Gold Outlook June 2012 HSBC RDV

Commodities Global
abc
Global Research
Although it is not trading in its traditional role as a safe-haven asset, gold should regain its luster and rally in 2H We expect gold prices to move above USD1,900/oz by year-end, based on the likely impact of easy monetary policy Currency moves, notably in EUR/USD, will remain key; gold could react to a Greek departure from the euro zone
Gold Outlook
Higher in a time of crisis
Gold price outlook and forecasts

Investment case: We remain bullish on gold. We maintain our forecast of the average bullion price at USD1,760/oz for 2012, and we expect prices to rally to above USD1,900/oz by year-end. Gold prices have closely tracked shifts in monetary policy expectations this year, rallying in anticipation of any easing and falling when this receded. The possibility that the US Federal Reserve and other central banks will lower rates later this year is gold price-supportive. Measures taken by governments to deal with mounting debt levels, known as financial repression, which include engineering negative real interest rates, are also gold-bullish. A shift in focus from euro zone sovereign debt issues to US fiscal issues in this presidential election year could encourage investor interest in gold. A Greek exit from the eurozone may affect gold, but if the EUR were to strengthen, we would expect bullion to rally. To explain the dynamics driving the gold market in this report, we analyzed: Golds sensitivity to monetary policy expectations, page 5. Golds lack of correlation with either safe-haven or risk assets, page 6. Golds historical reaction to political uncertainty, page 7.
View HSBC Global Research at: http://www.research.hsbc.com
15 June 2012
James Steel Analyst HSBC Securities (USA) Inc. +1 212 525 3117 james.steel@us.hsbc.com Howard Wen Analyst HSBC Securities (USA) Inc +1 212 525 3726 howard.x.wen@us.hsbc.com
The logic behind central bank purchases, page 13.
Issuer of report:
HSBC Securities (USA) Inc. Gold: HSBC forecasts of average annual prices (USD/oz) Gold
Source: HSBC
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
2012 1,760
* Long term = Five years
2013 1,775
2014 1,750
Long term* 1,500
Commodities Global 15 June 2012
abc
HSBC gold outlook

We forecast a rally in 2H and expect gold prices to move above
USD1,900/oz by year-end; we base this mostly on the likely impact of easy monetary policies and concerns about fiscal policy
Government efforts to manage large debt burdens, geopolitical
uncertainties, and central banks growing appetite for gold also argue for higher prices
Currency movements, notably in EUR/USD, should play an
important role in determining gold prices this year
Down but not out

Gold prices are down c300/oz from their record intraday high, in nominal terms, of USD1,920/oz set on 6 September last year. Gold prices weakened significantly in the remainder of 2011 due to heavy margin call-related liquidation as risk assets, notably equities, declined. Gold was also undercut by a weaker EUR as the eurozones sovereign debt problems weighed on the currency. Eruptions in the eurozone sovereign debt crisis this year, notably but not exclusively centering on Greece, weighed further on the EUR, and in turn, on gold prices.
Meanwhile, gold demand in India has been disappointing this year, based on a sharp fall in imports as a depreciating rupee drove up prices of gold items in local currency terms to record levels. High prices on the subcontinent also stimulated greater scrap supplies. A prolonged protest by jewelers in India to tax increases and import levies, which shut down the bulk of the countrys retail jewelry outlets for six weeks in March and April, also severely reduced Indian gold demand. Chinas gold demand has been rising, as evidenced by a jump in Chinese gold imports. Coin and small bar demand has been volatile this year. The pace of gold exchange traded-fund demand, although still up, is moderating, compared to strong demand in recent years.
Gold prices, 2005-present (USD/oz)
2,000 1,500 1,000 500 0 Jun-05
Gold prices, 1971-present (USD/oz)

2,000 1,500 1,000 500 0 Jun-72
Source: Reuters
Jun-80
Jun-88
Jun-96
Jun-04
Jun-12
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Source: Reuters
abc
HSBC economic and metals price forecasts 2004 G-7 IP Global IP* Aluminum Copper Nickel Zinc Aluminum Copper Nickel Zinc Gold Silver Platinum Palladium % pa % pa USD/t USD/t USD/t USD/t USc/lb USc/lb USc/lb USc/lb USD/oz USD/oz USD/oz USD/oz 2.5 6.6 1,270 2,866 13,845 1,058 78 130 628 48 410 7 847 231 2005 2.0 5.0 1,886 3,682 14,749 1,389 86 167 669 63 445 7 898 202 2006 2.9 6.4 2,557 6,586 24,219 3,275 116 299 1,099 149 605 12 1,142 321 2007 2.9 6.5 2,557 7,119 37,230 3,249 116 323 1,689 147 697 14 1,306 356 2008 -2.7 1.1 2,571 6,948 21,293 1,875 117 315 966 85 872 15 1,575 351 2009 -13.3 -6.5 1,670 4,938 14,845 1,659 76 224 673 75 974 15 1,210 265 2010 7.3 9.6 2,175 7,556 21,838 2,162 99 343 991 98 1,227 19 1,613 529 2011 2.7 4.8 2,401 8,820 22,885 2,195 109 400 1,038 100 1,573 35 1,721 732 2012f 1.3 3.9 2,200 8,500 20,000 2,104 100 386 907 95 1,760 34 1,775 785 2013f 2.6 5.5 2,300 7,500 18,500 2,264 104 340 839 103 1,775 32 1,825 825 2014f Long term** 2,400 7,000 20,000 2,673 109 318 907 121 1,750 28 1,800 835 2,315 6,173 18,739 1,742 105 280 850 79 1,500 25 1,800 850
* IP = Industrial production. ** Long term = Five years Source: HSBC
The gold market repeatedly built in price premiums this year on expectations that the Federal Reserve would launch a third round of quantitative easing (QE) or some other form of monetary policy easing. These expectations were based in part on weaker-than-expected economic data, in particular disappointing employment data. When Fed Chairman Ben Bernanke in congressional testimony did not provide any clue to future Fed easing intentions, this triggered bouts of investor liquidation, driving gold below USD1,600/oz. Going forward, gold prices should be determined largely by the interplay between monetary and fiscal policies and the real economy. The eurozone debt crisis and its effects on financial markets and currencies, in particular the EUR, have had a profound effect on the direction of gold prices this year. Although we expect eurozone developments will continue to exert a notable influence on gold, we also believe that gold may be positively affected by any shift in financial markets attention away from the eurozone problems and toward similar concerns about US government debt levels and fiscal policies. A potential standoff in Congress on fiscal policy and uncertainty surrounding the US presidential election are also likely to support gold prices, we believe.
The possibility that the Federal Reserve and other central banks may loosen monetary policy later this year also is potentially supportive of gold, in our view. Government policies aimed at keeping real interest rates negative are especially positive for gold. Demand for gold also could grow if investor confidence is undermined by rising geopolitical risks, including the increasing popularity of nationalist parties in Europe, still-high and volatile commodity prices, and risks associated with mounting debt burdens in many countries. Other elements that affect gold prices include traditional supply/demand factors, such as jewelry and industrial demand, mine supply, producers hedging policies, central bank activity, and scrap supplies. But we believe that these factors will generally play a secondary role to macroeconomic and geopolitical influences and investment demand for gold. Increased demand for gold by central banks is an important bullish factor in our analysis, but the impact of official sector demand appears likely to be offset by greater scrap supplies and lower jewelry demand. Meanwhile, mine supply is growing steadily. This should be sufficient to meet the increase in central banks gold appetite and investor demand in developed and emerging markets.
abc
We believe that a combination of monetary and financial influences, geopolitical concerns, and heightened investor anxiety will spur higher gold prices to move just above USD1,900/oz by the end of 2012. Sluggish underlying physical supply/demand balances are likely to keep gold from challenging the USD2,000/oz level, in our view. To the downside, we believe, a break of USD1,500/oz would stimulate increased physical demand and raise the possibility of a reduction in mine output, and this should help set a floor for prices at around USD1,450/oz.
abc
Investment case for gold

Gold prices have been subject to shifts in expectations of further
monetary easing; any additional easing would likely result in higher prices; fiscal concerns also are bullion-friendly
Although gold is not trading in its traditional role as a safe-haven
asset, its portfolio diversification qualities should attract investors

EUR/USD indicators provide a bullish case for gold; a Greek exit
from the eurozone may impact gold prices
Gold in a time of crisis

