The Gold Price Outlook Bullish/Bearish Factors

The Gold Price Outlook Bullish/Bearish Factors DGG European Gold Forum Dr. Martin Murenbeeld Zurich - May 6, 214

Last Year s Forecast April 16, 213 Scenario C was downgraded and the probabilities were shifted towards Scenario A in the latest update! Gold Price Scenarios 213-avg 213-end 214-avg Scenario A: p = 3% $1519 $141 $1338 Scenario B: p = 5% $1637 $1665 $17 Scenario C: p = 2% $1767 $195 $213 Weighted $1625 $1653 $177 Actual $1411 $125???? 2

1 What Went Wrong in 213? An orgy of ETF sales 881 tonnes in 213! Change from previous week, tonnes -1-2 -3-4 -5-6 -7 213-Q1 213-Q2 213-Q3 213-Q4 Source: Bloomberg, World Gold Council, DCM Economics 3

275 25 225 2 What Went Wrong in 213? ETF investors sold gold Tonnes Last date: April 24, 214-895 T -34% 175 15 125 1 75 5 25 Other SPDR Gold ETF -561 T -42% Apr-3 Mar-4 Mar-5 Mar-6 Mar-7 Mar-8 Mar-9 Mar-1 Mar-11 Mar-12 Mar-13 Mar-14 Source: ExchangeTradedGold.com, Bloomberg 4

3 24 What Went Wrong in 213? And the specs sold off net-long positions Weekly data Last date: April 22, 214 Gold Price (quarterly % change) 36 24 18 12 12 67.7 tonnes 6 Specs net long -12-24 -6 27 28 29 21 211 212 213 214-36 5 Source: US CFTC, Comex ETF sales plus COMEX spec selling totaled nearly 15 tonnes in 213!

19 What Went Wrong in 213? And everyone bought equities* 2 18 17 S&P 5 Gold 1875 175 16 1625 15 15 14 1375 13 125 12 1125 11 1 9 8 7 6 Daily data Last date: April 3, 214 27 28 29 21 211 212 213 214 Source: Thomson Reuters Datastream, London Bullion Market Association Massive negative correlation in 213: -.88 1 875 75 625 5 375 6 * what s good for gold is also good for equities

What Went Right in 213? Chinese demand picked up the slack! 25 2 15 Chinese Gold Imports from Hong Kong (monthly tonnes) 557 tonnes (net) 1158 tonnes (net) 1 5-5 Chinese Gold Re-Exports to Hong Kong (monthly tonnes) -1 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Source: Thomson Reuters Datastream, Hong Kong Census, DCM Economics Last month: February 214 7

225 What Went Right in 213? Chinese imports from Hong Kong hit record levels 2 175 Chinese Gold Imports through Hong Kong (monthly tonnes) 15 125 3-month MA 1 75 5 25 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Source: Thomson Reuters Datastream Last month: February 214 8

195 185 175 165 155 145 135 125 115 15 95 9 Where are we now? Struggling! Gold - $/oz Death Cross! 5-day MA 2-day MA Golden Cross! Last date: May 1, 214 21 211 212 213 214 Source: London Bullion Market Association $1895 $1795 $1694 $1614 $154 $1469 $142 $1385 $125 $1192 $1157 $158

The Outlook for 214-215 A balance between Bullish and Bearish factors! 1. Eight Bullish Factors, including: ETF supply will decline dramatically Asian physical demand will continue Global debt crisis will require ongoing monetary reflation Long-run central bank demand will remain firm 2. Five Bearish Factors, including: Fed will end QE US dollar will remain firm in 214 Inflation will remain mostly absent Financial assets will remain attractive 3. Forecast Flat to moderately bullish! 1

Bullish: (1) Gold Supply Supply to jewelers/investors unlikely to rise 15 Net Mine Supply ( supply less dehedging) Tonnes Billion US$ 15 Net Mine Supply + Scrap Supply Tonnes 12 Rising Modestly 12 9 9 6 6 Stable 3 3 29 21 211 212 213 214 29 21 211 212 213 214 15 12 9 6 3 Net Mine Supply + Scrap CB Demand Tonnes Stable Lower gold prices should curtail mine output going forward! (e) 29 21 211 212 213 214 11

2 1 Bullish: (1) Gold Supply Massive sales in 213 not to be repeated in 214! Change from previous week, tonnes -1-2 -3-25 tonnes 214 to date -4-5 -869 tonnes 213-6 -7 213-Q1 213-Q2 213-Q3 213-Q4 214-Q1 214-Q2 214-Q3 214-Q4 Source: Bloomberg, DCM Economics 12

