The rise and fall of gold December 213 Bernard.Dahdah@uk.natixis.com
The rise and fall of gold Gold pillars between the start of the millennium and 28 Gold pillars during the financial crisis and until end-212 Eroding pillars (since end-212) Looking forward, which pillars remain? 2
Gold pillars between the start of the millennium and 28 CBGA agreement Producer de-hedging Fed loose monetary policy Price of gold ($/oz) 1,1 9 7 5 1,1 9 7 5 3 3 Sources : Bloomberg 1 1 9/1999 3/21 9/22 3/24 9/25 3/27 9/28 3
Central Bank Gold Agreement (CBGA) -Introduced in 1999 in response to concerns in the gold market that the Bank of England would be selling 58% of its gold reserves. -Although the price of gold initially rose sharply, the agreement did not push prices higher over the longer term. Nevertheless the CBGA served as an important floor under gold prices. 45 4 35 3 25 Price of gold ($/oz) Signature of the CBGA Sources : Bloomberg 2 1995 1996 1998 1999 21 22 45 4 35 3 25 2 6 5 4 3 2 1 European gold g sales within central bank gold g agreements (tonnes) CBGA 1 CBGA 2 CBGA 3 Limit Source: IMF International Financial Statistics and European Central Bank 2 24 28 212 4
Producer de-hedging -In the period prior to 2 producers had been keen to hedge themselves to protect against gold prices falling below their costs of production. -With gold prices rising post 2, producers started dehedging, in effect raising demand for the metal. Between 2 and 28 Barrick and Anglogold alone de-hedged around 7 tonnes of gold. 5
Fed loose monetary policy -The most important factor behind the rise in the price of gold during this period was the weakening USD. The rise of the euro and the Fed s loose monetary policy contributed strongly gy to this depreciation. US dollar currency and fed target rate 13 DXY Fed funds target rate 12 11 1 9 8 7 Sources : Bloomberg 2 22 24 26 28 21 212 7 6 5 4 3 2 1 6
Gold pillars since the financial crisis until end-212 Gold as a safe haven Quantitative easing Central bank demand Investor demand Chinese demand Indian demand Price of gold ($/oz) 2,1 1,9 1,7 1,5 1,3 1,1 9 Sources : Bloomberg 7 9/28 5/29 1/21 9/21 5/211 1/212 9/212 2,1 1,9 1,7 1,5 1,3 1,1 9 7 7
Gold as a safe haven -Initial shock of the financial crisis after the collapse of Lehman Brothers drove prices up by 22% in twenty days. -The Greek government debt crisis in April 21 drove European investors into gold. Gold prices denominated in Euros rose by 23%. -The downgrade of the US in July 211 at a time when US politicians were struggling to agree to an increase in the US debt ceiling drove the price of gold to a record high. US outstanding debt vs. debt ceiling 18 18 16 14 US debt ceiling ($tn) US outstanding debt ($tn) 16 14 12 12 1 1 8 8 6 6 4 4 2 Souces : Bloomberg 2 1976 198 1984 1988 1992 1996 2 24 28 212 8
Quantitative easing -The biggest pillar behind the rise in the price of gold since the financial crisis. -US M increased from $95bn in 27 to $3.1tn today. QE led to abnormally low interest rates which as well as creating fears of medium-term inflation and a weaker dollar also resulted in depressing forward prices of gold. Gold prices - spot vs 1yr fwd Gold spot ($/oz) Gold - 1yr fwd 1yr yield (%, rhs) 26 24 22 2 18 16 14 12 1 Sources : Bloomberg, Natixis 8 1/1 6/1 11/1 4/11 9/11 2/12 7/12 12/12 5/13 1/13 5. 4.5 4. 3.5 3. 2.5 2. 1.5 35 3.5 US monetary base ($tn) US monetary base 35 3.5 3 3 2.5 2.5 2 2 1.5 1.5 1 1.5 Sources: Bloomberg.5 5/22 3/24 1/26 11/27 9/29 7/211 5/213 9
Central bank demand -Fear of a weaker dollar drove developing country central banks away from dollar denominated assets and into gold. Meanwhile central banks from developed countries stopped selling gold. -Since 29 only 29 tonnes of gold have been sold under the CBGA (mostly from the IMF) compared with 3,884 tonnes prior to the crisis. i -Central bank holdings rose from a 5-year low (29,934 tonnes) in 28 to 31,998 tonnes in August 213. Gold holdings in central banks (tonnes) 4, Developed countries Global holdings 7, 38, Developing countries (rhs) 6,5 36, 6, 34, 5,5 32, 5, 3, 28, 4,5 26, 4, 24, Sources : Bloomberg, IMF 3,5 1982 1988 1994 2 26 212 1
Investor demand -Prior to the financial crisis investor demand for gold typically represented only 8-1% of global demand for the metal. -From the beginning of the financial crisis until the end of 212 1,7 tonnes of gold were added to physically-backed ETPs bringing total holdings to 2,63 tonnes at the end of 212. -The total amount held in ETPs was equivalent to 9% of 212 s mined output and 6% of total output. US Mint sales of precious metal coins ( oz) Total holdings of gold in physically backed ETPs 25 3, Total holdings (tonnes) 3, 2 2,5 2,5 15 Sources : US Mint 1 5 1/21 6/23 2/25 1/26 6/28 2/21 1/211 6/213 2, 1,5 1, 5 Sources : Bloomberg 25 27 29 211 213 2 2, 1,5 1, 5 11