Fed rules
Gold prices have been strongly influenced by monetary policy and expectations for it. Western central banks have pursued highly accommodative monetary policies in an effort to prevent their economies from slipping back into recession, and in the eurozone, to help combat the sovereign debt crisis. These include unconventional policies, including a huge increase in bond purchases via
an expansion of central banks balance sheets. Concerns about the long-run inflationary consequences of these policies stimulated investor demand for gold from 2007-2011. Gold prices this year have closely tracked monetary policy expectations, as shown in the following chart. After the Federal Open Market Committee meeting last January, the panel said that it had anticipated keeping the fed funds rate close to zero at least through late-2014. This
Timeline of gold
1, 800 1, 750 1, 700 1, 650 1, 600
USD/o z
Ju ne 7: April 24: FOM C statemen t Ju ne 1: M ay US pay rolls Feb 29: Bernank e Te stim ony to JEC repo rt Bernanke Te stim ony to JEC
Jan 24: 1, 550 1, 500 Jan-12

Source: HSBC, Bloomberg
FOMC statem ent
Feb-12
M ar-12
Apr-12
M ay -1 2
Ju n-12
abc
was interpreted as a dovish shift from the FOMCs previous stance, according to Kevin Logan, HSBCs chief US economist. The January FOMC statement also hinted that a third round of quantitative easing (QE3) was possible. This set off a robust rally that propelled gold to a year-to-date intraday high of USD1,790/oz, on 29 February. Prices quickly reversed when Federal Reserve Chairman Ben Bernanke, in testimony before Congress, did not indicate any indications of additional monetary-policy easing. Gold prices subsequently dropped on liquidation by disappointed investors, as it became clear that the gold market had built in a substantial price premium based on further Fed easing. Statements by the FOMC after its next meeting, in late April, also hurt gold prices. In line with market expectations, Mr. Bernanke reaffirmed that the Fed was maintaining a highly accommodative monetary policy and was prepared for more QE, should the economy weaken further. This notwithstanding, once again he did not signal any Fed plans for loosening monetary policy, and gold prices came under renewed pressure. The release of poor US employment data for May sparked investor chatter that the central bank would ease monetary policy further. This expectation triggered another gold rally in early June, which boosted prices to USD1,640/oz on an intraday basis. Gold prices fell after Mr. Bernankes testimony to the Joint Economic Committee of Congress, when he said that the US financial system was at risk from the debt situation in Europe and from the prospect of fiscal tightening in the US. Although he also maintained that the Fed remained prepared to take action to protect the US financial system and economy in the event of escalating financial stresses, he again gave no hint of another round of QE or any other monetary policy accommodation. This was greeted bearishly by the bullion market.
Fed easing intentions are an important issue for the gold market. In US Monetary Policy: Shifting gears? (7 June 2012), HSBC economist Kevin Logan said the balance of Fed opinion may be tilting in favor of providing more monetary accommodation. He suggested that additional easing could be partly a pre-emptive response to the financial crisis in Europe and partly a reaction to signs that employment growth is faltering. If the Fed follows this path, we anticipate stronger gold prices as a result. If the Fed maintains current policies, gold prices could come under renewed pressure. That said, price declines may be limited, as Fed policy is already highly accommodative by historical benchmarks.
Neither risk-on nor risk-off

Gold is traditionally regarded as a safe-haven asset. Almost alone among all the widely accepted safe-haven assets, gold is not subject to government fiscal or monetary policies. The stock of gold cannot be increased or decreased by government fiat; it is dependent on mine output, whereas policymakers have the power to prime their currency printing presses at will. Despite these qualities, gold has not behaved as a traditional safe haven since the eurozone sovereign risk crisis began. This is partly because bullion has never been the only game in town as far as safe-haven assets are concerned, and it has had to compete with US Treasuries and other perceived safe-haven assets. A characteristic of the financial crisis has been that assets are increasingly correlated and behave either as risk assets or safe havens. In Risk On Risk Off: Fixing a broken investment process (19 April 2012), Stacy Williams, HSBCs head of FX quantitative strategy, showed that gold is one of the very few assets that have traded independently, neither as a safe-haven nor a risk asset, a departure from its traditional role. The safe havens include the USD and US Treasuries,
abc
as well as German and British government bonds, according to Mr. Williams. Risk assets include global equities, the AUD and CAD, and industrial commodities including copper and oil. Gold, along with some agricultural commodities, occupies a neutral area between risk-on/risk-off assets, as shown in the chart immediately below. This implies that gold is primarily influenced by its own supply/demand fundamentals and its status as a quality asset. Thus, it retains some degree of independence from other assets. That gold is not acting as either a risk-on or risk-off asset increases its portfolio diversification value. Hence, it may have attraction for investors wishing to maintain a risk-neutral portfolio.
arising in some countries. Furthermore, he wrote, nationalist backlashes are growing in many countries against creditors, particularly foreign creditors. This could have important bullish ramifications for gold prices, we believe. The emergence of the right-wing Golden Dawn party in Greece, led by Nikos Michalolikos, and a good showing by the far-right Marine Le Pen in the first round of the French presidential election in May, indicate evidence of voter disillusionment with mainstream political parties, Mr. King said. Mr. King cited a similar climate of popular discontent in the 1930s when debtor nations balked at austerity programs and creditor nations demanded payment, leading to a resurgence in nationalism, repeated defaults by creditor nations, more economic hardship for creditors and debtor nations, and ultimately a strife-ridden political climate. What relevance does this have for gold? Political polarization and extremism are traditionally positive for gold. Gold tends to prosper in times
Global risk factors are growing

Repeat of history may boost gold
In Ghosts from the 1930s have returned to haunt us,10 May 2012), HSBC Chief Economist Stephen King pointed out that although the world has avoided a Great Depression, political extremism is
Asset correlations with risk-on/risk-off factors
abc
of political uncertainty and conflict as financial markets turn increasingly volatile and investors seek the safety of hard assets. The possibility of sovereign default also is traditionally gold-bullish, as investors may flee sovereign paper for hard assets such as bullion. Mr. King suggested that gains by the far right in recent elections may spur mainstream politicians into action to seek compromises and solutions to the eurozones problems. In any case, he cautioned, the ghosts of the 1930s have returned. In our view, this could be positive for gold.
activity in the bond markets as a result of financial repression policies has led to a decoupling between interest rates and risk, according to the study. Mispricing of risk in financial markets is generally positive for gold. Furthermore, gold prices have been especially sensitive to financial repression used in combination with rising consumer inflation to reduce debt levels. Accommodative monetary policies, such as those now in place in many economies, traditionally hold out the possibility of higher consumer inflation. Faced with historically high public and private domestic debt, financial repression policies with the main goal of keeping interest rates low will probably be a favored policy response for a long time to come, the NBER study said. Prolonged periods of low negative real interest rates are gold-friendly, and we expect policies geared to financial repression to be an important element in higher gold prices this year and next.
Financial repression and gold

One of the legacies of the economic crisis is the enormous levels of sovereign debt in its wake. How governments cope with near-record peacetime debt levels may have important implications for gold prices, we believe. In The liquidation of government debt (2011) by Carmen M. Reinhart and M. Belen Sbrancia National Bureau of Economic Research the authors point out that periods of high indebtedness have typically been associated with rising incidents of default or restructuring of public and private debts. A subtle type of this debt restructuring is known as financial repression, a term used to describe a variety of measures that governments employ to channel funds to them that they might not otherwise attract for example, US government bond yields are historically low due partly to government policy. Financial repression can be particularly effective in liquidating debt, according to the NBER study. One of the main goals of financial repression is to keep nominal interest rates lower than would otherwise be the case. Financial repression and negative real rates are typically a more politically palatable alternative to inflation, tax increases, or spending cuts to solve a debt overhang, according to the Reinhart and Sbrancia report. Central bank
Food, fuel, and gold

