unique volatility, correlation and covariance properties Gold is a low cost tail risk hedge, volatility is positively skewed in periods of negative returns Gold is a currency which cannot be printed or de-based, a fiat currency hedge A unique diversifier in portfolios with a positive effect on portfolio performance Gold is being brought back into the fold as a critical asset in the world s financial system 33

34 Gold as an alternative currency 34

35 Bill Gross tweet, 14 th September 2012 Source: twitter 35

36 Disclaimer This presentation is provided solely for general information and educational purposes. It is not, and should not be construed as, an offer to buy or sell, or as a solicitation of an offer to buy or sell, gold, any gold related products or any other products, securities or investments. It does not, and should not be construed as acting to, sponsor, advocate, endorse or promote gold, any gold related products or any other products, securities or investments. This presentation does not purport to make any recommendations or provide any investment or other advice with respect to the purchase, sale or other disposition of gold, any gold related products or any other products, securities or investments, including without limitation, any advice to the effect that any gold related transaction is appropriate for any investment objective or financial situation of a prospective investor. A decision to invest in gold, any gold related products or any other products, securities or investments should not be made in reliance on any of the statements in this presentation. Before making any investment decision, prospective investors should seek advice from their financial advisers, take into account their individual financial needs and circumstances and carefully consider the risks associated with such investment decision. While the accuracy of any information communicated herewith has been checked, neither the World Gold Council nor any of its affiliates can guarantee such accuracy. In no event will the World Gold Council or any of its affiliates be liable for any decision made or action taken in reliance on the information in this presentation or for any consequential, special, punitive, incidental, indirect or similar damages arising from, related to or connected with this presentation even if notified of the possibility of such damages. Expressions of opinion are those of the author and are subject to change without notice. 36

37 37 Thank you World Gold Council 10 Old Bailey, London EC4M 7NG United Kingdom T F W

38 Additional slides 38

39 Investment demand in line with five-year average 39

40 Gold has low correlation relative to most asset classes in the long-run 40

41 Gold holds its value through time (100-year perspective) 41