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The Right Time To Buy Gold Is... NOW


									                                      The Right Time To Buy Gold Is…NOW! 


“The desire of gold is not for gold. It is for the means of freedom and benefit,” said the great American 
poet and lecturer Ralph Waldo Emerson.  
Gold has always been revered in India, with Indians being the largest consumers of the yellow metal. 
Traditionally, the importance of gold has always been from an ornamental standpoint. With the change 
in the global and economic scenario, gold has also become a viable and a lucrative investment option. 
During times of war, political conflicts, and economic uncertainties, currencies tend to lose their value. 
Gold however, is universally accepted and is in demand during such times as it remains a storehouse of 
wealth and value. 

At  this  juncture,  it  is  highly  confusing  as  to  which  scenario  will  evolve  going  forward.  Will  there  be  a 
positive economic growth or will the global economy continue to contract. Will there be inflation or will 
the currently falling inflation transform into deflation. How will the dollar move, will it appreciate as a 
safe  haven  or  will  it  collapse  on  account  of  soaring  debt  levels?  From  an  investor’s  perspective,  the 
volatility in gold prices has been worrying. But this is just short‐term volatility. Gold prices are clearly 
trending upwards. 
We  have  every  reason  to  believe  that  during  these  tumultuous  times,  gold  remains  the  safest 
investment as … 
Most roads lead to higher gold prices in the future 
We believe the broad themes that would drive gold prices are –  
   • inflation fears,  
   • currency devaluation, especially uncertainty surrounding the U.S dollar, and  
   • diversification  of  investments  &  reserves  by  central  bankers  which  would  largely  depend  on 
        how the global economy shapes up going forward.  

Now’s the time for money that cannot be manipulated 

The  attached  gold  report,  ‘The  Right  Time  To  Buy  Gold  Is…NOW!’,  aims  to  evaluate  gold  as  an 
investment opportunity for investors wanting to broaden their horizon and look beyond the traditional 
investing options, while discussing the macro‐economic and supply‐demand drivers that will determine 
a sustained increase in gold prices in the future.  
                                                        ~ 1 ~ 
                                      The Right Time To Buy Gold Is…NOW! 


Gold: A ‘must have’ in your portfolio now 
Given the positive fundamentals, it would be prudent to stay invested in gold in order to reap benefits of 
the  long‐term  increase  in its price.  Also,  given  gold’s  historically  low  correlation  to  other  asset  classes 
and its reputation of being a store of value, an  allocation of gold would be invaluable. So we suggest, 
continue to accumulate gold and make the most of any declines in the market. We reiterate that gold’s 
fundamentals still make it a very attractive investment. In fact we believe that the price of gold could 
appreciate by around 50% by 2012.  
This report is an effort on our part to help you understand how invaluable gold is given the turbulent 
economic  scenario.  Understanding  the  gravity  of  these  times  is  its  own  reward.  If,  however,  you 
understand the role of gold in these times, a reward of another magnitude awaits you.  

                                                       ~ 2 ~ 
                                The Right Time To Buy Gold Is…NOW!

Building a platform for next upmove in the $750-1,000 range
After crossing $1,000/oz, gold prices have retreated and have been more range
bound and seen consolidating more in $900 -$950 range.

With the inability to move higher, questions are being raised about whether these higher prices are
sustainable, or whether it is the beginning of a decline (just like the 1980’s).

                                 Chart: Gold (00-09) ($/ troy ounce)
                           00   01   02   03      04       05       06   07   08   09
                                               Source : Bloomberg

We certainly don’t think that the Bull Run in gold is anywhere near to its end. Gold has the potential
to scale greater heights. Factors for the gold price rise are perfectly in place. It’s only a matter of
“When” and not “If” for the gold price to set record highs. We will not be surprised if gold prices
double from current levels or surpass the $2,000 mark due to intensification of any of the broad
factors currently influencing gold prices.

Before beginning the discussion on the factors that would lead to higher gold prices, let’s take a
closer look at the fundamentals of the metal and what caused the fourfold increase in the price of the
yellow metal.

