Outlook for Gold CFA Victoria

Transcription

1 Important Information Outlook for Gold CFA Victoria Dr. Martin Murenbeeld September 211 This presentation was prepared for an audience of investment professionals. Views contained in this presentation regarding a particular company, security, industry or market sector are the views of the writer and do not necessarily represent the views of DundeeWealth Inc., its affiliates and subsidiaries. References to stocks, securities or other types of investments should not be considered a recommendation to buy or sell. Information contained in this report is current as of the date of publication and has been obtained from third party sources believed to be reliable. DundeeWealth Inc., along with its affiliates and subsidiaries, does not warrant or make any representations regarding the use or the results of the information contained herein in terms of its correctness, accuracy, timeliness, reliability, or otherwise, and does not accept any responsibility for any loss or damage that results from its use. Under no circumstances should the information provided herein be relied upon as investment advice, nor should it be construed as sales or marketing material for any financial instrument, product or service sponsored by DundeeWealth, Inc. or its affiliates or subsidiaries, including DundeeWealth US, LP Overview Gold bull market now in its 1 th year Friday p.m. fix Bull Market begins Trend 1 Trend 2 Trend 3 Last date: September 23, Overview from crisis to crisis it carries on! Gold - $/oz -day MA -day MA Recession Reflation Fed prints!! US downgrade ECB buys SP and IT debt Euro crisis commences! Fed QE-II Speech! Arab crisis!! Daily data Last date: September 23,

2 Ten Bullish Factors for Gold 1. Monetary reflation: sovereign debt crisis - PIIGS 2. Inflation in the EM s: boosts Chindia demand 3. Global imbalances: dollar fundamentally weak 4. Global FX reserves excessive : diversification. Central banks buying gold: huge attitude change 6. Gold not in a bubble: room to rise 7. Mine supply up only modestly: peak gold? 8. Investment demand: ETF, Asian market deregulation 9. Commodity price cycle: many years to run (BRIC) 1. Geopolitical environment: positive Bullish: (1) Reflation Antecedents of the Sovereign Debt Crisis: 1. Baby-Boomer Retirements: The fiscal stresses this would cause was visible years ago 2. The Great Recession: Pushed budgets into record deficit just when the early boomers are about to retire 3. Convergence in the Euro-zone: Interest rates converged to German rates - and undisciplined governments continued to borrow excessively 6 Bullish: (1) Reflation - Retirement But debt crisis not confined to the US Bullish: (1) Reflation - Retirement Entitlements are killing Western economies 7 6 US Budget: Percent of total outlays Entitlements 4 3 Defense 2 Other 1 Interest on Debt Annual data

3 Bullish: (1) Reflation Fiscal policy responded to Great Recession Fiscal Balances % of GDP - Bullish: (1) Reflation US deficits large as far as eye can see $BN Actual %GDP Forecast US Canada Japan Germany France Italy UK Greece Portugal Spain OECD Source: OECD, IMF THEY ARE ALL PIGS! China India 1-197s 198s 199s Blue: August 211 CBO current law projections Red: August 211 CBO projections if the income tax, estate tax and gift tax provisions of the 21 Tax Relief Act are extended combined with the AMT indexed for inflation and if Medicare s payment rates for physicians held constant s 21s -1 Bullish: (1) Reflation - Convergence Euro convergence encouraged borrowing by PIIGS Year Bond Spreads (to Bunds) Greece Ireland Source: Datastream Convergence! Italy Portugal Spain Weekly data Last date: September 22, 211 Bullish: (1) Reflation - Convergence Greece is one of several pathological borrowers Greece Fiscal deficit/gdp % EU/IMF targets Overshoot