Soaring commodity prices were a notable feature of the global economic boom from 2003-2008. As a commodity, gold is affected by the direction of the overall commodity sector. Gold rallies and price weakness are usually accompanied by higher and lower commodity prices, respectively. When the global financial crisis erupted, commodity prices crashed in mid-2008, triggering debate that the bull cycle in commodities was ending. Commodity prices rebounded in the early stages of the global recovery, and by the end of 2010, prices of many commodities were near or above pre-crisis highs. Commodity prices retraced when global economic activity slowed again in the second half of 2011. The gold price direction broadly reflected overall commodity price movements.
abc
Recent price weakness raises the question of whether it is time to re-evaluate prospects for commodity markets and therefore for gold. The answer to this question also has potential ramifications for the direction of gold prices. According to the IMF, the global financial crisis has not fundamentally changed the demand picture in commodity markets. According to traditional economic theory, increasing per capita income is key to rising commodity consumption. Commodity demand in much of the emerging world is driven by long-term, structural factors, which appear intact. This helps explain the unusual length and depth of the commodity boom and its generally price-supportive influence on gold. On the supply side, a major factor behind high commodity prices, before and after the crisis, was a slow response by producers to largely unanticipated increases in commodity demand. The high cost of developing mineral deposits for both metals and energy also contributed to this supply sluggishness. New productive capacity in mining and energy has been slow to come on stream. Meanwhile low stockpiles and supply disruptions help explain escalating food prices. Resource economists at the IMF identify two key factors behind the commodity revival that are likely to keep prices high: faster growth in emerging and developing economies, and supply constraints. Other economic forces are at work that may help lower commodity prices. Economies in the emerging world may become more service- and consumer-driven and therefore less commodity-intensive. Also, the global economy is adjusting to high commodity prices, which are spurring searches for lower-cost substitutes. Low natural gas prices in the US should spur greater use of that fuel, which may weigh on oil prices.
Commodity prices exert influence on gold both directly and indirectly. As a commodity, gold tends to move in sync with other commodities. Additionally, changes in oil, base metals, and agricultural prices affect commodity indices, such as the Goldman Sachs Commodity Index and the CRU. These indices have billions of dollars under management and have weightings of at least c60% in energy and more than 20% in agriculture but relatively low weightings in gold. Thus, when these indices rise or fall due to higher or lower oil and food prices, managers are compelled to buy or sell substantial amounts of gold to maintain balanced weightings. The potential risk of extreme volatility in energy and food prices has profound economic as well as geopolitical and societal ramifications, according to political scientists at the IMF. This stems partly from volatile climatic conditions, including unpredictable effects of greenhouse gases. Previous periods when the UNs Food and Agriculture Organization (FAO) declared a global food crisis, in 2008 and 2010, were accompanied by steep increases in gold prices. Though food and energy costs represent a relatively modest share of GDP in the developed world, they are an important component in emerging markets; for example, they account for about half of Chinas consumer price basket and nearly 60% of Indias. Higher food and energy prices are potentially more inflationary in emerging markets than in the developing world. The behavior of commodity prices is likely to continue to influence gold prices, in our view. Commodity-related geopolitical instability and commodity-related inflation scares would be likely to trigger increased investor demand for gold, we believe. According to the IMF, fundamentals arguing for higher commodity prices are essentially intact, although near-term demand levels are uncertain. Thus, while
abc
Gold and commodities index
300 250 200 150 100 Jan-0 8 J an-09 J an-10 Jan-11 Jan-12
2, 000 1, 500 1, 000 500
parties have not found common ground, and we expect gold to benefit from this as the year unfolds. Congressional elections and presidential balloting in November may make the situation more complex than usual, because this reduces incentives for either side to compromise, Mr. Logan said. The fiscal cliff is not the only looming flashpoint in Congress, according to Mr. Logan. By yearend, Congress may need to approve the 2013 budget and agree to another increase in the federal debt ceiling. Gold benefited substantially last summer from the debt ceiling standoff, when a stand-off in congress delayed the debt extension. In this atmosphere of limited compromise, the two sides could agree to postpone any decisions by suspending scheduled spending cutbacks and tax increases, and hand the problem to the newly elected Congress that will take office in January, Mr. Logan said. However, delaying decisions such as that required for deficit reduction might not sit well with the credit-rating agencies, he said. Moodys and Standard & Poors already have negative outlooks for the US sovereign credit rating. Mr. Logan said that without nearterm progress in reducing the budget deficit, the sovereign credit rating may be put on review for a possible downgrade. Rating downgrades typically create uncertainty and heightened volatility for financial markets and are positive for gold, as investors seek out hard assets. Mr. Logan said the rational course of action would be for Congress to seek compromise and make progress on smaller deficits and stabilization of the federal debt-to-GDP ratio. If this were viewed as a likely course, gold prices would probably come under pressure, in our view. But the experience of the deficit standoff last summer should remind investors that the political process in Washington can create budgetary stalemate and unexpected financial risks, Mr.
Blo om berg Comm odity Index (LHS ) Gold prices (USD/oz ) (RHS)
commodities mighty not be a positive near-term influence on gold due, to uncertain near-term demand, it appears that higher commodity prices in the medium to longer term are likely lend support to gold prices.
Fiscal cliff could buoy gold

In US Economics: The Fiscal Cliffhanger (17 May 2012), Kevin Logan, HSBCs chief US economist, wrote that if US taxes increase and spending declines as scheduled late this year and in early 2013, aggregate spending in the economy could drop off a cliff. This fiscal cliff is very likely to reduce growth, Mr. Logan said, but we believe it also could affect gold. According to Mr. Logan, Republicans and Democrats are deeply divided on how to avoid this fiscal cliff. Republicans favor lower tax rates and propose to lower tax brackets to broaden the tax base and make up for lost revenue. Spending cuts would be directed away from defense and toward federal social programs. Democrats are more willing to cut defense spending but want to reduce spending cuts on social programs and are more likely to raise tax rates on upper-income taxpayers. These are the same positions on which the two parties could not compromise last year. During that period of a lack of congressional compromise, gold rallied. So far this year, the
10
abc
Comex gold positions vs International Monetary Market (IMM) dollar positions

35 25 15 5 -5 -15 -25 -35 Jun-07 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
moz USDm
Golds performance vs currencies and platinum, 2011-present

2 0% 1 0% 0% -1 0% -2 0% -3 0%
NO K PLATINUM CH F BRL ZAR SGD EU R JPY GOLD AUD GBP SEK
50 40 30 20 10 0 -10 -20 -30 -40 -50
20% 10% 0% -1 0% -2 0% -3 0%
Total Speculative position on Comex (RHS)

Source: HSBC, CFTC
Net USD Positions (LHS)
Source: Bloomberg
Logan said. These risks, we believe, are goldfriendly and likely to help propel gold higher in the second half of this year and into 2013.
Golds role as surrogate currency

As a surrogate currency, gold is sensitive to movements in foreign exchange markets. The chart at the top right of this page shows golds price performance measured against currencies and platinum. Golds inverse correlation to the USD is among the most stable and enduring relationships in the bullion market. This is largely because gold prices are typically denominated in US dollars, which implies that exposure from buying and selling gold is strongly influenced by moves in the exchange rate for USD. Because the USD is widely regarded as the worlds principal reserve currency and gold as the worlds principal hard asset, it is logical that the two would be inversely correlated. This relationship has broken down periodically, most notably during the recent economic crisis, but in the long run, the traditional relationship has always been re-established. This is illustrated in the chart at the top left on this page, showing long gold positions on the Comex and changes in USD positions on the International Monetary Market (IMM), a division of the Chicago Mercantile Exchange.
As the worlds second reserve currency, the EUR is inversely correlated with the USD but positively correlated to gold prices. Thus, the direction of the EUR/USD is likely to play an important role in determining gold prices for the rest of this year and in 2013, we believe. In Currency Outlook: Euro fallout: GBP beware schadenfreude (7 June 2012), David Bloom, HSBCs global head of FX research, and the currency research team cut their year-end EUR/USD forecast to 1.35 from 1.44. The team still expects the EUR to finish the year substantially above its current spot level. We believe that its conclusions hold important ramifications for gold prices. Despite the decline in EUR/USD this year, the HSBC currency team retains the view that the EUR will finish 2012 substantially higher. It bases this on its view that Greece will stay in the eurozone. The team also believes that European policymakers will adopt measures to support the other peripheral European Union members. This, the team argued, should foster a EUR rally and undermine safe-haven demand for the USD. In another important factor for gold, the team suggested that the focus of financial markets will shift to the US. A greater focus on the weak state of US government finances in the run-up to the US elections in November could lead a reassessment of the USD, according to the team.
11
abc
Greece, the EUR, and gold

A Greek exit from the eurozone could have profound implications for gold prices, we believe. In Greek crisis: Four scenarios for the eurozone (23 May 2012), Stephen King and the HSBC economics team discussed possible ramifications of a Greek departure from the EUR area. We explore possible effects on gold.
Gold if Greece remains in the eurozone
Gold and US federal debt
2, 000 1, 500 1, 000 500 0 Jun-71 Jun-06 J un-86 J un-96 Jun-81 Jun-91 Jun-76 Jun-01 Jun-11
150% 100% 50% 0%
Gold p rices (USD/oz ) (LHS) Gros s Fe deral Debt as a % of GDP (RHS)

