Global Real Assets Strategy Report: Focus on Gold

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1 Global Investment Strategy Global Real Assets Strategy Report: Focus on Gold February 28, 2017 John LaForge Head of Real Asset Strategy Analysis and outlook for the real assets market» Gold in recent decades has largely been bought as a store of value (jewelry, bars, coins), and not necessarily as money (Central Bank reserves). What it may mean for investors» Gold holds a place in most investors portfolios, most of the time.» As with other investments, timing and position sizes are key. Who Owns Gold Today, we ll discuss who owns the world s gold, and where it comes from. According to Chart 1, the earth has yielded about 175,000 tonnes of gold in history. Now, precisely where that gold sits today is tricky to understand because of gold s uniqueness, which was discussed yesterday. Gold s density allows great wealth to easily cross borders, making it tough to track. Adding to the tracking complications, gold is easily reshaped, and a little bit of gold stretches a long way. As an example, one ounce of gold can be pounded into wire form that could stretch for 50 miles. Chart 1. Gold Above Ground Total Gold Above Ground 140 1,000 Metric Tons Sources: Bloomberg, U.S. Geological Survey (USGS), Wells Fargo Investment Institute, 2/17/17. Yearly Data: data includes estimates from USGS. Dates selected to show modern growth of gold above ground Wells Fargo Investment Institute. All rights reserved. Page 1 of 7

2 Overall Gold Demand In the end, gold s uniqueness makes it difficult to trace all of the world s gold, and where it sits as of That said there are some sources that do a decent job of following current demand flows. Table 1 is a breakdown of yearly demand for five types of buyers: 1) Jewelry, 2) Bars and Coins, 3) Exchange Traded Products (ETPs), 4) Technology, and 5) Central Banks. As you can see in the Total column to the far right, gold demand has continued to ratchet-up in recent years even as gold prices have fallen 35 percent from its 2011 peak (Table 1, yellow highlight). Before we leave Table 1, please note that the majority of demand comes from Jewelry and Bars and Coins. These are what could be called consumer store of wealth buyers versus a Central Bank, which could be classified as a gold as money buyer. The point being that gold in recent decades has largely been bought as a store of value (jewelry, bars, coins), and not necessarily as money (Central Bank reserves). Table 1. Historical Demand for Gold by Source (Metric Tons) Jewellery Bars and Coins ETPs Technology Central Banks Total , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,308.7 Source: Metals Focus; ICE Benchmark Administration; World Gold Council, Wells Fargo Investment Institute, 2/17/17. Central Bank Demand Central Banks, while not the dominant gold buyers, increased their demand for gold in recent years. But to be clear, this demand is not coming from the traditional western Central Banks (Table 2, yellow highlight). This can be seen in Table 2, which highlights the top Central Bank holders of gold. Table 2. Top Six Central Bank Holders (Metric Tons) Country Change from 2012 to United States Germany Italy France China Russia Sources: World Gold Council, Wells Fargo Investment Institute, 2/17/17. Data as of February Wells Fargo Investment Institute. All rights reserved. Page 2 of 7

3 ETP Gold Demand Chart 2 shows global ETP gold holdings by region. As of the third quarter of 2016, 95 percent of ETP gold holdings were listed in North America and Europe. As such, swings in ETP demand are largely driven by these markets. Chart 2. ETP Gold Holdings by Region (metric tons) North America 1,340 Europe Asia Other Source: Respective ETP providers, Bloomberg, ICE Benchmark Administration, World Gold Council, Wells Fargo Investment Institute, 2/17/17. Data as of 9/30/ Wells Fargo Investment Institute. All rights reserved. Page 3 of 7