4 Bullish: (1) Reflation Convergence But will Germany pay? Bullish: (1) Reflation So how will governments deal with their debts? Mark Steyn: Greece has run out of Greeks to stick it to. So it s turned to Germany Government Choices: Renege on promises Cut other services Raise taxes Print more money? 14 Bullish: (1) Reflation History suggests central banks will print Throughout history, feckless governments have dodged their fiscal responsibility by turning to their monetary authority to devalue the currency, monetize debt and inflate their way out of structural deficits Richard Fisher: President and CEO of the FRB of Dallas March 1, Bullish: (1) Reflation Money drives gold Gold (US$) Global Liquidity (trillion$) Global Liquidity: FX Reserves + US MBase Source: IMF, Federal Reserve Last month: August 211 Liquidity estimated

5 6 Bullish: (1) Reflation Gold rises and falls with liquidity 42 3 Bullish: (2) Inflation in EM s China inflation rising Global Liquidity yoy% China CPI % CORR:.26 to date Correlation: Gold yoy% Last month: August 211 Liquidity estimated Gold in renminbi % -6 Last month: August Global Liquidity: FX Reserves + US MBase Source: IMF, Federal Reserve Bullish: (2) Inflation in EM s India inflation rising India CPI % Gold in rupees % 8 6 Bullish: (3) Global Imbalances The US trade deficit with China is unsustainable - $bn US trade with China CORR:.23 CORR: to date Last month: August 211 G/rupee August CPI July month moving total bn$ -2 US recessions Last month: July

6 Bullish: (3) Global Imbalances China must revalue; reserves are excessive! RMB/US$ Chinese FX reserves ($bn) The Chinese RMB was devalued at year-end 1993 by 34% of which only half has been given back in recent years Last month: FX reserves June 211 RMB August Source: IMF Bullish: (3) Global Imbalances The fundamental problem With a fixed exchange rate: China and other surplus countries should inflate let inflation rise on the back of significant increases in the domestic money supply The US and other deficit countries should deflate let deflation and high unemployment run its course With a flexible exchange rate: China and other surplus countries should inflate modestly and allow their currencies to rise The US and other deficit countries should deflate modestly and allow their currencies to decline Bullish: (3) Global Imbalances US energy deficit bleeds dollars on world markets $bn US recessions 12-month running total US imports of crude oil Total energy-related petroleum products 12-month running total Last month: July $bn Bullish: (4) Global Reserves Global reserves are excessive Foreign Exchange Reserves (countries over $1 bn) bn$ bn$ China Switzerland Japan Thailand Saudi Arabia Algeria 172. Russia 472. Malaysia Taiwan.3 Mexico Brazil Indonesia 19.7 Korea 293. Poland 11. India 279. Libya 1.6 Hong Kong TOTAL Addendum: Fuel Exporters $124 bn Source: IM F - data through June Source: IMF, IFS June 211 6

7 Bullish: (4) Global Reserves Diversification out of reserve-held $ s is likely The choices for a central bank are limited: 1. Other currencies These currencies must have deep international capital markets - some do not: renminbi, ruble: some do: yen, pound, euro (but is euro now suspect?) 2. SDRs issued by the IMF The SDR is a basket currency that includes only the dollar, yen, pound, and euro - it has limited use outside of central bank markets 3. Gold, other hard assets, mining investments But gold market is narrow and China likes commodityproducing assets Bullish: () Central Bank Attitudes Central bank attitudes towards gold have changed 1. CBGA signatories are selling less gold (not selling at all) 2. China recently raised its gold reserves from to 14 tonnes 3. India bought tonnes of IMF gold 4. Mexico and others have also bought gold. Russia and India have suggested a new SDR basket should include gold 2 26 Bullish: () Central Bank Attitudes CBGA signatories have stopped selling gold CBGA-I CBGA-II CBGA-III Annual limit Signatories IMF Bullish: () Central Bank Attitudes Central banks were selling now buying Central Bank Gold Sales/Purchases tonnes China and Saudi Arabia reported acquisitions long after the fact The IMF reports 166 tonnes through / tonnes '99-' '-'1 '1-'2 '2-'3 '3-'4 '4-' '-'6 '6-'7 '7-'8 '8-'9 '9-'1 '1-'11 '11-'12 '12-'13 '13-'14 Source: IMF Source: IMF Data as reported in IMF statistics, which do not necessarily agree with date of actual gold sales or acquisitions 7