Forces that have propelled gold for the last 5 years are firmly in place.

Gold prices have been moving steadily primarily on account of tighter demand-supply equations,
higher inflation concerns, depreciating dollar and increasing geo-political uncertainties and tensions.
In the current scenario, these factors are not likely to recede anytime soon.

Gold supply is shrinking, while demand is growing. The drastic steps taken by the central banks
around the world in terms of liquidity measures to pull their economies out of impending recession
are likely to generate much higher inflation in the future. The U.S dollar is likely to be pressurized
on account of growing fiscal deficit, central banks’ quantitative easing policies, and growing
consensus amongst many central bankers to diversify away from the dollar. There are many
geopolitical hotspots around the world which may lead to increased tensions and uncertainty risk;
which in turn, would increase the demand for gold as a safe haven.

                                                 ~ 3 ~ 
                              The Right Time To Buy Gold Is…NOW!

Gold production is contained, while currencies are not:
governments can’t print gold
Gold is not subject to government manipulations

Gold is in many ways considered better than money. This is because the metal has a relatively fixed
supply and is the only currency that cannot be inflated at the discretion of politicians or bureaucrats.
The actual value of paper currencies is suspect as their supply can be increased by a decree to print
larger amounts.

Gold prices increase in proportion to monetary inflation and decrease in proportion to gold inflation,
which is the annual gold production as a function of all aboveground stocks. So logically, gold price
targets have been rising due to the rapid rate of monetary inflation. US money supply is expanding at
rate exceeding 15% year over year rate while global mine supply is growing at less than 1% per year.
Recent stimulus measures have helped this rate go higher. At these rates, the value of gold seems
likely to go in only one direction – up.

       All the gold that had ever been mined by the end of 2008 is estimated at around
       165,200 tonnes. At the 2008 annual average price of US$ 872 per troy ounce, above
       ground stocks of gold are worth nearly $ 4.6 trillion. (One tonne is equivalent to 32,151
       troy ounces).

A critical credibility test- Prices are up in Euro, Yen and Rupees

The fact that gold prices are up in almost all currencies is a testament to the fact that the price rise is
fundamentally supported and is not just on account of the dollar depreciation.

                                 Chart: Gold has moved up secularly

                       350              GBP


                          Jan-00          Jan-03             Jan-06        Jan-09
                                              Source : Bloomberg

                                                   ~ 4 ~ 
                              The Right Time To Buy Gold Is…NOW!

The following factors supported the uptrend in gold prices:

Financial / Credit markets crisis - Gold has historically thrived in times of uncertainty. As the
financial crisis intensified last year, there was a rush for gold buying as investors sought safety.

US dollar decline - Gold has traditionally been a store of value. A drop in the value of the dollar
encourages investors to increase gold holdings and hedge further declines.

Inflation risks / Oil price rally – Gold has a tendency to overcome inflation. Historically, when
inflation increases gold tends to follow. Increase in the prices of Oil has historically led to
development of inflationary pressures in the economy.

Secular growth in investment in commodities – Commodities have come into their own as an asset
class. Even pension and trust funds, which have a reputation for being very conservative, are
diversifying into commodities. Gold with potentially better diversification and hedging properties
has been one of the major beneficiaries of this trend, as the success of gold ETFs testify.

Rising & well-defended floor from fabrication demand – With rising gold prices, demand for
gold jewelry has steadily increased. Although, with the recent high magnitude of price increases,
some demand in price sensitive consumption centers have taken a hit. Also, the crisis has restrained
consumers from buying as discretionary spending was affected. But, we believe that with stability in
prices or any declines, there will be a large quantity of gold in demand. This will serve as a floor for
gold prices. With rising gold prices, consumers will be willing to pay a much higher price. Also,
relatively better economic growth in traditional consumption centers like India and China will keep
demand strong.

North Korea / Iraq / Iran / Pakistan / Nigeria geo-political tensions – During times of war and
political conflict, fiat currencies tend to lose their value. Gold however is universally accepted and is
in much demand during such times.

Current scenario:

After breaching the $1,000 barrier and unable to set new highs, gold prices have decreased. Gold
prices are seen to be consolidating around the $950 mark.

