| Filed Pursuant To Rule 433 Registration No. 333-180974 September 30, 2013 | ||
Gold and Its Role in Portfolio Construction
Presented by Robert Alderman
Managing Director – Private Investment | October 2013
Summary
Don’t Sell or Trade Your Hedge
1. No perfect foresight
2. Not rotatable
3. Hedge Asset – Cheaper Today
4. Foundation Asset which offers:
a) Diversification
b) Increased Liquidity
c) Protection against several types of risk
World Gold Council | Gold and Its Role in Portfolio Construction | October 2013
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Summary
Don’t Sell or Trade Your Hedge
“April” Correction was Brutal and Fast (After a 12 Year Run)
1. Market reaction to a potential U.S. recovery (along with Fed tapering), may be extreme
2. Futures experienced a short squeeze rally
3. ETF short interest continues to be at a high level; net long positions are relatively low (versus 2012)
4. Demand for physical gold is very high
5. Speculators have exited
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Summary
Don’t Sell or Trade Your Hedge
Correction was Brutal and Fast (After a 12 Year Run)
Long Term Fundamental Drivers are in Place
1. Demand
a) EMs: Strong demographics, savings rates, cultural affinity, etc.
b) Central Banks remain net buyers
c) Consumption demand is expected to rise significantly over the 3 to 5 years
d) Jewellery demand is recovering
2. Supply
a) Mine supply will likely be cut if prices remain at low levels
b) Recycled gold, (~ 1/3 supply) is likely to contract as less jewellery and coins are sold
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Who is The World Gold Council?
Founded by the world’s leading gold mining companies
Create and sustain demand for gold in major international markets
4 Primary Sectors:
-Jewellery
-Investments
-Industry
-Central Banks
Based in the UK, with operations in:
-India
-Japan
-China
-United States
Key Contributions (Investments):
-ETF (GLD)
-GAP (Indian Post Office/Reliance Capital; ICBC)
-Conflict Free Gold
-Research
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Agenda
Market Update Recent Activity in the Gold Market
Gold Fundamentals Strategic Portfolio Asset versus “Hot Dot”
Spotlight Gold’s Relationship with U.S. Real Rates
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Market Update 2012: Gold Demand Rises to Record High Value
Global gold demand(value) and the gold price (US$/oz)
US$bn US$oz
250 1,800
200 1,600
150 1,400
100 1,200
50 1,000
0 800
600
400
200
-50 0
Source: LBMA, Thomas Reuters GFMS, World Gold Council
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Market Update Gold has experienced several pullbacks over the past decade
The gold price has previously fallen by more than 10% seven times since 2001
Gold(US$/oz) Pullback
Log scale
1,600
800 40%
30%
400 20%
10%
200
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Note: Days shown on the chart are trading days and exclude weekends and holidays.
Source: LBMA, Bloomberg, World Gold Council
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Market Update What Has Driven the Latest Pullback in the Gold Price?
Macroeconomic Backdrop
Fed’s discussion of the possible reduction of asset purchases has led to a spike in 10 year yields of over 100 bps
Inflation expectations throughout the developed world have fallen during Q2
Weakness in emerging markets, particularly India and China, has led some to question whether the fundamental story is in place
Momentum
Weak sentiment exacerbated the move in the gold price
Momentum and margin related selling was partly responsible for the 10% drop between April 12th and April 15th
As a result, many tactical, non-core investors exited the market
World Gold Council | Gold and Its Role in Portfolio Construction | October 2013
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Market Update How Did the Market React?
