First Quarter 2010 GTAA Commodities

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GTAACommodities

January 9 th , 2009

Damien Cleusix

Clue6 Fourth Quarter 2009

am en c ue .com


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1Quotes

Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people. . .

W.Buffet, Harvard 1998

The generally accepted theory is that financial markets tend towards equilibrium, and on the whole, discount the futurecorrectly. I operate using a different theory, according to which financial markets cannot possibly discount the future correctlybecause they do not merely discount the future; they help to shape it. In certain circumstances, financial markets can affect theso called fundamentals which they are supposed to reflect. When that happens, markets enter into a state of dynamic

sequ r um an e ave qu e eren y rom w a wou e cons ere norma y e eory o e c en mar e s. ucboom/bust sequences do not arise very often, but when they do, they can be very disruptive, exactly because they affect thefundamentals of the economy.

. ,



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2Executive Summary

CommoditiesMost commodities are now greatly overvalued . As with other assets it does not really matter in the short-term (as long as thetrend is positive) but it is paramount for longer-term projections.

Demand has been artificially boosted by China strategic reserve building and infrastructure intensive fiscal stimulus and, as

the trend persisted, by trend followers and money managers new attraction to the sector (you know it is not correlated... sorry it... . ... ...

buying spree will abate as the strategic reserve are completed and the fiscal stimulus projects are being built (and we will havenew waves later but this is another story but as you know we are not as bullish as the consensus on 2030 and beyond China,and all other countries by the way, commodities demand... we are too maybe confident on human ingenuity...). While investorsmight buy some dips initially, they could become net sellers if price do not rebound as expected... And do not forget the

demand destruction caused by the current very high prices or potential decrease in subsidies in emerging markets...

Supply has been hit hard , as documented last year , by both prices fall and the credit crunch but this is changing rapidly .Lots of projects which were put on hold are restarted while closed mines/wells are reopened. This increase supply could hit themar et in full just when demand momentum will turn down... Longer-term, not enough investments have been planned fortoward commodity (especially energy) in the various stimuli package around the world This could come back to haut us in acouple of years

referee with regard to the timing as continued robust growth could mask some of those dynamics for some time butultimately we will have a correction to be remembered...

And commodities will probably be one of the cause of the slowdownObservers have focused too much on what happened to



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3Executive Summary

financial markets to explain the rapid slowdown we witnessed in 2008-early 2009... our contention is that even without it, we" " ...

Optimism is excessive on the crude oil market with a big chunk of the 2010 planned increase in demand, floating around the

world but the trend remains positive for the moment On a cyclical basis, one should expect a potential low by the end of Februar -earl March which would coincide with the start of the bullish season for oil We will see

Gold investor optimism has decreased somewhat but remains very high. Investments now represents 50% of the total yellowmetal demand while Central Banks in emerging countries have started to be net buyers Price have corrected to the lower partof the channel and rebounded Seasonals are not supportive for the short-term

Copper seems to have the most bubblious behavior Optimism is extremely high while price refuse to correct despite risinginventories around the world Seasonals are supportive in the short-term but we would not chase here and exit all longpositions Any change in trend should be shorted using put backspread to limit the risk We would be aggressive

Grains are behaving surprisingly well given the usually weak seasonals. Money managers direct holding is net short but swapsdealers are heavily long indicating that many institutional investors (pension funds,) are long. The curve is too steep at this

juncture to take a long position



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4Commodities: Valuationsere are var ous met o s to gauge commo t es va uat on.

We use models analyzing the long-cycles around production cash cost . The principle is thesame as with margin at the whole economy level I.e. when the price is much higher than cashcost (margins are too fat) supply(competition) will increase and push prices (margins) lower to

Industrial Metal andCrude Oil Marginal CostTable 1

.sum it up, this is true capitalism at work.

It is important to keep in mind that both supply and demand are very inelastic to price inthe short to medium-term for commodities but that demand is more elastic to growth than

Source: Brook Hunt, UBS, Clue6

. .

Industrial metals tend not to fall below the 75th percentiles of producers cash costs on asustainable basis (Table 1). They only do this briefly at the end of a bear market

accelerated in 2009 and investment demand which, after a dip during the autumn 2008 startedto increase again early in 2009 We have tried to document those 2 factors during 2009butwhat about now

,Nickel market and price could loose 50 to 70% to get to end of bear market valuation (butfor now the cycle remains up see graph section but with a lots of riskssee the rest).Looking at production, one can see that many mines/wells/projects which were suspended atthe end of 2008-beginning of 2009 are back on line/on the board So we are moving back to

Gold is trading significantly higher than cash costs (2-3 times) but , as you know, even if this isnot something to push completely aside, we think golds prospect are more closely linked to thefuture of the current monetary system...