8 Gold looks like it is in bubble 19 1 Friday p.m. fix Last date: September 23, This chart puts the rise in a different perspective 1 Friday p.m. fix log scale A Compound return from A to B is 6.8% From A to any other point it is more Last date: September 23, B It is not at a new high in constant Dollars Gold peak of $8 translates into $238 in today s money! Average price $66 (in 211-Q2$) Last date: 211-Q It s not in a bubble in terms of oil Average: Average price $39 (Nominal $) Barrels of oil per ounce of gold Latest month: August

9 3 1 It s not in a bubble in terms of copper Pounds of copper per ounce of gold Average: 343 Latest month: August To back US money supply higher prices needed 9 3 Price of gold to cover US M2 (Cover ratio =.24) Price of gold to cover US M1 (Cover ratio =.38) $7931 $ cover ratio as determined in 1934 when gold was revalued to $ Gold still cheap In terms of financial assets Ratio: S&P vs. Gold 1871 = 1. S&P Index: =1. Depression Gold revalued to $3 in 1934 Gold revalued years after peak Peak - Recession Gold cut loose in 1971 Gold cut years after peak With gold = $18 then S&P = 376 With S&P at 113 then gold = $8 Current Gold $18 SP But we can t be as sure about silver! Everything set to 1 NASDAQ SILVER 1 (11/23) to date GOLD 1 (3/3) to date Years 3 9

10 Bullish: (7) Gold Supply Models suggests mine output relatively flat Tonnes Western World Mine Output (GFMS) Source: GFMS, Murenbeeld World Mine Output (GFMS) Model Estimate The Mine Production Model is based on lagged gold prices and lagged production Bullish: (7) Gold Supply The general commodity supply outlook is impaired 1. Difficult governments: i.e., Venezuela 2. Governments are in debt: i.e., Australia has introduced a resource super-profits tax, Colombia raising mining taxes, etc. 3. Environmental hurdles: i.e., the Gulf of Mexico disaster changes the future for off-shore drilling 4. Peak gold, peak oil, peak : The lowhanging fruit has been picked Bullish: (8) Investment Demand Can we make a case for investment demand? 1. Central banks are rediscovering that gold is not another central bank s liability (i.e., China holds US Federal Reserve liabilities!) 2. The private sector is beginning to worry about the nature of fiat currencies and the likelihood of currency debasement 3. The private sector is also discovering that gold has attractive portfolio characteristics (gold improves the efficient frontier ) 4. Commodities in general, and gold specifically, are morphing into an investment asset class (like real estate did once it became securitized). Jewelry demand wasn t always the dominant demand in the gold market; private and central bank demand was historically more dominant 6. Major deregulation of Asian gold markets encourages people with an affinity for gold to invest in gold (and jewelry in many parts of the world is seen to be investment as well as adornment demand) Bullish: (8) Investment Demand The gold ETF rising strongly since introduction ETF demand is in a long-run uptrend even while from time to time there are reversals Last date: September 22, 211 GOLD TONNAGE - ETF

11 4 3 Bullish: (8) Investment Demand Identifiable investment demand Identifiable investment demand (bar, coin, ETF, etc. ) Bullish: (8) Investment Demand Investment demand in gold/commodities will grow 7 6 Global financial assets total: $139 trillion (9) Managed assets $48 trillion (9e) 3 As % total gold demand Managed commodities $ 38 billion (21) Source: World Gold Council Gold Demand Trends 21 Based on data tabulated by GFMS 1 Equities Private Debt Government Debt Original Sources: McKinsey & Company, IMF, Barclay s Managed Assets Managed Commodities Annualized Returns 3% 2% 2% 1% 1% % % -% -1% Bullish: (8) Investment Demand Risk/reward improves with gold/gold equities DSGC: Dynamic Strategic Gold Class (CD$) GLD: Gold Bullion (US$) DPMF: Dynamic Precious Metals Fund (CD$) MSCI: MSCI World (CD$) 4% GLD + 6% MSCI 1% GLD 1% DPMF + 9% MSCI 1% MSCI EFFICIENT FRONTIER (-21) % % 1% 1% 2% 2% 3% 3% 4% Std. Deviation 1% DSGC 1% DPMF Bullish: (9) Commodity Cycle The shortest copper cycle lasted 16 years Shortest cycle 16 years Real Copper Price 21 cents/lb 1-year MA *despite reversals which are common in all cycles 43 Source: PerTrac, Bloomberg, Goodman & Company

