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Document Sample
Thoughts on Gold and Resources
The Forbes Manhattan Conference
Dr. Martin Murenbeeld
November 4, 2010
Overview
1. Gold bullion is in a long-term
bull market
2. Resources will continue to
benefit from Asian demand
for years to come
1
1
Gold in a Bull Market
Nine bullish arguments:
1. Global fiscal and monetary reflation: PIIGS, US, etc.
2. Global imbalances: the dollar must decline
3. Global FX reserves are “excessive”: diversification
4. Central bank attitudes to gold: now positive
5. Gold is not in a bubble: room to rise
6. Mine supply is flat: “peak” gold?
7. Investment demand: long-run uptrend
8. Commodity price cycle: many years to run
9. Geopolitical environment: positive
2
Bullish: (1) Global Reflation
Antecedents of the (PIIGS) Sovereign Debt Crisis:
1. Baby-Boomer Retirements: The fiscal stresses
this would cause was visible years ago
2. The Great Recession: Pushed budgets into
record deficit – just when the early boomers are
about to retire
3. The Euro Common Currency: Membership in the
Euro System allowed interest rates to
“converge” - and “undisciplined” governments
to borrow excessively
3
2
Bullish: (1) Global Reflation
The baby-boomers are about to retire …
US Scenarios Canadian Scenarios
Source: Congressional Budget Office, November 6th presentation by Director Elmendorf
Slide: Federal Debt Under CBO’s Long-Term Budget Scenarios Source: Office of Parliamentary Budget Officer
“Fiscal Sustainability Report”, Feb 18, 2010
Policy Options:
Increase retirement age Decrease benefits
Decrease payment per service Decrease number of services
Increase tax rates for services Institute new taxes (VAT?)
4
Bullish: (1) Global Reflation
Fiscal policy blown out by “Great Recession”
4
Fiscal Balances
2 % of GDP
0
-2
-4
-6
-8
2007 2009
-10
-12
-14
US Canada Japan Germany France Italy UK Greece Portugal Spain OECD China India
-16
Source: OECD, IMF
THEY ARE ALL PIGS!
5
3
Bullish: (1) Global Reflation
Monetary policy blown up by “Great Recession”
2200
$bn
2000
US Monetary Base
1800
1600 September 2008
Federal Bailouts
Begin
1400
1200 September
11, 2001
Nixon
1000 Eliminates
The Fixed
Gold Price Y2K
800 WWII
600 1929 Stock Vietnam
Market Crash War
400
200
0
Last month: September 2010
-200
15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10
Bullish: (1) Global Reflation
So how will governments handle their debts?
Government Choices:
Renege on promises
Cut other services
Raise taxes
Print more money?
7
4
Bullish: (1) Global Reflation
Money drives gold …
1350 12.0
1200 10.5
1050 9.0
900 Global Liquidity 7.5
(trillion$)
750 6.0
600 Gold (US$) 4.5
450 3.0
300 1.5
Latest month:
Liquidity: June 2010
Gold: September 2010
150 0.0
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Global Liquidity: FX Reserves + US MBase
Source: IMF, Federal Reserve
8
Bullish: (1) Global Reflation
Gold rises and falls with liquidity
60 42
48 35
Global Liquidity yoy%
36 28
24 21
12 14
0 7
-12 0
-24 -7
Gold yoy% Latest month:
Liquidity: June 2010
Gold: September 2010
-36 -14
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Global Liquidity: FX Reserves + US MBase
Source: IMF, Federal Reserve
9
5
Bullish: (2) Global Imbalances
The US current account deficit is rising again
2 140
Current Account - %GDP
1 133
0 126
-1 119
-2 112
-3 105
-4 98
-5 US Dollar Index 91
(four currencies)
-6 84
-7 Last quarter: US recession
77
US$ - 2010-Q3
Current Account – 2010-Q2
-8 70
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
* So will continued recession!
10
Bullish: (2) Global Imbalances
The US trade deficit with China is unsustainable
0 0
$bn
US trade with China
-5 -50
-10 -100
-15 -150
-20 -200
12-month moving total bn$
-25 -250
US recessions
Last month: August 2010
-30 -300
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
11
6
Bullish: (2) Global Imbalances
China must revalue; reserves are excessive!
