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What Went Wrong in 2013? An orgy of ETF sales – 881 tonnes in 2013! 10 Change from previous week, tonnes 0 -10 The Gold Price Outlook -20 Bullish/Bearish Factors -30 -40 -50 -60 September 16, 2014 Presented at the Denver Gold Forum 2014 | DUNDEE CAPITAL MARKETS What Went Wrong in 2013? What Went Right in 2013? Investors went to equities …!! Chinese net imports from HK set record! 2100 250 2225 2000 2100 Gold S&P 500 1850 1700 1725 1600 1600 1500 1475 1400 1350 1300 1225 1200 1100 1100 Massive negative correlation in 2013: -.88 1000 900 Chinese Gold Imports from Hong Kong 1975 1800 800 600 2013: 1158 tonnes 150 2009 2010 2011 2012 2013 50 975 0 850 725 -50 | DUNDEE CAPITAL MARKETS Chinese Gold Re-Exports to Hong Kong (monthly – tonnes) 475 Last month: July 2014 -100 Jan-10 2014 Jan-11 Jan-12 Jan-13 Jan-14 Source: Thomson Reuters Datastream, Hong Kong Census, DCM Economics Source: Thomson Reuters Datastream, London Bullion Market Association 3 2012: 557 tonnes 100 350 2008 (monthly – tonnes) 200 600 Daily data Last date: September 12, 2014 700 2007 2013-Q4 2013-Q3 Source: Bloomberg, World Gold Council, DCM Economics 2 1900 2013-Q2 2013-Q1 -70 Dr. Martin Murenbeeld 4 | DUNDEE CAPITAL MARKETS 1 Bearish: (1) Fed Ends QE Bearish Factors for 2014-15 The Fed balance sheet must inevitably decline … 4800 The Fed must inevitably tighten policy 1. • • Total assets have quintupled! 4200 The Fed is currently “tapering” QE will end late 2014 And the Fed will raise rates in 2015 • Total Assets $ billions 4500 3900 3600 3300 3000 US dollar will remain firm in 2014-15!? The world economy is sluggish 2. 3. 2400 • • 5. 1500 900 Currency Swaps 600 Other Assets US Treasuries 300 Jan-08 Jun-08 Dec-08 May-09 Nov-09 Apr-10 Oct-10 Mar-11 Sep-11 Feb-12 Aug-12 Jan-13 Last date: September 10, 2014 6 | DUNDEE CAPITAL MARKETS Bearish: (1) Fed Ends QE US real rates rose in 2013 – “taper tantrum” … 5 US real short term interest rate 2000 -1.0 1750 -0.5 3 29% 1500 2 1 0 0.0 GOLD Real rates not above zero before 2016 …?? Real rates below zero are very positive for gold -1 Jul-13 Dec-13 Jun-14 Nov-14 Source: Federal Reserve And real rates will have to rise - but before 2016? Gold prices often stall when real rates rise above 2%! Liquidity to Banks 1200 Bearish: (1) Fed Ends QE 4 Agency Debt Securitization Market (support for mortgages) 1800 Equity markets will continue to draw investment interest away from gold Investors still have gold to sell – and “technicals” bearish 4. Commercial Paper Market 2100 Gold typically weakens during recessions Inflation pressures remain subdued There is often a need for “liquidity” • Other Credit Extensions 2700 1250 0.5 1000 1.0 750 1.5 500 2.0 -2 -3 250 -4 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 00 15 Source: US Bureau of Labor Statistics, Federal Reserve 7 Last month: August 2014 0 -5 | DUNDEE CAPITAL MARKETS 2.5 10-year TIPS Last month: August 2014 01 02 03 04 05 06 07 08 09 10 11 12 13 3.0 14 Source: LBMA, US Bureau of Labor Statistics, Federal Reserve 8 | DUNDEE CAPITAL MARKETS 2 Bearish: (1) Fed Ends QE Bearish: (1) Fed Ends QE But gold may have fully discounted rising yields …! 