Source: HSBC, US Congressional Budget Office
If Greece does not leave the eurozone and adheres to some version of the policies endorsed by the troika of the European Union, the European Central Bank, and the IMF, we would anticipate modest gains by gold. Bullion advances initially may be limited by any continuing uncertainty, particularly regarding other eurozone members. As the risk of a eurozone breakup diminishes, however, the USD may relinquish some of its safe-haven bid and the eurozone crisis story may begin to lose traction. A subsequent shift in focus across the Atlantic to US fiscal problems could make the USD vulnerable and benefit gold (see the chart at the top right of this page). Gold may weaken in a situation in which Greece remains in the eurozone but makes little effort to abide by troika policies. In this case, the EUR would drop but not collapse, according to the Four scenarios report. Gold could come under pressure, in a pattern similar to what happened last April. A lack of clarity and confusion about the eurozone could offset any positive impact on the EUR of Greeces continuing to use the currency. Gold and other assets would likely remain subject to headline risks and volatility might increase, we believe.
Gold if Greece exits the eurozone
by contagion and the eurozone was viewed as benefiting from Greeces departure. Then other factors could come into play, such as positive interest-rate differentials and US fiscal weakness that could support the EUR and gold. A Greek exit accompanied by contagion could be bullish for gold prices, we believe. A EUR drop and USD rally would not necessarily be negative for gold. Under extreme circumstances, if the viability of the EUR were called into question or if the Greek exit was followed by other eurozone countries, it is possible that investors would again rush into the USD and gold simultaneously, in our view.
A gold-friendly backdrop
Although gold has not recently behaved as a safe haven, we believe that the broader climate remains gold-friendly. Two by-products of the global financial crisis have been declines in investor confidence and eroding trust in financial systems and government policies. While gold prices in the near term may react to movements in currency markets based on European developments, gold ultimately retains its attraction as a hard asset with diversification value.
Should Greece abandon the EUR, we believe the initial knee-jerk reaction by the gold market might to decline if the currency were to weaken. Any price decline by gold, however, might be temporary if the Greek exit was not accompanied
12
abc
Investment market trends

Central banks were active buyers of gold in 2011; we believe
official sector demand will remain strong this year as reserve managers seek out bullion for its diversification qualities
Comex positions are historically low and unlikely to drop much
further, in our view; this is potentially gold-bullish, as it leaves plenty of room for investors to rebuild long positions
ETF demand has moderated but remains positive; despite
periodic bouts of liquidation, we anticipate modest demand growth
Central banks
The official sector buys
After nearly two decades as substantial sellers of gold, central banks turned buyers in 2010, purchasing a net 77t. The pace of central banks gold purchases accelerated sharply in 2011, with the official sector acquiring a net 456t, according to the Bank for International Settlements (BIS). This represented the greatest accumulation of gold by central banks in more than 40 years.
After building reserves for much of the post-WWII period, most Western central banks ceased accumulating gold with the 1971-73 dissolution of the Bretton Woods system of international monetary management. For the rest of that decade and through the 1980s, central banks kept their gold holdings relatively stable until geopolitical events helped trigger the next sizable change in gold holdings. The end of the Cold War greatly reduced the global geopolitical risk thermometer, thereby undercutting the need for nations to hold gold as a war chest. The official sector, composed of central banks and supranational organizations such as the International Monetary Fund, began largescale selling programs in the early 1990s. The bulk of these sales were conducted by gold-heavy Western European central banks, where bullion made up the vast bulk of their foreign exchange reserves. This trend accelerated in the second half of that decade, and official sector gold sales became a significant feature of the bullion market; this helps explain bullions profound price weakness in that period. In addition to reduced
Gold held in central banks, as a percentage of total reserves

10, 000 8, 000 6, 000 4, 000 2, 000 0 Ge rmany IMF Fra nce China Russia Ja pan Netherlands Italy US Switzer lan d 80% 60% 40% 20% 0%
Gold (tonnes)
Source: HSBC, World Gold Council
% of res erv es
13
abc
geopolitical tensions, poor price performance, expenses associated with storage and transport, and pressure on central banks to improve returns on reserves were factors spurring central banks to sell portions of their gold reserves.
The role of gold in central bank reserves
Although gold has no formal position in the international monetary system today, it nonetheless continues to play an important role as part of central bank reserves, constituting about 12% of all international reserves. The chart on the previous page shows gold holdings as a percentage of foreign exchange holdings by major central banks. Gold reserves are regarded as having the following important functions: Gold is a universally accepted medium of exchange between nations and allows for the settling of underlying payment imbalances. Gold has a historical role in the international monetary system as the ultimate backing for domestic money and so can be used to prevent a run on a currency. Gold features in the war chest argument, in which it is regarded as a superior asset to hold in times of severe financial instability or uncertainty, including war. Bullion retains its status as a store of value, quality asset, and long-run inflation hedge. Gold has no default risk and is the only asset that a central bank can hold that is no one elses liability and so cannot be frozen, repudiated, or defaulted on.
A new attitude
January-April this year. The major buyers were Turkey, 45t; the Philippines, 35t; Mexico, 20t; Russia, 16.6t; Kazakhstan, 16t; Belarus, 4t; and Ukraine, 3t. China also might have accumulated gold from domestic sources, but this has not been reported to the BIS. Light sellers included Sri Lanka and Germany. The BIS data are tabulated with a lag, however, and the likelihood that central banks bought additional gold in May and early June or that the existing data will be updated to show more purchases leads us to believe that total purchases for the year are well in excess of 119t. Statements by some of the large holders of bullion, including the German Bundesbank, the largest holder in the Central Bank Gold Agreement (CBGA), and the Swiss National Bank, have indicated that they have no intention to sell any more gold. We believe that the absence of Swiss and German sales and apparent reluctance by other members to sell significant quantities of gold greatly increase the likelihood that the official sector will be a significant net buyer of gold this year and next. Other large official sector holders of gold, including the US and Japan, also have said that gold sales are off-limits. Official sector purchases have emanated almost exclusively from central banks in emerging and transitional markets. We believe that portfolio decisions by emerging-market reserve managers will determine the scale and pace of official sector gold demand. Emerging-market central banks are likely to increase gold holdings in 2012, principally as a means to diversify away from the USD and as an overall strategy of portfolio diversification, we believe. According to Reserve Bank of India officials, uncertainty about the stability of the US dollar and the euro was a major factor spurring that central bank to purchase 200t of gold in
The financial crisis rekindled central banks appetite for gold. Although the scale of purchases appears to have moderated this year, compared to 2011, the official sector remains a strong buyer of gold. According to the most recent data from BIS, central banks purchased a net 118.9t of gold from
14
abc
December 2010. Although the USD has benefited from the eurozone crisis, any weakening of the USD may encourage greater central bank gold purchases, we believe. Traditional portfolio analysis also supports increased gold purchases by central banks. Gold holdings are part of a broad set of assets and liabilities of a central bank and are held to insure against the negative impact of a sudden withdrawal of foreign capital or adverse exchange-rate movements. By conventional portfolio analysis, many large emerging-market central banks are significantly underweight gold, compared to their substantial and growing foreign-exchange reserves. As long as the US runs large macroeconomic imbalances and current account and budget deficits, there will be corresponding growth in the foreign-exchange reserves of many emerging-market countries. The growth in foreign-exchange reserves, mostly in USDs in emerging-market nations, also implies that central banks will have to buy gold if they wish to maintain their current balances of gold to foreign exchange holdings. Russia has said it will keep 10% of its total foreign-exchange reserves in gold. Any meaningful increase in currency reserves therefore would trigger purchases by the Russian central bank. That said, most emerging-market central banks are accumulating US dollars at a slower pace this year than in 2011, as the US current account deficit has contracted and emerging-market exports slow. This may reduce but not eliminate emergingmarket central banks demand for gold. Analysis by Joshua Aizenman and Kenta Inoue of the University of California Santa Cruz in Central banks and gold puzzles (2012) suggests that a countrys gold holdings are positively correlated with global power. Historically, holding large amounts of bullion was associated with a countrys prestige. Even in modern times,
large holdings of gold are a signal of economic might, the study said. It is no accident, therefore, that the growing global might of key emerging markets, including China, India, and Russia, has coincided with increases in these nations gold holdings. According to BIS data, China is the sixth-largest gold holder in the world, Russia is No. 8, and India No. 11. This growth is consistent with the desire of the emerging economic giants to signal their growing economic clout and to diversify their reserves to help ensure stability during periods of global economic turbulence. Further economic expansion in these nations could precipitate gold purchases, we believe. Central bank activity in the past shows that policymakers operate on very long time horizons and do not change policy easily or quickly. This leads us believe that the official sector is likely to remain a net buyer of bullion for at least the next five years, with a commensurate impact on price. Historical analysis also shows that central banks tend to act in sync on gold purchases and sales. This helps explain the collective reluctance of Western European central banks to sell gold and also how demand for gold in the emerging world has become broad-based in the past few years. The gold markets ability to remain liquid at the peak of the credit crisis in 2008-09 reaffirmed golds utility for many central bankers. Gold also compares favorably with other assets. One lesson of the eurozone crisis is that sovereign bonds can no longer be regarded as totally risk-free. As sovereign credit ratings of some countries, including the US, have been downgraded, gold may become more attractive to central banks seeking to insulate their holdings from economic uncertainty. Many factors determine what gold holdings are appropriate for a particular central bank. These
15
abc
include the size and openness of the economy, trade flows, international capital flows, the magnitude of foreign debt, and the opportunity cost of holding reserves. Based on these factors, we believe that the majority of the worlds central banks in the emerging world are underweight gold, and that owing to uncertainty about the fragility of the financial system, future values of the USD and the EUR will encourage greater gold accumulation in the near to medium term. Another global financial crisis or further deterioration of the eurozones sovereign debt situation could encourage more gold purchases from the official sector, we believe. In the absence of any major sellers, we forecast that the official sector will account for c450t of net purchases in 2012 and c425t in 2013.
According to the latest CFTC data, net long speculative positions total c15.6moz, up from the year-to-date low of c13.0moz set in the last week of May. Net long speculative positions also are about 15.28moz below the record high of 30.8moz set at the beginning of December 2008, when gold prices were trading around USD1,200/oz. Historically low net long positions imply plenty of room for investors to rebuild long positions and for gold prices to trade higher. During periods of liquidation between the beginnings of the financial crisis in 2008 to early June this year, the average weekly decline in net speculative long positions was 1.138moz, with a corresponding average gold price drop of USD14.16/oz. This implies that since the financial crisis began, for every 100,000oz of gold that was sold out of net speculative long positions, gold prices dropped by USD1.24/oz. Conversely, during periods of accumulation, the average weekly build in net speculative long positions of gold was 1.057moz, with an average price increase of USD20.20/oz. This implies that for every 100,000oz of gold that was brought into the net speculative long positions, gold prices increased by USD1.91/oz. Net long speculative positions now total about c486t of gold, or a bit more than one-sixth of annual global mine output. During previous rallies, net long positions accounted for a much greater share of global mine output. This supports our contention that long positions could build further, with a commensurate bullish impact on prices. In the chart at left, we see a direct correlation between the often volatile movement of net speculative positions on the Comex and the gold price. In addition to leaving ample room for investors to rebuild long positions, the recent decline in net speculative positions also may dissuade potential sellers from entering the market. Our historical
Commitments of Traders
How low can you go?
Commitments of Traders reports issued by the Commodity Futures Trading Commission (CFTC) have been a reliable barometer of investor attitudes toward the metal. Speculators have been net long gold on the Comex since the genesis of the bull market in 2001. These positions, however, are often subject to considerable volatility and fluctuations, which can visibly affect gold prices. We believe this helps explain volatility of gold prices.
Gold and net speculative positions, 2010-present
2, 200 1, 800 1, 400 1, 000 Jan -10 Jul-10 Jan-11 Jul-11
m oz
40 30 20 10 0
Ja n-12
Spec p osition in COM EX (RHS) Gold Price USD/ oz (LHS )

