Market Report. Gold, Interest Rates, And Money OUR TOP ISSUE. 16 March 2018 Economics Finance Precious M etals. USD per ounce of gold

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1 Market Report 16 March 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, OUR TOP ISSUE This is a short summary of our fortnightly Degussa Marktreport. Gold, Interest Rates, And Money Gold is a good that has a truly global demand, and its price is determined by numerous factors. One of those is the market interest rate. The reason is obvious: Gold does not have an "inherent interest rate". The holders of gold have to bear "opportunity costs" by forgoing income they would enjoy if, for example, they kept in sight-, time- and savings deposits or short-dated debt (which may be considered the closest substitutes for gold in the financial sphere). As a result, one would expect that falling (rising) interest rates will encourage (discourage) the demand for gold, thereby increasing (decreasing) the price of gold (other factors being equal). 1 Gold price rises as interest rates go up how come? Gold price (USD/oz) and selected US interest rates in percent Gold (LS) US Federal Funds Rate 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 2 year yield 10 year yield 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 Financial; own calculations. In real life, one would have to expect that various factors influence the demand for and supply of gold at the same time. For instance, there might be periods in which interest rates go up, and the price of gold remains unchanged. How come? The reason may be that other, non-interest rate-related demand factors take hold (such as, for example, increased demand for gold for industrial purposes). However, we do know that the price of gold would have been lower were it not for the additional gold demand that has supported the gold price. That said, just eyeballing a chart showing the price of gold and the interest rate will not tell you the entire story about the interdependency of the price of gold and the interest rate. In fact, the negative relation between the price of gold

2 2 16 March 2018 and the interest rate is, and can be assumed to be, economically well established. Precious metal prices (USD/oz) Since the middle of 2012, the short-term interest rate in the US has been rising as markets expected the Federal Reserve (Fed) to move towards policy tightening (figure 1). Since the beginning of 2015, this development was accompanied by a decline in the price of gold (as one would expect). Also, investor risk aversion fell, and the demand for gold as a "safe haven" decreased. After that, the price of gold went up as short-term interest rates moved sideways and long-term interest rates dropped. As from 2016, short- and long-term interest rates went up, and so did the price of gold (a) Gold Keep in mind that in all these market phases a negative relationship between interest rates and the gold price was at work but it might have been concealed by price effects stemming from other factors. 2 Gold price, real interest rates and the money supply in the long-run (a) Gold price (USD/oz) and US real interest rate in percent (1) cess liquidity (b) Price of gold (USD/oz) and US ex- (2) Gold (LS) Real rate, inverted (RS) -1,5-1,0-0,5 0,5 1,0 1,5 2,0 2,5 3,0 3,5 Source: Thomson Financial; own calculations. (1) Calculated from the 10 year US gov t inflation-index bond. (2) M2 relative to nominal GDP. What about the relation between the real - that is the inflation-adjusted - interest rate and the price of gold? As figure 2a shows, the two are closely and negatively related (as one would expect). Since the beginning of 2017, the US long-term real interest rate has returned into positive territory, while the price of gold has increased. This is an excellent illustration of a situation in which non-interest raterelated factors (e.g. growing industrial demand) override the consequences higher borrowing costs have on the demand for and thus the price of gold. It may not be too surprising that despite higher interest rates investors' appetite for gold has returned. On the one hand, rising interest rates can be interpreted as a sign that the economies are, slowly and gradually, getting back to "normal". On the other hand, however, rising interest rates represent a growing risk to the economic and financial structure: The latest cyclical upswing has been orchestrated by central banks ultra-low interest rate policy. The Fed's tightening policy is like taking away the "punch bowl", and if it raises interest rates too much, the party would definitely come to an end. It is against this backdrop that gold, even in S&P 500 (LS) M2 "excess liquidity" (RS) 0,9 0,8 0,7 0,6 0,5 0,4 0, (b) Silver (c) Platinum (d) Palladium