1 2700
RMB/US$
2 Chinese FX reserves ($bn) 2400
3 2100
The Chinese RMB was devalued
at year-end 1993 by 34% … of
4 1800
which only a little has been given
back recently
5 1500
6 1200
7 900
8 600
9 300
10 0
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
Source: IMF
12
Bullish: (2) Global Imbalances
US energy deficit bleeds dollars on world markets
0 0
$bn
-4 US imports of crude oil -40
-8 -80
12-month running total
-12 -120
-16 -160
-20 -200
-24 -240
-28 US recessions -280
-32 -320
Total energy-related
-36 petroleum products -360
12-month running total
-40 -400
-44 -440
Last month: August 2010 $bn
-48 -480
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
13
7
Bullish: (2) Global Imbalances
The Obama Administration wants the dollar down
“We can’t go back to the era where the
Chinese or the Germans or other
countries just are selling everything to
us, we’re taking out a bunch of credit
card debt or home equity loans, but
we’re not selling anything to them”
President Obama on CNN in run-up to the G-20 Meeting in Pittsburgh, Sep
2009
So now we have “currency wars”!
14
Bullish: (3) Global Reserves
Foreign exchange reserves have exploded*
90 10
(e)
81 Global FX Reserves Global FX Reserves 9
% change yoy
72 8
63 65% of FX Reserves
7
are in US$!!
54 $7 trillion rise 6
since 2002
45 5
36 4
27 3
18 2
9 1
0 0
Source: IMF
-9 -1
69 73 77 81 85 89 93 97 01 05 09
* Most are held by emerging country central banks
15
8
Bullish: (3) Global Reserves
Global reserves are “excessive”
Foreign Exchange Reserves
(countries over $100 bn)
bn$ bn$
China 2648.3 India 256.2
Japan 1015.1 Brazil 254.1
Russia 436.6 Switzerland 202.4
Saudi Arabia 422.4 Thailand 149.3
Taiwan 372.1 Algeria 146.2
Korea 281.4 Mexico 106.1
Hong Kong 260.6
TOTAL 6550.9
Addendum: Fuel Exporters $1350.5bn
Source: IMF - data through August 2010
16
Bullish: (3) Global Reserves
Diversification out of $’s in FX reserves likely
The choices for a central bank are limited:
1. Other currencies
• These currencies must have deep international
capital markets - some do not: renminbi, ruble: some
do: yen, pound, euro (but is euro now suspect?)
2. SDR’s issued by the IMF
• The SDR is a basket currency that includes only the
dollar, yen, pound, and euro - it has limited use
outside of central bank markets
3. Gold, other “hard” assets, mining investments
• But gold market is “narrow” and China likes
commodity-producing assets
17
9
Bullish: (4) Central Bank Attitudes
Central bank attitudes towards gold have changed
1. CBGA signatories are selling less gold
(not selling at all)
2. China raised its gold reserves from 600
to 1054 tonnes
3. India bought 200 tonnes of IMF gold
4. Russia and India have suggested a new
SDR basket should include gold
18
Bullish: (5) Gold Not in a Bubble
Gold looks like it is in bubble …
1400
Friday p.m. fix
1300
1200
1100
1000
900
800
700
600
500
400
300
200
100
Last date: October 22, 2010
0
69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
19
10
Bullish: (5) Gold Not in a Bubble
… but that may be a function of perspective
10000
Friday p.m. fix
log scale
1000
B
100
Compound return from A to B is 6.8%
A From A to any other point it is more
Last date: October 22, 2010
10
69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
20
Bullish: (5) Gold Not in a Bubble
It is not in a bubble in constant Dollars
1750
Last date: 2010-Q3
Gold peak of
$850 translates
1500 into $2385 in
today’s money!
Average price $635
1250 (2010-Q3$)
1000
750
500
250
Average price $371
(Nominal $)
0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
21
11
Bullish: (5) Gold Not in a Bubble
Not in terms of oil prices
35
30
25
Average:
15.03
20
15
10
5
Barrels of oil per ounce of gold
Latest month: September 2010
0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
22
Bullish: (5) Gold Not in a Bubble
Not in terms of copper prices
800
700
Average:
343
600
500
400
300
200
100
Pounds of copper per ounce of gold
Latest month: September 2010
0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
23
12
Bullish: (5) Gold Not in a Bubble
Not if US gold had to “cover” US money supply
8000
7000 Price of gold to “cover” US M2 $7000
(Cover ratio = .24)
6000
5000
4000
3000 $3100
2000 Price of gold to “cover” US M1
(Cover ratio = .38)
1000
0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
“cover ratio” as determined in 1934 when gold was revalued to $35
24
Bullish: (5) Gold Not in a Bubble
Gold still “cheap” In terms of financial assets
30 Ratio: S&P vs. Gold
1871 = 1.00
S&P Index: 1941-43=10.0
Peak - 2000
25
•Recession 1973-1975
20
•Gold “cut loose” in 1971
•Gold cut 5 years after peak
15
•Depression 1930-1933
•Gold revalued to $35 in 1934
10
•Gold revalued 5 years after peak
Current
10/01/2010
5 Gold $1315
SP 1150
0
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
With gold = $1315 then S&P = 265
With S&P at 1150 then gold = $5660
25
13
Bullish: (5) Gold Not in a Bubble
It may one day be – but that day is not now
2500
GOLD PRICE 1971-1982
2000
1500
1000
500
Set to 100
NASDAQ 1990-2009
GOLD PRICE 2001-2010
0
1 2 3 4 5 6 7 8 9 10 11 12
Years
Bullish: (6) Gold Supply
Model suggests WW mine flat
2700
Tonnes
World Mine Output (GFMS)
2300
1900
1500
Model Estimate
The Mine Production Model is based on lagged
1100 gold prices and lagged production
Western World Mine Output (GFMS)
700
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Source: GFMS, Murenbeeld
27
14
Bullish: (6) Gold Supply
The general commodity supply outlook is impaired
1. Difficult governments: i.e., Venezuela
2. Governments are in debt: i.e., Australia has
introduced a “resource super-profits tax” …
3. Environmental hurdles: i.e., the Gulf of Mexico
disaster changes the future for off-shore
drilling
4. “Peak” gold, “peak” oil, peak … : The low-
hanging fruit has been picked …
28
Bullish: (7) Investment Demand
Can we make a case for investment demand?
