gold for beginners: em conference call edel tully, precious metals strategy edel.tully +44 207 567...
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Gold For Beginners: EM Conference CallEdel Tully, Precious Metals StrategyEdel.Tully +44 207 567 6755
Julien Garran, Metals and Mining Research Julien.Garran@ubs.com +44-20-7568 3540
ab
June, 2010
2ab
Gold’s Bull Run Persists
Source: Bloomberg, UBS
3ab
Assets and loan flow
Local banks lendto local consumers
& businesses
Growth picks up,Asset prices rise
Global central banks’ reserves rise
US authorities reflate
This attracts moreCapital flows
This bids up commodity prices
Raises central bankReserves at commodity
exporters
Capital flows out of the US to
emerging economies
Source: Bloomberg, UBS
4ab
Clock watching
Long; US equities, ‘growth’, bonds,
Short; Commodities,emerging markets
Source: UBS
Risk on
Risk on
Risk off
Risk off
Absolute trades Relative trades
Very positiveemergingmarketsandresources
Very negativeemergingmarketsandresources
1
42
3Reflationary boom
Long; US bonds, US dollarShort; Commodities,
emerging markets
Long; Commodities, emerging markets
Short; dollar, bonds
Long; Commodities, commoditycurrencies, emerging marketsShort; US bonds,
debtor currencies
I nflationary bust
Deflationary bust Disinflationary boom
US$s Out US$s Out
US$s I n US$s I n
5ab
2010 markets impacted by European Sovereign Risk
Eurozone sovereign (10y) spreads over Bunds
Eurozone Sovereign CDS premium (5y senior)
Source: Bloomberg, UBS
Faith in fiat currencies weakens, gold viewed as flight to quality
6ab
Gold in Multiple Currencies
Gold in alternative currencies remains popular trade • YTD: XAUEUR +31%; XUAGBP +23%; XAUUSD +11%
Source: Bloomberg, UBS
7ab
Gold and the USD – a negative relationship no more
• In May, decoupling of traditional gold and USD relationship• Previously, a stronger USD had negatively impacted gold’s direction
Source: Bloomberg, UBS
8ab
Gold versus the UBS Risk Index
• Risk averse market conditions in Q2 – fuels gold strength
Source: Bloomberg, UBS
9ab
The Path to Monetary Policy Normalisation begins…
Source: UBS FX Strategy
RBA and Norges Bank have already raised interest rates• UBS economists expect a US rate hike from September, ECB much later• Rising US interest rates (in particular) without an inflation backdrop could be
negative for gold
0.0
3.0
6.0
9.0
Pe
r C
en
t
2009
G10 Policy Interest Rates
2009 2007
BOJ
SNB
ECB
Riksbank BOC Fed
BOE
RBA
RBNZ
Norges
10ab
Gold and Inflation Expectations
QE actions of 2009 created an inflation potential…
• Prompted gold buying but those expectations now stalled• Some concerns for anticipated inflation remain, but time horizon extended
Source: Bloomberg, UBS
11ab
Emerging Markets are telling an inflation story though…
Era of declining inflation in emerging markets is over• Inflation is largely concentrated in Asia• China and India centred – gold positive
Source: Bloomberg, UBS
12ab
Fiscal Indicators – Past, Present and Predicted – inflation risk?
Government Debt as % of GDP
Government Balance as % of GDP
Source: UBS
13ab
Unstable Debt Dynamics - Potential for Inflation
QE actions of 2009 fuelled significant gold demand
Risk that persistently high levels of public debt will drive down capital accumulation, productivity growth and long term potential growth.
Long term fiscal imbalances pose significant risk of higher inflation:— Through Debt Monetisation (quantitative theory of money)
– But increasing interest rates to fight inflation equals larger debt burden— Potential to inflate away the real value of debt
BIS Paper: The future of public debt: prospects and implications— “History shows that countries that ran high public debts eventually ended up
with high inflation because governments were unwilling to pay high interest rates”
— Examples of Belgium, Spain and Italy pegging interest rates and resorting to debt monetisation post WW1
14ab
Lack of confidence in monetary system, gold’s moment?