60 Model: gold has fully discounted Fed actions!? -1.0 60 -0.5 50 10-year TIPS 48 GOLD % year-on-year 36 Correlation = .67 GOLD % year-on-year 40 0.0 30 24 0.5 12 1.0 0 1.5 -12 2.0 20 10 0 -24 Model -10 2.5 -20 3.0 -30 Real 10-year yields US dollar index - change Last month: July 2014 Last month: August 2014 -36 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 00 02 04 06 08 10 12 14 Source: US Bureau of Labor Statistics, Federal Reserve Source: London Bullion Market Association, Federal Reserve, Bureau of Labor Statistics, WSJ 9 | DUNDEE CAPITAL MARKETS 10 | DUNDEE CAPITAL MARKETS Bearish: (1) Fed Ends QE Bearish: (2) Dollar Strengthens What do the Models say specifically? The dollar rises … others devalue against dollar 65 2000 Corr: -.90 IMPACT ON GOLD OF 100-POINT RISE*** MODEL 1969-2014 REAL INTEREST RATE* US DOLLAR** -5.656% -1.219% -3.839% -1.235% (R-squared = .362) MODEL 1989-2014 (R-squared = .475) MODEL 2000-2014 -1.691% -1.513% (R-squared = .454) *Difference between 10-year Treasury yield and consumer price inflation (y-o-y) ** Dollar index includes Cdn$, Yen, Pound, Euro (pre-1999: DM, Lira, FF) ***A 100-point rise in the real rate is 100 basis points ***A 100 point rise in the US dollar is a rise in the index from, say, 75.00 to 76.00 Assuming a severe scenario, including a rise of 250 basis points in real interest rates and a 1000 point rise in the US dollar index, the models suggest that gold may decline anywhere from 18% to 29%! Corr: -.84 70 Corr: -.77 Corr: -.48 Corr: -.29 Corr: -.80 Corr: -.58 Corr: -.38 to date 1750 US Dollar (eight currencies) 75 1500 80 1250 85 1000 Gold 90 750 Correlation since 2006: -.80 But gold has already declined by nearly 30% …??? Latest week: September 12, 2014 95 07 08 09 10 11 12 13 14 500 15 Dollar Index includes: Canadian dollar, Aussie dollar, euro, yen, Swiss Franc, pound, rupee, RMB/yuan Source: Wall Street Journal, London Bullion Market Association, Dundee Capital Markets calculations | DUNDEE CAPITAL MARKETS 12 | DUNDEE CAPITAL MARKETS 3 Bearish: (2) Dollar Strengthens Bearish: (3) Global Economy Sluggish Gold/US dollar correlations always negative Recessions always a major headwind for gold … 50 -35 Gold - % 2000 US Dollar - % 40 1900 -28 Gold daily p.m. fix Data through September 12, 2014 1800 1700 30 -21 Correlation: -0.59 Correlation: -0.64 20 1600 US recession 1500 -14 10 -7 0 0 37% 1400 1300 1200 1100 Eurozone Recession/Depression 1000 -10 30% 900 7 800 -20 US dollar index US dollar index (four currencies) (eight currencies) 700 14 600 -30 500 21 82 84 86 88 90 92 94 96 98 00 13 13 13 13 13 12 Jan 07 Jul 07 Feb 08 Sep 08 Apr 09 Nov 09 Jun 10 Jan 11 Aug 11 Mar 12 Oct 12 Apr 13 Nov 13 Jun 14 14 Source: London Bullion Market Association Source: Wall Street Journal, Dundee Capital Markets calculations 13 Last quarter: 2014-Q2 | DUNDEE CAPITAL MARKETS 14 | DUNDEE CAPITAL MARKETS Bearish: (3) Global Economy Sluggish Bearish: (3) Global Economy Sluggish IMF forecast: 3.4%-2014 and 4.0%-2015 6 Commodities decline when world growth < 4% 8 18 World GDP Billion US$(%) 5 14 4 CRB and BoC commodity price indices are inflationadjusted and highly correlated with world growth China GDP (%) 16 7 12 40 30 CRB Index 10 3 6 8 20 Bank of Canada Index 2 6 (e) 1 4 5 10 4 0 3 -10 2 0 0 -1 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 -2 80 12 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 5 4 India GDP (%) 10 2 6 1 2 (e) 3 8 0 4 -20 1 -30 World GDP % -1 0 -2 2 -40 -3 -4 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 US recession EU GDP (%) 0 -2 -1 -5 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 -50 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Source: IMF World Economic Outlook, July 2014 Source: IMF, Bank of Canada, Thomson Reuters Datastream, DCM Economics 15 | DUNDEE CAPITAL MARKETS 16 | DUNDEE CAPITAL MARKETS 4 Bearish: (3) Global Economy Sluggish Bearish: (3) Global Economy Sluggish