25 May 2018 Economics Finance Precious M etals. Mind The Interest Rate

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Bartholomew Armstrong
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1 Market Report 25 May 2018 Economics Finance Precious M etals USD per ounce of gold USD per ounce of silver EURUSD 1,6 1,5 1,4 1,3 1,2 1,1 1, Source: Thomson Financial. Precious metals prices Actual Change against (in percent): (spot) 2 W 3 M 12 M I. In US-dollar Gold Silver Platinum Palladium II. In euro Gold Silver Platinum Palladium III. Gold price in other currencies JPY CNY GBP INR RUB Source: Thomson Reuters; own calculations. OUR TOP ISSUE This is a short summary of our fortnightly Degussa Marktreport. Mind The Interest Rate In recent weeks, US interest rates have continued to edge up. The 10-year US Treasury yield has climbed slightly above the three percent-level, and the 2-year has reached nearly 2.6 percent. The upward drift in US interest rates comes as investors expect the Federal Reserve (Fed) to bring its key interest rate, which currently stands between 1.50 and 1.75 percent, further up. Unsurprisingly, higher interest rates had an impact on the price of gold. The gold price fell from 1.351,7 US dollar per ounce on 18 April 2018 to US dollar per ounce on 21 May The negative link between the gold price and interest rates is easy to understand: Higher yields increase the (opportunity) costs of holding gold. If you own gold, you forgo interest income you could have earned by investing your funds in, say, shares in money market funds or short-term bills. The critical question, however, is: What will happen with real, that is inflation adjusted, interest rates? 1 Low interest rates benefit the price of gold and stocks (a) Gold price (USD/oz) and US real shortterm interest rates in percent (1) porate bonds in percent (b) NASDAQ-Index and yield on US cor- (2) Gold price (LS) Real interest rate (RS) NASDAQ (LS) Source: Thomson Financial; own calculations. (1) 2 year US short-term interest rate minus annual change in consumer prices. US short-term interest rates have, on average, been negative in real terms (minus 0.4 percent p.a., to be exact) since the beginning of This, in turn, has helped bring up the price of gold as holding gold did not burden the saver 9,0 8,5 8,0 7,5 7,0 6,5 6,0 5,5 5,0 4,5 4,0 BAA US corporate bond yield (RS)

2 2 25 May 2018 Precious metal prices (USD/oz) (a) Gold (b) Silver (c) Platinum (d) Palladium and investor with opportunity costs. Against this backdrop, one would have good reason to expect further downward pressure on the price of gold if and when short-term interest rates move back into positive territory. But is this likely? With the US economy growing at a fairly decent clip and the Fed in a hiking mood, a plausible scenario would indeed be interest rates returning towards "more normal levels" levels at which real interest rates become positive. At the same time, however, we have to remind ourselves that higher real interest rates pose a threat to the continuation of the cyclical upswing of the economy. In fact, substantially higher real interest rates could even cause another round of crisis. This is because they would bring to the fore the problems that central banks tried to keep beneath the surface by resorting to a monetary policy of exceptionally low interest rates. What is more, higher real interest rates could send inflated prices in the stock and housing market crashing down and affect borrowers' and banks' balance sheets negatively. This would be especially problematic given the elevated debt levels, which have gone up further in recent years. That said, we find two opposing trends influencing the price of gold as far as interest rates are concerned: Higher interest rates dampen the demand for gold and thus the price of gold, as the opportunity costs of holding gold go up. At the same time, increased risk to economic growth and financial market stability give investors a strong case for keeping up their demand for gold, which, in turn, should support the price of the yellow metal. Due to the strong credit dependency of the world's economic and financial system, it seems reasonable to expect real interest rates to remain at subdued levels going forward. The most convincing reason is perhaps the elevated level of debt which does allow the economies to return to "normal interest rate levels". In fact, the decade-long trend of falling real interest rates may even continue for quite some time. Of course, one cannot rule out that credit markets are going to exaggerate the potential for higher real interest rates. Especially monetary policymakers pose a risk factor: They may well overestimate the economy's capacity to cope with higher interest rates. Because they do not, and cannot, know the "correct level of interest rates". The latter is unknown, and so policymakers have to pursue a trial and error process which may all too easily push the economy over the cliff. What does it mean for gold's value proposition? First, gold does not appear to be expensive at the current price. In fact, there is reason to assume that it is (to borrow a term from the investment world) undervalued. Second, gold if you look at it as a form of money offers a hedge against the vagaries of the fiat money world. It cannot be debased by central banks' money printing, and it does not carry a default or counterparty risk. Reflected upon from this perspective, gold certainly has not lost its shine for the long-term oriented investor. This becomes clear once the investor realises that gold is not an investment instrument but a form of money* in fact, the best and most honest kind of money available Source: Thomson Financial. *See in this context: Gold Should be View as Money, published at the Ludwig von Mises Institute, 18 May 2018.

3 25 May 2018 Gold In Art Empirical Gate Mosaic in the Hagia Sophia, Istanbul, Turkey The mosaic depicts Emperor Leon VI (866-912 AD), who is also referred to as the "Wise Emperor of Byzantium".