Gold has strengthened even in the absence of favorable factors
The run up to $1,000 was led by safe haven flows emanating due to signs of deepening recession and
systemic fears. On a relative basis, gold’s performance has been much superior to other assets. Gold
was amongst the very few assets that yielded positive returns in 2008. However, it came as a surprise
to many that the gold price strength came in at a time when most of its supportive drivers moved

   •   The US dollar strengthened, especially against European currencies;
   •   Inflation rate reduced due to a decrease in demand as a result of the ensuing recession.
   •   Crude oil prices literally collapsed
                                                ~ 5 ~ 
                             The Right Time To Buy Gold Is…NOW!

Normally, we would have expected this set of circumstances to trigger steep declines in the gold
price, but the yellow metal glittered, minimizing losses on investor’s portfolios. This strength was
not only seen in dollar gold prices, but it appreciated in most of the other major currencies as well.
This has magnified the role and need for gold in one’s portfolio leading to an increase in the
investors’ demand for gold in an uncertain global scenario.

Investors rush for gold in times of turmoil
The crisis that erupted in 2007 left no part of the world unaffected and most of the traditional asset
classes lost heavily. During the same period, gold prices gained protecting investors’ portfolio from
getting slaughtered in the financial massacre. In this period of crisis, investment demand was the
major factor driving gold prices. Purchases of physical gold jumped during the period as investors’
fears about the financial crisis intensified. Investors rushed for gold on apprehensions of financial
and systemic collapse.

                    Chart: Retail Investor Demand at end of 2008 (in tonnes)

                                            Source: World Gold

Gold prices in 2009 have seen investment demand remain robust. Prices saw a rally above $1,000 in
early parts of the year and now it’s consolidating in the $900 - 950 range.

Signs of improvement in the beleaguered economies have ignited some optimism in the investor
community leading to an increase in risk appetite. Recent economizing in gold prices is reflective of
the “Green Shoots”. Different parts of the globe, where economies were badly hit by one of the worst
financial crisis ever faced, have seen modest signs of improvement as some indicators have been less
negative. This optimism has led to a lower demand for gold as a safe haven. One notable fact about
the recovery is; the dollar depreciated as the economies showed some early signs of recovery. Even
with the recent optimism, gold has retained its value and not depreciated much. Fears of inflation and
dollar depreciation seem to be supporting the yellow metal.

                                                ~ 6 ~ 
                              The Right Time To Buy Gold Is…NOW!

During the crisis period, we experienced contraction of economic growth, inflation declined as
demand collapsed and the dollar appreciated. At the same time, gold prices rallied above $1,000.
But, on account fears of systemic and financial collapse resulting from the crisis.
With some signs of recovery, investors are anticipating some improvement in the economic growth
expectations (as reflected in stock markets rally). While inflation is still at low numbers and the
dollar showing signs of weakness, gold has more or less held its value and has been moving in a
broad range of $980-920. But, still the future remains highly uncertain.

The uncertainty as to how the global economy will pan out leads to indecision in the minds of
investors. At this juncture, it is highly confusing to predict how the future scenario will evolve. Of
late, this has increasingly been a topic of debate in the investor community, raising a lot of disturbing
questions in the minds of the investors such as, “Will there be a positive economic growth or the
global economy will continue to contract?” “Will there be inflation or will the current disinflation
transform to deflation?” “How will the dollar move, will it appreciate as a safe haven or will it
collapse on account of soaring debt levels?” and so on.

Broad themes that would drive gold prices are inflationary
fears, currency devaluation & diversification
We believe the broad themes that would drive gold prices are - inflation fears, currency devaluation
(especially related to the uncertainty surrounding the U.S dollar), and diversification of investments
& reserves which would largely depend on how the global economy would shape up in future.

Before we discuss the possible scenarios that look likely to occur, let’s discuss the key issues
surrounding inflation and the dollar outlook.

