LBMA/LPPM Precious Metals Conference 2013

Summary

Edel Tully

UBS

Opening Session

Welcome one and all….Stewart Murray, David Gornall, Peter Smith

Keynote Speech 1: Post-Crisis Challenges to Central Bank

Independence

Salvatore Rossi, Bank D’Italia

• CB independence is paramount

• Threatened by pursuit of financial market stability

• Financial and price stability are complementary objectives, one requires the

other

• GFC prompted CBs to adopt wide ranging measures to avoid a collapse of

the financial system

• But undesirable (fiscal) side effects…..CBs have seen their balance sheet

expand enormously, implies higher risks. While reserves are still “reserves”,

financial market loses have threatened reputational risk which could lead to

interference

• Therefore, hugely important to communicate to the public – case in post the

OMT

• CBs need to communicate, effectively; be accountable and transparent

• Gold – special role in reserve mgt, diversification, safe haven etc etc

Keynote Speech 2: Is Europe Wasting a Good Crisis?

Francesco Papadia, Chairman, Primary Collateralised Securities

• It is a complex crisis; On The Brink Theory

• Monet and Padoa-Schioppa – each crises an occasion for progress

• A crisis is the ultimate proof that something is broken and should be fixed

• Reactive versus Proactive

• The complex nature calls for a more reactive policy response

• There are institutional limitations – technical and political difficulties

• There has been some progress…

• Euro area policy response has moved in the right direction, with sufficient

speed

• But the challenge continues

• Adjustment fatigue in peripheral countries

• Institutional innovation fatigue

• North-South Europe divide and lack of growth

Session 2: Precious Metals Short-Term Investment

Chair: Tom Kendall

Algorithmic Trading Facts & Fantasies

Scott Kerson, Head of Commodities, AHL/Man Systematic

Strategies, Man Group PLC

• History, need to go back to 1950’s, and Edward Thorpe’s observation that a

deck of cards has memory. Casinos loved him….

• Who’s going to win – human or machine? (Scott v Scott)

• Virtual traders outperform by playing the averages

• Algo exhibits wider distribution, but skewed to the left

• Trading desk has narrower distribution – less volatility at a cost

• At least 30% of all US equity market volumes are traded by machines, with some

estimates suggesting 60% or more

• Commodities traders increasingly adopt algorithms – In electronic commodities

futures execution, algo share is estimated to have doubled in the last 2 years to

40%

• Human fares better in less liquid markets, such as palladium

• Small orders for machines, larger for human

• 1 January 1994 to 30 June 2013

• Source: Man database.

© Man 2013 7

The final result

• Lower costs mean higher returns

0

20

40

60

80

100

120

140

Realis

ed s

lippage (

base y

ear

index =

100)

Slippage yield

Algorithmic Trading Facts & Fantasies

Execution aim is to lower slippage to least

possible amount, therefore increasing

returns, typically machines beat humans

Options for Outperformance – Managing the Challenges of

Volatility and Duration

Patrick Green, Director, Commodities Trading, Barclays

• 2013 has been a year of extremes in volatility trading

• Within 3 weeks at the start of April, the range in 1m implied vols exceeded the full

year range for 2012 (10.5% to >30%)

• Skew for puts reached all-time highs as price fell below $1200 (1y 25 delta risk

reversal reached -4%)

• Why use options?

• Yield enhancement

• Directional views

• Volatility trading

• Portfolio hedging

• Tail risk hedging

• Financial planning

• Who uses options?

• Miners/Producers

• Consumers

• Refiners

• Institutional investors (real

money, hedge funds)

• Central banks

• Retail/Private banking

The Gold Price is an Equation of Investors Demand. Platinum

Group Metals Share More Fundamentals!

