www.gold.

org

Gold Investment Digest

April 2010

QUARTER 1 2010
Price trends
The gold price rose modestly in Q1 2010, ending the quarter at US$1,115.50/
Contributors
oz, on the London PM fix, compared with US$1,087.50/oz at the end of Q4 2009.
Juan Carlos Artigas
Gold remained one of the least volatile of the commodities monitored by WGC
juancarlos.artigas@gold.org
with annualised average volatility falling to 17.6% from 20.0% in the previous
quarter. Gold price volatility fell further to 14.8% by the end of the quarter.
Louise Street
… read more on page 2
louise.street@gold.org
Investment trends
Investors bought 5.6 net tonnes of gold via exchange traded funds (ETFs) World Gold Council
in Q1 2010, bringing the total amount of gold in the ETFs that we monitor 55 Old Broad Street
to a new record of 1,768 tonnes (worth US$63.4 billion). GFMS reports that London
the over-the-counter market saw a moderate increase in net demand during EC2M 1RX
the first quarter. Meanwhile, previously existing long positions have generally
continued to be very firmly held. Net long positions on gold futures contracts, www.gold.org
a proxy for the more speculative investment, fell from the highs experienced in investment@gold.org
Q4 2009, but they remain high by historical standards. +44 (0) 20 7826 4700
… read more on page 5
Market and economic influences
A mix of large budget deficits and debt burdens in Europe started to put
pressure on European currencies. Given gold’s role as a dollar hedge, this
played a part in keeping gold from rising at the same rate as it had in previous
quarters. However, gold is affected by a myriad of factors which help offset
some of the short-term effects of currency appreciation. Robust fundamentals,
including evidence of both a rebounding jewellery market in India and growth
in China, plus sustained investor inflows, continued to support gold price
performance during Q1 2010. Moreover, continuing growth in other developing
economies such as China is likely to support future gold demand. In addition,
medium term concerns surrounding sovereign debt risk in some regions is
likely to favour gold.
… read more on page 8
Gold market trends
Preliminary reports on first quarter demand trends in India suggest a
continuing improvement supported by seasonal festivities and a stronger
Indian rupee. Anecdotal evidence also suggests jewellery demand in China
grew as a result of a seasonally strong demand around Chinese New Year.
European net central bank sales ground to a complete halt in Q1 2010, and
they may fall short of the CBGA3 ceiling of 400 tonnes for the year. The
International Monetary Fund (IMF) has sold 212 tonnes off-market and 5.6
tonnes on-market since September 2009 (of its intended 403 tonnes).
… read more on page 11
Key data
Our key data table provides you with a concise summary of gold returns,
supply and demand statistics, price volatility and a correlation matrix covering
gold, silver, commodities, equities and bonds.
… read more on page 14

© 2010 World Gold Council and GFMS Ltd

 Gold Investment Digest

PRICE TRENDS
The gold price edged up modestly in Q1 2010, ending the
quarter at US$1,115.50/oz, on the London PM fix, compared
with US$1,087.50/oz at the end of Q4 2009. The average
gold price also rose slightly, to US$1,109.12/oz, from
US$1,099.63/oz the previous quarter. Throughout the
quarter, gold mostly traded in a range between
US$1,058.00/oz and US$1,153.00/oz, as some factors
supported the price but others kept it from rising further.
On the one hand, the first quarter tends to be a seasonally
strong source of jewellery demand in India and China,
which has been corroborated by anecdotal evidence
this year. Moreover, investment activity suggests that
gold remains a looked-after asset. First, surveys that
WGC conducted during conferences and meetings
with investors this quarter show that, of those who
participated, 42% are planning to increase their exposure
to the yellow metal and 35% to maintain it, while only 7%
are looking to reduce the size of their position. Second,
net inflows on the gold ETFs we periodically monitor were
marginally positive on the quarter. Third, whilst net long
positions on gold futures contracts, a proxy for the more
speculative end of investment demand, fell from the highs
experienced in Q4 2009, it remains high by historical
standards as participants still see value in the yellow
metal. In addition to this, European net central bank sales
were close to zero during Q1, not bringing extra supply
into the market.
On the other hand, however, credit woes in Europe on the
back of concerns about the finances of Portugal, Ireland,
Greece, Spain, and Italy had a negative impact on the
euro and the British pound both depreciating by 5.66%
and 6.10%, respectively, against the US dollar over the
quarter. Given the role gold plays as a hedge against
the dollar, weaker European currencies played a part on
keeping the price of the yellow metal from rising at the
same rate as it had done during previous quarters when
the US dollar outlook was put to question.
During Q1 2010, the S&P 500 rose by 3.8% and emerging
market equities—as measured by the MSCI EM Index—
moved 2.1% higher as their economies continued to
gradually improve and many emerging market currencies
appreciated against the dollar. On the contrary, the
MSCI World ex US Index (which is heavily weighted in
European equities) increased only by 0.7%, as concerns
about the finances of Portugal, Ireland, Greece, and
Spain dampened the economic recovery and took their
toll on equity markets. During the same period, the S&P
Goldman Sachs Commodities Spot Index (S&P GSCI)
rose by 1.0%, as agricultural commodities fell sharply as
a result of excess supply while energy and most metals
followed a more positive tone in line with the global
business cycle. In particular, the price of oil increased
by 4.9% to US$81.30/bbl by the end of Q1 2009 from
US$77.20/bbl the previous quarter. Finally, US Treasuries,

Chart 1: Gold price (US$/oz), London PM fix Chart 2: Relative price performance in Q1 2010*

%
US$/oz
6
1,300

5
1,200

4
1,100

3
1,000

2
900

1
800

0
700
z)

y S
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SC 00

ex rld
S

S$ oil

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Ts U
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5

/b
(U e
ap

G
S$

IW

d
P

SC

ru
S&

P
rC
(U

S&
M

tc
Ba
M 08
M 08

Ju 8
Se 8
N 08

Ja 8
M 09
M 09

Ju 9
Se 9
N 09

Ja 9
M 10
0

en
M
-0
l-0

-0

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ol
n-

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ar
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Br
Ja

* For comparison purposes, gold performance was computed using 5PM EST prices.

