May 2010
J P M O R G A N G O L D O U T L O O K
Long-term inflation risks reflected in near-term pricing
STRICTLYPRIVATEAND
CONFIDENTIAL
M. Peter Neumann
Executive Director
JPMorgan Global Commodities Group
Michael Jansen
Executive Director
JPMorgan Global Commodities Research
Agenda
Page
1
Gold themes from the demand side 1
Gold’s micro fundamentals 13
JPMORGAN
GOLD
OUTLOOK
Gold’s value proposition(s)
� Gold as a hedge against inflation
� Gold retains its value in inflation-adjusted terms, or that in the very least is the perception of many analysts and investors
� Market concerns around inflation in the medium term are acute
� Gold as a store of value
� The total supply of above-ground gold is fixed in the short term, with limited mine supply elasticity to price in the medium
and long term.
� Demand for gold is investment-theme driven – gold is never consumed, only transformed and/or hoarded to varying
degrees
� Gold’s correlation with other asset classes is low to negative; gold is considered an efficient portfolio hedge
� Gold as a “hard” currency
� Gold is seen as money; as both a means of exchange and barometer of purchasing power
� Gold is no individual country or national central bank’s liability
� While gold is priced in USDs predominantly, it is quoted and traded in every other major paper currency
– As such gold is currently perceived as the “anti-currency”
2GOLD
THEMESFROM
THEDEMAND
SIDE
0
500
1000
1500
2000
2500
3000
3500
Jan-70
Jan-71
Jan-72
Jan-73
Jan-74
Jan-75
Jan-76
Jan-77
Jan-78
Jan-79
Jan-80
Jan-81
Jan-82
Jan-83
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Real Nominal Long term average price (since 1970)
Long term average real price
LBMA gold price – nominal – and adjusted for OECD All Items CPI, $/ozLBMA gold price – nominal – and adjusted for OECD All Items CPI, $/oz
Source: JPMorgan Commodity Research
Gold – long term real and nominal prices
3GOLD
THEMESFROM
THEDEMAND
SIDE
-2
0
2
4
6
8
10
Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Emerging Asia Global Global Core
Annual change in inflation: global inflation (core and total) and emerging AsiaAnnual change in inflation: global inflation (core and total) and emerging Asia
Source: JPMorgan Commodity Research
Inflation: A two tiered environment beginning to be realised – inflation is much
stronger in Emerging Markets/BRICs – much softer in the Developed World
4GOLD
THEMESFROM
THEDEMAND
SIDE
Measures of inflation in US, trimmed mean and 16% trimmed mean, annualised monthly changesMeasures of inflation in US, trimmed mean and 16% trimmed mean, annualised monthly changes
Source: JPMorgan Commodity Research, Federal Reserve of Cleveland
US inflation is on track to keep falling
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Jan-83
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0Median CPI, Revised Methodology 16% Trimmed-Mean, Revised Methodology
5GOLD
THEMESFROM
THEDEMAND
SIDE
400
500
600
700
800
900
1000
1100
1200
1300
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
0.0
0.5
1.0
1.5
2.0
2.5
3.0Gold - $US/oz 10 Year TIPS Spreads
10 Year TIPS Spreads and USD/Gold 10 Year TIPS Spreads and USD/Gold
Source: JPMorgan Commodity Research
However the market is pricing in a return to average rates of headline inflation on
a 10 year timeframe – market not worried about lack of inflation near term
6GOLD
THEMESFROM
THEDEMAND
SIDE
30
35
40
45
50
55
60
Jul-98
Nov-98
Mar-99
Jul-99
Nov-99
Mar-00
Jul-00
Nov-00
Mar-01
Jul-01
Nov-01
Mar-02
Jul-02
Nov-02
Mar-03
Jul-03
Nov-03
Mar-04
Jul-04
Nov-04
Mar-05
Jul-05
Nov-05
Mar-06
Jul-06
Nov-06
Mar-07
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
30
35
40
45
50
55
60
Backlogs of Work (left hand axis) Suppliers Delivery Times (right hand axis, inverted)
low delivery times and low work backlog
long delivery times and high work backlog
JPMorgan Manufacturing and Service PMI series on supplier delivery times and work backlogsJPMorgan Manufacturing and Service PMI series on supplier delivery times and work backlogs
Source: JPMorgan Commodity Research
Rising delivery times, and rising backlogs of work out of JPM PMI surveys
suggest that inflation risks are not as sanguine as the recent CPI outcomes imply
7GOLD
THEMESFROM
THEDEMAND
SIDE
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000Jan-97
Jul-97
Jan-98
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
US Reserve Balances with US Federal
Reserve Banks
Federal Reserve Bank Total Assets
US Reserve Balances with the Federal Reserve BanksUS Reserve Balances with the Federal Reserve Banks
Source: JPMorgan Commodity Research
Monetisation of Fiscal Deficits delivers Significant Upside Risk to Inflation Long
Term (will the pay off eventually be: recession or inflation?)