4 Consumer Demand (Jewelry, Bars and Coins) Overall consumer demand (jewelry, bars, coins, etc.) is driven to a significant extent by India and China, shown by the yellow highlight in Table 3. An interesting side note is that the U.S. is the third largest country buyer in the world. We say interesting because we do ask investors this question on occasion, and rarely does anyone guess that the U.S. is in the top three. Table 3. Consumer Demand in Selected Countries (Metric Tons) Country or Region Consumer Demand China 914 India 676 Europe ex CIS 272 Americas 269 United States 212 Middle East 211 World Total 3071 Source: Metals Focus; World Gold Council, Wells Fargo Investment Institute, 2/17/17. Data for year Americas' demand includes demand from the United States. India was historically the largest gold buyer, but it has been surpassed by China in recent years. Some of this was due to shrinking Indian demand, but increased demand from a rising Chinese middle class accounted for most of the change. Chart 3 shows gold imports flowing from Hong Kong into mainland China. Mainland China is now importing about 1000 tonnes of gold on a yearly basis. This is staggering considering that the yearly import number was consistently less than 200 tonnes prior to For added perspective, world mine production in 2015 was approximately 3000 tonnes. Effectively, the Chinese are importing about one-third of the world s annual mine production Wells Fargo Investment Institute. All rights reserved. Page 4 of 7

5 Many see Chart 3 and immediately jump to the conclusion that gold prices are soon set to spike higher, as Chinese demand continues to rise. This may very well be the case in the coming years. We ll certainly be watching Chart 3 with great interest. But keep in mind that there hasn t been a direct connection between gold prices and Chinese buying not yet anyway. The extra buying since 2011 largely happened as gold prices were falling. Chart 3. China Gold Imports Gross vs. Net Chinese Gold Imports Gross (metric tons - trailing 12 months) Chinese Gold Imports Net (metric tons - trailing 12 months) Metric Tons Chinese Gold imports Gross 12-Month % Change 12-Month % Change Sources: Hong Kong Census & Statistics Department, Bloomberg, Wells Fargo Investment Institute, 2/17/17. Monthly Data: 1/31/ /31/2016. Dates selected to show China's recent rapid increase of gold imports Wells Fargo Investment Institute. All rights reserved. Page 5 of 7

6 Gold Supply Global gold supplies can be separated into two main categories: 1) mine supply, and 2) recycled gold (Table 4, yellow highlight). In 2015, approximately three-fourth of overall supply came from mines, which is close to the historical yearly norm. Table 4. Gold Supply by Source (Metric Tons) Mine Production Net Producer Hedging Total Mine Supply Recycled Gold Total Supply Source: Metals Focus; GFMS, Thomson Reuters; ICE Benchmark Administration; World Gold Council, Wells Fargo Investment Institute, 2/17/17. On a country basis, the top six gold suppliers are China, Australia, Russia, the U.S., Canada, and Peru. Notice that the largest producers are not necessarily those countries with the largest reserves (Table 5, yellow highlight). That is it for today. Tomorrow we ll address how gold has performed historically under different investment scenarios. Table 5. Supply and Reserves by Country (Metric Tons) Mine Production Reserves China ,900 Australia ,100 Russia ,000 United States ,000 Canada ,000 Peru ,800 South Africa ,000 Mexico ,400 Uzbekistan ,700 Ghana ,200 Brazil ,400 Indonesia ,000 Papua New Guinea ,200 Other countries ,000 World Total 2,990 3,000 56,000 Sources: U.S. Geological Survey (USGS), Wells Fargo Investment Institute, 2/17/ figures are estimates from USGS Wells Fargo Investment Institute. All rights reserved. Page 6 of 7

7 Risk Factors There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk. Investments in gold and gold-related investments tend to be more volatile than investments in traditional equity or debt securities. Such investments increase their vulnerability to international economic, monetary and political developments. A metric ton is a unit of measurement based on the metric system and is known as a tonne in most other countries. It is equivalent to 1,000 kilograms. Disclaimers Global Investment Strategy ( GIS ) is a division of Wells Fargo Investment Institute, Inc. ( WFII ). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company. The information in this report was prepared by the GIS division of WFII. Opinions represent GIS opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Additional information available upon request. Past performance is not a guide to future performance. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee as to its accuracy or completeness. This material is published solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or investment product. Opinions and estimates are as of a certain date and subject to change without notice. Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. CAR Wells Fargo Investment Institute. All rights reserved. Page 7 of 7