Source: The London Bullion Market Association Source: Bloomberg, Barclays Capital

April 2010 2
 Gold Investment Digest

as measured by the Barclays US Treasuries aggregate

index, rose 0.8% during the course of the quarter, as Commodities – Returns
medium and longer term rates remained relatively flat—a
% QOQ % YOY
by-product of US dollar strength against some of the
major currencies and Federal Reserve officials signalling Gold (US$/oz) London PM fix 2.6 21.7
that rates will remain low whilst the US economy continues Silver 3.0 33.5
to recover.
Palladium 17.6 122.7

On a risk-adjusted basis, the yellow metal outperformed Platinum 11.7 45.4

compared with the broader commodity complex and Aluminum 3.6 67.6
international equities, but underperformed against US Copper 6.6 94.2
and emerging market equities, as well as US Treasuries in
Lead -11.4 66.7
the first quarter of 2010. In particular, emerging markets
benefited from economic growth and some currency Nickel 35.0 165.2
appreciation. Whilst oil tends to be considerably more Tin 9.8 76.1
volatile than gold (almost twice as high on average),
Zinc -8.2 81.5
crude oil returns per unit of risk this quarter were better
than that of the yellow metal. Brent oil 5.3 70.3
S&P GSCI Spot Index 1.1 47.9
Chart 3: Annualised return versus annualised daily return volatility
S&P GS Agriculture Spot Index -16.9 -0.5
for various assets, 12/31/09-3/31/10
S&P GS Livestock Spot Index 15.2 15.1
Annualised
return (%) R/J CRB Spot Index 2.4 34.5
25
DJ UBS Spot Index -3.6 37.9
Source: Global Insight, WGC
Oil
20

S&P 500 Price volatility

15
Market volatility has continued to ease during the first
quarter of 2010, reaching levels similar to those prior
1-to-1 ratio to the Lehman Brothers collapse. Similarly, gold price
10
MSCI EM volatility fell in Q1 2010 to an annualised average of
17.6% from 20.0% in the previous quarter. Gold price
Gold volatility reached a peak of 22.4% on 5 February 2010,
5
S&P GSCI measured on a 22-day rolling basis, as the price of gold
US Tsy MSCI ex US
reached the bottom of its trading range of US$1,053.50/
0 oz, on the London PM fix. Fluctuations in the gold price
0 5 10 15 20 25 30 eased thereafter and price volatility fell to 14.8% by the
Annualised daily return volatility (%) end of the quarter, below historical standards (gold’s
Source: Bloomberg, Barclays Capital, WGC 20-year price volatility is around 15.8%). Similarly, the
.
VIX index, a market estimate of future volatility based on
Demand for industrial metals continued to rise as the the weighted average of the implied volatilities of a wide
global recovery gathered pace, especially in some range of option strikes, eased to an average of 20.1%
emerging economies, resulting in double-digit price in Q1 2010 down from 23.0% in the previous quarter,
growth, both on a quarter-on-quarter and year-on-year trading as low as 16.3% in March (its lowest level since
basis. In Q1 2010, nickel and palladium were the best May 2008). Finally, average daily volatility on the S&P
performing of the commodities we regularly monitor Goldman Sachs Commodity Index fell slightly to 21.3%
rising by 35.0% and 17.6% respectively, while zinc fell by in Q1 2010, from 22.8% in Q4 2008 on an annual basis.
8.2%. Gold and silver saw a similar rise of 2.6% and 3.0%
respectively, over the quarter. Agricultural commodities Gold remained, on average, one of the least volatile of
fell sharply by 16.9% as record outputs in various parts the commodities that we monitor, with the exception of
of the world suppressed prices. the S&P GS Livestock Spot Index. Lead was the most

April 2010 3
 Gold Investment Digest

volatile commodity for the fourth consecutive quarter,

with an average volatility of 42.6% in Q1, followed by zinc
and nickel, which had volatilities of 36.1% and 34.7%
respectively. Crude oil volatility edged down slightly to an
average of 29.0% (on an annualised basis) in Q1 2010
from 30.5% in Q4 2009.

Chart 4: Gold & S&P GS Commodity Index annualised price

volatility (22-day rolling, %) and the VIX Index (level)
% level
90 90

80 80

70 70

60 60

50 50

40 40

30 30

20 20

10 10

0 0
M 08
M 08

Ju 8
Se 8
N 08
Ja 08
M 09
M -09

Ju 9
Se 9
N 09

Ja 9
M 10
0
-0
l-0

-0
l-0

-0

-1
n-

p-

-
n-

p-

n-
ar
ay

ov

ar
ay

ov

ar
Ja

Gold (US$/oz; LHS) S&P GSCI (LHS) VIX Index (RHS)