Source: HSBC, CFTC
16
abc
analysis indicates that long positions are likely to grow from current low levels, and that further steep declines in long positions are unlikely. We expect increases in long positions to have a commensurately bullish impact on prices. The chart at the bottom of the page shows combined ETF and net long speculative positions.
Exchange-traded funds
Barely higher and more volatile
A notable feature of the gold market has been the popularity of gold exchange-traded funds (ETFs) with investors. That said, following several years of near-robust growth, ETF demand is moderating notably and holdings have been subject to increasing volatility in the past 30 months, with changes in risk sentiment resulting in periodic liquidations. Despite this, the overall trajectory of demand remains slightly positive. After dropping to c2,075t on 15 February 2011 from the then record high of c2,184t set on 20 December 2010, ETF positions rebuilt for most of the rest of 2011. By year-end 2011, combined gold ETF holdings increased by 153.4t to 2,322.4t. As of early June 2012, combined gold ETF holdings stood at c2,353t, an increase of c31t for the year but down 30t from the record high set in late March this year of 2,383t. Total gold ETF holdings are equivalent to almost 90% of global mine output. Moderating demand in gold exchange-traded products has been one of the driving factors behind recent price weakness. Although net gold holdings have increased, periods of sharp liquidations have hurt prices.
Since the beginning of 2011, during periods of liquidation, the average weekly decline in gold ETFs was 12.2t, with a corresponding gold price drop of USD8.10/oz. This implies that for every 1t of gold that was sold out of ETFs, gold prices dropped by USD0.66/oz. Conversely, during periods of accumulation, the average weekly build in gold ETFs was 11.5t, with an average price increase of USD8.7/oz. This implies that for every 1t of gold that was brought into the ETFs, gold prices increased by USD0.76/oz. Declines in gold ETF holdings do not necessarily represent an overall drop in gold investment, we believe, as investors may be switching into other forms of bullion. That said, overall investor appetite for these ETFs appears at the very least to be moderating, and we do not expect the huge increases of a few years ago to be repeated. We attribute this in large part to a maturing of the product cycle, as gold ETFs have been available to the public for eight years and are therefore no longer a new investment. Gold ETF holdings notably overshadow net long positions on the Comex. Together, they now account for c2,839t, or c51t less than annual mine output. ETFs are also the sixth-largest holders of gold in the world, behind the central banks of the US, Germany, France, and Italy, and the International Monetary Fund.
Gold prices, gold ETF, and net speculative positions
2, 300 1, 800 1, 300 800 300 Jun -04 J un-06 Jun -08 Jun-10
moz
150 100 50 0
Jun-12
Gold in ETFs (RHS) Spe c position in COMEX (RHS) Gold Price USD/ oz (LHS)
Source: HSBC, Gold Bullion, ETF Securities, CFTC
17
abc
Despite an increase in gold price volatility, swings in gold ETF holdings are still moderate and slower-moving, compared to the Comex. Traditional futures and options trading are typically more volatile and more subject to shortterm fluctuations than gold ETF trading. Thus, swings on the Comex are often more influential in determining short-term price movements than the gold ETFs, despite the Comexs considerably smaller market position. That said, volatility in the gold ETFs holdings has risen over the past 30 months, which may hold important ramifications for the gold market. We attribute this increase in volatility to greater participation by hedge funds and other short-term investors in ETF products, as well as swings in risk sentiment. We anticipate that demand for allocated gold and other sources of bullion may limit any increase in gold ETF off-take to c125t this year and c100t in 2013. Other forms of physical gold demand include bars and coins. Combined bar and coin demand in Q1 1 2012 rose 13% to 389t from a year earlier, according to Thomson Reuters GFMS data compiled for the World Gold Councils most recent Gold Demand Trends. Physical demand for bullion products appears to have fallen sharply since Q1, with the US Mint reporting c50% lower demand for its gold coins in April and May, compared with the same period in 2011. We expect lower prices, combined with continuing investor concerns, to stimulate physical demand for coins and bars in the second half of this year. This should also help put a floor under gold price declines. The following chart shows monthly sales of US gold coins.
US Mint: Monthly gold coin sales
250 000 oz 200 150 100 50 0 Dec-07 Dec-0 8 Dec-09 Dec-10 Dec-11
1, 900
1, 400
900
400
Gold S ales (LHS)

Source: US Mint, HSBC
Gold Pric e USD/oz (RHS)
18
abc
Trends in supply/demand
High prices are encouraging mine output, despite challenges and
obstacles to production, including skills shortages and a resurgence in resource nationalism in some host countries
High prices in local currency terms have severely crimped Indian
gold demand and encouraged greater scrap supply; this has been partly offset by rising Chinese consumption and strong imports
We believe that a price drop below USD1,500/oz would likely
buoy jewelry demand and curb scrap supplies
Gold mine supply trends

More but harder to get
Gold production is rising in response to high prices and investments made earlier in the mining cycle. Output gains are modest, however, compared to the steep increases in recent years. Gold prices have risen every year since 2000, and despite a more than fourfold price increase since then, it was not until 2010 that production surpassed that in the banner year of 2001. Although costs are rising rapidly, at current prices the vast bulk of producers still have significant financial incentive to increase output wherever possible. Regardless of price, producers face a range of obstacles and challenges to raising output, including declining ore grades, reserves that are difficult to access, increased government regulations, rising costs, and a shortage of skilled and technical manpower. Despite this, the output trajectory for at least the next three years appears to be higher.
We have examined these and other obstacles to raising production in greater detail in previous editions of our Precious Metals Outlook, and now we take a closer look at employment trends in the gold mining industry.
Global gold mine production (metric tons)
3, 200 3, 000 2, 800
2, 000 1, 500 1, 000
2, 600 2, 400 2, 200