8GOLD
THEMESFROM
THEDEMAND
SIDE
0
200
400
600
800
1000
1200
31/01/2008
29/02/2008
31/03/2008
30/04/2008
31/05/2008
30/06/2008
31/07/2008
31/08/2008
30/09/2008
31/10/2008
30/11/2008
31/12/2008
31/01/2009
28/02/2009
31/03/2009
30/04/2009
31/05/2009
30/06/2009
31/07/2009
31/08/2009
30/09/2009
31/10/2009
30/11/2009
31/12/2009
31/01/2010
28/02/2010
31/03/2010
30/04/2010
Greece
Italy
Spain
Portugal
5yr U
SD CDS Sovereign Countrie
s5yr U
SD CDS Sovereign Countrie
s
Source: JPMorgan Commodity R
esearch
Sovereign Risk –Elevated as EMU Stresses Linger. R
ecent massive bailout
package only a
lleviates short te
rm funding needs –long term stresses remain
9
G O L D T H E M E S F R O M T H E D E M A N D S I D E
0
200
400
600
800
1000
1200
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
650
700
750
800
850
900
950
1000GREECE CDS USD SR 5Y ITALY CDS USD SR 5Y SPAIN CDS USD SR 5Y EUXU XAU-EUR X-RATE
5yr USD CDS Sovereign Countries5yr USD CDS Sovereign Countries
Source: JPMorgan Commodity Research
Gold in EUR terms has failed to drop even though CDS points towards lower
default risk: gold is trading the longer term risks
10GOLD
THEMESFROM
THEDEMAND
SIDE
400
500
600
700
800
900
1000
1100
1200
1300
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
70.0
75.0
80.0
85.0
90.0
95.0
Gold - $US/oz USD Index - INVERSE
USD and USD/Gold USD and USD/Gold
Source: JPMorgan Commodity Research
Gold has managed to ride out the USD rally extremely well, reflecting underlying
demand on the back of longer term risks
11GOLD
THEMESFROM
THEDEMAND
SIDE
50
100
150
200
250
300
350
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
US gold stocks adjusted for performance of S&P 500 gold price
Gold price ($US/oz) and performance of HUI gold stocks index divided by performance of S&P500 (both indexed to January 2005)
Gold price ($US/oz) and performance of HUI gold stocks index divided by performance of S&P500 (both indexed to January 2005)
Source: JPMorgan Commodity Research
Gold’s relative outperformance to gold stocks also indicating the prospect of the
gold price reflecting bearish global macro health themes
12GOLD
THEMESFROM
THEDEMAND
SIDE
Agenda
Page
13
Gold’s micro fundamentals 13
Gold themes from the demand side 1
JPMORGAN
GOLD
OUTLOOK
2000
2500
3000
3500
4000
4500Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Mine Supply Secondary/Scrap
Metric tonnes per AnnumMetric tonnes per Annum
Source: GFMS, JPMorgan Commodity Research
Supply from Above Ground (Scrap) and Below Ground (Mines) - Improving
14GOLD’SMICRO
FUNDAMENTALS
0
500
1,000
1,500
2,000
2,500 2006 2007 2008 2009
Some very high cost operations but overall, profitability is considerableSome very high cost operations but overall, profitability is considerable
Source:
Cash costs: rising but not as fast as the price
420.6703.7589.7468.92009
447.0776.9631.7514.02008
363.2623.0533.8455.02007
281.7511.0464.0382.02006
Avg90th75th50th
Gold Total Production Costs $/oz
Profit margin for 75th Percentile Producer
Total Costs Cash Price Margin
2006 464.0 604.7 30%
2007 533.8 697.3 31%
2008 631.7 872.4 38%
2009 589.7 974.4 65%
15GOLD’SMICRO
FUNDAMENTALS
0
100
200
300
400
500
600
700
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Metric tonnes per Annum of Gross Central Bank SalesMetric tonnes per Annum of Gross Central Bank Sales
Source: GFMS, JPMorgan Commodity Research
Mine/Scrap availability increase acting to counter the declining appetite of
Central Banks to sell
16GOLD’SMICRO
FUNDAMENTALS
0
500
1000
1500
2000
2500
3000
3500
4000
4500Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Jewellery Non-Jewellery Fab Coins/Bars