Chinese demand -With negative real interest rates on Chinese bank deposits (between 21 and 211) and government policies aimed at depressing real-estate prices Chinese investors found themselves with few attractive investments. -Precious metals gained focus with a range of new precious metal exchanges and investment products. -Between 28 and end 212 rural income rose by 7%. As urban and rural demand rose, so gold jewellery outlets expanded to a record amount (over 7,). 25 Chinese imports of gold from Hong kong (tonnes) Imports from Hong kong (tonnes) Price of gold ($/oz, Rhs) 2, 2 1,8 15 1,6 1 1,4 5 1,2 1, 9/9 3/1 9/1 3/11 9/11 3/12 9/12 3/13 9/13 Sources : Hong Kong Census and Statistics dept, Bloomberg, Reuters 7 5 3 1 Chinese real interest rate China household savings deposits (1year) Chinese CPI (yoy, %) Chinese real interest rate -1/28 7/29 4/21 1/211 1/211 7/212 4/213-3 Sources : Bloomberg 7 5 3 1-1 -3 12
Indian demand -Between 29 and 21, Indian demand for gold grew considerably. In 21 the country accounted for around 22% of global demand for gold. -GDP growth peaked in 21 at 11%, with the rupee appreciating by 4% that year. Indian rupee India real GDP (yoy %) 6 Indian rupee 6 56 56 52 52 48 48 44 44 Sources : Bloomberg 4 4 1/28 1/29 1/21 1/211 1/212 12 12 11 11 1 1 9 9 8 8 7 7 6 6 5 5 4 4 3 Sources : Bloomberg 3 2 2 1/27 6/28 2/29 1/29 6/21 2/211 1/211 13
Eroding pillars (since end-212) Central banks Investment demand Indian demand Tapering and the US economy Price of gold ($/oz) 1,9 1,9 1,7 1,7 1,5 1,5 1,3 1,3 Sources : Bloomberg 1,1 1,1 11/212 2/213 5/213 8/213 11/213 14
Central banks -Between 29 and 212 central bank purchases remained elevated, peaking at 334 tonnes in 21 (net of Turkey). -As central banks reached their target holdings so their purchases slowed down. -The first eight months of this year have experienced the slowest central bank additions since the financial crisis. -Cyprusremindedusthatcentralbankscouldpotentiallyturn back to being a source of supply. Gold holdings in central banks (tonnes) Price of gold ($/oz) 32, 31,8 Global holdings 32, 31,8 1,9 1,7 Cyprus intends to sell gold 1,9 1,7 31,6 31,6 1,5 1,5 31,4 31,4 1,3 1,3 31,2 31,2 Sources : Bloomberg Sources : Bloomberg, IMF 31, 31, 1,1 1,1 7/211 1/212 7/212 1/213 7/213 11/212 2/213 5/213 8/213 11/213 15
Investment demand -ETPs fundamentally altered the dynamics of supply and demand, allowing a wide range of investors direct access to physical gold but investors are not always netbuyers. -From a record high of 2,63 tonnes at the beginning of the year, ETPs shifted from a source of demand to a source of supply. -Physically-backed ETPs have released around 76 tonnes since the beginning of the year. Total holdings of gold in physically y backed ETPs 3, Total holdings (tonnes) 2,5 2, 1,5 1, 5 Sources : Bloomberg, 25 27 29 211 213 3, 2,5 2, 1,5 1, 5 16
Indian demand -Indian GDP growth slowed to a low of only 4.4% in 213 Q1. -Since the end of 21 the rupee has depreciated by over 4%. -Government restrictions on imports of gold (tariffs, re-export requirements). -Indian imports of gold dropped to record lows in August- September. India- Gold imports India- imports of gold (tonnes) 18 15 12 9 Price of gold ( Rs/oz, rhs) 5, 6, 7, 6 8, 3 9, 1, 1/1 7/1 1/11 7/11 1/12 7/12 1/13 7/13 Sources : Natixis, Bloomberg 17
Tapering & the US economy -The price of gold dropped by 5.5% in one week after it was revealed that the US budget deficit was falling faster than expected. -Fed s announcement in June about the intention of withdrawingqetriggereda13%dropinthepriceofgoldin June. US budget deficit Gold prices and 1year yield US budget deficit (as % of nominal GDP) 9/27 9/28 9/29 9/21 9/211 9/212 9/213-2 -2 19 Gold spot ($/oz) 1yr yield (%, rhs) 3.5-4 -4 17-6 -8-1 -12 Sources : Bloomberg -6-8 -1-12 15 13 11 Sources : Bloomberg, Natixis 11/12 4/13 9/13 2.5 1.5 18
Looking forward: which pillars remain? Central banks Indian demand Chinese demand 19
Looking forward: which pillars remain? Central banks -Deep dissatisfaction with US politicians and the potential for a US default if debt ceiling cannot be raised. -Potential for gold to play a greater role within banking system, eg Turkish use of gold as part of banks capital. -Dynamic hedging of foreign exchange reserves. Indian demand -Strong cultural attachment to gold. -An improvement in the trade balance, currency, economy could lead to a removal of import tariffs and restrictions. -But some structural changes may be less supportive, eg deregulation of banking system aimed at offering more universal banking to rural communities, issuance of index-linked bonds to protect versus inflation. 2
Looking forward: which pillars remain? Chinese demand: -Need to look very carefully at causes of strength in Chinese demand for gold. Positives -Rising incomes, both rural and urban. -Expanding jewellery outlets. Negatives -As investors become more wealthy and more sophisticated, will deregulation of the financial system offer a wider range of attractive investment products to investors who are currently buying gold? -If foreign exchange reserves are capped as the central bank scales back FX intervention, does that mean that gold purchases will be scaled back as well? 21
A new pillar? Producers -Eating into the supply curve -Rising cash costs of production -Will the gold industry start to resemble the platinum industry? $/oz Gold supply curve 14 12 1 8 6 4 2 Cash cost (net of by products, $/oz) Sources : Bloomberg, Natixis 5 1 15 2 25 3 Tonnes 22
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