2 005 2 009 2006 2007 2008 2010 2011 201 2f 2013f
500 0
M ine pro duction - LHS

Source: Thomson Reuters GFMS, WGC, HSBC
Gold (USD/ oz) - RHS
A lack of trained manpower, particularly at the professional level, is a significant obstacle to increasing gold output. Producers report chronic shortages of geologists, geophysicists, mining engineers, and other technical staff members. The paucity of talent is directly related to steep
19
abc
declines in graduation rates in mining-related subjects over the past two decades. After peaking in the early 1980s, enrollment in mining schools and mining-related geosciences declined sharply along with metals prices in the 1990s and the early part of this century. In 2000, there were just 148 mining engineering graduates from 16 US mining schools. Low enrollment forced the closures of two US mining schools in that year alone. According to the American Geological Institute, current staffing levels and enrollment in higher educational institutes in the geosciences and related mining fields are up from depressed levels earlier this century but will not keep up with projected demand by the industry. The US Bureau of Labor Statistics projects a 21% increase in all geoscience-related occupations between 2011 and 2020. According to the American Geological Institute, approximately 1,500 geoscience graduates enter the professional workplace each year, and this number falls well short of geoscience workforce demand and replacement needs. Data from federal sources, professional societies, and industry indicate an imbalance of the age of geoscientists in the profession, as the majority are within 10 to 15 years of retirement age. The percentage of geoscientists between 31and 35 years old is less than half of those between 51 and 55 years old. Government and private sector estimates in other mining nations that traditionally produce highly trained mining professionals, including the UK, Canada, South Africa, France, and Australia, reflect similar professional shortages. Rapid professional attrition rates would strain the mining industry globally, compounding skills shortages, thereby presenting another obstacle to increasing output. Competition for skilled talent is a major driver of higher salaries and escalating mining costs. The shortage of skilled manpower at all levels is pushing salaries up across the board. Mid-career
engineers in Australia are paid more than AUD200,000 per year, according to local recruiters. The market for expertise in the local mining industry is so tight that the Australian government loosened its immigration policy to allow more highly skilled mine workers into the country on short-term visas. The Canadian government is considering similar reforms, according to the Ministry for Mines. Higher salaries in mining and reduced job prospects in other industries have led to increased enrollment in mining schools worldwide in the past few years. In 2011, the Colorado School of Mines reported receiving a record 11,000 applications for fewer than 1,000 places. In Canada, admissions to the top mining schools have nearly tripled in three years, according to the Mining Association of Canada. The Colorado School of Mines, one of the worlds top mining schools, reported a job placement rate of more than 95% for 2011 graduates from the mining engineering, metallurgy and materials, geological engineering, and geophysics programs. In that year, the median starting pay offer across the four departments was USD66,000 per year for a graduate, well above the USD42,000 median that the National Association of Colleges and Employers expects first-time job seekers with college degrees to command in 2012. Despite higher enrollment in mining-related sciences, companies will still run the risk of not having enough skilled people to staff their project pipelines for years to come, according to the American Geological Institute, and this could mean that some projects will never come to fruition or will be seriously delayed. If new projects are shelved because of a lack of skilled manpower, that would put more pressure on the worlds current productive resources and could help send prices of gold and other precious metals higher.
20
abc
Resource nationalism: Your mine is my mine

Resource nationalism is a term coined by political scientists to describe the tendency of governments and people, such as indigenous groups and organized labor, to assert greater control over domestic natural resources, including precious metals. The term is often used in conjunction with a corresponding decrease in producer influence. According to a survey conducted by Ernst & Young in late 2011, the heads of the 30 biggest global mining companies regard resource nationalism as the top business risk this year for the metals and mining industry; the secondbiggest risk was identified as a shortage of skilled and profession manpower. The survey attributed the No. 1 concern to announced plans by a host of producer nations to boost their share of perceived mining profits. As many governments struggle with deficits or grapple with the global economic crisis on their domestic economies, officials are targeting metals and mining as an arena in which they believe they can raise revenue. This has led governments to reassess the economic rent they can derive from metals and mining projects including gold projects in their countries in light of their fiscal situations, rather than on normal, objective economic terms. Over time, a resurgence in resource nationalism can deter or at least inhibit investment and progress in otherwise viable gold projects, history shows. South Africa, in addition to being the largest gold producer in Africa, is home to the worlds largest gold reserves. In late 2011, a panel of academics, miners, and politicians set up by the ruling African National Congress to study the possibility of greater state intervention in the mining industry suggested imposing a 50% windfall tax on mining super profits and a 50% capital-gains tax on the sale of prospecting rights. Earlier this year,
Ghana, Africas second-biggest gold producer, announced a review of all mining contracts with a view toward renegotiating tax and royalty agreements. It also raised miners corporate tax rate to 35% from 25% and imposed a windfall tax of 10% on super profits. Namibia has decided to transfer all new mining and exploration to a stateowned company. Increased taxes and royalties have also been adopted in mature and traditionally miningfriendly countries such as Australia. Venezuelan President Hugo Chavez nationalized that countrys gold mining industry on 23 August 2011. Although resource nationalism is on the rise, most host countries reject a policy of outright nationalization. Despite persistent demand by the ruling African National Congresss Youth League for nationalization with or without compensation, the ANCs panel on the mining industry has come out strongly opposing a policy of outright nationalization. Furthermore, South African cabinet officials, including the president and the mining minister, insist that nationalization is not under consideration. It seems that, rather than commit to a policy of nationalization, host countries are more likely to impose royalties on production volumes. These can be derived even when a producer is not profitable. Because mining projects can cost billions of dollars and take as long as a decade to become fully active, miners are reluctant to commit to projects in countries in which rules pertaining to their investments can change unpredictably. If host countries take a too heavyhanded approach with producers, gold production will be lower than would otherwise be the case, with a commensurate impact on prices.
21
abc
Between a rock and a hard place

An increase in labor strikes and other industrial stoppages also is inhibiting mine output. According to PricewaterhouseCoopers, 99 mining strikes occurred from 2009-2011, and the largest number of those strikes, 23, were at gold mines. Of the latter, 16 were staged in pursuit of higher wages. According to PwC, the gold mine walkouts lasted 25 days on average, and production losses averaged 550oz of gold per day. The PwC data showed that strike action is much more likely to occur in an emerging economy than in an advanced economy. For those gold producers hit by strikes, almost half were in South America and more than one-third in Africa. As gold output increases, producers are finding it more difficult to replace reserves. According to the latest Mineral Commodity Summaries issued by the US Geological Survey, global gold reserves in 2011 were unchanged from a year earlier at 51,000t. In an interview in late 2011, Michael George, gold commodities specialist at the USGS, reported that the biggest changes in reserves were a 70t increase in Australia to 7,400t and a 100t decrease in Canadian reserves to 920t. According to the USGC, at current production rates, reserves will be exhausted in c17 years. This appears unlikely to happen, however, as reserves data are dynamic and can change with higher or lower prices, changes in production costs, and new discoveries. Yet static reserves do imply that prices will have to rise or the amount of gold mined will have to fall as the decade unfolds. Reduced mining supply could be reasonably expected to support gold prices in the long term. Gold output could be sensitive to a further sharp decline in gold prices. According to Gold Fields CEO Nick Holland, the market will require prices in excess of USD1,500/oz to sustain mine production at 70-75moz, or about 500t below current production levels. Mr. Holland put the all-
in cost of producing an ounce of gold including exploration and other costs not included in cash costs at USD1,400/oz. Should prices drop sharply and go near or fall below USD1,450/oz, the highest-cost could be compelled to shelve some development plans, which could become uneconomical with gold at these levels. Because few producers are hedged, any sustained drop in prices below these levels would be likely to lead to some small cuts in production, we believe. Though such cuts might be modest, as the vast bulk of gold is mined for cash costs between USD700-900/oz insufficient to move the price by itself we believe that any output cut would have a positive psychological impact on prices and help establish a floor under prices. Though most production costs are rising, not every cost has risen this year. Mining is energyand power-intensive, and although the decline in oil prices should help all gold producers, it can be especially good news for those that operate large open-pit operations and that depend on diesel or heavy fuel oil (HFO) for power generation. Also, the global financial and economic crisis has helped contain certain cost pressures on key inputs, notably cement and steel. Prices are high enough to encourage greater gold production. According to Demand Trends, produced by Thomson Reuters GFMS for the World Gold Council, world gold output in 2011 totaled 2,818t, surpassing the 2,749.5t, a record high set in the previous year. Production continues to rise at a steady pace; in Q1 2012, it increased 3% from a year earlier to 673.8t. Production increases were spread across the globe, with only a few countries reporting net declines in output. Most of the increases came from expansions of commissioned projects that entered production in 2009-10.
22
abc
Despite challenges and obstacles to production, we forecast further gold production increases for 2012 and for 2013. These obstacles include but are not limited to a chronic shortage of skilled and technical personnel, notably geophysicists, geologists, and mining engineers; long waiting times for essential equipment; declining ore grades; and longer permitting and regulatory processes. Power constraints and insufficient fresh water also are curbing production, notably but not exclusively in South Africa. We forecast gold production will increase c3% each in 2012 and 2013 to 2,890t and 2,980t, respectively. Though we do not expect increases in output to weigh on prices this year, additional mine output would make more supply available for investment and thus could curb any price rallies. This is an element in our view that gold prices are unlikely to push above USD2,000/oz this year or next.
fabricators and refiners, we believe that the scrap supply rose sharply in Q2 2012 due to a significant increase in Indian recycling levels. Indian recycling was stimulated by a weak INR, which drove gold prices to near-record highs in local currency terms. Indian consumers may recycle c300t of gold this year, compared with 130t a year earlier, according to Prithviraj Kothari, president of the Bombay Bullion Association.
Old gold scrap (metric tons)
1,900 1,700 1,500 1,300 1,100 900 700 500 2012f 2005 2007 2008 2009 2010 2011 2013f 2006
2,000 1,500 1,000 500 0
Old gold scrap - LHS

