Post on 24-May-2020
The Strategic Case for Gold
AAIN
David Badham, Investment
October 15th 2012
Introducing World Gold Council
Funded by the world’s leading gold
mining companies.
We promote the use of gold through marketing
and market development activities
in major international markets.
Offices in key consuming countries:
• India
• China
• United States
Combined market capitalisation $250bn+,
revenue $80bn
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Members
African Barrick
Agnico Eagle
Alamos Gold
AngloGold Ashanti
Barrick Gold Corporation
Buenaventura
Centerra Gold Inc
Eldorado Gold
Franco-Nevada Corporation
Goldcorp
Golden Star Resources
Gold Fields Limited
IAMGOLD Corporation
Kinross Gold Corporation
Newcrest Mining Ltd
New Gold
Newmont Mining Corporation
Primero Mining Corp
Yamana Gold
Associates
China Gold Group Corporation
The Hutti Gold Mines Company
Mitsubishi Materials Corporation
Royal Gold Inc.
World Gold Council | Gold as an asset class | October 2012
Agenda
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1. Basic properties of gold investment
• Demand & Supply dynamics, return
• Risk management: volatility and correlation
2. Risk hedging properties of gold
• Tail risk properties
• Capital preservation: currency and inflation hedging
3. Gold in a portfolio context
• Optimal allocations
• Reduction of cross-correlation and portfolio risk
4. Gold in the new financial architecture
World Gold Council | Gold as an asset class | October 2012
Basic properties of gold investment
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Gold has outperformed most asset classes over the
past decade
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The current bull market in perspective
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Drivers of gold demand growth
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• Asian driver, ‘Great Rebalancing’
-China and India, 50% of total gold demand today, by 2030 40% of
global middle-class consumer spending
-Cultural affinity for gold and economic development will support
demand – by 2020, 300 million new middle class households
• Central banks
-Central banks are net buyers led by emerging markets; trend will
continue, diversification from US$ and Euro
• Investment demand
-Economic uncertainty is conducive for gold investment: low/negative
real rates, currency wars, potential inflation, heightened risks
• Gold is becoming a foundation asset in portfolio construction
-Diversification and risk management are key in portfolio construction
-Capital preservation makes gold a strategic asset
World Gold Council | Gold as an asset class | October 2012
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Physical above ground stock breakdown
1 Based on end-2011 volume and 2011 average gold price.
2 Includes “other fabrication” (12.1%) and “unaccounted for” (2.1%)
Source: Thomson Reuters GFMS, US Geological Survey, World Gold Council
Total above ground stocks
= 171,300 tonnes (US$8.7 trillion)1
68ft
68ft
World Gold Council | Gold as an asset class | October 2012
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Diversity of supply and demand
World Gold Council | Gold as an asset class | October 2012
The gold market has experienced structural changes
in demand
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The evolving structure of gold supply – mine
production
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‘The Great Leveraging?’
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New finds are proving increasingly elusive...
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Represents 189 gold deposits discovered since 1990, each with at least 2m oz of gold in total reserves, resources
and past production (or at least 1m oz in reserves)
Data sources: Metals Economics Group – Strategies for Gold Reserves Replacement 2012
World Gold Council | Gold as an asset class | October 2012
Risk hedging properties of gold
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Gold’s volatility tends to be lower than equity and
commodity indices
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Precious metals during the recent crisis Retracement from peaks
Source: Bloomberg, World Gold Council
World Gold Council | Gold as an asset class | October 2012
Gold is negatively correlated in tail risk events
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Gold’s volatility is positively skewed
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Gold outperforms other alternative assets during
period of turmoil
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Gold tends to reduce losses when tail events occur
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Following recent European policy events, also QE3 in
the US, which statement best represents your view?