Source: Bloomberg, WGC

Chart 5: Annualised Q1 2010 volatility for selected commodities

%
45

40

35

30

25

20

15

10

0
Br m
x

ul do dex

SC ot ix
po ex

Pl ex
Al um

il

um

l
nc

ad
r

lla r

ke
pe

Pa lve
to
G $/o S S nde

Ti
u
Sp M f

I S Ind

nd

Zi

Le
in

ic
in

di
op
en

Si
n

um

N
P

at
I

tI

tI

C
ot

n
po
Sp

ric on
k

re
oc

Ag z) L

u
S& (U J U

t
st

G
ve

P
S&
Li

S
S
G

S
d
P

ol
S&

P
G

Source: Global Insight, WGC

April 2010 4
 Gold Investment Digest

INVESTMENT TRENDS
Exchange traded funds 5 February at 215,324 and 132,922 contracts respectively,
Investors bought 5.6 net tonnes of gold via exchange the same day the yellow metal fell by more than 4.0%
traded funds (ETFs) in Q1 2010, bringing the total amount and reached the quarter’s low of US$1,058.00/oz, on the
of gold in the ETFs that we monitor to a new record of London PM fix. Subsequently, option volumes started to
1,768 tonnes, worth US$63.4 billion at the quarter-end fall coinciding with the downward trend in gold volatility.
gold price. ZKB Gold ETF and Julius Baer Physical Gold At-the-money implied volatilities on the 3-month call and
ETF, both listed on the Swiss Exchange (SWX), recorded put options trended downwards during the quarter;
the strongest inflows during the first quarter, adding 10.2 implied volatility reached the high for the quarter on
and 8.1 tonnes respectively, as interest in the Swiss- 4 February trading at 25.7%, finally retrenching back to
based securities continued. These funds remain small, 17.4% by the end of the quarter.
however, compared to SPDR® Gold Shares, or GLD as
it is known, listed on the NYSE Arca and cross-listed Gold futures
in Mexico, Singapore, Tokyo and Hong Kong with 1,130 COMEX total non-commercial and non-reportable net
tonnes (worth US$40.5 billion) in assets. GBS Bullion long positions, a proxy for the more speculative end
Securities (listed on the London Stock Exchange) shed of investment demand, gradually fell over the quarter.
7.8 tonnes in Q1, the largest net outflow of the ETFs The net long ultimately shed 7.1 million ounces to 20.8
we monitor. million ounces by the end of Q1 2010, compared to
the end of Q4 2009. On average, net long positions in
Chart 6: Gold ETF holdings in tonnes and the gold price (US$/oz)
the first quarter of 2010 decreased by 13.8% from 29.2
million ounces in Q4 2009. The net long fell for most of
Tonnes US$/oz January and February, to later spike up back to 25.2
1,800 1,200
ETFS Physical Swiss Gold Shares (LSE) million ounces in March, as the trade-weighted dollar lost
1,600
ETFS Physical Swiss Gold Shares (NYSE)
1,100 some ground from its peak in late February. This peak
Julius Baer Physical Gold - SWX
XETRA-GOLD (Deutsche Böerse) was short-lived, as the trade-weighted dollar gained
1,400 ETFS Physical Gold (LSE) 1,000 momentum again (primarily on the back of continuing
GOLDIST (Istanbul Stock Exchange)
1,200
ZKB Gold ETF (SWX)
900
concerns surrounding fiscal and credit woes in Europe)
IAU (Amex)
GLD (NYSE)
and the net long position in gold fell back again. Overall,
1,000 NewGold (JSE) 800
GBS (LSE)
800 GBS (ASX) 700 Chart 7: COMEX net long on non-commercial & non-reportable
Gold PM Fix (US$) positions on the active gold futures contract (million oz) versus
600 600 the gold price (US$/oz)

400 500 Million oz; LHS US$/oz; RHS

35 1,200
200 400
30 1,100
0 300
3

04

07

10
r-0

-0

-0

r-0

-0

-0

r-0

25 1,000
n-

n-

n-
ct

ct

l
Ju

Ju
Ap

Ap

Ap
Ja

Ja

Ja
O

Data: www.ishares.com; www.exchangetradedgold.com;

20 900
www.etfsecurities.com; Zurich Kantonalbank; Finans Portföy;
www.Deutsche-Boerse.com; www.juliusbaer.com; Global Insight
Chart: WGC, www.gold.org 15 800

GLD options 10 700

Trading in GLD options fell in the first quarter of 2010 to a

5 600
total of 11.5 million contracts from 13.7 million in Q4 2009,
but remained high relative to the historical average of 7.5
0 500
million contracts (from Q3 2008 to Q1 2010). Volumes
M 7
7

07

08

08

M 9
9

09

10
0

-0

-0

-0
n-

p-

n-

p-

n-

p-

n-

sharply decreased from an average high of 283,072

ay

ay

ay
Ja

Ja

Ja

Ja
Se

Se

Se
M

contracts per day in December 2009 to a daily average Gold active net-long positions (million oz) Gold (US$/oz)
of 143,168 contracts by March 2010. After retreating for
most of January, call and put volumes spiked again on Source: COMEX, Bloomberg

April 2010 5
 Gold Investment Digest

both long-only and short-only positions decreased
over the quarter. Long-only positions fell by 13.7%
on average during Q1 2010 relative to the previous
quarter, more than offsetting a 3.0% reduction in short-
only contracts during the same period. Whilst net long
positions decreased on average during Q1 2010, the
price of gold remained well supported throughout the
quarter, as physical demand flows for gold appeared not
to be driven by speculative trading. Nevertheless, net long
positions on gold remain high by historical standards, as
these kinds of investors also continue to see value in the
gold trade.
Over-the-counter market
According to research carried out by GFMS on behalf
of the World Gold Council, investor activity in the over-
the-counter (OTC) market saw a moderate increase in
long positions during the first quarter. Anecdotal
evidence and preliminary analysis by GFMS suggest
that Q1 2010 experienced strong demand for physical
bars which kept suppliers (including importers to
SGE) fabricating gold bars till the last day before the
Chinese New Year holiday (14 February 2010)—a peak
season for both gold bars and jewellery demand. In the
US, first quarter data on American Eagle bullion coin sales
from the US Mint shows a more modest picture relative
to a very strong Q4 2009. Demand for 1-ounce coins in
Q1 2010 was 271,000 ounces (8.4 tonnes), compared
to 362,000 ounces (11.2 tonnes) in Q4 2009. Overall
demand, however, remains high by historical standards.
Investors wishing to purchase gold coins or small bars
can find a list of retail dealers on our website at: http://
www.invest.gold.org/sites/en/where_to_invest/directory.
Chart 8: American Eagle bullion sales
’000 oz
500