12 Bullish: (9) Commodity Cycle The shortest gold cycle lasted 1 years 1 9 Bullish: (1) Geopolitical The biggest geopolitical crisis to date 1 1 Shortest bull-cycle 1 years about $ (or 1%) Cyclical peak in gold Real Gold Price 21$/oz Several years of counter-trend developments 1-year MA 3 Gold Price: Iranian hostage crisis / Russia in Afghanistan Jul Oct Dec Mar-83-May-812-Aug-8 24-Oct-8 14-Jan Mar Eight Bearish Factors for Gold 1. OECD Recession: no further policy stimulus 2. Chinese recession: commodity demand plunges 3. Policy exit strategies : rising real interest rates 4. Strong dollar: against the euro flight to safety?. Liquidity of last resort: for Greece, Italy,, US? 6. Stabilization of EU debt crisis: The 44bn EFSF is expanded and boosts confidence in Eurozone 7. Confidence returns to equity markets: investment interest in gold wanes 8. Dehedging finished: hedging to recommence Bearish: (1) OECD Recession Gold declines before stimulus kicks in Gold daily p.m. fix 3% US recession Fed acts Jan 1/7 May 21/7 Oct 8/7 Feb 2/8 Jul 14/8 Dec 1/8 Apr 2/9 Sep 7/

13 Bearish: (2) A Chinese Recession Commodity demand could tumble 1. China s growth rate will decline (a recession is <6%) 2. Investment cools - money could leave China 3. World equity markets sell off some very sharply 4. A flight to safety will almost certainly favor US Treasuries. Chinese gold demand will suffer But policy will respond 1. The PBoC will likely print money, and the government will expand fiscal policy as it, too, learns about non-performing loans 2. Other Asian central banks will want to insulate their economies, and print/devalue 3. Which could eventually see gold demand rise to new highs When above 2% gold prices often stall Bearish: (3) Exit Strategies US real rates will rise eventually Real rates below zero are very positive for gold US real short term interest rate Last month: August Exit strategy! But not before 213!? 49 Bearish: (3) Exit Strategies With restrictive fiscal and monetary policies: 1. Tighter fiscal policies will be a drag on economic growth 2. Inflation pressures will remain subdued, and the threat of deflation will linger 3. Confidence in monetary policy (and fiscal policy) will improve 4. Which all will weigh heavily on the gold price Bearish: (4) Dollar Strengthens A strong dollar would hurt gold all else constant Dollar Axis Inverted (Index includes eight currencies incl. renminbi and rupee) Correlation: -.9 Gold Latest week: September 23, ?

14 Bearish: () Liquidity of Last Resort The PIIGS need cash! Bearish: (7) Equity Markets Rally Gold is often negatively correlated with equities 1 The PIIGS hold over 3 tonnes of gold We have been concerned about Italy for years But Greece, Portugal, and Spain might be the first to sell were it to come to that Gold Reserves tonnes Portugal 382 Ireland 6 Italy 242 Greece 111 Spain 282 Total 3233 US Gold S&P Daily data Last date: September 23, Conclusion* We favor the positive factors. Gold Price Scenarios 211-avg 211-end 212-avg Scenario A: p = % $14 $1 $148 Scenario B: p = % $167 $183 $19 Scenario C: p = 4% $16 $197 $221 Weighted: $162 $187 $21 *Based on revised 211-Q2 projections *Next update due September-end 6 14

15 Thank you for your attention! 1