3 3 16 March 2018 times of slightly higher real interest rates, is increasingly attracting investors, which has ultimately led to a price increase. In a long-term perspective, one would expect a positive relation between the price of gold and the quantity of money, as indicated by figure 2 b. An increase in the money supply inevitably leads to a rise in prices of goods (compared to a situation in which the increase in the money supply has not occurred). This, in turn, reduces the purchasing power of fiat currencies (be it the US dollar, the euro, the Chinese renminbi or the British pound). If and when gold is in demand for monetary purposes, one would expect that the price of gold (in terms of fiat currencies) rises as the quantity of money increases. In other words, the price of gold should, over the long-run, compensate its owner for the loss in the purchasing power of fiat currencies. What is more, examining figure 2 b suggests that the current price of gold does not seem to be dear. In fact, it appears that it has upside price potential. Clearly, the interest is a key factor in the short-run. If the Fed does not hike interest rates beyond current market expectations, gold stands a good chance to go up in price sooner rather than later. And if borrowing costs go up by more than what is currently expected, the rather elevated level of excess liquidity may provide a cushion, preventing the price of gold from dropping substantially, and - perhaps even more important - for a prolonged period of time. At the current price, there is good reason to expect that gold can serve as insurance against the vagaries of the fiat money system, providing its owner with optionality: the upside price potential of gold in times of crisis and in a fiat money system a crisis will return at some point, unfortunately. Gold price per ounce in US dollars and all world currencies (excl. the US dollar)* January 2008 to March In US-Dollar In all currencies, excl. US-Dollar Source: Bloomberg; own calculations. *Calculated from the gold price (USD/oz) and the nominal trade weighted exchange rate of the US dollar. The timeline was indexed at 5 September 2011 with a value of

4 16 March 2018 Gold In Art Jeff Koons, Michael Jackson and Bubbles, 1998 Michael Jackson and Bubbles is a life-size porcelain sculpture created by the US-American artist Jeff Koons (*1955) in 1998

4 4 16 March 2018 Gold In Art Jeff Koons, Michael Jackson and Bubbles, 1998 Michael Jackson and Bubbles is a life-size porcelain sculpture created by the US-American artist Jeff Koons (*1955) in 1998 as part of his Banality series. It depicts Pop-Superstar Michael Jackson ( ), leaning back on a flower bed, together with his domesticated chimpanzee Bubbles. Together, they form an optical unit: They wear similar military clothing, colored both in white and gold, and parts of their bodies are paralleled with each other. In particular the gold paint reminds of catholic mass-produced figures of saints (icons), making the sculpture a kitschy object. Three of the Michael Jackson and Bubbles sculpture were made.. Dr Ruth Polleit Riechert, Art Historian (

5 5 16 March 2018 Precious metals prices and ETF holdings Gold ETFs (million ounces) und gold price (USD/oz) Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 Million ounces (LS) Gold prices (USD/oz, RS) Silver ETFs (million ounces) and silver price (USD/oz) , ,0 17,5 16, Mar Jun Sep Dec-17 Millionen ounces (LS) Silver price (USD/oz, RS) Platinum ETFs (million ounces) and platinum price (USD/oz) 2,30 2,25 2,20 2,15 2,10 2,05 2,00 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Million ounces (LS) Platinum price (USD/oz, RS) Palladium ETFs (million ounces) and palladium price (USD/oz) 1,8 1,7 1,6 1,5 1,4 1,3 1,2 1,1 1,0 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Million ounces (LS) Palladium price (USD/oz, RS) 14,

6 6 16 March 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.

7 16 March 2018 Bitcoin, performance of various asset classes Bitcoin in US dollars 20000 10 16000 0 0 0 0 6000 4000 2000 0 12 13 14 15 16 17 18 Performance of stocks, commodities, FX and bonds (a)

7 7 16 March 2018 Bitcoin, performance of various asset classes Bitcoin in US dollars Performance of stocks, commodities, FX and bonds (a) In national currencies 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 ,0-7,2-4,9-5,9-3,1-2,1-3,4-0,6-6,0-2,1-0,2-0,8-0,1-1,3-0,4 2,8 8,4 0,3 5,4 11,9 7,6 0,3 1,2 2,8 3,5 3,3 (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 ,0-6,7-4,9-5,9-2,5-1,6-5,9-4,9-3,4-0,6-0,1-6,0-4,9-3,0-0,8-0,1-0,8 0,1 0,2 5,7 3,7 5,6 9,7 5,5 2,8 3,6 3,3 6,0 6,0 Source: Thomson Financial; own calculations

8 8 16 March 2018 Articles in earlier issues of the Degussa Market Report Issue Content 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 30 September 2016 On the Debt Ratio and the Price of Gold 16 September 2016 Central Banks May Choose Helicopter Money Over Negative Rates 2 September 2016 No return to normal interest rates 19 August 2016 Debt Monetized En Masse to Fend Off the Euro Crash? The Degussa Marktreport (German) and the Degussa Market Report (English) are available at:

9 9 16 March 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: 16 March 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:

1 4 M a r c h E c o n o m i c s F i n a n c e P r e c i o u s M e t a l s USD per ounce of gold Degussa Marktreport USD per ounce of silver

1 4 M a r c h E c o n o m i c s F i n a n c e P r e c i o u s M e t a l s USD per ounce of gold Degussa Marktreport USD per ounce of silver Market Report 14 March 2019 Economics Finance Precious M etals USD per ounce of gold 1900 1 1700 1600 1500 1400 1300 1100 900 09 10 11 12 13 14 USD per ounce of silver 51 46 41 36 31 26 21 16 11 09 10