Gold (USD/oz) - RHS
Scrap
Not strapped
Recycled scrap supplies have replaced official sector sales as the largest source of gold supply after mine output. The scrap market grew from c600t in 2000 to c1,661t in 2011, but the latter was down from 1,718t in 2010, according to data compiled for the World Gold Council by Thomson Reuters GFMS. The likely dearth of any further significant official sector sales leaves the gold market highly dependent on recycled flows for new supply. According to the World Gold Councils latest Demand Trends, compiled by Thomson Reuters GFMS, scrap supplies in the first quarter of 2012 totaled 392t, up c11% from Q1 2011 levels but very close to the Q1 2007-Q1 2011 average of 395t. Historically, about one-third of recycled gold has come from Western markets and the rest from the emerging world, notably India, China, and the Middle East. Based on our discussions with
Scrap supply from Western markets appears to have dropped slightly year-to-date, compared to the same period in 2011. This may be because recycling levels in the West are driven not just by price but also by other economic factors, most notably unemployment levels and income growth. As unemployment levels in the US and other Western nations begin to drop and income rises gradually, the economic need to cash in old jewelry appears to have receded. This argues against the notion that scrap supply is solely a function of price. We believe that emerging nations have not increased scrap recycling to the extent that India has done. Other traditional large contributors to scrap supply, notably China and parts of the Middle East, have currencies that are pegged or linked to the USD and so have not benefited as Indian gold recyclers have from rising local prices for gold as their currencies depreciated.
23
abc
Based in part on our outlook for higher gold prices later this year, a slight reduction in recycling from Western markets, and continued high recycling levels from India, we anticipate a c125t increase in scrap supply to a record c1,786t for 2012, or c60% of our estimate of mine supply. For 2013, we expect a reduction Indian scrap levels, which should reduce them to near 1,650t. Based on our conversations with refiners and merchants, we believe that gold prices below USD1,500/oz would reduce the incentive to recycle and begin to shut off scrap flows. Meanwhile prices above USD1,900/oz could elicit an increase in scrap supply. Thus, scrap movements could help us define a reasonable trading range for this year.
will not amount to much more than c20t this year. It is possible that a sustained drop in prices could prompt some producers to re-evaluate their hedging strategies. Should gold enter a bear market, producers could rush to hedge, thus adding further pressure on prices.
Fabrication
Indian troubles
Jewelry consumption is the largest component of fabrication demand. This makes jewelry consumption arguably the single most important determinant of price. A notable feature of the gold jewelry market is its decline as a share of total demand in recent years. In 2011, gold jewelry accounted for barely 45% of total gold demand, down from c75% in 2005. For 2012, we forecast that jewelry will remain below 50% of total fabrication demand. The decline in jewelrys share of demand is also a reflection of the increased importance of investment demand, as well as outright declines in physical jewelry consumption. Demand for gold jewelry is a function of many factors, including the underlying price of gold, income growth, inflation, exchange rates, expectations about the gold price, employment levels, and the cost of competing luxury goods. Slower-moving influences on jewelry demand include demographics and changes in taste and fashion.
Global demand for gold jewelry (tons)
Hedging
Return from the grave?
A long-running feature of the gold market has been the industry trend toward dehedging, the process in which producers buy back or otherwise close out previously established hedges. Dehedging policies have left the global hedge book greatly diminished, and producers have little left in the way of hedge positions to close out. Based on company reports, we estimate net new hedging may have contributed just c5t to supply in 2011. Some new high-cost projects, which may require some form of hedging to attain project financing, may have created c5t in fresh hedging in Q1 this year. Although the industry retains a near-universal antihedging bias, the drop in prices from 2011 highs of USD1,920/oz to near USD1,525/oz this year may encourage some new hedging at the margins. The paucity of interest in initiating new hedges, even by producers operating near the costs of production, is a reflection of the bullish conviction in the producer community. Based on our conversations with producers, we estimate that net new hedging
3,000 2,500 2,000 1,500 1,000 500 0 2013f 2005 2007 2008 2009 2010 2011 2012f 2006
24
abc
Gold: Supply/demand balance (tonnes) 2005 2006 2007 2008 2009 2010 2011 2012f 2013f
Mine production Official sector net sales Old gold scrap Producer hedging Total supply Jewelry Electronics Dentistry Other industrial uses Other fabrication Total fabrications Bar hoarding Official coins Medals Exchange-traded funds Total investment demand Total demand Balance = net investment Gold price (USD/oz)
2,550 662 886 -86 4,012 2,707 280.4 62.4 87.8 430.6 3,138 237.6 110.9 37 208.1 594 3,731 281 445
2481 367 1,107 -373 3,582 2,283 306.1 60.7 91.2 458 2,741 210.4 129.1 59.4 260.2 659 3,400 182 605
2,476 484 956 -444 3,472 2,405 310.6 57.8 93.2 461.6 2,867 222.5 137 72.6 253.3 685 3,552 -80 697
2,409 236 1,217 -349 3,513 2,187 292.7 55.9 86.9 435.5 2,623 605.2 187.3 69.6 320.9 1,183 3,806 -293 872
2,589 33.6 1,695 -236.4 4,081 1,814 274.9 52.7 82.2 409.8 2,223 483.1 234.1 58.9 617.1 1,393 3,617 464 974
2,741 -77 1,719 -107.8 4,275 2,017 326 48.7 90.9 465.6 2,482 908.7 213.1 88.3 367.7 1,578 4,060 214 1,227
2,818 -456.4 1,661 5 4,028 1,973 320 43.4 89.4 452.7 2,426 1,191 245.5 87.8 162 1,686 4,112 -84 1,573
2,890 -450 1,786 20 4,246 1,848 323 43 90 456 2,304 1,100 175 89 125 1,489 3,793 453 1,760
2,980 -425 1,650 20 4,225 1,950 325 42 90 457 2,407 1,150 225 88 100 1,563 3,970 255 1,775
Source: HSBC, WGC, Thomson Reuters GFMS
According to data collected by Thomson Reuters GFMS for the World Gold Council, global jewelry demand in Q1 this year was c511t, a 10% drop compared with Q1 2011 demand of c570t. Some of this decline can be explained by the price increase between the two periods; gold prices were 20% higher on average in Q1 2012 than a year earlier. Jewelry demand remains sluggish globally but is above the near-disastrous levels during the worst periods of the financial crisis in 2008 and 2009, when consumers cut back on expenditures on luxury goods, including gold jewelry. A feature of the gold jewelry market is the increasing dominance of Asian markets. The Indian subcontinent and East Asian markets together account for about two-thirds of global jewelry demand. Indian demand for gold jewelry is down considerably so far this year. Demand fell sharply in response to near-closure of the Indian retail jewelry segment from mid-March to the end of April in response to proposed government increases on bullion imports and other bullion taxes. In addition, domestic Indian demand has been severely crimped by a weak INR, which noticeably increased the gold price in local terms. High local prices also triggered a boom in Indian scrap recycling.
Chinese demand, meanwhile, has been generally strong for most of this year. Although the pace of growth in Chinese gold jewelry demand appears to have slowed in the first quarter, it remains strong. More recently, any big jump in gold imports from Hong Kong, as can be seen in the chart at the bottom right of the next page, supports the notion that Chinese jewelry demand has increased recently. Even so, some of the gold may have been re-exported and some was for investment, so the broad import figure does not entirely represent jewelry demand. Taking these factors into account, we believe that gold jewelry demand in China is on a strong footing. By comparison, advanced markets such as the US and Europe recorded declines in jewelry purchases in Q1, compared with the same period in 2011. With the shift in the locus of gold jewelry demand from the West to the East also comes a shift in the price elasticity of demand. The majority of gold jewelry is purchased in the emerging-markets world. Traditionally, high prices can have a negative impact on relatively price-sensitive buyers in economies with limited discretionary consumer incomes, such as India, China, and the Middle East. The drop in prices below
25
abc
Indian gold jewelry demand and the INR
250 200 150 100 50 0 Jan06
tonnes
58 53 48 43 38
For other non-jewelry, non-investment fabrication demand, including dental, electronics, and other industrial uses, we believe that demand will be relatively little changed this year from 2011 levels.
China: Gold imports from Hong Kong
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
120
Tonnes
100 80 60 40
Ind ia Je wellery De mand (LHS)
U SD-IN R (RH S)
Source: HSBC, Thomson Reuters GFMS World Gold Council, Bloomberg
USD1,600/oz is likely to stimulate jewelry demand later in the year, we believe, and should prices fall below USD1,500/oz, we would expect a rapid consumer price response. Based on our conversations with manufacturers, we believe that any price rally to near USD2,000/oz is likely to curtail global jewelry demand severely. Jewelry also must compete with necessary household items and staples, including food and fuel, which represent the bulk of consumer spending in the emerging world, and higher food and oil prices could inhibit jewelry demand in India and China, the two largest markets for gold jewelry. The recent pullback in commodity prices may help support jewelry demand. According to Thomson Reuters GFMS, global jewelry demand in 2011 totaled 1,973t, a modest drop from 2,017t in 2010. Based on poor levels of Indian demand, slightly weaker Western market consumption, and strong Chinese and other Asian demand, we believe that gold jewelry demand may decrease by c125t this year to c1,848t compared with a year earlier. For 2013, we forecast a recovery in jewelry demand to c1,950t, based in part on HSBC forecasts of economic growth, real income, unemployment, inflation, and exchange rates in key gold-consuming nations. Our own forecasts are based in part on trends in the jewelry industry and sales data.
20 0 May-10 Nov-10 Nov-09 May-09 May-11 Nov-11 Nov-08
Source: Hong Kong Census and Statistics Department
26
abc
Notes
27
abc
Notes
28
abc
Notes
29
abc
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: James Steel and Howard Wen
Important Disclosures
This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means. This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice. Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products. The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results. Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. * HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures
1 2 3 This report is dated as at 15 June 2012. All market data included in this report are dated as at close 13 June 2012, unless otherwise indicated in the report. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
30
abc
Disclaimer
* Legal entities as at 12 June 2012 Issuer of report UAE HSBC Bank Middle East Limited, Dubai; HK The Hongkong and Shanghai Banking Corporation HSBC Securities (USA) Inc. Limited, Hong Kong; TW HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, 452 Fifth Avenue Toronto; HSBC Bank, Paris Branch; HSBC France; DE HSBC Trinkaus & Burkhardt AG, Dsseldorf; 000 HSBC Tower HSBC Bank (RR), Moscow; IN HSBC Securities and Capital Markets (India) Private Limited, Mumbai; JP HSBC Securities (Japan) Limited, Tokyo; EG HSBC Securities Egypt SAE, Cairo; CN HSBC New York, NY 10018, USA Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Telephone: +1 212 525 5000 Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Fax: +1 212 525 0356 Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Website: www.research.hsbc.com Securities (South Africa) (Pty) Ltd, Johannesburg; GR HSBC Securities SA, Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; US HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC Mxico, SA, Institucin de Banca Mltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA Banco Mltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR This material was prepared and is being distributed by HSBC Securities (USA) Inc., ("HSI") a member of the HSBC Group, the NYSE and FINRA. This material is for the information of clients of HSI and is not for publication to other persons, whether through the press or by other means. It is based on information from sources, which HSI believes to be reliable but it is not guaranteed as to the accuracy or completeness. Expressions of opinion herein are subject to change without notice. This material is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. HSI and its associated companies may make a market in, or may have been a manager or a co-manager of the most recent public offering of, any securities of the recommended issuer herein. HSI, its associated companies and/or their directors and employees may own the securities, options or other financial instruments of any of the issuers discussed herein and may sell them to or buy them from customers on a principal basis. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (SFA) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (FSCMA). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. HSBC Mxico, S.A., Institucin de Banca Mltiple, Grupo Financiero HSBC is authorized and regulated by Secretara de Hacienda y Crdito Pblico and Comisin Nacional Bancaria y de Valores (CNBV). HSBC Bank (Panama) S.A. is regulated by Superintendencia de Bancos de Panama. Banco HSBC Honduras S.A. is regulated by Comisin Nacional de Bancos y Seguros (CNBS). Banco HSBC Salvadoreo, S.A. is regulated by Superintendencia del Sistema Financiero (SSF). HSBC Colombia S.A. is regulated by Superintendencia Financiera de Colombia. Banco HSBC Costa Rica S.A. is supervised by Superintendencia General de Entidades Financieras (SUGEF). Banistmo Nicaragua, S.A. is authorized and regulated by Superintendencia de Bancos y de Otras Instituciones Financieras (SIBOIF). In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its wholesale customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR. Copyright 2012, HSBC Securities (USA) Inc, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Securities (USA) Inc. MICA (P) 038/04/2012, MICA (P) 063/04/2012 and MICA (P) 206/01/2012
[333073]
31
abc
Global Currency Strategy Research Team