The Current Crisis is often compared to “The Great
Depression” of 1930

The Inflation Deflation debate - 1930s and Today

Global economy, especially the developed world is clearly not out of the woods as yet. We are in the
midst of one of the worst financial crisis which is unprecedented and global in nature. Crisis of such
severity and magnitude is often compared to “The Great Depression” of the 1930s in order to seek
directions as to how things can pan out.

In the crisis of 1930s, with the collapse of stock markets, government quickly initiated its spending
measures and reduced taxes. It furthered its inflationary policies that would support declining prices
like restricting production, support unsound and dying businesses and various new regulations were
framed to bail the economy out of the crisis.

The current crisis triggered by the bursting of the credit bubble is the biggest of all preceding crisis.
Governments have massively intervened this time around by lending to businesses and financial
institutions in order to bail them out and provide them money to survive. In an effort to avoid
financial collapse and systemic failure, governments around the world have infused trillions of

                                                ~ 7 ~ 
                            The Right Time To Buy Gold Is…NOW!

dollars in the system. Governments have also introduced various unconventional policies so as to
support the economy and avoid any chance of depression.

                         Chart: Explosive growth in U.S Money Supply

                                          Source: World Gold

Repeating the mistakes
It is therefore fair to say that the mistakes of the 1930s are not only being repeated, they are also
being magnified. We are in a much worse position than we were in the 1930s. This time around we
have higher unemployment rate, far higher money supply, confidence levels are low, soaring debt
levels, fiscal & economic imbalances and troubled assets.

In the 1930s, as the economy started recovering, governments started to pull out excess liquidity
from the system. As a result, money supply declined considerably. At the same time, the recovery
process reversed, leading the economy towards depression. Policy makers strongly believe that the
decline in U.S money supply in the 1930s caused the Great Depression. Today, it is this belief that
has led to enhanced efforts by the FED to ensure that money supply is not sucked out unless we have
sustained recovery on hand. Also, when it becomes clearer that the economy is failing to recover
despite the government's massive fiscal stimulus; the dosage is expected be increased leading to
further increase in money supply. Due to the seriousness of deflation, policy makers are likely to be
biased towards over-accommodation, making inflation the more likely result as they choose to
combat the much bigger threat they consider of deflation.

It’s too early to talk about unwinding
In the current scenario, unwinding of the liquidity infusion termed as “Exit strategies” won’t be
possible as the FED would be in favour of more sustained recovery and won’t take any actions
unless it’s too late.

                                                ~ 8 ~ 
                              The Right Time To Buy Gold Is…NOW!

It is highly likely that inflation will grow into a big problem for the world. It is similar to a growing
cancer within the global economy and especially in the U.S.

As per the Quantity theory of money, keeping productivity constant, inflation will grow in
accordance to the increase in money supply and the changes in the velocity of money.

                            Chart: Monetary Base Velocity Growth

                                           Source: St. Louis

Large reservoir of excess money
So far we have seen an explosion of money supply in U.S and many other developed economies. U.S
has spent trillions of dollars in the form of bailouts, stimulus packages in an effort to combat the
crisis and saving the economy from spiraling into depression.

Monetary growth rate in the U.S was running above 10% levels and have further increased. This
trend is likely to continue as additional measures in terms of quantitative easing are undertaken to
purchase debt securities, for funding the budget deficits or for further liquidity infusions in the

Lower velocity of money on account of reduced lending from banks and also reduced consumer
spending has restricted the exponential growth in money supply transform to inflation.

Eventual inflation is the likely outcome
Once the money transfers begin, this large reservoir of excess money will transform into a spending
spree and lead to heightened levels of inflation.

The chart given below shows the potential increase in inflation targets based on growth in the
monetary base.

                                                   ~ 9 ~ 
                            The Right Time To Buy Gold Is…NOW!

Average returns for gold over previous inflation periods was
                    Chart: Monetary Base Growth* and Inflation Targets

                                               Source: St. Louis

Since the gold price was fully freed in 1971 there have been 9 years when the US CPI has exceeded
5% year-on-year. The gold price increased by 31%, on average.

            Chart: Relative performance of Gold during high inflation years.

