Gold, Silver, And The Global Economy Outlook Peruvian International Gold and Silver Symposium 21 May 2014 Jeffrey M. Christian Managing Partner jchristian@cpmgroup.com 30 Broad Street, 37 th Floor New York, NY 10004 www.cpmgroup.com
Economic Environment 2
Slower Long Term Real Economic Growth Globally Real Gross Domestic Product Annual, Projected Through 2022 Percent Change 10 Percent Change 10 8 Actual Projected 8 6 6 4 4 2 2 0 0-2 -4 World Emerging and Developing Economies Advanced Economies -2-4 -6 1980 1985 1990 1995 2000 2005 2010 2015p 2020p Source: IMF, CPM Group Note: Historical data are IMF statistics. Projections are made by CPM Group. Projections for "Emerging and Developing Economies are only for BRIC countries, which account for approximately 52.8% of this category. Projections for "Advanced Economies" are only for the U.S., U.K., Eurozone, and Japan. These countries accounted for 82.2% of this category. -6 3
Chinese Economic Growth 7.5% - 8.0%: On Target For Government
Inflation Remains Under Control For Now; Deflation is the Major Risk U.S. Inflation Monthly Data, Through January 2014 Percent 16 Percent 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0-2 -2-4 Apr-68 Mar-71 Feb-74 Jan-77 Dec-79 Nov-82 Oct-85 Sep-88 Aug-91 Jul-94 Jun-97 May-00 Apr-03 Mar-06 Feb-09 Jan-12-4 5
Global Surplus of Labor Is A Major Impediment to Growth U.S. Unemployment Rate Monthly Data, Through January 2014 Percent 12 Percent 12 10 10 8 8 6 6 4 4 2 2 0 Jan-48 Dec-51 Nov-55 Oct-59 Sep-63 Aug-67 Jul-71 Jun-75 May-79 Apr-83 Mar-87 Feb-91 Jan-95 Dec-98 Nov-02 Oct-06 Sep-10 0 6
Surplus Labor Will Be A Major Global Problem Now and Going Forward The U.S manufactures 51% more today than it did in the late 1980s, but uses 34% fewer workers. More jobs have been lost to computers than to off-shoring. The next wave of technological innovation will be even more devastating to jobs, replacing computer-assisted manufacturing with computerized manufacturing. It already has begun. U.S. Manufacturing Output U.S. Manufacturing Employment Index (2009 = 100) 130 Index 130 Million Persons 23 Million Persons 23 120 110 120 110 21 19 17 21 19 17 100 100 15 15 90 90 13 11 13 11 80 80 9 9 70 70 7 7 60 87 89 91 93 95 97 99 01 03 05 07 09 11 13 60 5 39 45 52 59 66 72 79 86 93 99 06 13 5 7
Gold Outlook
Gold Prices Gold Prices: 1 January 2010 to 25 April 2014 $ / Oz 2,000 1,900 1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 9
Investors Physical Gold Purchases Are Sharply Lower Investment Demand's Effect on Gold Prices Price Change Through April 2014 Percent 110 90 70 Net Investment Demand (Left Scale) Percent Change in Price Million Ounces 60 50 40 50 30 30 20 10 10-10 0-30 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14p -10
CPM Group s intermediate-term price recommendations $/Oz. 2,000 1,800 S $/Oz. 2,000 1,800 1,600 1,600 1,400 1,400 1,200 1,200 1,000 800 S S S S S B 1,000 800 600 600 400 400 200 200 0 B B B B B 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 0 11
A Brief History Of Recent Gold Price Predictions 2011 2012 Market Consensus: Gold Is Going to $2,000, $2,400, $3,000. CPM Group: Gold has reached a cyclical peak in a secular bull market. Prices may drop to $1,300 - $1,400 on an annual average basis between 2013 and 2015, before resuming an upward move later in the decade. 2013 2014 Market Consensus: Gold Is Going to $1,100 or $1,000. CPM Group: Gold reached a cyclical peak in a secular bull market in 2011 and 2012. Prices have dropped to $1,300 - $1,400 and may move sideways to slowly higher between now and 2015, before resuming an upward move later in the decade. 12