Copper prices weakened in recent quarters … 500 And commodity prices generally are down … 470 180 US recessions 150 430 400 120 390 350 90 Nov 2001 60 250 30 200 0 150 50 90 92 94 96 98 00 02 04 06 08 10 12 350 12 310 0 270 -12 -24 Thomson Reuters/Jeffries CRB Index -36 Last month: August 2014 150 -90 90 14 92 94 96 98 00 Source: Wall Street Journal Source: Wall Street Journal 17 24 190 -60 Last month: August 2014 | DUNDEE CAPITAL MARKETS 18 04 06 08 10 12 -48 14 CRB INDEX: 19 commodity prices - Energy 39%, Agriculture 41%, Precious Metals 7%, Industrial Metals 13% Bearish: (3) Global Economy Sluggish Headline inflation is going nowhere fast …! Scrap supply elevated when liquidity needs rise 2000 Last month: July 2014 % YoY 02 | DUNDEE CAPITAL MARKETS Bearish: (3) Global Economy Sluggish 7 36 Nov 2001 230 -30 Copper US cents/lb China Joins WTO % year-over-year % year-over-year 300 100 48 US recessions China Joins WTO 450 tonnes 6 Great Recession 1800 Headline CPI 5 Recycled/Scrap Gold 1600 Core CPI 4 1400 3 Asian Financial Crisis 1200 2 1000 1 800 0 Fed’s PCE 600 US recessions -1 400 -2 200 -3 90 92 94 96 98 00 02 04 06 08 10 12 0 14 1986 Source: US Bureau of Labor Statistics, US Bureau of Economic Analysis 19 | DUNDEE CAPITAL MARKETS 1990 1994 1998 2002 2006 2010 2014 Source: World Gold Council “Gold Demand Trends - Full Year 2013” Thomson Reuters GFMS 20 | DUNDEE CAPITAL MARKETS 5 Bearish: (3) Global Economy Sluggish Bearish: (4) Equity Markets Rally Further India: import barriers to preserve liquidity Monetary factors also help equities! 175 2100 INDIA Gold Imports 150 2175 2000 1900 (monthly – tonnes) 125 100 12-month MA 75 2050 Gold S&P 500 1925 1800 1800 1700 1675 1600 1550 1500 1425 1400 1300 1300 1175 1200 1050 1100 50 925 Monetary Reflation! 1000 800 900 25 675 800 550 Daily data Last date: September 12, 2014 700 0 600 J a n- 0 3 J a n- 0 4 J a n- 0 5 J a n- 0 6 J a n- 0 7 J a n- 0 8 J a n- 0 9 J a n - 10 J a n - 11 J a n - 12 J a n - 13 Last month: August 2014 Source: Thomson Reuters Datastream, DCM estimates 21 2008 2009 2010 2011 2012 2013 2014 Source: Thomson Reuters Datastream, London Bullion Market Association | DUNDEE CAPITAL MARKETS 22 | DUNDEE CAPITAL MARKETS Bearish: (5) Gold for Sale Bearish: (5) Gold for Sale COMEX “specs” net-long position still significant 300 425 300 2007 J a n - 14 ETF holdings still substantial …! 2750 36 Weekly data Last date: September 2, 2014 Gold Price 2500 (quarterly % change) 240 24 180 12 2633 Tonnes Tonnes Last date: September 11, 2014 2250 2000 120 0 1250 1000 -12 “Specs” net long Other 1500 607.7 tonnes 295.9 tonnes 60 1715 Tonnes 1750 SPDR Gold ETF 750 0 -24 -60 -36 500 250 2007 2008 Source: US CFTC, Comex 23 | DUNDEE CAPITAL MARKETS 2009 2010 2011 2012 2013 2014 0 Apr-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Source: ExchangeTradedGold.com, Bloomberg 09/02 Net-Long: 301 Tonnes 24 | DUNDEE CAPITAL MARKETS 6 Bearish: (5) Technical Picture Bullish Factors for 2014-15 1950 Gold - $/oz $1895 1850 $1795 1. $1694 2. $1614 3. $1540 4. 1750 1650 1550 50-day MA 1450 200-day MA $1469 1350 Death Cross! 1250 $1419 $1385 $1340 5. $1242 6. $1192 7. 1150 8. 