1. Central banks are rediscovering that gold is not another central
bank’s liability (i.e., China holds US Federal Reserve liabilities!)
2. The private sector is beginning to worry about the nature of fiat
currencies and the likelihood of currency debasement
3. The private sector is also discovering that gold has attractive
portfolio characteristics (gold improves the “efficient frontier”)
4. Commodities in general, and gold specifically, are morphing into an
“investment asset class” (like real estate did once it became
securitized)
5. Jewelry demand wasn’t always the dominant demand in the gold
market; private and central bank demand was historically more
dominant
6. Major deregulation of Asian gold markets encourages people with an
affinity for gold to invest in gold (and jewelry in many parts of the
world is seen to be investment as well as adornment demand)
29
15
Bullish: (7) Investment Demand
The gold ETF rising strongly since introduction
1700
Last date: October 21, 2010
• ETF demand 1600
1500
1400
has been very 1300
1200 GOLD TONNAGE - ETF
strong during 1100
1000
this period of 900
800
700
financial stress 600
500
400
300
200
100
0
2003 2004 2005 2006 2007 2008 2009 2010
30
Bullish: (7) Investment Demand
Retail investment plus ETF demand rising
50
(e)
45 Net retail investment demand plus ETF’s as
a percent of total identifiable gold demand
40
35
30
25
20
15
10
5
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: World Gold Council “Gold Demand Trends”
Based on data tabulated by GFMS
2010 estimate by DundeeWealth Economics
31
16
Bullish: (7) Investment Demand
Retail investment demand will grow in Asia
Net Retail Investment Demand (excluding ETF’s)
Billion US$
1600 160
World – tonnes (e) China – tonnes (e)
1400 140
1200 120
1000 Without ETF 100
800 With ETFs 80
600 60
400 40
200 20 2001
2001
H1 H1
0 0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
120 250
US - tonnes India – tonnes
100
(e) (e)
200
80
150
60
40
100
2001
20 H1
50 2001
0 H1
-20 0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: World Gold Council, GFMS
Estimates by DundeeWealth Economics
32
Bullish: (7) Investment Demand
Investment demand in gold/commodities will grow
70
Global financial assets Managed assets
60 total $ 117 trillion $ 40 trillion
Equities declined
50 by 45% in 2008
40
30
Managed
commodities
$ 300 billion
20
10
0
Equities Private Debt Government Managed Managed
Debt Assets Commodities
Source: McKinsey & Company, IMF, Barclay’s
Estimates are for 2008
33
17
Bullish: (7) Investment Demand
Gold investment products more sophisticated
The Dynamic Strategic Gold Fund
GOLD BULLION GOLD EQUITIES
Physical bullion Senior, Intermediate & Junior Producers
Bullion certificates Production & Development
“Best-in-class companies”
34
Bullish: (9) Geopolitical
The biggest geopolitical crisis to date …
900
800
about $400 Cyclical peak in gold
(or 100%)
700
600
500
Iranian hostage crisis /
400
Russia in Afghanistan
300
Gold Price: 1979-1980
200
30-Jul-79 11-Oct-79 28-Dec-79 13-Mar-8030-May-8012-Aug-80 24-Oct-80 14-Jan-81 27-Mar-81
35
18
Outlook: Six Bearish Arguments
1. Policy “exit strategies”: in US, Asia, Europe
2. Strong dollar: against the euro …
3. Deflation: government debt more attractive
4. Liquidity of last resort: for Greece, Italy, …
5. Dehedging finished: hedging to recommence
6. Chinese recession: commodity demand will
decline
36
Bearish: (1) Exit Strategies
Real rates will rise with “exit strategies”
5
US real short term
4 interest rate
When above 2% 3
gold prices
often “stall”
2
1
0 Exit
strategy!