From
To
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Agenda
Market Update Recent Activity in the Gold Market
Gold Fundamentals Strategic Portfolio Asset vs.. “Hot Dot”
Spotlight Gold’s Relationship with U.S. Real Rates
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Gold Fundamentals Diversity of Supply and Demand (2Q12 – 1Q13)
Q2’12 – Q1’13 demand by source Total: 4,427 t
Jewelry (1,913 t) 43%
Investment* (1,571 t) 35%
Technology (404 t) 9%
Central banks (527 t) 12%
*Includes bars, coins, ETFs, OTC purchases and gold stock movements t: tonnes
Source: Thomson Reuters GFMS, World gold council
Q2’12 – Q1’13 demand by source Total: 4,427 t
Mine supply** (2,852 t) 64%
Recycled gold (1,575 t) 36%
** Net of producer heading
t: tonnes
Source: Thomson Reuters GFMS, World gold council
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Gold Fundamentals Supply and Demand
1. As current prices are close to the cost of extraction, mine exploration activities are likely to be scaled back
2. Supply coming from recycling is likely to decline due to price drop
3. New supply of gold will unlikely meet physical demand leading to the use of large wholesale bars - straining the supply chain
4. Investors could add the portfolio risk management and capital preservation benefits of gold at a lower price
Gold’s Fundamental Supply and Demand Story Remains in Place
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Gold Fundamentals Supply and Demand
Total above ground stocks = 174,100 tonnes (US$9.6 trillion)1
2 0 .8m
20.8m
1 Based on end-2012 volume and Q4 2012 average gold price of US$1,721.8/oz
2 Includes “other fabrication” (12%) and “unaccounted for” (2%)
Note: Totals may not sum due to independent rounding.
Source: Thomson Reuters GFMS, US Geological Survey, World Gold Council
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Gold Fundamentals Supply and Demand
Asian Markets
-China and India represent more than half of total gold demand
-Cultural affinity to gold coupled with economic development (2020 300 MM new middle class HHs)
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Gold as a Strategic Portfolio Asset The Case for Strategic Allocation to Gold
Portfolio Risk Management
-“True” portfolio diversification
1.Lack of correlation to most other asset classes
2.Tail-risk hedging
-Moderate volatility
-Deep and liquid market
-No credit or counterparty risk
Capital Preservation
-Inflation/deflation hedging
-Currency hedging
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Gold as a Strategic Portfolio Asset Optimal Allocation: Range Between 2% and 10%
Research findings for optimal gold allocations for various portfolios*
Gold allocation
10%
8%
6%
4%
2%
0%
*These ranges depend on investor risk tolerance and portfolio composition. Assets include cash, bond, equities, gold, commodities, and in some cases other alternative investments. Results bases on research conducted by Oxford Economics, New Frontier Advisors and the World Gold Council.
Source: World Gold Council
Gold Holdings < 1% of Total Global Assets (Dec 2012)
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Price of Gold 7 Interrelated Drivers
1. Currencies
2. Interest Rates
3. Short-term investment flows
4. Inflation
5. Systemic & tail risks
6. Consumer spending
7. Supply side drivers
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Price of Gold Market Structure
Long term impact
Short term impact Gold
Price Discovery Price
high price sensitivity
low price sensitivity
direct price impact
indirect price impact
World Gold Council | Gold and Its Role in Portfolio Construction | October 2013
Price of Gold Market Structure
Long term impact
Short term impact Gold
Price Discovery Price
high price sensitivity
low price sensitivity
direct price impact
indirect price impact
ETF OTC Futures
ETF Holding
World Gold Council | Gold and Its Role in Portfolio Construction | October 2013
Price of Gold Market Structure
Long term impact
Short term impact Gold
Price Discovery Price
high price sensitivity
low price sensitivity
direct price impact
indirect price impact
ETF OTC Futures
ETF Holding
Refiner Importer
World Gold Council | Gold and Its Role in Portfolio Construction | October 2013
Price of Gold Market Structure
Long term impact
Short term impact Gold
Price Discovery Price
high price sensitivity
low price sensitivity
direct price impact
indirect price impact
ETF OTC Futures
ETF Holding
Refiner Importer
Wholesaler
Central Bank