Here Is What We Said Gold Would Do in 2012 Quarterly Average Prices, Through 1Q 2014 $1,900 $1,900 $1,800 $1,800 $1,700 $1,700 $1,600 $1,600 $1,500 $1,400 Actual $1,500 $1,400 $1,300 $1,200 Projections $1,300 $1,200 $1,100 $1,100 $1,000 $1,000 $900 $900 $800 $800 $700 $700 2009 2010 2011 2012 2013 2014
Gold Quarterly Average Price Projections to Q4 2015 From CPM Group s Precious Metals Advisory, 2 May 2014 $ / Oz $ / Oz $1,900 $1,900 $1,800 $1,800 $1,700 $1,700 $1,600 $1,600 $1,500 $1,500 $1,400 $1,400 $1,300 $1,300 $1,200 $1,200 $1,100 $1,000 Actual Projections $1,100 $1,000 $900 $900 $800 $800 $700 2009 2010 2011 2012 2013 2014 2015 $700 14
Real Interest Rates There Is No Correlation Between Gold and Real Interest Rates Returns on Gold and Real Interest Rates 60% 50% 40% 30% 20% 10% 0% -8-7 -6-5 -4-3 -2-1 -10% 0 1 2 3 4 5 6 7 8-20% -30% Real Interest Rates -40% -50% -60% Gold Returns Slope: -0.0041 Correlation: -0.19 Note: Monthly data from May 1968 through December 2012. Gold returns are based on changes in monthly average London PM fix gold prices. Real interest rates are U.S. 3-Month Treasury bills minus U.S. Consumer Price Index. Gold prices are the dependent variable and real interest rates are the independent variable. Data points in black are for those between September 2007 and December 2012.
Gold Is Highly Uncorrelated Over Time With Other Assets Long - Term Correlations Monthly Data Gold Inflation TWD DJIA S&P T-Bill T-Bond Silver 1970-2013 9% -33% -5% -6% 0% 3% 70% 1970-1990 9% -34% 2% -2% -2% 10% 71% 1978-1982 6% 6% 32% 13% -13% 3% 85% 1990-2013 -3% -35% -18% -14% 2% -3% 65% 2000-2013 1% -38% -20% -17% 1% -8% 75% 2002-2013 3% -38% -18% -17% 1% -9% 75% 2008-2013 -5% -34% -23% -22% 3% -5% 80% Source: CPM Group January, 2014 16
The Outlook for Gold Gold prices have fallen to what CPM Group sees as a base. Prices may consolidate for a couple of years around $1,300 - $1,400 on an annual average basis, and may not fall much further. For prices to fall further economic conditions would have to improve dramatically more, which we do not see happening. For prices to rise more forcefully than we envision, economic conditions would have to deteriorate very sharply. This seems more possible than stronger than expected growth. 17
Silver
Silver Prices Remain Weak Silver Prices: 1 January 2010 to 24 April 2014 $ / Oz 52 48 44 40 36 32 28 24 20 16 12 8 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14
Silver Investment Demand Down Sharply, But Still High Silver Market Balance Projected Through 2014, Prices through 2013 $/Ounce 50 45 40 35 30 25 20 15 10 Net Additions Net Changes in Inventories Price (LHS) Million Ounces 250 200 150 100 50 0-50 -100-150 5 0 Net Withdrawals 60 64 68 72 76 80 84 88 92 96 00 04 08 12-200 -250
Here Is What We Said Silver Would Do in 2012 Quarterly Average Prices, Through 1Q 2014 $48 $48 $44 $44 $40 $40 $36 $32 Actual $36 $32 $28 $28 $24 $24 $20 $20 $16 $12 Projections $16 $12 $8 $8 2009 2010 2011 2012 2013 2014
Silver Quarterly Average Price Projections to Q4 2015 From CPM Group s Precious Metals Advisory, 2 May 2014
Uniformed Things To Say About Gold