Christoph Eibl, CEO, Tiberius Asset Management AG

• Gold

• The key message is saturation of consumer demand

• 2000 gold story – not many investors held gold; 2013: not many that don’t hold

gold

• Short-term money behaves similarly to long-term money – different beta

• Bearish gold for 4+ years

• Platinum

• Impacted less by long-term investment products

• Short-term money is part of its lifeline

• Easier to predict in terms of logical fundamentals (rather than fear and greed)

• Commodities – examines via a relative value lens, who will outperform

Driver of the ETF and its Future

Daniele Sabato, ETF Sales Trader, Flow Traders

Three generations of commodities indices:

• First Generation – Long-only indices without paying much attention to the fundamentals of

backwardation and contango

• Rebalance infrequently

• Fully collateralised – total return depends on futures returns and collateral yields

• Hold liquid contracts at the front-end of the term structure

• Heavily weighted towards energy

• Second Generation – Long-only indices but there is an attempt to lessen the negative blow on

performance of contango while exploiting backwardation

• Enhance roll – chooses a liquid contract located in the mid- to far-end of the futures curve

• Constant maturity – it invests in a number of contract months across the futures curve

• Implied roll yield – dynamic approach to choosing the contract with the highest implied roll yield

• Third Generation – Long-short indices; try to capitalise on both the price appreciation associated

with backwardation and the price depreciation related to contango

• Momentum – price continuation to determine long and short positions

• Term structure – considers shape of the curve

• Market neutral

• Fundamental/Rule based – fundamental forecasts and technical signals

11

Periodic Table of Returns

Past performance is no guarantee of future results, and diversification/asset allocation doesn’t ensure a profit or guarantee against a loss. Asset class represented: Large

Caps (S&P500 Index), Small Caps (Russell 2000 Index), Growth (Russell 3000 Growth Index), Value (Russell 3000 Value Index), Developed Countries (MSCI EAFE Index),

Emerging Markets (MSCI Emerging Markets Index), High Yield (Bank of America Merrill Lynch US High Yield Index), Investment Grade Bonds (Barclays US Aggregate Bond

Index), Real Estate (NAREIT Equity-Only Index), Commodities (DJ-UBS Commodity Index). Source: Ibbotson Associate, Standard & Poor’s, Bloomberg as of 6/30/2013

Last Minute Addition…..India

Shekar Bandari, Kotak Mahindra Bank

• Short-term gold demand dependent on:

• Number of marriages; Monsoon season, Government Policy

• Gold is not monetised in India – “it is bought and kept in lockers”.

• This is the focus of the government, meeting India’s demand for gold internally,

80/20 rule

• Temples in India can serve demand for 10 years

• Trust is needed

• Government and Central Bank need to ensure deficit is under control, gold is

part of that solution

• Watch out for elections next May

• Demand – cultural, habit – is strong, issue is with the supply side

Session 3: Precious Metals Long-Term Investment

Chair: John Reade

Stand and Deliver! The Way Forward For Gold Mining

Equities

Charles Carter, Executive Vice President, AngloGold Ashanti Ltd.

• The changing correlation between gold and miners

Stand and Deliver! The Way Forward For Gold Mining

Equities

Charles Carter, Executive Vice President, AngloGold Ashanti Ltd.

• Industry challenges:

• Project execution

• Regulatory

• Labour/community

• Capital allocation

• Capital and operating cost pressures have dominated

• Rising capital intensity and declining production

• Balance sheets under pressure

• Increasing impairments

• Back to basics: Capital Discipline and Cash Flow Optimisation

• Focusing on returns, cash flow and consistent performance

• Controlling costs – lower overhead cost structure

• Move away from growth at any cost thinking

• Not returning to hedging any time soon

• It’s a case of survival of the fittest, but this all takes time

Physical Investment – Unshakeable Faith?

David Madge, President, A-Mark Precious Metals Inc.

• Investors in small bars and coins are loyal and have strong appetite for

physical metal

• Some products have supply issues – particularly silver

• Fabrication capacity limitations – delicate balance between ability to respond

to high demand and having idle capacity when things are slow

• No sustained periods of secondary market liquidations for precious metal

coins and small bars

• Overall demand should remain strong

• Germany – unclear impact of proposed VAT increase to 19% from 7 % on silver

bullion coins

• China – secondary market needed, but tax still high on bullion coins

A Portfolio Approach to Generating Alpha from Gold

Jeremy Baker, Portfolio Manager, Harcourt Investment Consulting

AG, Zurich

• Reasons behind gold as an investment theme

• Unprecedented levels of balance sheet expansion

• Negative real interest rates

• Alternative to USD, EUR & JPY due to currency devaluation

• Increased CB purchases

• Long-term supply imbalance

• Late 2011, 2012 changed to more active trading of gold, not taking LT

position – issue is predicting the direction and investor sentiment (not

forecasting the price)

• Adding alpha

• Portfolio alpha – large price moves, mean reversion, low/negative correlation

across different commodities, roll yield optimisation

• Many sources of alpha opportunities through tactical strategies – macro, micro

and technical variables

South African Investors’ Approach to Precious Metals: are

ETFs a Substitute for or a Hedge against Mining Equities?