11 1 9 8 7 6 5 4 Bullish: (2) Consumer Demand* India/China becoming richer LT demand positive tonnes RoW China India 3 2 49% 1 9-Q1 1-Q1 11-Q1 12-Q1 13-Q1 14-Q1 13 Source: World Gold Council Gold Demand Trends - Full Year 213 data tabulated by Thomson Reuters GFMS *Consumer Demand = Jewelry + bar/coin

2 Bullish: (3) CB s Buying Gold Data show demand holding up 15 tonnes 1 5-5 -1 Central Bank Gold Sales/Purchases 9-Q1 1-Q1 11-Q1 12-Q1 13-Q1 14-Q1 Source: World Gold Council Gold Demand Trends - Full Year 213 Thomson Reuters GFMS 14

Bullish: (3) CB s Buying Gold Global FX reserves are excessive (62% in $ s) Foreign Exchange Reserves (countries over $1 bn) bn$ bn$ China 3978.1 Hong Kong 315.8 Japan 1213.4 India 266.9 Saudi Arabia 727.4 Algeria 191.7 Switzerland 491.9 Mexico 173.6 Russia 429.7 Thailand 158.8 Taiwan 419.2 Malaysia 125.8 Brazil 354.1 Libya 115.7 Korea 341. Turkey 14.3 TOTAL 947.3 Addendum: Fuel Exporters $184 bn Source: IM F - data through M arch 214 Some central banks like the fact that gold is not a liability of the Federal Reserve RUSSIA? CHINA? OIL EXPORTERS? 15

Bullish: (4) Global Debt Crisis Entitlements are killing Western economies 7 6 US Budget: Percent of total outlays Entitlements 5 4 3 2 Defense Interest on Debt 1 Other Annual data (last year 213) 197 1975 198 1985 199 1995 2 25 21 Source: Bureau of Economic Analysis 16

25 2 15 Bullish: (4) Global Debt Crisis Countries accordingly have high debt/gdp ratios Percent of GDP 22 28 214 General government debt 1 Over 9% spells trouble (Reinhart/Rogoff) 5 Japan Italy US Portugal Greece Spain France Source: IMF Fiscal Monitor April 214 17

Bullish: (4) Global Debt Crisis Higher growth needed (and lower interest rates) Estimates for 213 Primary Nominal 5-year Balance GDP Growth Bond Yield A B C A+B-C Greece 1.5-5.8 5. -9.3 Japan -7.6 1..2-6.8 Spain -4.3 -.6 1.7-6.6 Ireland -3.4.1 1.1-4.5 Portugal -.7.3 2.6-3. US -4.1 3.4 1.7-2.4 Canada -2.6 3.3 1.7-1.1 Italy 2. -.4 1.9 -.3 Germany 1.7 2.7.6 3.7 Sources: Primary Balance - IM F Fiscal M onitor, April 214 Nominal GDP - IM F World Economic Outlook, April 214 Yields as of April 28, Thomson Reuters DataStream (Greece: April 1 bond sale) RED: Debt/GDP ratio to rise further! For debt ratio to decline A+B C > As it stands only Germany will actually have reduced its Debt/GDP ratio in 213!! 18

Bullish: (4) Global Debt Crisis So what will governments do? Government Choices: Austerity: Cut services/raise taxes Deflate accept depression Reflation: Inflate-devalue-default Financial repression Bad for gold Good for gold 19

1 Bullish: (4) Global Debt Crisis All balance sheets expanding ECB excepted January 2 = 1 8 6 People's Bank of China Bank of England* Federal Reserve European Central Bank Bank of Japan 4 2 Set to 1 Last month: March 214 1 2 3 4 5 6 7 8 9 1 11 12 13 14 *Bank of England June 26 = 13 Source: Thomson Reuters Datastream 2

11 Bullish: (4) Global Debt Crisis But ECB will have to change policies 15 REAL GDP Q4 27 = 1 1 United States 95 9 Eurozone 85 8 Last quarter: 213-Q4 1 2 3 4 5 6 7 8 9 1 11 12 13 14 Source: US Bureau of Economic Analysis, Eurostat, DCM Economics calculations 21

185 17 Bullish: (4) Global Debt Crisis Liquidity is important to gold 16.5 15. 155 14 125 Gold oversold in 213? 13.5 12. 1.5 11 9. 95 8 65 Gold (month average) Global Liquidity 7.5 6. 4.5 5 3. 35 2 82 84 86 88 9 92 94 96 98 12 12 12 12 1 12 14 Global Liquidity: FX Reserves + US MBase Source: London Bullion Market Association, IMF International Financial Statistics, Federal Reserve Last month: Gold April 214 Liquidity March 21r 1.5. 22