that this moderate increase reflects slower than 450

expected commitment to gold from so-called ‘real money’
400
funds, partly on the back of dynamics between the
gold market and global economic developments 350
including the sovereign debt crisis in Europe. Meanwhile,
300
GFMS believes previously existing long positions have
generally continued to be very firmly held, with very little 250
in the way of liquidations in recent months. Moreover,
200
gold’s strong performance in 2009 coupled with other
considerations such as its portfolio diversification and 150
inflation hedge characteristics were likely behind the
100
fresh wave of allocations that occurred at the beginning
of 2010. Finally, GFMS finds evidence that most of the 50
OTC activity has been on the form of “plain vanilla” rather
0
than structured products, in particular in the form of
7
7
7

Q 8
Q 8
Q 8

Q 8
Q 9

Q 9

Q 9
Q 9
0
’0
’0
’0

’0
’0
’0
’0
’0

’0
’0

’0

’0
’1

allocated gold positions.

1
2
3

4
1
2
3
4

1
2

4
1
Q
Q
Q

Q
Q

1-oz coin sales Total sales*

Bars and coins *Includes 1-, 1/2-, 1/4-, and 1/10th-ounce coin sales

The latest available data on coin and bar sales Source: The United States Mint

corresponds to Q4 2009 (comprehensive Q1 2010

data will be released in mid-May). Net retail demand
for gold, which includes demand for coins, small bars,
medals and imitation coins and other retail investment,
remained strong during the fourth quarter. It rose by
14.0 tonnes to 187.9 tonnes in Q4 2009, an increase
of 8.0% on the previous quarter. This largely reflected
a recovery in investment demand primarily in the US—
which experienced the single biggest inflow during the
quarter from 19.0 tonnes in Q3 to 37.3 tonnes in Q4
2009—followed closely by India, which increased by 15.6
tonnes. Overall, European investment flows also enjoyed
solid gains during Q4 2009 adding 7.2 tonnes. Whilst
bar and coin demand in Q4 2009 was not as strong
for China relative to Q3, anecdotal evidence suggests
Lease rates
The implied gold lease rate is the difference between
the dollar interest rate and the equivalent duration gold
forward rate—the rate at which gold holders are willing
to lend gold in exchange for dollars (also known as the
swap rate). Of the two components, the 3-month US Libor
started to rise to 0.30% by the end of the quarter from
around 0.25% in early January. The second component,
the 3-month gold swap rate, fell to a low of 0.16% by
the end of January from 0.39% in end-December 2009,
before rising modestly back to 0.22% by the end of the
quarter. Consequently, the implied gold lease rate turned
slightly positive in Q1 after being negative for most of
Q4 2009.

April 2010 6
 Gold Investment Digest

Chart 9: Implied 3-month gold lease rate

%
3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.5
07

07

08

08

09

09

10
-0

-0

-0
n-

p-

n-

p-

n-

p-

n-
ay

ay

ay
Ja

Ja

Ja

Ja
Se

Se

Se
M

Source: Bloomberg, WGC

April 2010 7
 Gold Investment Digest

MARKET AND ECONOMIC INFLUENCES

Global economic data continued to show signs of
growth during Q1 2010, as the world emerges from
the so-called “Great Recession”. It was not, however, a
homogenous picture. Whilst the optimism of economic
growth has been reflected in higher equity prices,
especially in the US and in many emerging economies,
the first quarter of 2010 was also marked by concerns
that some European countries would not be able to meet
their debt obligations.
By the end of 2009, a mix of large budget deficits and
debt burdens in Portugal, Ireland, Greece, Spain and
Italy started to put pressure on European currencies.
Indeed, the euro had fallen by 5.4% against the dollar
(US$) in December alone, and the British pound did
not fare much better, depreciating by 3.9% against the
dollar over the same period. That same trend continued
in Q1 2010, as the Greek borrowing rate continued to
rise and the European Union had to confront the risk of a
default amongst its members. This, in turn, caused many
market participants to question the soundness of the euro
and its role as an alternative currency for international
trade. During the first quarter, the euro and the British
pound lost 5.7% and 5.9% respectively against the dollar
and it was not until the end of the quarter that they started
to stabilise, following an offer from the IMF to open an
emergency line to Greece and talks amongst European
Union members of implementing a similar measure.
Although some economic indicators in Europe such
as exports and IP have recovered, a weaker currency
coupled with high unemployment rates, especially in
those distressed European countries, caused the MSCI
Europe Equity Index to fall by 2.3% in dollar terms over
the quarter.
In the US, the economy appears strong enough to
generate jobs and while unemployment remains high,
non-farm payrolls added 162,000 jobs in March, the
most since December 2007. Inflation, on the other hand,
remains low but its evolution will depend on how long it
takes for interest rates to be normalised. Federal Reserve
officials have expressed some concerns regarding the
risk of tightening monetary policy too early, signalling that
the Federal Reserve funds rate may remain low for some
time. This view is shared by Wall Street as analysts predict
that the Federal Reserve will not lift rates until sometime in
the autumn. Nevertheless, the Federal Reserve also has
to manage the risk that leaving rates at historically low
levels for too long may increase the likelihood of higher
inflation in the longer term. In all, an optimistic view on
the future of the US economy kept equity prices rising
and the dollar strengthening against some of the major
currencies over the quarter (namely the euro, the pound,
and the yen).