-1 Real rates below zero are
very positive for gold
-2
-3
-4
Last month: September 2010
-5
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
37
19
Bearish: (1) Exit Strategies
fiscal policies must be tightened
Assuming central banks do not “print money”:
1. Tighter fiscal policies will be a drag on economic
growth
2. Inflation pressures will remain subdued, and the
threat of deflation will linger
3. Confidence in monetary policy (and fiscal policy)
will improve
4. Which all will weigh heavily on the gold price
38
Bearish: (4) Liquidity of Last Resort
The PIIGS need cash!
• The PIIGS hold over Gold Reserves
3000 tonnes of gold tonnes
Greece 112
• We have been
Ireland 6
concerned about Italy Iceland 2
for years Italy 2452
• But Greece, Portugal, Portugal 383
and Spain might be Spain 281
the first to sell – were
it to come to that Total 3236
39
20
Bearish: (6) A Chinese Recession
Commodity demand could tumble
1. China’s growth rate will decline (a recession is <6%)
2. Investment cools - money could leave China
3. World equity markets sell off – some very sharply
4. A flight to safety will almost certainly favor US Treasuries
5. Chinese gold demand will suffer
But policy will respond …
1. The PBoC will likely “print money”, and the government will
expand fiscal policy
2. Other Asian central banks will want to insulate their
economies, and print/devalue
3. Which could eventually see gold demand rise to new highs
40
The October 2010 Forecast*
We are bullish – Scenario A is given low probability
Gold Price Scenarios
2010-avg 2010-end 2011-avg
Scenario A: p.=.10% $1187 $1215 $1074
Scenario B: p.=.45% $1217 $1340 $1398
Scenario C: p.=.45% $1237 $1420 $1559
_______________________________________________
Weighted: $1223 $1365 $1438
* Forecasts are updated quarterly
41
21
Commodity/Resources
The IMF forecasts a moderate global recovery …
6 Billion US$ 18
World GDP (%) 16 China GDP (%)
5
14
4 12
10
3
8
2 (e) 6
1 4
2
0
0
-1 -2
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
12 5
4
10 India GDP (%)
3 (e)
8 2
1
6
0
4
-1
2 -2
-3
0
-4 EU GDP (%)
-2 -5
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Source: IMF, October 2010
42
Commodity/Resources
China has a major impact on commodities
30
Chinese consumption of copper
27 As a % of world copper consumption
24
21
18
15
12
9
6 US consumption of copper
As a % of world copper consumption
3
0
-3
90 92 94 96 98 00 02 04 06 08 10
Source: World Metals Bureau
43
22
Commodity/Resources
China’s oil consumption has risen dramatically
45
Percent of world consumption
40 Up 839%
35
30
25
20
15
10
5
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
44
Commodity/Resources
China’s nickel consumption has risen significantly
9
As a percent of world consumption
8 Up 410%
7
6
5
4
3
2
1
0
1980 1985 1990 1995 2000 2005 2010
45
23
Commodity/Resources
BRIC’s appetite for commodities has surged
60
Percent of world consumption
2000 2009
50
40
30
20
10
0
Copper Aluminum Nickel Zinc Lead
46
Commodity/Resources
BRIC set to overtake US oil consumption
30
Percent of world consumption
BRIC US
25
20
15
10
5
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
47
24
Commodity/Resources
All commodities exhibit long cycles …*
700
650
600 Shortest cycle – 16 years
Real Copper Price
550
2009 cents/lb
500
450
400
350
300
250
200
150
100 10-year MA
50
1850 1875 1900 1925 1950 1975 2000
*despite reversals, which are common in all cycles
48
Commodity/Resources
Including gold – which has had no reversal to date
1600
1400
Shortest bull-cycle – 10 years
1200
1000
Several years
800 of “counter-
Real Gold Price - 2009$/oz trend”
developments
600
400
10-year MA
200
0
1800 1825 1850 1875 1900 1925 1950 1975 2000
49
25
Commodity/Resources
In short, the demand side of market has exploded
1. Commodity prices have been driven higher by
fundamental structural changes in the global
economy
2. Which suggests that the long-cycle is intact and
will continue for many years
3. Some short-term price weakness is of course
possible as China’s economic growth decelerates
to more normal and sustainable levels (8%-9%)
and demand in OECD remains subdued.
50
Last Thought
Boomers create asset bubbles …
Boomers have rotated through three assets:
Equities – Saving, Pension Assets
This asset bubble exploded in 2000-2001
Real Estate – Family Home, Recreational Property
This asset bubble exploded in 2007-2008
Debt Instruments – Retirement Income
This asset bubble exploded in 2011-2012 ??
After debt?
Resources and Gold – the emerging asset class?
51
26
Thank you for your attention
27