There Are No Real Efforts To Push Gold And Silver Prices Down Contrary to market commentary, using last October as an example, one sees what really goes on in the market: 1. More than half of the trades have been heavy buying pushing prices higher; obviously not smack-downs. 2. No single entity but hundreds of algorithmic traders using similar systems generating the same sell points. 3. Occurring across financial markets: Other commodities, fixed income, currencies, equities. Recent Major Intraday Price and Volume Changes Date Time Interval S top Logic Troy Ounces Volume During Time Interval as % of Total Daily December Contract Volume as % of Total Daily Aggregate Futures Volume Price Action during Time Interval Daily Change in Settlement Prices 22-Oct 8:20-8:30 NA 2,219,600 13.9% 12.6% $19.50 $26.80 17-Oct 4:00-4:10 No 1,780,000 8.2% 8.1% $33.00 $40.70 15-Oct 9:50-10:00 No 1,320,000 6.5% 6.1% $11.00 -$3.40 11-Oct 8:50-9:00 20 Seconds 2,810,000 15.1% 14.3% -$27.00 -$28.70 9-Oct 10:10-10:20 No 1,280,000 8.1% 7.8% -$10.00 -$17.40 7-Oct 9:50-10:00 No 1,140,000 11.9% 11.4% $11.00 $15.20 1-Oct 8:40-8:50 10 Seconds 2,410,000 11.3% 10.9% -$24.00 -$40.40 Averages on Declines 2,166,667 11.5% 11.0% -$20.33 -$28.83 Averages on Increases 1,614,900 10.1% 9.6% $18.63 $19.83 Ratio of Declines to Increases 1.34 1.14 1.15-1.09-1.45 Note: Time is military time, EDT. S ources: Reuters data, CPM Group 24
Percent of Comex Gold Open Interest Backed by Stocks Monthly, Through February 2014 Percent 35% Percent 35% 30% 30% 25% 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% ene-85 mar-89 may-93 jul-97 sep-01 nov-05 ene-10 0%
Official Transactions
Official Transactions, Adjusted for Turkish Central Bank Additions Official Transactions Annual Data, Projected through 2014 Million Ounces 20 15 10 5 0-5 -10-15 -20-25 -30-35 Net Additions Net Reductions Adjusted for Turkish Central Bank's ROM Gold Additions 80 83 86 89 92 95 98 01 04 07 10 13e Million Ounces 20 Note: Turkey introduced a policy in 2011 that allowed commercial banks to use gold to meet a portion of their reserve requirements. The bank included this gold in its monetary reserves. Because these additions were not outright central bank purchases and no ownership has been transferred from the actual owner to the central bank, annual official transactions have been adjusted to exclude Turkish central bank gold additions since 2011. 15 10 5 0-5 -10-15 -20-25 -30-35
Only A Handful of Central Banks Did the Most Buying Share of Central Banks in Gross Gold Reserve Additions, 2013 Others, 9% Indonesia, 2% Russia, 47% Ukraine, 4% Sri Lanka, 4% South Korea, 12% Kazakhstan, 17% Azerbaijan, 12%
Central Banks Are Not Dumping Dollars, But Adding Them Currency Composition of Official Foreign Exchange Reserves 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Yen, 6.8% Euro 27.3% U.S. Dollar 59.0% Other, 4.8% Other, 1.8% Other, 5.9% Pound, 2.1% Yen, 6.1% Pound, 2.8% Pound, 4.1% Yen, 4.1% Euro 18.3% Euro 24.1% U.S. Dollar 71.1% U.S. Dollar 61.8% 0% 1995 2000 2012 Note: 1995 Claims in Euros refers to the sum of claims in Deutschemarks, French francs, Netherland guilders, and the European Currency Unit. 2012 data is end-september. Other years is year-end data. Source: IMF Statistics Department COFER database and International Financial Statistics.
Thank You Jeffrey M. Christian Managing Partner jchristian@cpmgroup.com 30 Broad Street, 37 th Floor New York, NY 10004 www.cpmgroup.com