Global
David Bloom Global Head of FX Research +44 20 7991 5969 david.bloom@hsbcib.com
Technical Analysis
Murray Gunn +44 20 7991 6797 murray,gunn@hsbcib.com
Precious Metals
James Steel +1 212 525 3117 Howard Wen +1 212 525 3726 james.steel@us.hsbc.com howard.x.wen@us.hsbc.com
Asia
Paul Mackel Head of FX Research, Asia-Pacific +852 2996 6565 paulmackel@hsbc.com.hk Perry Kojodjojo +852 2996 6568 Dominic Bunning +852 2822 1672 perrykojodjojo@hsbc.com.hk dominic.bunning@hsbc.com
United Kingdom
Daragh Maher +44 20 7991 5968 Stacy Williams +44 20 7991 5967 Mark McDonald +44 20 7991 5966 Murat Toprak +44 20 7991 5415 Mark Austin Consultant daragh.maher@hsbcib.com stacy.williams@hsbcgroup.com mark.mcdonald@hsbcib.com murat.toprak@hsbcib.com
United States
Robert Lynch +1 212 525 3159 Clyde Wardle +1 212 525 3345 robert.lynch@us.hsbc.com clyde.wardle@us.hsbc.com
Marjorie Hernandez +1 212 525 4109 marjorie.hernandez@us.hsbc.com

Gold Outlook June 2012 HSBC RDV

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Gold Outlook June 2012 HSBC RDV

Uploaded by

Copyright:

Available Formats

Commodities Global

Gold price outlook and forecasts

The logic behind central bank purchases, page 13.

Long term* 1,500

Commodities Global 15 June 2012

HSBC gold outlook

important role in determining gold prices this year

Down but not out

Gold prices, 1971-present (USD/oz)

Commodities Global 15 June 2012

* IP = Industrial production. ** Long term = Five years Source: HSBC

Commodities Global 15 June 2012

Commodities Global 15 June 2012

Investment case for gold

asset, its portfolio diversification qualities should attract investors

from the eurozone may impact gold prices

Gold in a time of crisis

1, 800 1, 750 1, 700 1, 650 1, 600

Jan 24: 1, 550 1, 500 Jan-12

FOMC statem ent

Commodities Global 15 June 2012

Neither risk-on nor risk-off

Commodities Global 15 June 2012

Global risk factors are growing

Asset correlations with risk-on/risk-off factors

Source: HSBC, Bloomberg

Commodities Global 15 June 2012

Financial repression and gold

Food, fuel, and gold

Commodities Global 15 June 2012

Commodities Global 15 June 2012

Gold and commodities index

2, 000 1, 500 1, 000 500

Fiscal cliff could buoy gold

Commodities Global 15 June 2012

Comex gold positions vs International Monetary Market (IMM) dollar positions

Golds performance vs currencies and platinum, 2011-present

50 40 30 20 10 0 -10 -20 -30 -40 -50

Total Speculative position on Comex (RHS)

Net USD Positions (LHS)

Golds role as surrogate currency

Commodities Global 15 June 2012

Greece, the EUR, and gold

Gold and US federal debt

150% 100% 50% 0%

Gold p rices (USD/oz ) (LHS) Gros s Fe deral Debt as a % of GDP (RHS)

Commodities Global 15 June 2012

Investment market trends

periodic bouts of liquidation, we anticipate modest demand growth

Gold held in central banks, as a percentage of total reserves

Commodities Global 15 June 2012

Commodities Global 15 June 2012

Commodities Global 15 June 2012

2, 200 1, 800 1, 400 1, 000 Jan -10 Jul-10 Jan-11 Jul-11

Spec p osition in COM EX (RHS) Gold Price USD/ oz (LHS )

Commodities Global 15 June 2012

Gold prices, gold ETF, and net speculative positions

Commodities Global 15 June 2012

US Mint: Monthly gold coin sales

Gold S ales (LHS)

Gold Pric e USD/oz (RHS)

Commodities Global 15 June 2012