“The main thing we miss today is universal money. Gold fulfilled this role from the time of Augustus to 1914. The absence of gold as an intrinsic part of our monetary system makes our century, the one that has just past, unique in several thousand years …
I firmly believe gold will be a part of the international monetary system sometime in the twenty first century. ”Robert MundellNobel Laureate in EconomicsAcceptance Speech—December 1999
Getting Specific on Gold Fundamentals
ab
16ab
Central Bank Gold Sales: 2009 = Historic Year
• Change in multi-decade official sector approach• Overall net sellers of 41 tonnes in 2009, but net buyers in Q2, Q3 and Q4• One of the largest fundamental shifts in this market
Source: GFMS, WGC, UBS
17ab
Makeup of Gold Official Sector Reserves
Source: WGC, UBS
Asia significantly underweight Gold
18ab
CBGA3 – Limited Sales to Date, IMF dominated
Source: WGC, UBS
19ab
Not just the official sector which has altered its gold course In 2009, gold investment demand was larger than jewellery demand
— the first occasion since 1980
Jewellery fabrication represented just 43% of global mine production
Investment angle takes up the slack— Gold price heavily dependant on investor sentiment; supply and demand
balances of limited importance
Main players this year:— Official Sector: continued IMF selling, but overall buying dominated trend— Investors: getting longer— Jewellery holders: priced out of the market— Potential for scrap supply to dampen rallies— Fundamentals of limited importance; externalities of economic forces will
drive gold
20ab
Gold Primary Mine Supply
• Mine supply typically follows a downward trend• Increased 7% in 2009 due to new projects• But Q1 2010 South African gold production fell 12.4% YoY• Henry Tax implications - expect lower mine supply
Source: GFMS, UBS
21ab
Jewellery Demand – the negative trend extends
Source: GFMS, UBS
22ab
Jewellery Sales in Traditional Hubs Decline
• Current gold price prohibitively expensive• India reflective of other regional hubs
Source: Bloomberg, UBS
23ab
As jewellery demand diminishes, investors now dominate
• Sharp surge in investment is the primary catalyst for rising gold price
Source: GFMS, UBS
24ab
Producer Hedging – Story Unchanged
• Global Hedge Book at 236 tonnes end 2009• Anticipate limited demand from this avenue going forward
Source: GFMS, UBS
25ab
Scrap Supply – record high in 2009
• With current gold price, expect scrap supply to resemble 2009• This will act to curtail rallies
Source: GFMS, UBS
26ab
Gold – Through the Investment Lens Macroeconomic forces and sovereign crisis have prompted heightened investor flow
–> significant safe haven demand for gold
Investment demand is the strongest driver — Through all investment vehicles: Futures, OTC, ETFs, Bars and Coins.
The fear trade: coin and small bar demand— Reflects concern over debt position of many industrialised nations, inside and outside
Europe
The diversification trade
The Armageddon trade
Diversification within diversification – increased enquiries about allocated / segregated metal
Underpinning the market:— Official Sector see-change: from net sellers to net buyers— Medium term threat of inflation
27ab
Intense ETF buying in May – new record high
• After a slow Q1, ETF buyers have returned in force• May inflows equal 4.8 moz, largest monthly creation since Feb 09
Source: UBS; WGC, ETFS, ZKB, and others
28ab
ETFs – Drilling down in on a daily basis
• Rolling monthly increase hit 5.34 moz on June 3, levels not seen since March 09• Closely aligned to demand for physical metal – bars and coinsSource: UBS; Bloomberg, WGC, ETFS, ZKB, and others
29ab
Comex Net Longs Get Longer
• Comex speculators /investors near record net long position • Following March’s liquidation, one way path has been followed
Source: CFTC, Bloomberg, UBS
30ab
US Mint Coin Sales - May volume highest since 1999
Replicated across Mints & UBS sales - reflection of the fear trade
Source: US Mint, Bloomberg, UBS
31ab
Gold Train continues – Short Term Thoughts
Investment demand persists— ETF inflows at all time high— Comex net longs near all time high— Persistent coin and small bar demand
Jewellery demand sluggish
Scrap supply risk— In May, this helped to stall gold’s rally; similar to Q1 2009— $1250 appears to be a significant supply point
So long as fears surrounding the world’s debt baggage remain heightened and sovereign risk concerns continues, gold should benefit
Threat of gold caught in cross-fire of another extreme de-risking event— Buy on dips
Forecast $1300/oz in one-month; $1200 in three months
32ab
Looking further out
Gold to average $1135/oz this year, $1250 in 2011— Expect new high in H2 2010— Exchange investment demand to remain firm— Jewellery demand at current prices to fall, scrap to rise— Extension of safe haven demand— Central banks as net buyers
Anticipate greater diversification flows
Inflation threat to grow
So long as fears surrounding the world’s debt baggage remain heightened and sovereign risk concerns continues, gold should benefit
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