Growing Asian Demand In Physical Gold And Its Impact On Gold Prices

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1 The LBMA Bullion Market Forum June 215 Growing Asian Demand In Physical Gold And Its Impact On Gold Prices Minerals Council of Australia Gold Forum 2 June 215 ANZ Precious Metals at a Glance Awards At a Glance 214 Market Maker of the year 213 Market Maker of the year Trading Desks Sydney, Singapore, London and New York Lending Largest lender to the Natural Resources Industry in Australia Derivatives Active in Precious Metals derivatives 212 Market Maker of the year 214 Precious metals house of the year Physical Gold Active in trading over 1% of global supply Asia Significant supplier to Asia: 2% of China s imports COMMODITY RISK SURVEY 213 No 1. ranking in precious metals COMMODITY RISK SURVEY 212 No 1. ranking in precious metals Shanghai Gold Exchange Largest foreign trader on the Shanghai Gold Exchange Import License in China First foreign bank to be awarded the license 1 Session 5 - John Levin 1

2 The LBMA Bullion Market Forum June 215 ANZ Finances the Total Supply Chain in Precious Metals Miners Refiners Wholesalers Jewellers Fabricators Project Financing Pipeline Loans Consignments Metal Loans Inventory Loans 11 Full Service for Investment Clients Custody Clients will be able to access secure vaults in which to store their Gold ANZ has vaults in Perth and Singapore. Trading Clients can buy and sell Gold through ANZ 24 Hour Coverage Spot, Swaps and Options Transportation ANZ has agreements in place with secure transport companies Armoured vehicles and armed guards are available for transport to and from vaults Appraisal ANZ can pick up and assay any metal the client wants to sell and or have held in ANZ vaults Session 5 - John Levin 2

3 The LBMA Bullion Market Forum June 215 The key East Asia and the Middle East markets account for 53% of global gold demand Global Supply & Demand Heat Map Russia Canada Europe Turkey China US Ghana Middle East India Thailand Vietnam Indonesia Mexico Peru Sth Africa Australia Supply Demand Source: GFMS, WGC, ANZ Commodity Strategy Discussion Outline 1 Is NOW a good time to invest in gold? 2 Asia s impact on future gold demand 3 Difference between past and future 14 Session 5 - John Levin 3

4 The LBMA Bullion Market Forum June 215 Discussion Outline 1 Is NOW a good time to invest in gold? 15 Precious metals the outperformer of the commodity complex Precious metals don t look so bad, do they? PM Agri Industrials ANZ CCI Energy The ANZ-China Commodity Index is down 3% over the past 18 months Precious metals are the shining beacon in the commodity world 5 Bulks 4 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Gold looks even better in local currency terms Index, Jan 214 = EUR 12 JPY 115 CAD AUD 11 GBP 15 CHF INR Gold 95 In some currencies, gold is still in a bull market In Euro terms, gold is up nearly 25% in the past 18 months Australian, Canadian and Japanese consumers/producers have seen prices rise by 1-15% 9 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Source: Bloomberg, ANZ Research 16 Session 5 - John Levin 4

5 The LBMA Bullion Market Forum June 215 What does the big dollar mean for gold? USD bull markets = gold bear markets but the reverse is also true to Higher USD, Lower Gold 11 Oct 8 Oct 81 Oct 82 Oct 83 Oct 84 USD Gold (RHS) Lower USD, Higher Gold Mar 85 Mar 86 Mar 87 Mar 88 USD Gold (RHS) to Higher USD, Lower Gold 9 Aug 95 Aug 96 Aug 97 Aug 98 Aug 99 Aug Aug 1 USD Gold (RHS) Lower USD, Higher Gold Feb 2 Feb 3 Feb 4 Feb 5 Feb 6 USD Gold (RHS) to Higher USD, Lower Gold Lower USD, Higher Gold 9 Oct 11 Oct 12 Oct 13 Oct 14 Oct USD Gold (RHS) USD Gold (RHS) Source: Bloomberg, ANZ Research 17 Market Trend #1 - China Eyes too big for stomach Metric tonnes Metric tonnes Onshore stocks have increased by over 5 tonnes over the past 12 months This is likely to create problems with oversupply of physical metal Gold jewellery demand down 1% y/y in the first quarter of 215 Supply Demand Physical Stock Change (RHS) Metric tonnes imports are still too high Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar Value Our Physical Demand barometer showed a sharp pickup in Q2 imports This will continue to exacerbate the physical oversupply issues onshore Physical premiums and spreads will remain soft this year Imports (CH) Imports (HK) Demand Barometer (2m (RHS) fwd) (RHS) Source: ANZ Research 18 Session 5 - John Levin 5