Metric tonnes per AnnumMetric tonnes per Annum
Source: GFMS, JPMorgan Commodity Research
Traditional Demand – Weak as You Can Imagine
17GOLD’SMICRO
FUNDAMENTALS
Metric tonnes per Annum (NET PRODUCER BUYING)Metric tonnes per Annum (NET PRODUCER BUYING)
Source: GFMS, JPMorgan Commodity Research
And You Cant Rely on Dehedging to Fill the Gap
0
50
100
150
200
250
300
350
400
450
500
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Size of the Global Hedge Book (moz)Size of the Global Hedge Book (moz)
0
20
40
60
80
100
120
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Net Puts
Other Products
Net Calls
Net Forwards
18GOLD’SMICRO
FUNDAMENTALS
Source: JPMorgan global commodity research
Million oz of gold investments by categoryMillion oz of gold investments by category
So why is gold so Bid…Investors, investors, investors
Rolling 12month purchases of gold by central banks (MT)Rolling 12month purchases of gold by central banks (MT)
Gold Supply and Physical Metal Demand (mt)Gold Supply and Physical Metal Demand (mt)
2,400
2,600
2,800
3,000
3,200
3,400
3,600
3,800
4,000
4,200
q405
q106
q206
q306
q406
q107
q207
q307
q407
q108
q208
q308
q408
q109
q209
q309
q409
Physical Demand (fabrication and bars/coins) Metal Supply
Key Points:
• Global demand from traditional drivers – jewellery and non-jewellery fabrication very weak
•But investment demand strong – and more than an offset – all excess material easily absorbed
•Investment drivers – excess liquidity, current debasement and inflation fears to remain in play for 2010 and into 2011 – expecting further investment flow
•Gold prices likely to peak mid-2010 but remain firm afterwards
Investors
5
15
25
35
45
55
65
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
ETFs
Futures
Futures
-1000
-800
-600
-400
-200
0
200
400
600
800
1000
Jan-80Jan-82Jan-84Jan-86Jan-88Jan-90Jan-92Jan-94Jan-96Jan-98Jan-00Jan-02Jan-04Jan-06Jan-08Jan-10
19GOLD’SMICRO
FUNDAMENTALS
0
10
20
30
40
50
60
Nov-04 May-05 Nov-05 May-06 Nov-06 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09
Streettracks Lyxor iShares NewGold GBS - ASX ETFSecurities ZKB
Gold in ETFs, 000ozGold in ETFs, 000oz
Source: JPMorgan Commodity Research
With the gold market in surplus, any slip in gold oz in ETFs is potentially worrying
20GOLD’SMICRO
FUNDAMENTALS
Key Points
� The USD rebound in 2010 initially took some of the gloss off the gold price, but gold is back at record highs on most currency
pairings – the USD, EUR, GBP for instance. This is sovereign risk at work.
� The macro picture for gold is friendly – accommodative monetary conditions, still aggressive fiscal expansion, debt
monetisation and possible USD and broader currency debasement.
� However the micro fundamentals are less supportive. The hedge book is wound down, mine supply is growing solidly (likely to
slow into 2011 however), while scrap supply is strong.
� The one positive micro fundamental is the change in central bank selling activity. IMF sales will be renewed in 2010-2011 but
absolute volumes are small.
� Cash costs appear to be better behaved. This is bullish for gold producer margins in 2010-2011 but the long term bull case in
energy and ongoing yield deterioration in the big 4 suggests that cash cost creep will emerge sooner or later, which is
supportive for gold prices in the long term.
� Long term issues around reserve repletion are also slightly positive for the gold market but at current prices miners are
incentivised to add reserves via exploration and organic development.
� We expect gold prices to be extremely strong in 2010, with an average of $1250/oz in Q3.