3 3 25 May 2018 Gold In Art Empirical Gate Mosaic in the Hagia Sophia, Istanbul, Turkey The mosaic depicts Emperor Leon VI ( AD), who is also referred to as the "Wise Emperor of Byzantium". It is located above the Imperial Gate of Hagia Sophia, Istanbul, Turkey, through which only the emperors entered the church. On his knees, left of Christ, is Leon VI in prayer position. The creation of the mosaic dates back to the 9th or 10th century. The overarching golden background is a sign of divinity and earthly power. Dr Ruth Polleit Riechert, Art Historian (

4 4 25 May 2018 Precious metals prices and ETF holdings Gold ETFs (million ounces) und gold price (USD/oz) Million ounces (LS) Gold prices (USD/oz, RS) 1080 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Silver ETFs (million ounces) and silver price (USD/oz) , ,0 17,5 16,0 Millionen ounces (LS) Silver price (USD/oz, RS) ,5 23-May Aug Nov Feb May-18 Platinum ETFs (million ounces) and platinum price (USD/oz) 2,30 2,25 2,20 2,15 2, , Million ounces (LS) Platinum price (USD/oz, RS) 2, May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Palladium ETFs (million ounces) and palladium price (USD/oz) 1, , ,6 1, , ,3 1, , , ,9 Million ounces (LS) Palladium price (USD/oz, RS) 450 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Source: Thomson Financial.

5 5 25 May 2018 Precious metals prices In US-dollar Gold Silver Platinum Palladium I. Actual II. Gliding averages 5 days 10 days 20 days 50 days 100 days 200 days III. Bandwidths for 2018 Low High Low High Low High Low High (1) IV. Annual averages In Euro Gold Silver Platinum Palladium I. Actual II. Gliding averages 5 days 10 days 20 days 50 days 100 days 200 days III. Bandwidths for 2018 Low High Low High Low High Low High (1) IV. Annual averages Source: Thomson Financial; own calculations and estiamtes. (1) Estimated return against actual price in percent.

6 25 May 2018 Bitcoin, performance of various asset classes Bitcoin in US dollars 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 12 13 14 15 16 17 18 Source: Thomson Financial.

6 6 25 May 2018 Bitcoin, performance of various asset classes Bitcoin in US dollars Source: Thomson Financial. Performance of stocks, commodities, FX and bonds (a) In national currencies (b) In euro S&P 500 Nasdaq Euro STOXX 50 FTSE 100 DAX Swiss MI Nikkei Hang Seng Bovespa Russia CRB Index Gold Silver Crude oil EURUSD EURJPY EURGBP EURCHF USDCAD USDGBP USDJPY US gov't bond 7-10 yrs US gov't bond 1-3 yrs Euro gov't bond 7-10 yrs Euro gov't bond 1-3 yrs UK gov't bond 7-10 yrs UK gov't bond 1-3 yrs Japan gov't bond 7-10 yrs Japan gov't bond 1-3 yrs ,1-5,9-0,5-2,4-2,3-5,0-1,2-0,7-1,2-2,7-3,4-0,4-0,4-0,2-1,6-0,3-0,1-0,1 1,9 6,9 1,7 0,5 0,5 2,5 8,3 8,8 6,4 2,4 19,0 S&P 500 Nasdaq Euro STOXX 50 FTSE 100 DAX Swiss MI Nikkei Hang Seng Bovespa Russia CRB Index Gold Silver Crude oil EURUSD EURJPY EURGBP EURCHF USDCAD USDGBP USDJPY US gov't bond 7-10 yrs US gov't bond 1-3 yrs Euro gov't bond 7-10 yrs Euro gov't bond 1-3 yrs UK gov't bond 7-10 yrs UK gov't bond 1-3 yrs Japan gov't bond 7-10 yrs Japan gov't bond 1-3 yrs ,1-5,2-0,1-2,3-5,0-1,2-0,7-1,2-2,7-1,1-0,4-0,2-0,3 4,2 9,2 2,9 0,4 5,5 6,5 0,7 4,3 8,7 1,8 2,4 2,0 1,0 2,6 2,7 21,4 Source: Thomson Financial; own calculations