1050 ETF “supply” down dramatically in 2014-15 Asian physical demand will continue to expand Central banks will continue to buy gold Global debt crisis will require ongoing monetary reflation Global imbalances will remain unresolved until the dollar declines significantly The commodity cycle will run many more years Geopolitical crises will multiply Gold price not “expensive” by normal measures Last date: September 16, 2014 950 2010 2013 2012 2011 2014 Source: London Bullion Market Association 25 | DUNDEE CAPITAL MARKETS Bullish: (1) Gold Supply Bullish: (1) Gold Supply Massive sales not to be repeated in 2014-15 Indeed, supply to jewelers/investors unlikely to rise 20 Change from previous week, tonnes 1500 10 Net Mine Supply Billion US$ ( supply less dehedging) 1500 Net Mine Supply + Scrap Supply Tonnes Tonnes Rising Modestly 1200 1200 0 -10 -20 -48 tonnes 2014 to date -30 900 900 600 600 300 300 0 Stable 0 2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014 Net Mine Supply + Scrap – CB Demand 1500 -40 -50 -869 tonnes 2013 (e) Tonnes 1200 Lower gold prices will curtail some mine output! 900 -60 2013-Q1 2013-Q2 2013-Q3 2013-Q4 2014-Q1 600 2014-Q2 2014-Q3 2014-Q4 Stable -70 300 0 2009 Source: Bloomberg, DCM Economics 27 | DUNDEE CAPITAL MARKETS 28 2010 2011 2012 2013 2014 | DUNDEE CAPITAL MARKETS 7 Bullish: (2) Consumer Demand* Bullish: (2) India Consumer Demand* India/China becoming richer … LT demand positive Demand down in 2014-H1 (YoY) but trend positive 1400 1300 400 tonnes RoW China India 1200 1100 350 300 1000 900 250 800 700 200 600 150 500 400 100 300 51% 200 50 100 0 2007-Q1 0 09-Q1 10-Q1 11-Q1 12-Q1 Source: World Gold Council “Gold Demand Trends – Second Quarter 2014” data tabulated by Thomson Reuters GFMS 29 13-Q1 14-Q1 *Consumer demand = jewelry plus bar/coin/medal investment demand 2008-Q1 2009-Q1 2010-Q1 2011-Q1 2012-Q1 Source: World Gold Council “Gold Demand Trends – Second quarter 2014” data tabulated by Thomson Reuters GFMS 30 | DUNDEE CAPITAL MARKETS 2013-Q1 2014-Q1 *Consumer demand = jewelry plus bar/coin/medal investment demand | DUNDEE CAPITAL MARKETS Bullish: (2) China Consumer Demand Bullish: (2) China Consumer Demand Down in 2014-H1 - but trend very positive Shanghai deliveries in clear uptrend! 400 80 350 70 300 60 250 50 200 40 150 30 100 20 50 10 Shanghai Gold Deliveries 0 2007-Q1 (tonnes weekly totals) 12-week MA 0 2008-Q1 2009-Q1 2010-Q1 2011-Q1 2012-Q1 2013-Q1 09 2014-Q1 10 11 12 13 14 Date: Sept 12, 2014 Source: World Gold Council “Gold Demand Trends – Second quarter 2014” data tabulated by Thomson Reuters GFMS 31 | DUNDEE CAPITAL MARKETS Source: Shanghai Gold Exchange, Sharelynx Gold, DCM Economics *Consumer demand = jewelry plus bar/coin/medal investment demand 32 | DUNDEE CAPITAL MARKETS 8 Bullish: (3) CB’s Buying Gold Bullish: (2) China Consumer Demand CB demand will continue for years … Cumulative Shanghai deliveries on trend! 200 2400 tonnes 2000 150 Shanghai Gold Deliveries (cumulative tonnes) 1600 100 1200 50 800 0 400 -50 0 -100 Central Bank Gold Purchases 09 10 11 12 13 14 09-Q1 10-Q1 11-Q1 12-Q1 13-Q1 14-Q1 Date: Sept 12, 2014 Source: Shanghai Gold Exchange, Sharelynx Gold, DCM Economics 33 Source: World Gold Council “Gold Demand Trends - First Quarter 2014” Thomson Reuters GFMS 34 | DUNDEE CAPITAL MARKETS | DUNDEE CAPITAL MARKETS Bullish: (3) CB’s Buying Gold Bullish: (3) CB’s Buying Gold Global FX reserves are excessive … (62% in $’s) Other currencies vying to become reserve currencies Foreign Exchange Reserves (countries over $100 bn) bn$ China 3993.2 India Japan 1210.0 Algeria Saudi Arabia 741.7 Mexico Switzerland 505.5 Thailand Taiwan 423.7 Malaysia Russia 409.6 Turkey Brazil 367.0 Indonesia Korea 355.8 Libya Hong Kong 320.8 TOTAL bn$ 289.3 191.6 181.1 160.8 127.3 109.9 105.4 104.3 9596.9 Addendum: Fuel Exporters $1839 bn A number of central banks like the fact that gold is not a liability of the Federal Reserve/US Treasury RUSSIA CHINA OIL EXPORTERS China