                                      Source: World Gold Council

The fate of the dollar
The U.S economy is in a really bad shape. The biggest single story is the deterioration of the long-
term fundamentals of the USD. The dollar seems more vulnerable than ever given the extent to
which the US Federal Reserve has expanded its balance sheet with quantitative easing and the extent
to which the federal government has widened the national deficit.

Decades of deficit spending by the U.S federal government has built long-term structural fiscal
issues leading to deterioration of the U.S currency. This addition of new spending to the already
enormous deficits will have adverse consequences.

                                               ~ 10 ~ 
                              The Right Time To Buy Gold Is…NOW!

The Fed's balance sheet also gives insights on the condition or quality of the dollar.

                                    Chart: Fed’s Balance sheet

                                      Source: Federal Reserve Bank of Cleveland

Since the crisis broke out, the Fed has continuously weakened the quality of the dollar by weakening
its balance sheet. In fact, the assets that the Federal Reserve holds have deteriorated tremendously.
At the end of the day, it is these assets that the Fed can use to defend the dollar's value externally and

Until the Lehman collapse, counted as the first phase of the crisis, the Federal Reserve did not
expand the size of its balance sheet. It rather brought some changes in its balance sheet structure. In
these changes, the quantity of money remained unchanged but quality deteriorated sharply. The
Federal Reserve sold good assets in order to acquire bad assets. The FED sold highly liquid U.S
Treasury bonds and in turn made loans to troubled banks backed by problematic and illiquid assets.
This naturally had a negative impact on its currency.

When situations turned worse after the Lehman collapse, the earlier measures proved insufficient as
liquidity became a major problem. The faster solution to it as adopted by the FED was to expand its
balance sheet. The FED used unconventional policies in order to lend under new credit programs and
infused the much needed liquidity to banks and financial institutions. As a consequence, the sum of
the balance sheet has nearly tripled since June 2007.

Markets demanded more measures. This led to the introduction of a new tool, the so called
Quantitative Easing, by the FED. Quantitative easing is when a central bank, with interest rates
already near zero, continues to buy assets, thus injecting reserves into the banking system. The new
assets acquired were debts previously owned by Fannie Mae, Freddie Mae, and the Federal Home
Loan Banks so as to provide them with liquidity.

This isn't a temporary stimulus but a ramp-up in debt followed by a greater explosion in spending
and debt. All this sums up to a heightened probability of a weaker currency in the long run.

                                                   ~ 11 ~ 
                             The Right Time To Buy Gold Is…NOW!

The Budget deficit
President Obama's own Office of Management and the Budget (OMB) now estimates a Federal
budget deficit of $1.84 trillion for the current fiscal year ending September 30. This is equivalent to
12.9pc of the overall economy or gross domestic product – and, by this measure, the biggest deficit
since World War Two. Early estimates for next year put the deficit at 8.5pc of GDP. These are only
estimates and the actual number can be much higher.

               Chart: U.S Budget Deficit (% of GDP – LHS; US$ Billions – RHS)

                                         Source: World Gold Council

President Obama's ambitious plans to cut middle-class taxes, overhaul health care and expand access
to college would require massive borrowing over the next decade, leaving the nation mired far
deeper in debt.

It can't go on forever, and it won't. What will shock America into action is the prospect of fiscal
collapse, which will grow more vivid each year. In 2008, federal borrowing accounted for 41% of
GDP, which was about the same as the postwar average. By 2019, the burden will double to 82% as
per the CBO's estimate, reaching $17.3 trillion, nearly tripling last year's count. By that point, $1 of
every 6 the U.S. spends will go to interest, compared to 1 in 12 last year.

It seems that the U.S is building up a long-term gap between revenues and spending which is
increasingly widening over years. Put simply, spending is following a steep upward curve, while
revenues are basically fixed as a portion of GDP.

                                                ~ 12 ~ 
                             The Right Time To Buy Gold Is…NOW!

Total Revenues and Outlays as a percentage of Gross Domestic Product in CBO’s
Baseline and the President’s Budget.