6 The LBMA Bullion Market Forum June 215 Market Trend #2 - India No more supply shortage! USD/oz 1,8 1,7 1,6 1,5 1,4 1,3 RBI restricts imports 2/8 scheme implemented RBI relaxes import restrictions RBI removes 8: USD/oz Since the Reserve Bank of India removed import restrictions, supply has been ample Physical market premiums have done little more than trade around par 25 1,2 1, -25 1, Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15-5 Premium (RHS) MCEX (net) Import channels now wide open April Gold imports have picked up since import controls were relaxed in June 214 USD billion Y/Y % change But volume remains below the bull market run in Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 - Gold Imports y/y % change (RHS) Source: Bloomberg, Haver Analytics, ANZ Research 19 Market Trend #3 - Investors From a flood to a trickle metric tonnes 2,8 2,4 2, 1,6 1, , 1,8 1,6 1,4 1,2 1, 8 6 USD/oz Overall positioning looks much more balanced Exchange-traded funds not liquidating enmasse, in fact holdings have declined only marginally in the past 18 months Other ETFs SPDR Gold Trust Price (RHS) 4 Sentiment ship is slowly turning But we re not there yet Speculative positioning is bordering on neutral, reflecting the lack of a consensus view on gold Source: Bloomberg, ANZ Research 2 Session 5 - John Levin 6

7 The LBMA Bullion Market Forum June 215 Discussion Outline 1 Is NOW a good time to invest in gold? Gold will rise once the USD has had its run China/India physical demand is soft, rush to buy is not there Investors are sidelined by low conviction Accumulate! 2 Asia s impact on future gold demand 21 The Asian Century an economic perspective of the A1 Asia s ascension will be led by 1 economies China, India, Indonesia, Japan, South Korea, Malaysia, Philippines, Singapore, Thailand and Vietnam These 1 economies could account for 5% of global GDP by 25 6% Percentage of World GDP Current Prices 5% 4% 3% 2% 1% Asia 1 USA Euro Zone % Source: CEIC, ANZ Research projections Session 5 - John Levin 7

8 The LBMA Bullion Market Forum June 215 The income effect: rising wealth in Asia THA Global gold demand intensity (212) GER USA grams per capita CAN KOR VNM CHN JPN IND RUS MAL FRA IDN PHL 1, 2, 3, 4, 5, GDP per capita (25 USD) Source: Thomson Reuters GFMS, CEPII, ANZ Research 23 Financial reform and the substitution effect Economic development can have a negative impact on gold demand Less precautionary gold holdings More investment opportunities Higher/freemarket deposit rate Greater participation in equity markets Less shadow banking Other emerging Asian nations will follow China s example of liberalisation over the decades ahead 24 Session 5 - John Levin 8

9 The LBMA Bullion Market Forum June 215 Financial reform and Asia s new fund managers Institutional asset base of Asia 1 countries to continue growing Projected size of institutional assets (% of GDP) % of GDP Asia 1 Vietnam Thailand Singapore Philippines Malaysia South Korea Japan Indonesia India China Source: World Bank, ANZ Research 25 Total retail and institutional gold demand to double by 25 An increase to 5, annually, from 2,5 tonnes currently RETAIL CONSUMPTION (gm/capita) Asia 1 projected annual gold investment demand % OF INSTITUTIONAL HOLDINGS BY 25.%.5% 1.% 1.5% 2.% 2.5% 3.% 3.5% 4.% 4.5%.5 1,841 2,24 2,28 2,391 2,575 2,758 2,941 3,125 3,38 3, ,29 2,392 2,576 2,759 2,943 3,126 3,31 3,493 3,677 3,86.7 2,577 2,76 2,944 3,127 3,311 3,494 3,678 3,861 4,45 4, ,945 3,129 3,312 3,495 3,679 3,862 4,46 4,229 4,413 4, ,313 3,497 3,68 3,864 4,47 4,231 4,414 4,598 4,781 4, ,681 3,865 4,48 4,232 4,415 4,599 4,782 4,966 5,149 5, ,49 4,233 4,416 4,6 4,783 4,967 5,15 5,334 5,517 5, ,418 4,61 4,785 4,968 5,152 5,335 5,518 5,72 5,885 6, ,786 4,969 5,153 5,336 5,52 5,73 5,887 6,7 6,254 6, ,154 5,337 5,521 5,74 5,888 6,71 6,255 6,438 6,622 6, ,522 5,76 5,889 6,72 6,256 6,439 6,623 6,86 6,99 7, ,89 6,74 6,257 6,441 6,624 6,88 6,991 7,174 7,358 7, ,258 6,442 6,625 6,89 6,992 7,176 7,359 7,543 7,726 7, ,626 6,81 6,993 7,177 7,36 7,544 7,727 7,911 8,94 8, ,995 7,178 7,362 7,545 7,728 7,912 8,95 8,279 8,462 8, ,363 7,546 7,73 7,913 8,97 8,28 8,464 8,647 8,83 9,14 Source: Thomson Reuters GFMS, World Bank, ANZ Research 26 Session 5 - John Levin 9