Chart 10: Debt and budget deficit as a percentage of GDP Chart 11: Change in US nonfarm payrolls (month-over-month) and
in 2009 US total unemployment rate (% sa, inverted)

% % ’000s %
140 14 600 0

120 12 400
2

200
100 10
4
0
80 8
-200 6
60 6
-400
8
40 4
-600

10
20 2
-800

0 0 -1000 12
8
l

nd

ly

n
ng ed
m

St ed
es

0
ga

06
Ja 4
Se 0

Ju 1
M 92

M 3

N 5

Se 5

9
10
N 00

y-
an
ec

ai
Ita

do

-0
-0

-0

0
-0

l-0

-0
at
la

Ki it

t
Sp

p-
tu

ni

p-

l0

n-

n-
n-

a
m
re

ar
ov

ay

ov

ar
Ire

Ju
r

M
Ja
Ja
er
Po

M
G

Change in nonfarm Unemployment rate

Debt as % of GDP (LHS) Budget deficit as % of GDP (RHS)
payrolls (RHS) (inverted; LHS)

Source: CIA World Factbook, Eurostat, Bloomberg Source: Bureau of Labor Statistics

April 2010 8
 Gold Investment Digest

Luckily for the gold market, a stronger dollar against
the euro or the pound does not necessarily mean lower
prices. In fact, gold is affected by a myriad of factors and
fundamental drivers of demand and supply help offset
some of the short-term effects of currency appreciation.
Many developing economies are recovering faster than
their developed counterparts, especially in countries
like India and China, which are key markets in gold
consumption. This, in turn, can have positive effects for
gold demand.
Historically gold has served as a hedge against the
dollar. This characteristic, however, needs to be put in the
context of global markets. For example, given that gold is
transacted globally in dollar terms, when the Indian rupee
strengthens against the dollar, Indian consumers benefit
from the lower gold price in local currency terms. During
the first quarter, whilst the dollar appreciated against the
euro, the pound, and the yen, it lost ground against the
Indian rupee, which gained 4.6% against the greenback,
thus counteracting some of the negative effect the dollar-
euro appreciation could have had on gold.
per capita lags other major markets substantially given
that, prior to 2002, the gold market in China was tightly
regulated from production through to retail distribution.
Gold prices and quotas were dictated by the People’s
Bank of China (PBoC) jointly with other central authorities
and export barriers and import tariffs made it very
difficult to enter the market. Since then, the gold market
has opened up and its potential for growth remains high.
According to the report, if gold were consumed in China
at the same per capita rate as in India, Hong Kong or
Saudi Arabia, annual Chinese demand could increase by
at least 100 to as much as 4,000 tonnes in the jewellery
sector alone.
Chart 12: Chinese cumulative gold supply and demand in tonnes
and the gold price (Yuan/oz)
Tonnes Yuan/oz
7,000 8,000
6,000 7,000
5,000 6,000

To put this in context, the 3-year correlation of weekly

4,000 5,000
gold returns versus the trade weighted dollar was about
-0.51, by the end of Q1 2010. However, if one adjusts
3,000 4,000
the trade-weighted dollar index by increasing the weight
of countries that tend to be large consumers of gold
2,000 3,000
(such as India, China, the Middle East, etc.), the 3-year
rolling correlation would stand at about -0.57. This can
1,000 2,000
partly explain why gold had a 2.6% positive return over
the quarter while the trade-weighted dollar gained about 0 1,000
1.5% over the same period. The adjusted dollar index,
19 91

19 97

20 01

20 07
1989
1990

1992
1993
1994
1995
1996

1998
2099
2000

2002
2003
2004
2005
2006

2008
09

in turn, remained largely flat during that time. In other

19

Cumulative supply Gold price

words, the dollar did not substantially rise once currency (LHS)
Cumulative demand
(RHS)
(LHS)
appreciation in traditional gold-consuming countries is
taken into account. Source: GFMS, Bloomberg, WGC

Moreover, continuing growth in other developing
economies such as China is likely to support future gold
demand. In a recent research note China Gold Report:
Gold in the Year of the Tiger published 29 March 2010,
WGC discusses the role of China in the gold market.
China, the second largest consumer of the yellow metal
in the world (around US$14billion in 2009 alone), is
expected to double its gold consumption over the next
decade. Domestic supply is expected to be unable to
keep pace with demand resulting in an imbalance which
may have implications for the global gold market.
The report notes that over the past five years, demand
for gold has increased at an average rate of 13% per
annum in China. At the same time, Chinese consumption
The report shows that total gold investment demand
in China has grown in line with the country’s GDP and
population since the establishment of the Shanghai
Gold Exchange in 2002 and, more importantly, WGC
expects this trend to continue going forward. In 2009, for
example, China’s net retail investment in gold reached
80.5 tonnes, up 22% on 2008. It also notes that Chinese
consumers are high savers and gold investment amongst
private individuals in China is developing rapidly.
Gold’s role as a monetary asset, a global currency and
an insurance policy providing protection against the
unknown, certainly seem to be working in its favour.
Near-term inflationary expectations and rising income
levels are likely to provide further support to the local
market for gold.