Vladimir Nedeljkovic, Head Investments Absa CIBW

In case you missed it, NewPlat holds 680 koz platinum

2nd biggest SA ETF, largest Pt ETF globally

Mainly Insti investors, listed in April 2013

Where would the platinum price be trading without this?

What does it say about forecasted deficits in the platinum market?

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13

ETFS UK ETFS US Absa NewPlat ZKB

Global Pt ETFs

South African Investors’ Approach to Precious Metals: are

ETFs a Substitute for or a Hedge against Mining Equities?

Vladimir Nedeljkovic, Head Investments Absa CIBW

Key Driver:

- Regulatory treatment

• Domestic investment

• Pension funds – Regulation 28: 5% allocation to

platinum, 10% to gold

• FSB Notice 19: CIS (mutual funds) can invest up to

10% (max commodity exposure) in gold and platinum

ETFs/ETNs, but only physically backed

- Palladium ETF next on the menu

- Rhodium possibility?

Session 4: Official Sector

Chair: Terrence Keeley

Terrence Keeley, Blackrock

have been muted/ negated by market timing

Source: World Gold Council

Official Sector Gold Activity 2002-12

Selling Low, Buying High

Average sale: $498 Average purchase: $1624

CB changes in tons, yoy

Marked-to-market losses and

volatility are not the only

problem with Gold. Other

asset classes – like

inflation-linked bonds,

equities, real estate and even

cash – have superior

diversification and liquidity

benefits. For these reasons,

many central banks are now

prioritizing other assets

classes over Gold

-547

-620

-479

-663

-365

-485

-235

-34

77

456

534

0

200

400

600

800

1000

1200

1400

1600

1800

-800

-600

-400

-200

0

200

400

600

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012P

rice o

f G

old

TO

NS

Gold Reserves of the Deutsche Bundesbank – Current Role

Clemens Werner, Deputy Head of the Market Operations Division,

Deutsche Bundesbank

• Gold functions

• Motivations for relocating gold

• End of cold war

• Launch of euro – no need to store gold in Euro area countries

• Euro banknotes and coins tied up vault storage capacity – new storage

possibilities

• Gold relocations

• 2000-2001 – 930 tonnes moved from London to Frankfurt to reduce storage costs

Gold Reserves of the Deutsche Bundesbank – Current Role

Clemens Werner, Deputy Head of the Market Operations Division,

Deutsche Bundesbank

• No active management of gold

• Annual sales of 5-7 tonnes within commemorative coin programme

• Comments from q&A

Managing Gold as a Central Bank

Alexandre Gautier, Director of Market Operations Department,

Banque de France

• BdF sold 516 tonnes between Sept 2004 – Sept 2009 (additional return, less

volatile return for balance sheet)

• 4 drivers to define asset allocation

• Risk, return, resources and governance

• Considers gold a strategic asset, 40% of overall reserves

• Holds 91% in Paris and 9% abroad

• Bars not all LGD but improvement still ongoing

• No plan to sell gold, BdF active in market for its own a/c

• Market participation

• For own account: Trading desk in gold/loan restart still pending

• For CBs and official institutions: Custody, Buy/Sell, Deposits, Swaps

Central Banks and Gold – A New Challenge

Juan Ignacio Basco, Deputy General Manager, Central Bank of

Argentina

EM CBs have been increasing gold

holdings – optimal allocation 8.4% -

10%

Change in LATAM countries attitudes

towards gold after the financial crisis

Central Banks and Gold – A New Challenge

Juan Ignacio Basco, Deputy General Manager, Central Bank of

Argentina

Change in CB attitude towards gold

over time – remain net buyers this

year

Uncomfortable with tail-risk scenarios

– some hedging strategies: long put,

risk reversal

The Bank of England’s Gold Vault Operations

Matthew Hunt, Head of Customer Banking Division, Bank of

England • Long historical association with gold

• Allocated accounts and Book Entry

Transfers

• Holds more than 400,000 bars

• Currently using around 3,000

sqm floor-space for gold

Official Sector Q&A

• Concerned about volatility in the gold market recent

• Recent volatility has changed some attitudes towards gold and the use of

hedging tools “I have to do something, volatility is not good for us”.

