The Strategic Case for Gold AAIN -...

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


Basic properties of gold investment

4 World Gold Council | Gold as an asset class | October 2012

Gold has outperformed most asset classes over the

past decade


The current bull market in perspective


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


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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


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Diversity of supply and demand


The gold market has experienced structural changes

in demand


The evolving structure of gold supply – mine

production

11 World Gold Council | Presentation title | Date

‘The Great Leveraging?’


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


Risk hedging properties of gold


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


Gold is negatively correlated in tail risk events


Gold’s volatility is positively skewed


Gold outperforms other alternative assets during

period of turmoil


Gold tends to reduce losses when tail events occur


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


Gold in a portfolio context


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


Gold reduces portfolio value at risk


An allocation to gold over the past 12 years has

resulted in higher risk-adjusted returns


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


Optimal allocations to gold range from 2% - 10%


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.


Gold in the new financial architecture


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


Central banks have become net buyers of gold


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


Gold as an alternative currency

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Bill Gross tweet, 14th September 2012

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Source: twitter


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 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


Investment demand in line with five-year average


Gold has low correlation relative to most asset

classes in the long-run


Gold holds its value through time (100-year

perspective)


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