April 2010 9
 Gold Investment Digest

Moreover, while China is currently the world’s sixth largest

official holder of gold, its gold reserves currently account
for less than 2% of total reserves and, therefore, remain
low by international standards. The research shows that
even adding 10% to its current level would translate to
an additional 100 tonnes of gold off-take, and if it
rebalances its books to earlier holdings of 2.2% as a
proportion of reserves (as in Q4 2002) it could account
for a total incremental demand of 400 tonnes at the
current gold price.

Finally, the report discusses the role of China in mine

production and notes that, during the last decade,
Chinese gold mining producers have stepped up gold
production by 84%, but its known reserves account for
just 4% of total known global gold reserves. While future
exploration could rise that percentage, demand is still
expected to outpace production.

April 2010 10
 Gold Investment Digest

GOLD MARKET TRENDS Please note that data on jewellery and industrial demand
are released with a lag; the latest data is for Q4 2009.
Data for the first quarter of 2010 will be released in
Jewellery mid-May 2010.

Global jewellery demand picked up in the fourth quarter of
2009 relative to the previous quarter, despite the international
gold price hitting record levels during the period. In fact,
jewellery demand enjoyed three consecutive quarter-on-
quarter gains on the back of a rebound in the Indian market.
Fourth quarter demand of 500.4 tonnes in 2009 was 8%
below year-earlier levels, the smallest decline since Q4 2008.
At the same time, the average gold price during Q4 2009
rose by 38% compared to the same period the previous
year, implying that consumers are gradually becoming
accustomed to higher prices. The annual tonnage decline
in jewellery demand during 2009 was considerably larger
at 20% relative to 2008, influenced significantly by an
extremely weak first quarter. Economic conditions continued
to take their toll on jewellery demand as the global economic
recovery has been gradual. Crucially, with its implications
for earnings and disposable income, unemployment
remains a concern in a number of key markets.
At the country level, India delivered the strongest
performance in Q4 2009, improving 27% on year-earlier
levels to 137.8 tonnes. It was followed by mainland China,
which saw a 2% increase in jewellery demand to 86.5
tonnes in Q4—China was the only country to observe
positive jewellery demand growth (6%) in 2009. While
the rest of the world showed some signs of improvement
relative to previous quarters, jewellery demand remained
weak relative to 2008. In particular, Turkey was the worst
performer during Q4 2009, where a sharp rise in the local
gold price during H1 2009 (as the Turkish lira depreciated)
and extreme weakness in the local economy, had a severe
impact on jewellery off-take.
Preliminary reports on Q1 2010 demand trends in India
suggest a continuing improvement, as witnessed in
Q4 2009, and supported by seasonal festivities which
include a number of Hindu New Year festivals. Moreover,
the average price of gold in Indian rupees during the
quarter was significantly lower and more stable than
the previous quarter, on the back of a stronger rupee,
further supporting demand. This coupled with local pawn
programs is likely to continue to tame recycled gold
supply relative to 2009. Anecdotal evidence suggests
jewellery demand in China continued to grow as a result
of a seasonally strong period. In the US, retail activity
appears to be improving as the overall economy picks
up some speed which may induce higher levels of gold
jewellery purchasing than in previous quarters; higher
gold prices, however, have resulted in some evidence of
demand for lighter weight pieces.

Chart 13: Jewellery demand in tonnes and US$ billions Chart 14: Tonnage growth in jewellery demand by country
(Q4 ’09 vs. Q4 ’08, % change)
Tonnes US$ bn %
800 20 40

18 30
700

16 20
600
14 10
500
12 0

400 10 -10

8 -20
300

6 -30
200
4 -40

100
2 -50

0 0 -60
C ia
Ja na
n

g sia

Sa T SA
i A an
M Vie bia
dl am

Tu ia
ly
ng
9

st
AE

Ru pt

ey
7

H on K
5

9
5

pa
d
’0

ss
’0

Ita
’0

’0

’0

’0

’0

’0

’0
’0

In U

Ea
hi

y
ud aiw
on e
In

rk
U
Ko

ra
id tn

U
Eg
3
3
3

1
1

e
Q
Q

Q
Q

Tonnes (LHS) US$ bn (RHS)

Source: GFMS Source: GFMS

April 2010 11
 Gold Investment Digest

Industrial applications Chart 15: Industrial demand by category in tonnes

Tonnes
Gold demand for industrial and dental applications 120
recorded its third consecutive quarter-on-quarter
improvement during Q4 2009 and its first year-over-year
100
gain in more than two years. Demand totalled 99.7 tonnes,
11% higher than Q4 2008. Demand in 2009, however,
was down 16% on 2008 levels. Electronics demand 80
(usually 70% of total industrial off-take) rebounded
strongly in Q4 2009 jumping 25% relative to year-earlier
60
levels. Elsewhere, the other industrial and decorative
sector fell by 13%, as well as gold used in dental
applications which fell by 5% relative to Q4 2008. With 40

the outlook for the global economy improving, industrial

demand is expected to recover further in 2010. While 20
an increasing gold price can prove challenging, a
recent survey conducted on behalf of WGC found that
0
although a majority of global semiconductor companies
6

9
are considering the use of copper in some applications,
’0

’0

’0

’0

’0

’0

’0

’0
1

3
3
Q

Q
Q
almost all the companies surveyed identified important Electronics Other industrial Dentistry
advantages of gold over copper and expressed concerns
Source: GFMS
with copper’s reliability, process yield (relative to gold)
and unproven performance.

Mine production and Please note that data on mine production and recycled
gold are released with a lag; the latest data is for Q4 2009.
recycled gold Data for the first quarter of 2010 will be released in
mid-May 2010.