wants the CNY to be used more actively in Chinese and SE Asian trade; indeed many countries want the US dollar to be replaced in global trade and global reserves. To encourage other countries to hold CNY balances (and as reserve currency) the CNY must have: • • Deep capital markets, which allows the CNY to be readily banked around the world and therefore acceptable for transactions Some form of guarantee to enhance acceptability in the initial phase of internationalization (historically this included some form of gold convertibility) Source: IMF International Financial Statistics, July 2014 35 | DUNDEE CAPITAL MARKETS 9 Bullish: (4) Global Debt Crisis Bullish: (4) Global Debt Crisis Entitlements are killing Western economies … 70 60 And developed economies are aging … 80 US Budget: Percent of total outlays Population Ratio: 65+/15-64 Entitlements Japan Western Europe Canada US 70 60 50 50 “Super-aged” 40 40 30 Defense 30 Interest on Debt 20 20 10 10 Other 0 Annual data (last year 2013) 1970 1975 0 1980 1985 1990 1995 2000 2005 2010 2010 Source: Bureau of Economic Analysis 37 2015 2020 2030 2050 Source: United Nations Department of Economic and Social Affairs Source: United Nations Department of Economic and Social Affairs | DUNDEE CAPITAL MARKETS 38 | DUNDEE CAPITAL MARKETS Bullish: (4) Global Debt Crisis Bullish: (4) Global Debt Crisis Which leads to ever higher debt/GDP ratios … Unless growth and inflation can be boosted …! 250 Estimates for 2013 General Government Debt % of GDP 200 Primary Nominal Balance GDP Growth A B Greece Japan Spain Ireland Portugal US Canada Italy Germany 150 2003 2009 2015 Over 90% spells trouble (Reinhart/Rogoff) 100 50 Greece Italy Portugal US Spain France UK -5.8 1.0 -0.6 0.1 0.3 3.4 3.3 -0.4 2.7 A+B-C 5.0 0.2 0.7 0.5 1.6 1.7 1.6 1.0 0.2 -9.3 -6.8 -5.6 -3.8 -2.0 -2.4 -1.0 0.6 4.1 Sources: Primary Balance - IM F Fiscal M onitor, April 2014 Nominal GDP - IM F World Economic Outlook, April 2014 Yields as of September 5, Thomson Reuters DataStream (Greece: April 10 bond sale) 0 Japan 1.5 -7.6 -4.3 -3.4 -0.7 -4.1 -2.6 2.0 1.7 5-year Bond Yield C Canada For debt ratio to decline A+B > C ! As it stands only Germany will really reduce its Debt/GDP ratio in 2014 ! RED: Debt/GDP ratio to rise further! Source: IMF Fiscal Monitor April 2014 39 | DUNDEE CAPITAL MARKETS 40 | DUNDEE CAPITAL MARKETS 10 Bullish: (4) Global Debt Crisis Bullish: (4) Global Debt Crisis But growth appears to be in secular decline …! What will governments do about debt/entitlements? 7 Average US real GDP growth rate Government Choices: 6 Robert Gordon: “There is no guarantee that growth will continue indefinitely” 5 Austerity: • • 4 3 2 Cut services and raise taxes Deflate and accept “depression” Bad for gold Reflation: 1 • Go for growth: Inflate-devalue • Default/financial repression 0 1940-49 1950-59 1960-69 1970-79 1980-89 1990-99 2000-09 2010-13 Good for gold Source: Bureau of Economic Analysis Robert Gordon, NBER – WP 18315, August 2012 41 42 | DUNDEE CAPITAL MARKETS | DUNDEE CAPITAL MARKETS Bullish: (4) Global Debt Crisis Bullish: (4) Global Debt Crisis All balance sheets expanding – ECB soon too! Eurozone in desperate need of growth/inflation 1000 110 January 2000 = 100 105 800 People's Bank of China Bank of England* Federal Reserve European Central Bank Bank of Japan 600 REAL GDP Q4 2007 = 100 100 United States 95 400 Eurozone 90 Set to 100 200 85 Last quarter: 2014-Q2 Last month: July 2014 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 80 14 00 *Bank of England June 2706 = 130 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Source: US Bureau of Economic Analysis, Eurostat, DCM Economics calculations Source: Thomson Reuters Datastream 43 | DUNDEE CAPITAL MARKETS 44 | DUNDEE CAPITAL MARKETS 11 Bullish: (4) Global Debt Crisis Bullish: (4) Global Debt Crisis Liquidity is important to gold … Gold often rises and falls with liquidity … 1850 60 16.5 Oversold in 2013? 