6 48 Bullish: (4) Global Debt Crisis Gold often rises and falls with liquidity % % 42 35 36 Gold Global Liquidity 28 24 21 12 14 7-12 -24 Correlation:.62 Gold oversold in 213? -7-36 Last month: April 214 82 84 86 88 9 92 94 96 98 2 4 6 8 1 12 14-14 Global Liquidity: FX Reserves + US MBase Source: London Bullion Market Association, IMF International Financial Statistics, Federal Reserve 23

Bullish: (5) Dollar Fundamentally Overvalued US dollar should continue to decline 15 14 13 12 US recession US Dollar Indices Fed Major (March 1973=1) Murenbeeld-EFXR (Jan 1999=1) Murenbeeld-NEFXR (Jan 1999=1) 11 1 9 8 7 6 Last month: April 214 73 75 77 79 81 83 85 87 89 91 93 95 97 99 1 3 5 7 9 11 13 Source: Wall Street Journal, Federal Reserve, DCM Economics 24

Bullish: (5) Dollar Fundamentally Overvalued US trade deficits are much too large -1-2 -3 bn$ Billion US$ -1-2 -3-5 -1 bn$ Billion US$ -5-1 -4-4 -15-15 -5-6 -7-8 World 12-month total bn$ 12-month total (goods only) -9 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14-5 -6-7 -8-9 -2-25 China -3 12-month -35 total bn$ 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14-2 -25-3 -35-2 -4-6 bn$ Billion US$ -2-4 -6-1 -2-3 -4 bn$ Billion US$ -1-2 -3-4 -8-8 -5-5 -1-12 -14 EU 12-month total bn$ -16 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14-1 -12-14 -16-6 -7-8 -9 Japan 12-month total bn$ -1 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14-6 -7-8 -9-1 Source: Thomson Reuters Datastream Last month: February 214 25

Bullish: (5) RMB Fundamentally Undervalued China s trade balance surpluses significant! 225 2 bn$ Billion US$ 4-quarter total bn$ 81 72 1 9 bn$ Billion US$ 4-quarter total bn$ 4 36 175 15 125 1 75 5 25 World 63 54 45 36 27 18 9 8 7 6 5 4 3 2 1 US 32 28 24 2 16 12 8 4 95 98 1 4 7 1 13 95 98 1 4 7 1 13 8 7 6 bn$ 4-quarter total bn$ 32 28 24 18 15 bn$ 4-quarter total bn$ (e) 6 5 5 4 EU 2 16 12 9 Japan 4 3 3 12 6 2 2 8 1 4 3 1 95 98 1 4 7 1 13 95 98 1 4 7 1 13 Source: Thomson Reuters Datastream 26

7 65 Bullish: (6) Commodity Cycle The shortest copper cycle lasted 16 years* Shortest cycle 16 years 6 55 5 Real Copper Price 213 cents/lb 45 4 35 3 25 2 15 1 1-year MA 5 185 1875 19 1925 195 1975 2 *despite reversals which are common in all long cycles Source: Wall Street Journal, DCM Economics 27

7.5 7.25 Bullish: (6) Commodity Cycle The shortest gold cycle lasted 1 years* LN (Real Gold Price) 213$/ounce 7. 6.75 6.5 US Civil War Shortest bull-cycle 1 years 6.25 6. 5.75 5.5 1-year MA Gold set at $35 CORRECTION 5.25 18 1825 185 1875 19 1925 195 1975 2 *data converted to log-data for easy visual! Source: Thomson Reuters Datastream, LBMA, DCM Economics 28

9 8 The 197 Bull Market - Price Corrections London Daily PM Fix 85 Bull market ends 7 6 5 4 3 2 1 29 US recession 7 127 18 195 129-28% 9-29% 6-14% 19 154 193 168-12% -2% 137-11% -47% 7 71 72 73 74 75 76 77 78 79 8 81 Source: London Bullion Market Association Mid-Cycle Correction (more than 86 weeks) 14 Geopolitical Crisis! 243 426-17% 354 482-43%

16 14 Bullish: (7) Gold Not "Expensive" The NASDAQ was a real bubble not gold 12 1 NASDAQ 199-29 SILVER: 21/11/23 to date GOLD: 21/3/3 to date 8 6 4 Everything set to 1 2 1 2 3 4 5 6 7 8 9 1 11 12 13 14 Source: Thomson Reuters Datastream, DCM Economics Years 3