1. The foundations for sustainable recovery are
in place; tail risks much reduced 4%
2. We are merely postponing deflation and
restructuring; tail risks continue to be
elevated 66%
3. Too soon / difficult to judge 30%
Source: FT Family Office conference, 25th Sept 2012
Gold’s performance in a deflationary environment
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• Oxford Economics in the study
entitled ‘The impact of inflation and
deflation on the case for gold’
found:
-Deflation might lead to a
stronger dollar but gold benefits
anyway due to the destructive
impact on other assets
-Gold performs better than
equities and housing in
deflationary environments
World Gold Council | Gold as an asset class | October 2012
Gold in a portfolio context
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The case for strategic allocation to gold
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• Risk management
- “True” portfolio diversification
• Lack of correlation to most other asset classes
• Tail-risk hedging
-Moderate volatility
-Deep and liquid market
-No credit or counterparty risk
• Capital preservation
- Inflation/deflation hedging
-Currency hedging
World Gold Council | Gold as an asset class | October 2012
Gold reduces portfolio value at risk
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An allocation to gold over the past 12 years has
resulted in higher risk-adjusted returns
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Gold has a positive effect on portfolio performance
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• Higher risk-adjusted returns
-In the long-run, portfolios with modest allocations to gold
(2%-10%) tend to outperform those without
-From a tactical/short-term perspective, gold allocations can
be adjusted higher to reflect particular macroeconomic
views
• Lower Value at Risk (VaR)
-Gold acts as a hedge against tail risks
-On average, VaR is reduced when gold is added to a
portfolio, especially during periods of market turmoil
World Gold Council | Gold as an asset class | October 2012
Optimal allocations to gold range from 2% - 10%
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Global allocations to gold remain small
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• Total above ground stocks of gold
in private hands ~ 32,000 tonnes
by June 2011.
• Gold holdings as a % of total
global assets were about 1% by
June 2011.
World Gold Council | Gold as an asset class | October 2012
Gold in the new financial architecture
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1. Exchanges (LCH, ICE, CME) are accepting gold as collateral
• Gold investors can earn yield on long term positions
2. Commercial banks can use gold:
• To raise cheaper funding (Gold used during credit crisis)
• As part of liquidity buffers
• As a reserve requirement (Turkey)
3. Central banks are:
• Building gold reserves
• Providing secured loan facilities backed by gold (Russia)
4. BASEL III:
• Deterioration of high quality liquid assets promotes gold’s role
• CRD IV bank’s liquidity buffers
New financial architecture
Gold’s growing role in the financial system
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Central banks have become net buyers of gold
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In conclusion
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• Gold is a top performer, real returns since it was freely traded are above
long term average of zero AND it is a unique diversifier
• Demand and supply are diverse resulting in unique volatility, correlation
and covariance properties
• Gold is a low cost ‘tail risk’ hedge, volatility is positively skewed in
periods of negative returns
• Gold is a currency which cannot be printed or de-based, a fiat currency
hedge
• A unique diversifier in portfolios with a positive effect on portfolio
performance
• Gold is being brought back into the fold as a critical asset in the world’s
financial system
World Gold Council | Gold as an asset class | October 2012
Gold as an alternative currency
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Bill Gross tweet, 14th September 2012
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Source: twitter
World Gold Council | Gold as an asset class | October 2012
Disclaimer
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This presentation is provided solely for general information and educational purposes. It is not, and should not be construed
as, an offer to buy or sell, or as a solicitation of an offer to buy or sell, gold, any gold related products or any other products,
securities or investments. It does not, and should not be construed as acting to, sponsor, advocate, endorse or promote
gold, any gold related products or any other products, securities or investments.
This presentation does not purport to make any recommendations or provide any investment or other advice with respect to
the purchase, sale or other disposition of gold, any gold related products or any other products, securities or investments,
including without limitation, any advice to the effect that any gold related transaction is appropriate for any investment
objective or financial situation of a prospective investor. A decision to invest in gold, any gold related products or any other
products, securities or investments should not be made in reliance on any of the statements in this presentation. Before
making any investment decision, prospective investors should seek advice from their financial advisers, take into account
their individual financial needs and circumstances and carefully consider the risks associated with such investment decision.
While the accuracy of any information communicated herewith has been checked, neither the World Gold Council nor any of
its affiliates can guarantee such accuracy. In no event will the World Gold Council or any of its affiliates be liable for any
decision made or action taken in reliance on the information in this presentation or for any consequential, special, punitive,
incidental, indirect or similar damages arising from, related to or connected with this presentation even if notified of the
possibility of such damages.
Expressions of opinion are those of the author and are subject to change without notice.
World Gold Council | Gold as an asset class | October 2012
World Gold Council 10 Old Bailey, London EC4M 7NG United Kingdom
T +44 20 7826 4700 F +44 20 7826 4799 W www.gold.org
Thank you
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Additional slides
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Investment demand in line with five-year average
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Gold has low correlation relative to most asset
classes in the long-run
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Gold holds its value through time (100-year
perspective)
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