1700 15.0 1550 13.5 1400 12.0 1250 10.5 1100 9.0 950 % % 48 42 35 Global Liquidity Gold 36 28 24 21 12 14 7.5 Global Liquidity 800 Gold 650 (month average) 0 6.0 4.5 500 7 -12 0 Oversold in 2013? 3.0 Last month: Gold – August 2014 Liquidity – June 2014 350 200 -24 1.5 84 86 88 90 92 94 96 98 00 12 12 12 12 10 12 82 14 Global Liquidity: FX Reserves + US MBase Source: London Bullion Market Association, IMF International Financial Statistics, Federal Reserve 45 Last month: August 2014 -36 0.0 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 -14 14 Global Liquidity: FX Reserves + US MBase Source: London Bullion Market Association, IMF International Financial Statistics, Federal Reserve | DUNDEE CAPITAL MARKETS 46 | DUNDEE CAPITAL MARKETS Bullish: (5) Dollar Fundamentally Overvalued Bullish: (4) Global Debt Crisis US dollar in long-term downtrend … … Liquidity in one form or another … 60 % 48 60 150 48 140 US recession Global Liquidity G-6 money supply - M2 36 -7 Correlation: .62 US Dollar Indices Fed Major (March 1973=100) Murenbeeld-EFXR0 (Jan 1999=100) Murenbeeld-NEFXR (Jan 1999=100) 130 36 120 24 24 12 12 110 100 0 0 -12 -12 -24 Gold Gold oversold in 2013? Correlation: .49 Last month: August 2014 -36 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 80 -24 70 -36 60 Last month: August 2014 73 14 | DUNDEE CAPITAL MARKETS 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 Source: Wall Street Journal, Federal Reserve, DCM Economics G-6 M2 Money Supply: US, China, EU, Japan, UK, Canada Source: London Bullion Market Association, IMF International Financial Statistics, Federal Reserve 47 ?? 90 48 | DUNDEE CAPITAL MARKETS 12 Bullish: (5) Dollar Fundamentally Overvalued Bullish: (5) Dollar Fundamentally Overvalued The US trade deficit has declined recently … … on back of rising US energy production 0 0 0 $billion US trade balance -10 (Goods and Services) -20 -30 -100 -50 -200 -100 12-month total Million barrels/year -500 Balance 12 mo total -1000 -150 -300 -40 0 Million barrels/month -1500 6.2 million barrels/day -200 -2000 -250 -2500 -300 -3000 -350 -3500 -400 -50 -500 -60 -600 -70 12-month total -700 -80 (goods only) -800 -450 -900 -500 -400 -4000 12.7 million barrels/day -4500 $billion Last month: July 2014 -90 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Last month: June 2014 -5000 14 82 Source: US Census Bureau 49 50 0 0 Billion US$ -100 -200 -30 -300 -5 Billion US$ -40 -400 -50 -500 -60 World 98 -90 -900 Billion US$ -20 World -100 -15 100 720 90 630 80 540 -150 125 450 -20 -200 100 360 75 270 -25 -250 50 25 China -30 12-month total bn$ -35 -300 -350 0 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 0 bn$ -4 08 10 12 14 0 -1 bn$ 0 Billion US$ -20 -3 -30 01 04 07 10 160 120 80 90 10 -50 40 160 -100 -6 -60 30 120 20 80 10 40 -16 -8 -160 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Source: Thomson Reuters Datastream -7 -9 50 -70 Japan 12-month total bn$ -10 200 EU -80 -90 0 -100 0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 98 01 04 07 Source: Thomson Reuters Datastream Last month: July 2014 52 01 04 07 18 10 13 4-quarter total bn$ (e) 15 60 50 240 -40 -140 0 98 bn$ 280 -5 -120 40 0 95 -4 12-month total bn$ 