• Majors no plan to sell gold

• Non-commital stance on the renewal of the CBGA

Session 5A: Precious Metals Regulation

Chair: Ruth Crowell

Is Bullion Covered? Don Groves, Financial Conduct Authority

Treasury order must define benchmarks

Strategically important markets likely to be covered

LBMA GOFO Rate?

Daily Fixing?

“nothing is decided”….

30

EU Legislative and Regulatory Structure

31

PARLIAMENT

Directly elected 766 member

legislature.

Approves and revises laws but

no legislative initiative.)

COUNCIL

EU heads of state plus

Commission/Council Pres.

Approves and revises laws.

Strategic and political

leadership.

EUROPEAN

COMMISSION

Executive body. Proposes

and implements legislation.

Germany BaFIN

Bundesbank

France AMF

Banque de France

UK FCA

Bank of England

Level1

Legislative

Institutions

(Brussels)

Level 2

European

Supervisory Authorities (ESAs)

National

Competent Authorities

(NCAs)

ESMA (Paris)

Securities and markets regulator with

rulebook for the single market

EBA (London)

Prudential banking authority –

contributes to convergence and

single rulebook

28

Member

State

NCAs

Italy Consob

Banca d’Italia

US and EU Derivatives Regulatory Reform Update

Jonathan Jachym, CME

Q2/Q3

Scope Proposed

15 March

EU Rules Enter in Force

2013 2014

11 March

Mandatory Clearing

Category 1 Entities

10 June

Mandatory Clearing

Category 2 Entities

Q2 Work on

legislation determining

clearing obligation cont’d

US

EU Q4 2014 / Q1 2015

Mandatory clearing begins

9 Sept

Mandatory Clearing

Category 3 Entities

Q4 / Q1

CCPs Authorised

Q1

Start of official ESMA

assessment of classes of

derivatives

US and EU Derivatives Regulatory Reform Update

Jonathan Jachym, CME

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2015 Mandatory Clearing – Projected Implementation in US and EU

• Three Dodd-Frank Sections relate to PM

• 737. Position Limits

• 1502. Conflict Minerals

• 1504. Disclosure of Payments for Resource Extraction)

• All Challenged:

• Two Industry Wins in District Court

• One Industry Appeal Still Pending

• One SEC Appeal Still Pending

• But: All Dodd-Frank Sections Will Still Exist

• Decisions in Early 2014, but even if all industry challenges prevail,

there will be three new rules created by CFTC, SEC.

Dodd-Frank Act – Update

John Bullock, IPMI

Session 6: Silver

Chair: Michael DiRenzo

Future of Silver Mining

Mitchell J Krebs, President, CEO and Director, Coeur Mining Inc.

Silver Mining Industry – Key Themes

• Competition from ETFs – ETFs and the like eliminate operating risks

• Multiple compression – structural shifts

• Cash cost inflation – labour costs, in-country currency appreciation and

declining grades

• Undisciplined capital management – growth for growth’s sake;

• Focus on return of capital – investor demand for dividends driven by 1)

desire for return of capital and 2) desire to impose financial discipline

• Silver market deficit within 5 years

• Now seeing impact of lack of exploration spending 10+ years ago

• Silver mining industry – runs the risk of becoming irrelevant due to small size

and poor shareholder returns

The Importance of Silver in the Portfolio of a Fully Integrated

Mining Company

Radoslaw Zalozinski, Director of Market and Credit Risk

Management, KGHM Polska Miedz S.A.