As an aside, marginal cost of production have been declining since the 2008 peak The majorfactor for the decline are decreasing energy and equipment prices


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6Commodities: Miscellaneous Crude OilChart 4Chart 3

Contract Premium/Discount

Survey Bullish Ratio

Contango remains high (Chart 3) which has historically been bullish but could be distorted by the increase in investment-related demand which is

Source: Gibson Consultancy and ResearchSource: Bloomberg, Clue6

...2008 so the cycle might top while still in contango Furthermore oil has still experience nasty short-term corrections while in contango as in 2006-2007

Temporary floating remains high (Chart 4)


There are estimates circulating that half of the increase in oil demand for 2010, on a crude equivalent basis, are in temporary floating storage


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7Commodities: Miscellaneous Crude OilChart 6Chart 5 Petroleum Products Demand (2008)

Products Consumpt ion

Source: BP, Clue6

Source: BP Clue6

We have tried in the past to give a balanced view between the peak oil hypothesis and the Supply wont be a problem hypothesis Given the resurgence of peak oil talks nowthat oil have rebounded from last year doldrums, lets review the no-problems argument First we repeat that this has no great importance on short-term movements as the short-term supply/demand curve are extremely steep. The perceived lack of spare capacity contributing to short-term volatility This is crucial for crude oil price far away in thecurve The below stats and commentaries are mainly

The main argument is that supply might or might not peak, this does not really matter as demand will decline We see many graphs comparing the US consumption of energy percapita to China used to tell us that China consumption will increase by many, many fold This wont happen China demand will rise but not that much and demand indeveloped country will decline On Chart 5 one can see the total demand per products. Light distillates are used for transport, middle distillates is 2/3 used for transport and 1/3for heating and fuel oil for heating So transport represent a bit more than 50% of the total consumption and according to the UN, cities represents nearly 70% of the total oilconsumptions so Can you imagine all the economy that can be made with electric cars, more effective building, better public transport The IEA future demand projectionare too high by a mile


And as we said in 2008 price had risen too much for those change not to occur, demand was destroyed, permanently The decline was so steep that we moved to a supplydestruction theme in early 2009 but now price are high again human beings need crisis to make bold change and the very high oil price is just what was needed It did it in thepastdid you know for example that Europe and Japan consume less oil than in 1979 (Chart 6?


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8Commodities: Sentiment GoldChart 8Chart 7 Gold and CEF Premium/Discount

.Managed Money Net Future Position

The Cot data is displaying the same configuration has in the crude oil market (chart 7) except that you can not justify the high net short position of roducers and merchants on a hi h contan o chart next a e Mana ed mone decreased its net lon osition before the recent to

Source: Bloomberg, Clue6Source: Bloomberg, Clue6

Worrying

Especially now that investment demand now represents 50% of total demand (one of our assumption back in 2002)

The Central Fund of Canada remium to its NAV s iked to the 15% level which have tended to ut a short-term ceilin on old rice when the


yellow metal reached usd 1200 (chart 8) and has now fallen back to 10%...


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9Commodities: Miscellaneous GoldChart 10Chart 9 Gold and Central Bank Gold Reserve

Premium/Discount

The curve is currently moving around the 0 level (chart 9)


entra an s ave een net uyers c art . entra an s ave approx mate y o t e r reserve n o w e t e ot er mem ers othe G20 only have 3.5%... If they were to move to 10% gold, this would imply a purchase of a bit less than 400 mio. Troy ounce or approximately30% of total Central Bank gold holding or 20% of all the gold mined not in the hand of Central Banks

The recent rise comes from emerging market official buying as advanced economy Central banks have continued to sell


Real rate are still negative and this is supportive for precious metal and commodities in general


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10Commodities: Sentiment CopperChart 12Chart 11

Survey Bull Ratio


Managed money net long position is making new historic highs while producers and merchants are SHORT (chart 11) and this can not be justified by


e curve c ar

The Bloomberg bull ratio is above 50% but while local peaks have tended to have some minor predicting power, it is hard to find a real edge here