11 Bullish: (7) Gold Not "Expensive" To back US money supply higher prices needed 1 9 8 7 6 Price of gold to cover US M2 (Cover ratio =.24) $98 5 4 3 Price of gold to cover US M1 (Cover ratio =.38) $37 2 1 1934 1944 1954 1964 1974 1984 1994 24 214 Cover ratio as determined in 1934 when gold was revalued to $35 Source: Thomson Reuters Datastream, DCM Economics 31

35 Bullish: (7) Gold Not "Expensive" But gold close to long-term average versus oil 3 25 2 197 to date average: 15.1 15 1 5 Barrels of oil per ounce of gold Last month: April 214 7 72 74 76 78 8 82 84 86 88 9 92 94 96 98 2 4 6 8 1 12 14 Source: Thomson Reuters Datastream, London Bullion Market Association 32

8 7 Bullish: (7) Gold Not "Expensive" Gold close to long-term average with copper Pounds of copper per ounce of gold 6 5 4 3 2 1 197 to date average: 349. Last month: April 214 7 72 74 76 78 8 82 84 86 88 9 92 94 96 98 2 4 6 8 1 12 14 Source: Thomson Reuters Datastream, London Bullion Market Association 33

15 Bullish: (7) Gold Not "Expensive" And gold/silver ratio close to long-term average 9 75 Ounces of silver per ounce of gold 6 45 3 197 to date average: 53.8 15 Last month: April 214 7 72 74 76 78 8 82 84 86 88 9 92 94 96 98 2 4 6 8 1 12 14 Source: Thomson Reuters Datastream, London Bullion Market Association 34

9 8 7 Bullish: (8) Geopolitical The biggest geopolitical crisis to date about $4 (or 1%) IRAN Cyclical peak in gold 6 5 4 3 2 Gold Price: Jul 3/79 to May 29/8 Iranian hostage crisis and Russia in Afghanistan 1979 198 1981 Source: London Bullion Market Association 35

14 135 Bullish: (8) Geopolitical the Ukraine/Crimea crisis added about $1 Ukraine/Crimea 13 125 12 The Ukraine/Crimea crisis would appear to have added about $1 to the gold price the first time around. We ll see what the (likely) second round will look like! Gold Price: Oct 1/13 to date 115 213 214 Source: London Bullion Market Association 36

9 Bearish: (1) Need for Liquidity The EM s have significant gold reserves of late Tonnes Last month: February 214 8 US Gold Reserves 7 EM s Gold Reserves 6 5 4 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Source: IMF International Financial Statistics 37

Bearish: (1) Need for Liquidity Recycled gold elevated when liquidity needs rise 2 18 tonnes Recycled/Scrap Gold Great Recession 16 14 12 Asian Financial Crisis 1 8 6 4 2 1986 199 1994 1998 22 26 21 214 Source: World Gold Council Gold Demand Trends - Full Year 213 Thomson Reuters GFMS 38

175 15 Bearish: (1) Need for Liquidity Indian CA deficit* has led to gold import barriers INDIA Gold Imports (monthly tonnes) Last month: January 214 125 1 75 12-month MA 5 25 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 39 Source: Thomson Reuters Datastream, DCM estimates *Need to preserve scarce FX liquidity!

2 Bearish: (2) Fed Ends QE US real rates rise TIPS rise -1. 175 -.5 15 125 GOLD..5 1 1. 75 5 1-year TIPS 1.5 2. 25 2.5 Last month: April 214 1 2 3 4 5 6 7 8 9 1 11 12 13 14 3. Source: US Bureau of Labor Statistics, Federal Reserve 4

6 48 36 Bearish: (2) Fed Ends QE US real rates rise but gold down too far!? GOLD % year-on-year 1-year TIPS -1. -.5. 24.5 12 1. 1.5-12 2. -24-36 Last month: April 214 1 2 3 4 5 6 7 8 9 1 11 12 13 14 2.5 3. 41 Source: US Bureau of Labor Statistics, Federal Reserve Gold fell too far in 213?