                           Total Deficits or Surpluses, 1969 to 2019

                                       Source : Congressional Budget Office

Money meltdown occurs when governments face an overwhelming difference between revenues and
expenditures; foreign investors abandon the currency as they race to the exits, leaving bereft citizens
with worthless paper.

As the Federal Reserve continues to increase its money supply (quantitative easing) at a breakneck
pace, nations around the world have become very concerned about their holdings of US dollars and
dollar backed assets. The dollar at this point in time looks like it's virtually guaranteed to lose its
status as the international reserve currency. Countries like China and Russia have recently raised
their voices and recognized urgency for a new and stable international currency.

                                                 ~ 13 ~ 
                                           The Right Time To Buy Gold Is…NOW!

What does History indicate?

We have had a long history of reserve currencies which reflects an interesting fact that the position of
a country as a super power of the world (whose currency acts as a reserve currency) tends to rotate in
a natural cycle of around 100 years.

Will History repeat itself?

 Supremacy                               From                                  To          No. of Years
 Portuguese                              1450                                  1530        80
 Spanish                                 1530                                  1640        110
 Dutch                                   1640                                  1720        80
 French                                  1720                                  1815        95
 British                                 1815                                  1920        105
 U.S*                                    1920                                  2009        89

Content provided by Hongkong Monetary Authority
*U.S Dollar still remains the world reserve currency. No. of years calculated upto 2009.

The above table indicates that we may be near or just few years away from the climax. Historically, as
other currencies have dominated as a reserve currency for a cycle of nearly 100 years, it could be true
for the dollar too.

Is the current dollar strength an illusion?

During the heights of uncertainty, fear and risk aversion, the dollar has been the beneficiary. Despite
America’s economic weakness, low rates and evidence of Japan-style quantitative easing, dollar
gained strength.

The dollar strength has been mainly on account of shortage of dollars after unwinding of investments
from assets across the globe as the crisis intensified. It was money returning back home propping the
value of the dollar as demand increased.

However, the fact remains that dollar survives on lack of alternatives. There isn’t an alternative
currency that is stronger and fundamentally sound. The dire situation of the US economy combined
with the high probability of the US government/Fed making the mistake of looking at monetary
inflation as a solution leads to ultra-bearish prospects for the Dollar.

When we look at what's happening in the US, we see good reasons to expect the US Dollar to move
much lower relative to gold over the years ahead, but when we look at what's happening in Europe
and other developed countries, we do not see good reasons to expect any additional weaknesses in
the US$ in comparison to the Euro and other major currencies at least in the short-term.

What we are witnessing is competitive currency devaluation and so it becomes futile considering
relative strength of currencies. Loss of faith and confidence in paper currencies is what is driving
investors to buy gold. Going forward, the currencies will continue to devalue in terms of gold prices
weighed down by increased money supply and soaring debt levels. Even, the U.S dollar may
maintain its strength in the short-term but is bound to depreciate over the long-term.
                                                                     ~ 14 ~ 
                              The Right Time To Buy Gold Is…NOW!

Gold and Dollar usually are negatively correlated to each other

Gold and Dollar relationship
Gold has historically been negatively correlated to the dollar. The appreciation of gold prices has
been accompanied by a steady decline in the dollar. Fundamentally, the dollar looks to continue its
decline on account of the rising deficit and the growing monetary inflation.
During the Bull Run in gold prices that started from 2001 and upto 2008, we calculate that a one cent
change in USD/EUR exchange rate affected the dollar by $8 change in gold price. When the dollar
depreciation intensified it turned to be the main driver behind the rise in gold prices, a one cent
movement led to a $13 change in gold prices.

                               Chart: Gold and Dollar relationship
                  ($/oz)                                     ($/Euro; Inverted)
                 1050                                                            0.8
                                                            Gold (LHS)
                  950                                                            0.9
                                                            Dollar (RHS)         1
                  450                                                            1.5
                  350                                                            1.6
                  250                                                            1.7
                      1999 2000 2001 2002 2003 2004 2005 2007 2008 2009
                                            Source: Bloomberg

This time around, with the recent talks for diversification away from the dollar, gains in the dollar
denominated gold prices can be much larger.

