Roger Yuan Goldman Sachs (Asia) L.L.C. (+852)

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1 Goldman Sachs Research Precious Metals Gold caught in a tug-of-war May 2014 Roger Yuan Goldman Sachs (Asia) L.L.C. (+852) roger.yuan@gs.com The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to Analysts employed by non-us affiliates are not registered/qualified as research analysts with FINRA in the U.S.

2 Our gold modeling is based on US real interest rates and monetary physical gold demand (ETF and central banks) Gold prices in 2014 $ (lhs), 10-yr US real rates (rhs, inverted, prior to 1997 calculated as 10-yr US treasury yield less inflation expectations from University of Michigan Survey) 1,800 1,650 1,500 1,350 1,200 1, An extremely low real interest rate environment characterized the rally of the 1970 s and today -2% -1% 0% 1% 2% 3% 4% 5% Central banks selling gold Physically backed ETF inflows 6% 7% 8% 9% % Real gold price (2014$, lhs) 10-yr ex-ante real rates (rhs, inverted) 10-yr TIPS (rhs, inverted) Source: COMEX, FRB, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 2

3 For example, COMEX gold net speculative positioning is well explained by real rates and quantitative easing by the Federal Reserve CFTC net speculative positioning (million toz) Predicted value Net speculative length Source: FRB, CFTC, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 3

4 with ETF holdings also tracking US real rates after their initial ramp up million toz (left); % (right, inverted) Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Gold ETFs holdings US 10 year TIPS yield (right axis, inverted) Source: Bloomberg, FRB. Goldman Sachs Global Investment Research 4

5 Combined net long gold positioning is off its highs but offers sufficient ammunition for another leg lower million toz Source: Bloomberg, CFTC Net speculative length Gold ETFs holdings 19-Mar-14 Goldman Sachs Global Investment Research 5

6 COMEX Gold price ($/toz) We view retail demand for gold as responding to prices rather than setting prices. It should continue to grow as prices decline Annual average gold prices ($/toz, vertical axis); Annual global jewelry demand net of scrap (million toz) 1,800 1, , ,200 1, Jewelry demand net of scrap (mtoz) Source: GFMS, COMEX. Goldman Sachs Global Investment Research 6

7 Chinese gold demand is price responsive: the Shanghai premium is inversely correlated to gold returns cash premium (%, lhs); 2-mo gold return (%, rhs, inverted) 6% -30% -20% 5% -10% 4% 0% 10% 3% 20% 2% 30% Shanghai over London gold premium 2-mo change in gold prices (rhs, inverted) Source: COMEX, SGE, LBMA. Goldman Sachs Global Investment Research 7

8 The sharp decline in the Shanghai gold premium points to sharply weaker sequential imports HK exports to China (tonnes, lhs); cash premium (%, rhs) % % % % % % % 0 3.0% China gold imports from HK Shanghai premium (rhs) Source: UNComTrade, SGE, LBMA. Goldman Sachs Global Investment Research 8

9 The introduction of import tariffs last year led to a collapse in official gold imports into India Monthly gold trade (tonnes) India HK Source: UNComTrade. Goldman Sachs Global Investment Research 9

10 Lower gold import following the introduction of tariffs were a significant contributor to a lower CA India s monthly trade balance (million USD) Source: Haver. Oil Balance Gold balance Non-oil non-gold trade balance Goldman Sachs Global Investment Research 10

11 While EM central banks have become steady gold buyers and DM holdings are stable Central bank gold holdings (mtoz) 1,200 1,150 1,100 1,050 1, Source: IMF. Commercial bank gold reserves held at Turkey's central bank EM ex. Turkey Turkey central bank DM Goldman Sachs Global Investment Research 11

12 EM central bank gold purchases have slowed in 2013 as gold prices declined Central bank gold holdings (mtoz, monthly changes) All countries Source: IMF. Goldman Sachs Global Investment Research 12

13 Our economists forecast strong US GDP growth in 2014 coupled with low inflation Real GDP growth (Ann. % chg.) Inflation (Core PCE); Percent change, year ago Range* GS Consensus * Top 10 avg - bottom 10 avg Range* GS Forecast Consensus * Top 10 avg-bottom 10 avg. 0.5 Source: Goldman Sachs Global Investment Research, FRB. Goldman Sachs Global Investment Research 13

14 This outlook points to higher US real rates and lower gold prices once economic data shows an acceleration in growth % $/toz (left GS gold price forecast (since June 23, 2013) COMEX realized gold prices Support level since year TIPS yield Forecast Source: Goldman Sachs Global Investment Research, FRB. Goldman Sachs Global Investment Research 14

15 The determination of gold prices will likely go back to being driven by US economic releases Gold prices ($/toz): Actual vs. active and lull windows of economic releases 1,950 1,700 1,450 1, Source: COMEX, Goldman Sachs Global Investment Research. Active window Lull window Actual Goldman Sachs Global Investment Research 15

16 Our year-end $1,050/toz gold price forecast is below current marginal fully allocated production costs but the 1990s gold bear market suggests marginal cash cost is a more likely floor Real gold prices in 2014 $/toz 1,850 1,650 1,450 1,250 1, Source: Wood Mackenzie, COMEX. COMEX gold price C1 90th %ile C3 90th %ile Goldman Sachs Global Investment Research 16

17 The rally in gold prices has occurred despite stable US real rates $/toz (left); % (right, inverted) mtoz (left); % (right, inverted) 1,800 1,700 1,600 1, , ,300 1,200 1, COMEX gold 10-yr TIPS yield (right axis, inverted) 3 1-Oct-13 1-Nov-13 1-Dec-13 1-Jan-14 1-Feb-14 1-Mar-14 CFTC gold net speculative positioning 10-yr TIPS yield (right axis, inverted) Source: COMEX, CFTC, FRB. Goldman Sachs Global Investment Research 17

18 Russian geopolitical risk offsetting improving US data so far US MAP score (lhs); Russian risk factor (rhs) Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Source: Goldman Sachs Global Investment Research. US MAP score Russia risk factor Goldman Sachs Global Investment Research 18

19 The long-term gold outlook is dependent on the potential for strong inflation following significant Fed balance sheet expansion % QE1 QE1 Expansion QE2 Operation Twist QE Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Yr 5-Yr Forward Breakeven Umich 5-Yr Ahead Expectations Source: FRB Goldman Sachs Global Investment Research 19

20 Disclosure Appendix May 26, 2014

21 Disclosure Appendix Reg AC I, Roger Yuan, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced by considerations of the firm's business or client relationships. Disclosures Global product; distributing entities The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd (ABN ); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; in Canada by either Goldman Sachs Canada Inc. or Goldman, Sachs & Co.; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union. European Union: Goldman Sachs International authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, has approved this research in connection with its distribution in the European Union and United Kingdom; Goldman Sachs AG and Goldman Sachs International Zweigniederlassung Frankfurt, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also distribute research in Germany. General disclosures This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment. Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research Division. Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC ( Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. The analysts named in this report may have from time to time discussed with our clients, including Goldman Sachs salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analyst's published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analyst's fundamental equity rating for such stocks, which rating reflects a stock's return potential relative to its coverage group as described herein. We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at Transaction costs may be significant in option strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request. All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our research by third party aggregators. For research or data available on a particular security, please contact your sales representative or go to Disclosure information is also available at or from Research Compliance, 200 West Street, New York, NY Goldman Sachs. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc. Goldman Sachs Global Investment Research 21

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