� The gold market though is exposed to a significant thematic change. Any change of heart around sovereign risk, inflation risks,
exit strategies would be tough for the gold market given the inherent considerable excess supply of gold relative to traditional
fundamentals.
21GOLD’SMICRO
FUNDAMENTALS
Gold Supply and Demand - MTGold Supply and Demand - MT
Source: JPMorgan Commodity Research
The Gold Market Surplus: Not a Problem with Longer Term Thematic Tailwinds
Significant further investment flows are needed to keep price moving higher
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E
Supply
Mine Production 2,645 2,612 2,620 2,492 2,551 2,486 2,478 2,409 2,572 2,601 2,636
% change 1.2% -1.2% 0.3% -4.9% 2.4% -2.5% -0.3% -2.8% 6.8% 1.1% 1.3%
Central Bank Sales 520 547 617 469 674 365 484 232 41 150 100
Scrap 713 841 944 849 886 1,133 982 1,316 1,674 1,450 1,400
Net producer Hedging - - - - - - - - - - -
Implied Disinvestment 16 - - 35 - - - - - - -
Total Supply 3,894 4,000 4,181 3,845 4,111 3,984 3,944 3,957 4,287 4,201 4,136
% change -3.0% 2.7% 4.5% -8.0% 6.9% -3.1% -1.0% 0.3% 8.3% -2.0% -1.5%
Demand
Jewellery 3,008 2,660 2,482 2,614 2,707 2,297 2,417 2,193 1,759 1,920 2,060
% change -6.1% -11.6% -6.7% 5.3% 3.6% -15.1% 5.2% -9.3% -19.8% 9.2% 7.3%
Other fabrication 474 481 513 552 575 650 672 696 659 679 694
% change -14.9% 1.3% 6.7% 7.6% 4.2% 13.1% 3.4% 3.6% -5.4% 3.1% 2.2%
Bar Hoarding 261 264 180 257 263 235 236 386 187 215 225
Net Producer de-hedging 151 412 255 422 86 434 444 352 254 25 25
Implied investment - 184 751 - 479 368 175 330 1,428 1,362 1,132
Total Demand 3,894 4,000 4,181 3,845 4,111 3,984 3,944 3,957 4,287 4,201 4,136
% change -3.1% 2.7% 4.5% -8.0% 6.9% -3.1% -1.0% 0.3% 8.3% -2.0% -1.5%
Residual 16- 184 751 35- 479 368 175 330 1,428 1,362 1,132
22GOLD’SMICRO
FUNDAMENTALS
400
500
600
700
800
900
1000
1100
1200
1300
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09E
1Q10
2Q10E
3Q10E
4Q10E
1Q11E
2Q11E
3Q11E
4Q11E
Actual Forecast
Gold price forecasts, London fix, $/ozGold price forecasts, London fix, $/oz
Source: JPMorgan Commodity Research
Gold Price Forecasts
LT Real
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2010 $Aluminium 1,431 1,729 1,895 2,593 2,664 2,624 1,696 2,213 2,025 2,150 2,250 2,350 2,200 Copper 1,779 2,889 3,506 6,669 7,286 6,902 5,157 7,288 6,688 7,250 7,750 8,250 5,500 Nickel 9,636 13,921 14,563 23,125 36,935 21,327 15,363 22,858 18,250 19,000 19,500 20,000 16,000 Zinc 829 1,055 1,394 3,249 3,384 1,908 1,669 2,388 2,125 2,100 2,400 2,600 2,000 Lead 507 890 946 1,287 2,739 2,105 1,729 2,263 2,013 1,850 2,000 2,100 1,800 Tin 4,891 8,483 7,480 9,234 15,021 18,395 13,314 17,430 17,750 18,000 18,500 19,000 17,500 Gold 363 416 445 604 697 872 976 1,178 1,175 1,100 1,000 1,000 950 Platinum 692 846 897 1,139 1,305 1,575 1,205 1,650 1,788 1,800 1,800 1,800 1,600 Palladium 200 236 202 320 355 349 262 523 675 742 775 800 700 Silver 4.9 6.7 7.3 11.5 13.4 15.0 14.7 18.1 18.1 16.9 15.4 15.4 13 Alumina 249 397 445 492 300 400 254 332 304 323 338 353 280
23GOLD’SMICRO
FUNDAMENTALS
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