Possible scenarios:
   SCENARIO             GDP      INFLATION       U.S DOLLAR                OUTCOME

         I                                                                 Very Bullish

        II                                                                   Bullish

        III                                                                Very Bullish

        IV                                                                   Bearish

                                              ~ 15 ~ 
                              The Right Time To Buy Gold Is…NOW!

Scenario I – High GDP, High Inflation and Falling U.S Dollar
Result: Extremely Bullish For Gold
This scenario assumes that the wide and unconventional monetary measures by central banks around
the world succeed to turn around the current recessionary effects and take us on the growth path.
Increased growth expectations levels may reduce demand for gold as a safe haven but at the same
time also lead to a rebound in terms of higher fabrication demand. Also, as expectations of recovery
are felt, velocity of money would increase due to an improvement in the level of confidence.
Heightened levels of money supply and increased velocity is bound to increase inflationary
pressures. The dollar is also highly likely to resume its long term secular decline weighed by soaring
debt levels and rising deficits. An increase in inflation and the declining dollar will also trigger
strong investment demand, seeking a hedge against both these evils.

Gold will be supported by strong investment flows and also a recovery in fabrication demand. This
scenario is an ideal scenario for gold to scale to new highs.

Scenario II – High GDP, Low Inflation and Falling U.S Dollar
Result: Bullish for Gold.
This scenario is relatively less bullish for gold. It’s a magical scenario which central bankers would
simply dream for. A case where the global economy recovers and the central bankers are able to
unwind much of the excesses at the right time. Or, the measures are able stimulate growth again and
the over production capacities restrict the inflation factor.
The dollar devaluation has been a big concern and the recent monetary measures have accelerated its
pace. There will be diversification away from the dollar and it is also not impossible that the U.S
dollar losing its status as an international reserve currency. This would be very positive for gold.

Scenario III – Declining growth, Increase in Inflation and Falling U. S Dollar
Result: Extremely Gold Bullish
This scenario can be best described as an “Economic depression of the inflationary kind”.
In this scenario, growth would soon start faltering as depicted in the Depression of 1930s. The
central bankers would double the dosage of money infusion and lending so as to avoid depression
and the deflation scare. This would definitely ignite inflationary pressures. Current money supply
growth has been exponential and would potentially result in an inflationary outcome. However, in
this scenario, monetary inflation might support stock markets at superficially high levels. During the
early 1930s the money supply declined at a double-digit pace, but now it is rising at a double-digit
pace. This can potentially make the economic situation even worse, but it could support stock prices.
The climate of uncertainty, increasing inflation and declining dollar will lift gold to far higher levels
than it is today. This is most ideal scenario for gold to scale to record levels.

Scenario IV – Declining global growth, Lower Inflation and Appreciation U.S
Result: Bearish for Gold
This scenario spells deflation. It will be similar to the great depression of 1930s. Dollar may also
remain at elevated levels on account of cash hoarding and flows continuing to U.S treasuries. But,
this time around it is difficult to occur. Central bankers will leave no stone unturned to avoid the

                                                ~ 16 ~ 
                              The Right Time To Buy Gold Is…NOW!

depression scenario. Dollar is also surviving due to lack of alternatives. If more extraordinary
policies are undertaken by the U.S, it may actually lead to dumping of the dollar by countries holding
massive dollar reserves. Also, remember that the solution to the 1930s Depression was found in
devaluing the dollar vis-à-vis gold prices. All in all, this outcome looks very unlikely in our view;
however, if it occurs it may depress gold prices though not very significantly.