240 20 -80 -10 280 180 320 60 360 320 US 60 4-quarter total bn$ bn$ 70 4-quarter total bn$ Billion US$ 70 13 80 -10 -2 98 400 bn$ 200 -60 | DUNDEE CAPITAL MARKETS 06 30 -8 EU 04 40 0 95 -40 -14 02 50 -6 -12 00 810 4-quarter total bn$ Billion US$ 150 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 51 96 175 -700 -800 bn$ 200 -600 12-month total bn$ -80 0 94 225 -50 -10 -2 92 While China has huge trade surpluses … 0 bn$ -20 -70 90 Bullish: (5) RMB Fundamentally Undervalued But deficits with most countries much too large … -10 88 | DUNDEE CAPITAL MARKETS Bullish: (5) Dollar Fundamentally Overvalued bn$ 86 Source: US Energy Information Administration | DUNDEE CAPITAL MARKETS 0 84 10 13 12 40 Japan 9 30 6 20 3 10 0 0 95 98 01 04 07 10 13 Last quarter: 2014-Q1 | DUNDEE CAPITAL MARKETS 13 Bullish: (5) Dollar Fundamentally Overvalued Bullish: (6) Commodity Cycle Some Asian currencies undervalued by 30%+ The shortest copper cycle lasted 16 years* 700 Dollar Overvaluation Country 48.2 42.2 34.6 34.1 33.2 29.8 28.3 27.8 25.4 24.1 23.1 20.3 20.1 19.7 19.3 17.3 16.8 Singapore Taiwan Sweden Hong Kong Switzerland China Malaysia Japan Euro area Philippines Korea Israel Czech Thailand Norway Saudi Arabia Hungary Country Dollar Overvaluation 15.9 15.7 11.7 8.2 7.3 4.8 2.7 2.0 1.1 0.0 0.0 ‐1.6 ‐3.7 ‐9.2 ‐11.0 ‐11.2 ‐17.9 UK Russia Poland Indonesia Venezuela Chile Australia Argentina India United States Mexico Canada South Africa Turkey New Zealand Colombia Brazil Shortest cycle – 16 years 650 This table is based on the PIIE’s FEER analysis, modified to target zero current account balances. 600 Real Copper Price 550 2013 cents/lb 500 450 Some Asian currencies would appear to be seriously undervalued … 400 350 300 250 … even the Euro is undervalued by some 25% against the US dollar! 200 150 10-year MA 100 50 1850 1875 1900 1925 1950 1975 2000 *despite reversals – which are common in all long cycles Source: PIIE Estimates of Fundamental Equilibrium Exchange rates, May 2014; Reworked by DCM Economics to force zero current account balances Source: Wall Street Journal, DCM Economics 53 | DUNDEE CAPITAL MARKETS 54 | DUNDEE CAPITAL MARKETS Bullish: (6) Commodity Cycle Bullish: (6) Commodity Cycle The shortest gold cycle lasted 10 years And log data suggests a correction was overdue … 1800 7.50 1600 7.25 LN (Real Gold Price) Real Gold Price 1400 Shortest bull-cycle – 10 years 2013$/ounce 1200 1000 Shortest bull-cycle – 10 years 6.75 US Civil War 6.50 Correction 800 6.25 600 6.00 400 Correction Gold set at $35 5.75 10-year MA 200 10-year MA 5.50 0 5.25 1800 1825 1850 1875 1900 1925 1950 1975 2000 1800 Source: Thomson Reuters Datastream, LBMA, DCM Economics 55 2013$/ounce 7.00 | DUNDEE CAPITAL MARKETS 1825 1850 1875 1900 1925 1950 1975 2000 Source: Thomson Reuters Datastream, LBMA, DCM Economics 56 | DUNDEE CAPITAL MARKETS 14 The 1970 Bull Market - Price Corrections Bullish: (7) Geopolitical 900 The biggest geopolitical crisis to date … 850 London Daily PM Fix 800 Bull market ends 900 IRAN 700 800 Geopolitical Crisis! 