Silver Uses in Technology & Industry

Silver in Green Technologies – Solar Energy, Water

Purification, Silver - Coated Windows and Glass,

Silver in Medicine – Anti - Bacterial Biocide, X

- Rays,

Silver in Nanotechnology – Pigments,

Photographics, Conductive/Antistatic Composites,

Silver In Batteries – Silver Oxide Batteries, Silver

- Zinc Battery Replacing Lithium Ion Batteries,

Silver in Bearings – Essential Component in Many

Types of Engines,

Silver in Electronics – Excellent Electrical

Conductivity,

Silver in Catalysts – Production of Foundation for

Plastics Including Polyester,

Silver in Brazing & Soldering – High Tensile

Strength, Ductility and Thermal Conductivity,

Silver in Automotive Industry – Silver Coated

Contacts, Silver - Ceramic Lines in Windows.

The Position of Silver in Today’s Financial System

Shayne McGuire, Gold Fund Manager, Teacher Retirement

System of Texas

Comparing the 80s Metals Bear Market with Today’s

• Bias at the Fed

• 1980: inflation was the enemy

• Today: unemployment is the enemy

• Gold:silver ratio – does 61 make sense?

• Such a high level is extreme historically

Session 7: PGMs

Chair: David Jollie

The Catalyst for Change

Andrew Hinkly, Executive Head of Marketing, Anglo American

Platinum

• Platinum mining structural changes – higher operating costs

• Increased UG2 mining and declining head grades

• Increased mining depths

• Increased capital intensity

• Above-inflation cost increases – labour

• Reduced by-product revenue – rhodium thrifting, low focus on development of

minor metals markets

• Industry response

• Unprofitable operations put on care and maintenance or shut down

• Reduced operational footprints

• Reduced funding of capital projects

• Increased focus on operational costs and reduced stay-in-business capital

expenditure

40

Challenges…

Global automotive PGM demand, then and now

2003 2012

ozs (000's) Price

Total Value

(000's) ozs (000's) Price

Total Value

(000's)

3,190 $ 692 $ 2,207,480 3,085 $ 1,552 $ 4,787,920

3,460 $ 200 $ 692,000 7,262 $ 644 $ 4,676,728

665 $ 530 $ 352,450 636 $ 1,276 $ 811,536

Total 7,315 $ 3,251,930 10,983 $10,276,184

% Change 150% 316%

• Volume has increased 50% over the last 10 years...

• …the dollar value has more than tripled.

Challenges Facing PGM Refiners and Fabricators

Mark Barnard, Director of Marketing, Materials Services, BASF

Corporation, Catalysts Division

Platinum and Palladium Availability

Walter de Wet, Head of Commodity Research, Standard Bank plc

PGM Inventory is high

• Platinum and palladium not

trading as tight markets

• Lease rates remain near zero;

sponge continues to trade at a

discount to ingot

• Estimate above-ground platinum

inventory at 1,046 days of

consumption, palladium at 879

days (higher than consensus)

Days consumption — Pd above-ground

inventory

Days consumption — Pt above-ground

inventory

700

950

1,200

1,450

1,700

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Days

300

550

800

1,050

1,300

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Days

Platinum and Palladium Availability

Walter de Wet, Head of Commodity Research, Standard Bank plc Palladium recycling – substantial upside from

2018

0

1,500

3,000

4,500

6,000

2009

2010

2011

2012

2013F

2014F

2015F

2016F

2017F

2018F

2019F

2020F

2021F

ozs ('000)

Other China US Japan Europe

Palladium recycling – supply is

coming but it may be too late

• Pick up in Chinese Pd recycling

from 2018 as current vehicle

stock ages

• Expect Pd market to stabilise

only in 2021 given deficit

forecasts

China import data raises doubts on

autocatalyst loadinvgs

• Car production up but palladium

imports down

China net palladium imports

0

30

60

90

120

Jan

-09

Ap

r-09

Jul-0

9

Oct-0

9

Jan

-10

Ap

r-10

Jul-1

0

Oct-1

0

Jan

-11

Ap

r-11

Jul-1

1

Oct-1

1

Jan

-12

Ap

r-12

Jul-1

2

Oct-1

2

Jan

-13

Ap

r-13

Jul-1

3

ozs ('000)

Session 8: Is the gold bull market over?

Chair: Prof Brian Lucey