7 7 25 May 2018 Articles in earlier issues of the Degussa Market Report Issue Content 25 May 2018 Mind The Interest Rate 11 May 2018 Mr Buffett on Gold Viewed Differently 27 April 2018 Moving Towards Higher Gold Prices 13 April 2018 The Risk of a Currency Crisis 29 March 2018 Walking the Tightrope 16 March 2018 Gold, Interest Rates, And Money 2 March 2018 Gold in Times of Boom and Bust 16 February 2018 The Fed Makes The Stock Market A Risky Place 2 February 2018 Central Banks Put a Safety Net Under Financial Markets 19 January 2018 Chances And Risks For Investors in December 2017 New Competition: Gold and Crypto Currencies Against Fiat-Monies 8 December 2017 It Is Just Another Inflationary Boom 24 November 2017 There Is, And Will Be More, Inflation 10 November 2017 Calm Markets: The Great Mystery 27 October 2017 The Interest Rate Becomes A Crash Factor 13 October 2017 The Great Complacency 29 September 2017 The German Election Outcome Might Turn Up The Heat On The Euro 15 September 2017 A Case for Gold in the Investment Portfolio 1 September 2017 On the Intrinsic Price of Gold 18 August 2017 Gold in Times of Boom and Bust 4 August 2017 The Underpriced Risk 21 July 2017 The Fed Remains on Course to Trouble 7 July 2017 Gold And The Blockchain 23 June 2017 The Super-Bubble in Danger 9 June 2017 Trapped in Boom-and-Bust 26 May 2017 The Make-Believe World of Fiat Money 12 May 2017 The Fed Will Likely Chicken Out on Planned Rate Hikes 28 April 2017 Central Banks Will not Dare to Take Away the Punch Bowl 13 April 2017 The Gold Price Rise Tells Us: The Crisis Isn t Over Yet 31 March 2017 ECB Negative Interest Rate Policy Will Come to an End 17 March 2017 The Fed s Half-Hearted Attempt of Monetary Tightening 3 March 2017 ECB Flirts With Higher Inflation. The Case For Gold 17 February 2017 Gold Gains Ground vis-a-vis the US-Dollar 3 February 2017 Gold Insures Against Risks Lurking in the Financial System 20 January 2017 The Year of Change 20 December 2016 Gold Rather Than Euro 25 November 2016 Mr Trump Loves Gold. Does Gold Love Him Back? 11 November 2016 Trump Election Puts Euro Under Pressure 28. October 2016 US Presidential Elections and the Price of Gold 14 October 2016 Amid Uncertainty, Opportunity Knocks The Degussa Marktreport (German) and the Degussa Market Report (English) are available at:

8 8 25 Mai 2018 Disclaimer Degussa Goldhandel GmbH, Frankfurt am Main, is responsible for creating this document. The authors of this document certify that the views expressed in it accurately reflect their personal views and that their compensation was not, is not, nor will be directly or indirectly related to the recommendations or views contained in this document. The analyst(s) named in this document are not registered / qualified as research analysts with FINRA and are therefore not subject to NASD Rule This document serves for information purposes only and does not take into account the recipient's particular circumstances. Its contents are not intended to be and should not be construed as an offer or solicitation to acquire or dispose of precious metals or securities mentioned in this document and shall not serve as the basis or a part of any contract. The information contained in this document was obtained from sources that Degussa Goldhandel GmbH holds to be reliable and accurate. Degussa Goldhandel GmbH makes no guarantee or warranty with regard to correctness, accuracy, completeness or fitness for a particular purpose. All opinions and views reflect the current view of the author or authors on the date of publication and are subject to change without notice. The opinions expressed herein do not necessarily reflect the opinions of Degussa Goldhandel GmbH. Degussa Goldhandel GmbH is under no obligation to update, modify or amend this document or to otherwise notify its recipients in the event that any circumstance mentioned or statement, estimate or forecast set forth in this document changes or is subsequently rendered inaccurate. The past performance of financial instruments is not indicative of future results. No assurance can be given that any views described herein would yield favorable returns on investments. There is the possibility that said forecasts in this document may not come to pass owing to various risk factors. These include, without limitation, market volatility, sector volatility, corporate actions, the unavailability of complete and accurate information and/or the circumstance that underlying assumptions made by Degussa Goldhandel GmbH or by other sources relied upon in the document should prove inaccurate. Neither Degussa Goldhandel GmbH nor any of its directors, officers or employees shall be liable for any damages arising out of or in any way connected with the use of this document and its content. Any inclusion of hyperlinks to the websites of organizations in this document in no way implies that Degussa Goldhandel GmbH endorses, recommends or approves of any material on or accessible from the linked page. Degussa Goldhandel GmbH assumes no responsibility for the content of and information accessible from these websites, nor for any consequences arising from the use of such content or information. This document is intended only for use by the recipient. It may not be modified, reproduced, distributed, published or passed on to any other person, in whole or in part, without the prior, written consent of Degussa Goldhandel GmbH. The manner in which this document is distributed may be further restricted by law in certain countries, including the USA. It is incumbent upon every person who comes to possess this document to inform themselves about and observe such restrictions. By accepting this document, the recipient agrees to the foregoing provisions. Imprint Marktreport is published every 14 days on Fridays and is a free service provided by Degussa Goldhandel GmbH. Deadline for this edition: 25 Mai 2018 Publisher: Degussa Goldhandel GmbH, Kettenhofweg 29, Frankfurt, Tel.: (069) , Fax: (069) info@degussa-goldhandel.de, Internet: Editor in chief: Dr. Thorsten Polleit Degussa Market Report is available on the Internet at:

10 December 2018 Economics Finance Precious M etals. The Fed Supports Gold. S&P 500 NASDAQ Fed Funds Rate (RS)

Market Report 10 December 2018 Economics Finance Precious M etals USD per ounce of gold 1 1 1700 1600 1500 1400 1300 09 10 11 12 13 14 15 16 17 18 19 USD per ounce of silver 51 46 41 36 31 26 21 16 11