As an aside, as said in September, there are talks of increased speculation in China with notably pig farmers stocking copper



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11Commodities: Miscellaneous CopperChart 14Chart 13 Copper and LME Stocks


The curve remains in a small contango which is supportive (chart 13) but when you combine this data with copper valuation things do not look


good anymore

Stocks have been increasing around the world Stocks in the London Metal exchange have reached the peak level of 2008 (chart 14) The same istrue in Shanghai and at the Comex Yet prices have continued to move higher this is a highly unusual behavior


na strateg c reserve u ng an n rastructure- eavy sca st mu us are pro a y t e answer to t s conun rum


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12Commodities: Sentiment GrainChart 16Chart 15


Survey Bu ll Ratio


long position

The corn Bloomberg bull ratio has recently spiked above 60% (Chart 16) Needs more to be very concerned



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13Commodities: Miscellaneous GrainChart 18Chart 17 Wheat World Stock to Use Ratio (Weeks)_


The contango remains high which has been supportive in the past, especially when it was not the result of an abrupt front-month price decline (chart

Source: WASDE, Clue6Source: Bloomberg, Clue6

17)

Wheat stock to use ratio has increased (chart 18) and moved away form levels where huge price peaks occur but El nino which, according to theNOAA, will continue into the spring could have some negative impact of world production


e structura case or gra ns, a out rom rema ns


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14Commodities: SeasonalityChart 20Chart 19 Gold TR Seasonality (since 1977)Crude Oil TR Seasonality (since 1987)

-


.correction until then

Gold is entering its weak seasonal spot in February (end of January if you add granularity to the analysis) (chart 20)



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15Commodities: SeasonalityChart 22Chart 21 Copper TR Seasonality (since 1977) Wheat TR Seasonality (since 1969)

Copper had historically tended to be strong until mid-April when it starts to perform poorly until the end of October (with an intermittent rally in


July) (chart 21)

Wheat and agriculture in general tends to perform best when the uncertainty with regard to the harvest are the highest (well when the harvest sizeforecast can change the most I.e. during growth season) Interpret this as a risk premium During the early part of the year, wheat tends toperform poorly (notable because of the shape of the future curve) (chart 22)



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16Commodities: ChinaChart 24Chart 23 China Relative Commodity DemandChina Import (Volume)

Source: CSFB

We have written a lot about Chinese influence on the commodity market in the past At the start of 2009 we said that China would probably use the decline in price to build strategic

reserve and secure as much access to natural resource around the world as possible We did not think that it would be sufficient to set in motion a new mini-bubble Well itdid

Source: Bloomberg, Clue6

According to the IEA, China will soon have accumulated in its reserve the equivalent of 90 days of import of crude oil (300 mio. Barrels) by increasing its stocks by 250000-300000a day It is buying copper and iron ore as if there were no tomorrow (chart 23) and there are increasing signs of speculative stock building by the private sector (and at the SOEs)

China represents a high percentage of many commodities total demand (chart 24) but it has been even more important in 2009, representing more than the total increase in net demandfor some commodities as advanced economies demand has continued to decline


China will remain the main driver with speculators A China slow down or even a collapse as some are predicting (J. Chanos,) between the end of 2010 and 2012 would haveDRAMATIC consequences More on this latter during the year


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17Commodities: J.Grantham Deep Thought



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18Commodities: J.Grantham Deep Thought



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19Commodities: How Long Will it Last A Repeat



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20Commodities: Graphs Crude OilCrude Oil

Crude oil remains in its second rising channel and has made, on a non total return basis new recovery highs recently

One can also see the rhythm of the current advance and that the cycle dynamic as moved from right to left translation, indicating aotential tirin trend



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21Commodities: Graphs GoldGold

ShoulderShoulderShoulder

Shoulder

Head

Gold has corrected justifying our November decreased allocation and has rebounded when it reached the lower part of its risingchannel

The trend is up


The strategic USD 3000/ounce target we fixed on gold in 2002 remains our minimum target


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22Commodities: Graphs CopperCopper

Copper continues to be strong after the August-September consolidation.

Heading toward very heavy resistance and at the top of the channel Would not be chasing it here



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23Commodities: Graphs AgricultureS&P GSCI Agriculture TR

Trend up but the contangos are often high



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First Quarter 2010 GTAA Commodities

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