Annual gold supply data revealed that a sharp increase

Chart 16: Recycled gold supply in tonnes
in recycling activity in Q1 2009 was the primary reason
behind an 11% year-on-year increase in 2009 supply,
Tonnes
while mine also made a sizeable positive contribution.
600
A 6% increase in annual mine production over 2008 to
2,554 tonnes reflected a number of new projects
coming on stream during the year (notably in Tanzania 500
and Senegal) as well as improvements in production at
existing mines.
400

Producer de-hedging, which had slowed to negligible

levels in the first half of the year, picked up strongly in 300
H2 2009. There was a 125-tonne reduction in supply in
Q4 2009. Barrick was the main contributor in the fourth
quarter, following the announcement in September of its 200

intention to eliminate its entire hedge position. The global

hedge book as at the end of 2009 stood at about 235
100
tonnes (around half the level of one year earlier) with
numerous gold producers removing hedge positions.
0
Recycled gold spiked to a record level of 584 tonnes in
6

9
6

8
’0

’0

’0

’0

’0

’0
’0

’0
3

3
1

Q1 2009 as the gold price in many countries hit record

Q

Q
Q

highs, but it subsided during the following quarters. The Source: GFMS

April 2010 12
 Gold Investment Digest

strong rise in the gold price during Q4 2009 coincided Top 40 Official Gold Holdings*
with an increase in recycled gold relative to Q3 2009, but Tonnes % of reserves**
a comparison with Q4 2008 reveals a very modest 3% 1 United States 8,134 70.4%
increase, despite a 38% rise in the average gold price 2 Germany 3,407 66.1%
over the same period. Overall, recycled gold was up 27% 3 IMF 3,005 1)

in 2009 to 1,549 tonnes, primarily due to weak global 4 Italy 2,452 64.9%
economic conditions especially at the beginning of 2009. 5 France 2,435 65.7%
6 China 1,054 1.6%
7 Switzerland 1,040 27.0%
8 Japan 765 3.0%
9 Russia 641 5.0%
10 Netherlands 613 53.4%
The official sector 11 India 558 6.9%
12 ECB 501 25.2%
13 Taiwan 424 4.1%
European net central bank sales ground to a complete 14 Portugal 383 84.9%
halt in the first quarter of this year. Between September 15 Venezuela 361 36.8%
2009, when the third Central Bank Gold Agreement 16 United Kingdom 310 16.5%
(CBGA3) began and the end of Q1 2010, signatories 17 Lebanon 287 25.6%
sold a cumulative 1.6 tonnes of gold, unchanged from 18 Spain 282 35.7%
the level at the end of last year. This mainly reflects the 19 Austria 280 54.6%
small amount of gold sold by Germany to mint gold coins 20 Belgium 228 33.7%
21 Algeria 174 3.9%
for its population.
22 Philippines 154 12.5%
23 Libya 144 4.8%
CBGA3 caps annual sales at 400 tonnes until September
24 Saudi Arabia 143 1.2%
2014. Given the clear downturn in central banks’ appetite 25 Singapore 127 2.3%
for gold sales, aggregate sales look set to fall well short 26 Sweden 126 9.3%
of this ceiling. However, some of the European central 27 South Africa 125 11.0%
banks’ unused quota has been negated by planned sales 28 BIS 120 1)

from the International Monetary Fund (IMF). 29 Turkey 116 5.4%

30 Greece 112 73.2%
The IMF’s Executive Board announced in September 2009 31 Romania 104 8.1%
that it intended to sell 403 tonnes of gold, the proceeds 32 Poland 103 4.2%
of which would be used to set up an endowment fund. 33 Thailand 84 2.0%
34 Australia 80 6.7%
The IMF indicated its preference would be for a series of
35 Kuwait 79 11.9%
off-market deals, failing which it would conduct phased
36 Egypt 76 7.8%
on-market sales via CBGA3 so as not to disrupt the
37 Indonesia 73 3.9%
market. The Fund initially reached three off-market deals: 38 Kazakhstan 71 9.3%
200 tonnes of gold was sold to the Reserve Bank of India, 39 Denmark 67 3.0%
10 tonnes to the Central Bank of Sri Lanka and 2 tonnes 40 Pakistan 65 16.2%
to the Central Bank of Mauritius. It has now commenced Source: IMF, national data, WGC
phased on-market sales, selling 5.6 tonnes of gold during * This table was updated in March 2010 and reports data available at that time.
February 2010. It should be noted that the fact that the Data are taken from the International Monetary Fund’s International Financial
Statistics (IFS), March 2010 edition, and other sources where applicable. IFS
IMF has started on-market sales does not preclude data are two months in arrears, so holdings are as of January 2010 for most
further off-market deals being reached at a later date. countries, September 2009 or earlier for late reporters. The table does not list
all gold holders: countries which have not reported their gold holdings to the
IMF in the last six months are not included, while other countries are known to
hold gold but they do not report their holdings publicly. Where the WGC knows
Elsewhere, Russia bought a total of 8.3 tonnes of gold
of movements that are not reported to the IMF or misprints, changes have
in January and February 2010, continuing its now well- been made. The countries showing as having 0.0 tonnes of gold report some
gold but less than 0.05 tonnes to the IMF.
established gold purchasing programme, and bringing
** The percentage share held in gold of total foreign reserves, as calculated by
its total gold holdings to 645.5 tonnes or 5.1% of total the World Gold Council. The value of gold holdings is calculated using the
reserves. Separately, Jose Khan, a director of the Central end-January gold price of $1,078.50 per troy ounce (there are 32,151 troy
ounces in a metric tonne). Data for the value of other reserves are taken from
Bank of Venezuela, was quoted by Bloomberg saying IFS, table ‘Total Reserves minus Gold’.
that the bank would buy more than half the country’s 1)
BIS and IMF balance sheets do not allow this percentage to be calculated. In
the case of any countries, up to date data for other reserves are not available.
estimated 20 tonnes of domestic production this year.