10 The LBMA Bullion Market Forum June 215 Discussion Outline 1 Is NOW a good time to invest in gold? Gold will rise once the USD has had its run China/India physical demand is soft, rush to buy is not there Investors are sidelined by low conviction Accumulate! 2 Asia s impact on future gold demand Annual gold demand in Asia to double to 5, tonnes by 25 Higher incomes boosting consumption - Income effect Substitution effect initially negative, ultimately positive for demand 3 Difference between past and future 27 The pattern of gold production has changed in recent decades China is both the world s largest producer and consumer 135 Source: Thomson Reuters GFMS, ANZ Research 28 Session 5 - John Levin 1

11 The LBMA Bullion Market Forum June 215 Ultimately, the producer cost-curve should underpin prices 2% of world production is not profitable on a cash-cost basis tonnes But the years ahead could look different 2, 1, Annual Mine Production 1, 2, 3, 4, 5, 6, Below Ground Reserves 7, 8, 9, 1, Other Australia South Africa Russia Chile United States Indonesia Brazil Peru China Uzbekistan Ghana Mexico PNG Canada China may only have 5 years of domestic supply left Australia and South Africa are some of the highest-cost producers Historically, the 75 th percentile has provided a good guide to long-term price levels Cash Cost (USD/oz) 2, 1,8 1,6 1,4 1,2 1, Gold mining is not cheap 214 average price USD/oz (log scale) Long-term, the cost-curve will underpin prices 2, 1,6 1, , 1,25 1,5 1,75 2, Cumulative Production (tonnes) Gold Price Weighted Average 75th Percentile 9th Percentile Source: Wood Mackenzie, US Geological Survey, Bloomberg, ANZ Research 29 Producer hedging was common practice during the 199 s But the impact of this is now much smaller tonnes tonnes 5 25 (25) (5) 3, 2,5 2, 1,5 1, 5 Producer hedging activity in the gold market Hedging De-hedging Global Hedge Book Avg. gold price (RHS) 1,75 1,5 1,25 1, USD/oz Source: Thomson Reuters GFMS, Bloomberg, ANZ Research 3 Session 5 - John Levin 11

12 The LBMA Bullion Market Forum June 215 Central banks no longer net sellers of gold After liquidating holdings for most of the past 25 years Central bank activity in the gold market tonnes (2) (4) Central banks became net accumulators of gold since the global financial crisis Most of the buying has been from emerging market central banks, particularly Russia, Turkey and Kazakhstan (6) (8) Some should be holding more gold Percent of total FX reserves High-income countries hold an average 2% of FX reserves in gold, though this is heavily skewed by western European countries and the U.S. Countries in the other income brackets hold gold comprising less than 1% of reserves, on average High-income Upper middle- Lower middle- Low income income income Source: World Gold Council, World Bank, Bloomberg, ANZ Research 31 CONCLUSIONS 1 Is NOW a good time to invest in gold? Gold will rise once the USD has had its run China/India physical demand is soft, rush to buy is not there Investors are sidelined by low conviction Accumulate! 2 Asia s impact on future gold demand Annual gold demand in Asia to double to 5, tonnes by 25 Higher incomes boosting consumption - Income effect Substitution effect initially negative, ultimately positive for demand 3 Difference between past and future Cost-curve is supportive of prices Producer hedging is minimal and central banks net buyers Gold prices forecast to reach USD2,4/oz by Session 5 - John Levin 12

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