600 700 about $400 (or 100%) Cyclical peak in gold US recession 500 400 600 -43% Mid-Cycle Correction 482 426 500 -17% (more than 86 weeks) 354 300 Iranian hostage crisis and Russia in Afghanistan 400 243 195 200 180 127 100 70 154 -28% 90 -29% -14% 60 190 104 -47% 193 -20% -12% 300 168 137 129 -11% Gold Price: Jul 30/79 to May 29/80 200 1979 0 70 71 72 73 74 75 76 77 78 79 80 81 1980 1981 Source: London Bullion Market Association Source: London Bullion Market Association 57 | DUNDEE CAPITAL MARKETS 58 | DUNDEE CAPITAL MARKETS Bullish: (7) Geopolitical Bullish: (7) Geopolitical But there have been others … Some boosted gold by more than 10% - most not! 420 390 Oil peaks at $40 410 400 390 Iraq invades Kuwait IRAQ 380 Counterstrike commences; US bombs Iraq IRAQ 370 360 about $40 350 340 about $70 AL QUEDA 330 380 320 310 370 360 350 340 300 about $30 US attacks Iraq on 3/20 290 280 Gold Price: Jul 2/90 to Jun 28/91 1990 | DUNDEE CAPITAL MARKETS Gold Price: Jun 23/01 to May 8/03 270 260 1991 2001 2002 2003 Source: London Bullion Market Association Source: London Bullion Market Association 59 Attack on WTC about $25 9/11 60 | DUNDEE CAPITAL MARKETS 15 Bullish: (7) Geopolitical Bullish: (8) Gold Not "Expensive" The Ukraine/Crimea crisis added $100 in 2014-Q1 The NASDAQ was a real bubble … not gold … 1600 1400 Ukraine/Crimea 1400 1350 NASDAQ 1990-2009 1200 SILVER: 2001/11/23 to date GOLD: 2001/03/30 to date 1000 1300 800 1250 600 about $100 Everything set to 100 400 1200 200 Gold Price: Oct 01/13 to date 0 1150 2013 2014 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Years Source: Thomson Reuters Datastream, DCM Economics Source: London Bullion Market Association 61 62 | DUNDEE CAPITAL MARKETS | DUNDEE CAPITAL MARKETS Bullish: (8) Gold Not "Expensive" Bullish: (8) Gold Not "Expensive" To back US money supply higher prices needed To back US$ reserves higher prices needed 30000 11000 Gold Price 10000 $9800 Price of gold to “cover” US M2 (Cover ratio = .24) 9000 25000 Price of gold to cover $US FX reserves 8000 20000 7000 Price of gold to cover US debt held by world 6000 15000 5000 Price of gold to “cover” US M1 (Cover ratio = .38) 4000 $3700 10000 Price of gold to cover 35% of $US FX reserves 3000 2000 5000 1000 Updated through 2013-Q4 0 0 1934 1944 1954 1964 1974 1984 1994 2004 2014 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 “Cover ratio” as determined in 1934 when gold was revalued to $35 Source: Thomson Reuters Datastream, DCM Economics Source: Thomson Reuters Datastream, DCM Economics 63 | DUNDEE CAPITAL MARKETS 64 | DUNDEE CAPITAL MARKETS 16 Bullish: (8) Gold Not "Expensive" Bullish: (8) Gold Not "Expensive" Gold close to long-term average versus oil Gold close to long-term average with copper 35 800 30 700 Pounds of copper per ounce of gold 600 1970 to date average: 15.12 25 500 20 400 15 300 10 5 100 Last month: August 2014 0 Last month: August 2014 0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: Thomson Reuters Datastream, London Bullion Market Association 65 1970 to date average: 349.8 200 Barrels of oil per ounce of gold Source: Thomson Reuters Datastream, London Bullion Market Association | DUNDEE CAPITAL MARKETS 66 Bullish: (8) Gold Not "Expensive" | DUNDEE CAPITAL MARKETS Forecast Update: June/Sept 2014 And gold/silver ratio close to long-term average 105 90 Gold Price Scenarios Ounces of silver per ounce of gold 75 60 Scenario A: p = 25% Scenario B: p = 50% Scenario C: p = 25% 45 1970 to date average: 55.0 30 2014-end 2015-avg $1257 $1283 $1302 $1120 $1295 $1385 $1075 $1355 $1525 _______________________________________________ Weighted Last month: August 2014 15 2014-avg $1283 $1274 $1335 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: Thomson Reuters Datastream, London Bullion Market Association 67 | DUNDEE CAPITAL MARKETS 68 | DUNDEE CAPITAL MARKETS 17 THANK YOU Gold Monitor To receive the Please contact your Dundee representative 18 The author(s) is an economist with Dundee Capital Markets, a division of Dundee Securities Ltd. 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