April 2010 13
 Gold Investment Digest

KEY DATA
Gold price Demand (cumulative Q1-Q4 2009)
Q2 ’09 Q3 ’09 Q4 ’09 Q1 ’10 % % Value %
Gold (US$/oz); Tonnes QOQ1 YOY ($ bn) YOY
London PM fix average 922.18 960.00 1,099.63 1,109.12 Jewellery 1,747 -3% -20% 55.1 -10%
% QOQ 1.5% 4.1% 14.5% 0.9% Identifiable investment 1,271 -15% 7% 38.9 20%
of which ETFs
% YOY 2.9% 10.1% 38.4% 22.1% and similar products 595 -10% 85% 17.7 99%
Source: The London Bullion Market Association, WGC Industrial and Dental 368 3% -16% 11.5 -6%
Source: GFMS, WGC
Volatility2 (%) to end-March 2010
1-month 3-month 6-month 1-year Supply (cumulative Q1-Q4 2009)
Gold (US$/oz) 15.7% 18.6% 19.2% 17.7% % % Value %
Tonnes QOQ1 YOY ($ bn) YOY
Source: The London Bullion Market Association, WGC
Mining output 2,554 0% 6% 80.0 19%
Net producer hedging -257 – – – –
Market capitalisation Total mine supply 2,296 -3% 11% 71.6 25%
Value (US$ bn) Official sales 44 -28% -81% 1.2 -82%
Above-ground stocks of gold 3 5,914.4 Recycled gold 1,549 1% 28% 48.1 42%
Source: GFMS, WGC
ETFs (as at 31 March 2010) 4
63.4
Notional value of net long non-commercial and non-reportable 1
Quarter-on-quarter % change in rolling 4-quarter totals.
positions as reported by CFTC gold futures (at 31 March 2010) 22.9
2
Annualised daily return volatility.
3
Based on 2009 volume and Q1 2010 average gold price
Source: GFMS, LBMA, CFTC, WGC
4
Data: www.exchangetradedgold.com; www.etfsecurities.com; www.ishares.com;
Zurich Kantonalbank; Finans Portföy; www.Deutsche-Boerse.com; www.juliusbaer.com.

Performance
Gold BarCap US MSCI World DJ UBS S&P GS Trade-weighted Dow Jones/Wilshire
(US$/oz) Treasury Aggregate S&P 500 ex-US Commodity Index Commodity Index US$ REITs Index

1 month -0.4% -0.8% 6.0% 6.5% -1.2% 1.9% 0.1% 10.2%

3 months 1.5% 0.8% 4.3% 1.4% -5.2% -1.0% 1.6% 9.8%
6 months 10.5% -0.2% 11.8% 4.0% 3.5% 7.4% 2.4% 19.9%
1 year 21.1% -1.2% 49.8% 56.8% 20.5% 25.9% -8.6% 113.5%
Volatility2 (1-year) 17.7% 5.1% 19.1% 19.6% 21.7% 26.9% 8.8% 49.7%
Source: Global Insight, Barclays Capital, WGC; performance calculations based on total return indices unless otherwise noted.

Correlations (3 years ending 26 March 2010, weekly returns)

BarCap BarCap BarCap DJ/
Brent S&P GS R/J DJ UBS BarCap US US US High DJ MSCI Wilshire
Gold Silver crude oil Commodity CRB Commodity 1-3 month Treasury Credit Yield Industrial Russell World REITs
(US$/oz) (US$/oz) (US$/bbl) Index Index Index T-bills Index Index Index S&P 500 Average 3000 ex-US Index
Gold (US$/oz) 1.00
Silver (US$/oz) 0.80 1.00
Brent crude oil (US$/bbl) 0.40 0.54 1.00
S&P GS Commodity Index 0.43 0.58 0.92 1.00
R/J CRB Index 0.49 0.64 0.86 0.97 1.00
DJ UBS Commodity Index 0.51 0.66 0.77 0.93 0.98 1.00
BarCap 1-3 month T-bills 0.05 -0.04 0.08 0.12 0.05 0.04 1.00
BarCap US Treasury Index 0.10 -0.01 -0.26 -0.24 -0.26 -0.22 0.12 1.00
BarCap US Credit Index -0.07 0.00 -0.06 0.01 0.03 0.07 0.03 0.66 1.00
BarCap US High Yield Index -0.09 0.19 0.29 0.38 0.40 0.42 -0.08 -0.24 0.40 1.00
S&P 500 -0.11 0.17 0.35 0.40 0.43 0.40 -0.06 -0.36 0.05 0.64 1.00
DJ Industrial Average -0.14 0.13 0.31 0.35 0.37 0.35 -0.04 -0.35 0.03 0.60 0.98 1.00
Russell 3000 -0.09 0.19 0.37 0.41 0.44 0.41 -0.07 -0.36 0.06 0.65 1.00 0.97 1.00
MSCI World ex-US 0.13 0.39 0.46 0.57 0.61 0.60 -0.10 -0.19 0.21 0.67 0.84 0.81 0.85 1.00
DJ/Wilshire REITs Index -0.01 0.16 0.22 0.24 0.26 0.24 0.02 -0.26 0.04 0.50 0.78 0.72 0.80 0.63 1.00
Source: Global Insight, Barclays Capital, WGC; performance calculations based on total return indices unless otherwise noted.

April 2010 14
 Gold Investment Digest

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April 2010 15