World Gold Council | Gold and Its Role in Portfolio Construction | October 2013
Price of Gold Market Structure
Long term impact
Short term impact Gold
Price Discovery Price
high price sensitivity
low price sensitivity
direct price impact
indirect price impact
ETF OTC Futures
ETF Holding
Refiner Importer
Wholesaler Retailer
Central Bank
World Gold Council | Gold and Its Role in Portfolio Construction | October 2013
Price of Gold Market Structure
Long term impact
Short term impact Gold
Price Discovery Price
high price sensitivity
low price sensitivity
direct price impact
indirect price impact
ETF OTC Futures
ETF Holding
Refiner Importer
Wholesaler Retailer Consumers
Central Bank
World Gold Council | Gold and Its Role in Portfolio Construction | October 2013
Agenda
Market Update Recent Activity in the Gold Market
Gold Fundamentals Strategic Portfolio Asset vs. “Hot Dot”
Spotlight Gold’s Relationship with U.S. Real Rates
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Spotlight Gold’s Relationship with U.S. Real Rates
Higher interest rates: not necessarily adverse for gold
Influence of U.S. real interest rates has receded over time as demand has shifted from west to east
Along with interest rates, multiple factors (e.g. U.S. dollar, credit spreads, Fed balance sheet) have significant influence on gold
Low real rate environment’s have historically produced the highest return . .. .
. . .However, in a normal real rate environment, returns are in line with gold’s long term average, but volatility and correlation go down
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Spotlight Influence of US Real Rates on Gold
Gold’ return is higher in lower rate
Avg. monthly return
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
Low (<0%) Moderate (0%-4%) high (>4%)
Real rate environment
Source: Bloomberg, World Gold Council
Rate environment
Low (<0%) Moderate (0%-4%) high (>4%)
Return 1.5% 0.7% X
Volatility 20.5% 14.1% __
Correlation 0.08 -0.06 __
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Two Flagship Publications: Gold Demand Trends and Gold Investor
Gold Demand Trends
Second quarter 2013
August 2013 WWW.gold.org
Q2 gold demand totaled 586.3 tonnes, worth US$39bn. Lower prices generated another surge in quarterly jewellery demand, most notable in India and china. Record quarterly investments in gold bars and coins was countered by sizeable outflows from ETFs as western investors reacted to a seemingly more positive outlook for the us economy and an eventual tapering of quantitative easing. Read more
Overall demands changes (Q2’13 vs Q2’12, tonnes)
Sources: Thomson Reuters GRMS, World Gold Council
Contents
Executive summary 02
Global Gold market – second quarter 2013 review 06
Lewellery 06
Investments 08
Central Bank 10
Technology 10
Supply 11
Gdd demand statistids 13
Appendix 21
Notes and definitions 25
Contributors
Louise street louise.street@gold.org
Krishna Gopaul Krishna.Gopaul@gold.org
Johan Palmberg Johan.Palmberg@gold.org
Juan Carlos Artigas JuanCarlos.Artigas@gold.org
Marcus Grubb Managing director, Investment Marcus.Grubb @gold.org
Scan with your mobile device to access our research app for investor Gold Investor
Risk Management and Capital preservation In this edition Gold and US interest rates: A reality check What drives gold?
The role of gold in defined contribution plans: Mexico case study
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Accessing the Gold Market Options to Suit Needs and Preferences
1.Coins and bars
-Bullion vs.. Numismatic
2.Gold accounts
3.Mining equities
4.Over-the-counter products
5.ETFs
6.Gold futures and options
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Accessing the Gold Market World Gold Council research – simple to access
Ease of navigation, several views available
Research app for investors – available on iPad / iPhone
To download or subscribe to our gold investment research studies:
www.gold.org/investment/research
Or click on the link below:
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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.
No part of this presentation may be copied, reproduced, republished, sold, distributed, transmitted, circulated, modified, displayed or otherwise used for any purpose whatsoever, including, without limitation, as a basis for preparing derivative works, without the prior written authorization of the World Gold Council.
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. IBG-9769
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