6 Bearish: (2) Fed Ends QE Real 1-year rate rising -2. 48 36 1-year Treasuries less CPI -1.. 24 1. 12 2. -12-24 GOLD % year-over-year 3. 4. 5. -36 Last month: April 214 1 2 3 4 5 6 7 8 9 1 11 12 13 14 Source: US Bureau of Labor Statistics, Federal Reserve 6. 42

6 Bearish: (2) Fed Ends QE Real TB-rate also rising somewhat -4. 48 36 GOLD % year-on-year -3. -2. 24-1. 12. 1. -12 2. -24 9-day TB less CPI 3. -36 Last month: April 214 1 2 3 4 5 6 7 8 9 1 11 12 13 14 4. Source: US Bureau of Labor Statistics, Federal Reserve 43

5 4 Bearish: (2) Fed Ends QE But real ST rates <2% do not usually slow gold! US real short term interest rate Gold prices often stall when real rates rise above 2%! 3 2 1-1 -2-3 -4 Real rates below zero are very positive for gold Real rates not above zero before 216?? -5 Last month: April 214 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 Source: US Bureau of Labor Statistics, Federal Reserve 44

Bearish: (3) Global Economy Sluggish Recessions always a major headwind for gold 2 19 18 Gold daily p.m. fix Data through May 1, 214 17 16 15 14 13 12 US recession 37% 11 1 9 8 7 6 3% Eurozone Recession/Depression 5 Jan 7 Jul 7 Feb 8 Sep 8 Apr 9 Nov 9 Jun 1 Jan 11 Aug 11 Mar 12 Oct 12 Apr 13 Nov 13 Jun 14 Source: London Bullion Market Association 45

8 7 6 5 4 3 2 Bearish: (3) Global Economy Sluggish Commodities decline when world growth < 4% CRB Index CRB and BoC commodity price indices are inflationadjusted and highly correlated with world growth Bank of Canada Index 4 3 2 1-1 -2 1 World GDP % -3-1 US recession 1968 1972 1976 198 1984 1988 1992 1996 2 24 28 212-4 -5 Source: IMF, Bank of Canada, Thomson Reuters Datastream, DCM Economics 46

47 43 39 35 31 27 23 19 15 Bearish: (3) Global Economy Sluggish And commodity prices generally are down US recessions % year-over-year Thomson Reuters/Jeffries CRB Index China Joins WTO Nov 21 Last month: April 214 9 92 94 96 98 2 4 6 8 1 12 14 5 4 3 2 1-1 -2-3 -4-5 Source: Wall Street Journal CRB INDEX: 19 commodity prices - Energy 39%, Agriculture 41%, Precious Metals 7%, Industrial Metals 13% 47

7 6 5 4 3 2 1 Bearish: (3) Global Economy Sluggish US CPI is trending lower too! % YoY Core CPI Headline CPI Last month: March 214-1 -2 US recessions Fed s PCE -3 9 92 94 96 98 2 4 6 8 1 12 14 Source: US Bureau of Labor Statistics, US Bureau of Economic Analysis 48

US Dollar stronger 65 7 Bearish: (4) Dollar Strengthens The dollar rises others devalue against dollar Corr: -.9 Corr: -.84 Corr: -.77 Corr: -.48 Corr: -.29 Corr: -.8 Corr: -.58 Corr: -.2 to date 2 175 75 15 8 125 85 9 Gold Since 26 correlation: -.81 1 75 95 Latest week: April 25, 214 7 8 9 1 11 12 13 14 Dollar Index includes: Canadian dollar, Aussie dollar, euro, yen, Swiss Franc, pound, rupee, RMB/yuan Axis is inverted! Source: Wall Street Journal, London Bullion Market Association, Dundee Capital Markets calculations 5 49

5 4 Bearish: (4) Dollar Strengthens Gold/US dollar correlations always negative Gold % US Dollar - % Inverted scale -35-28 3 2 US dollar index (four currencies) -21-14 1-7 -1-2 US dollar index (eight currencies) 7 14 5-3 Last quarter: 214-Q1 82 84 86 88 9 92 94 96 98 13 13 13 13 13 12 14 Source: Wall Street Journal, Dundee Capital Markets calculations correlation: -.59 correlation: -.64 21

19 Bearish: (5) Equity Markets Rally Further Equity markets are competition for gold!? 2 18 17 S&P 5 Gold 1875 175 16 1625 15 15 14 1375 13 125 12 1125 11 1 1 875 9 Monetary Reflation! 75 8 625 7 6 27 28 29 21 211 212 Daily data Last date: April 3, 214 213 214 5 375 Source: Thomson Reuters Datastream, London Bullion Market Association 51

Forecast Issued March 28, 214 Gold Price Scenarios 214-avg 214-end 215-avg Scenario A: p = 25-15% $1182 $115 $165 Scenario B: p = 5-55% $137 $135 $14 Scenario C: p = 25-3% $149 $1535 $1667 Weighted $1311 $1367 $1438 Averages to date: Q1 - $1293; April - $13 52