The outcome is gold positive
What we favor
From the above discussion and previous global episodes, it looks increasingly likely that fears of
increased inflation and at the other end, risk of dollar depreciation are looming large. With these two
factors taking hold, gold outlook turns extremely bullish. A rising growth environment may see some
shift of safe haven investments to other asset classes as risk appetite increases but at the other side it
increases flows to fabrication demand. Given that the investments in gold are very small as compared
to the total investments in all assets put together, illustrates the potential for further flows especially
after evidencing the crisis of last year. If we see growth faltering and the global economy taking
more time to recover, then the uncertainty surrounding it will see an increased investment flow to

Additional factors supporting Gold price rise
Diversification of Investments and Reserves to Gold
Despite record flows seen in the past one year, gold still constitutes to be a minority investment. The
total value of the holdings in the gold ETFs (as on Q109) is only about US$48.6 bn, almost
insignificant compared to the US$3.69 tn held in US money market funds. Even after taking into
account World Gold Council’s estimate of the total gold held in private investment hands (27,100
metric tonnes as of the end of 2008) , the estimated worth of this stock is “only” about US$790bn,
thus small compared to the market capitalisation of equity, bond and real estate holdings.

Gold still remains a minority investment

The small size of investment in gold demonstrates the potential for a shift of money into gold. If gold
were to become a more mainstream asset, if a small percent of the cash held in money market funds
and savings were re-directed towards gold, then the impact on gold prices would be profound. Also
there is an argument that gold can become more desirable the higher the price, as the more the price
increases, the more newsworthy gold becomes and in this case – since the investment is being driven
mostly by fear – investors can be persuaded that gold is demonstrating safe-haven characteristics,
thus attracting further investment flows.

                                                ~ 17 ~ 
                            The Right Time To Buy Gold Is…NOW!

                                          Source: World Gold Council

Central banks diversification of Reserves:
There have been increased concerns that the value of the dollar may collapse and its status as the
premier international reserve currency may grow more precarious. There have been strong comments
from central banks like Russia and China calling for a new reserve currency. Globally, we have some
countries which have accumulated huge foreign exchange reserves, due to the large trade surplus
they generate every year. Most of these reserves are predominantly invested in US dollar
denominated assets. BRIC countries i.e. Brazil, Russia, India and China have accumulated huge
foreign exchange reserves over the years and the same is increasing each year. Many experts feel that
sooner than later these countries would want to diversify their foreign exchange reserves and reduce
holdings in US dollar denominated assets, due to the continued depreciation in the value of the
dollar. The future of the dollar is uncertain, given the current turmoil in the US Economy and its
Financial Sector. Many experts also feel that money supply as well as debt levels are increasing at a
rapid pace in the US and this will lead the US dollar to depreciate over long-term

Russia has been increasing its gold reserves over the last few years. China has also recently
announced that it has bought 454 tonnes of gold since 2003. The diversification process seems to
have begun.

To put this in perspective, gold as a percentage of Forex reserves of BRIC countries amounted to
only 2.3% as per latest data released by the World Gold Council. Foreign exchange reserves of the
BRIC Countries stood at US Dollar 2.5 trillion at the end of the first quarter of 2009. An additional
1% allocation of these foreign exchange reserves by the BRIC Countries to Gold would result in an
additional demand of nearly 800 tonnes of Gold at current prices. Many other countries, besides the
BRIC Countries, can also be expected to follow a similar trend and increase allocations of their
foreign exchange reserves to Gold to gain more stability and confidence. A 5% diversification by
BRIC countries would result in additional demand of more than 4,000 tonnes. Imagine the impact on
prices when we already have a tight supply-demand balance on hand.
                                               ~ 18 ~ 
                             The Right Time To Buy Gold Is…NOW!

Gold tends to rise in times of increased tensions

Rising uncertainty and geopolitical concerns:
Gold also has a tendency to move in tandem with uncertainty. Prices have shot up during times of
war and geopolitical concerns. Globally, there are lots of potential hotspots. Concerns about Iran’s
nuclear program, the Turkish offensive against Kurds in Iraq, Civil unrest in parts of Asia and the
continuing concerns in Afghanistan and Iraq can push prices higher. The rising disturbance from the
North Korea’s nuclear ambitions and increased opposition from U.N and other countries is building
up increased tensions. Also, any Middle Eastern conflict can also lead to a rise in oil prices,
providing a further stimulus to gold.

Risks to the view:

Gold – a crowded trade

In the last one year, we have seen unprecedented buying of gold by various investors. There have
been extraordinary inflows in Gold ETFs, there were episodes of shortages of smaller coins and bars
on account of higher demand, which shows that investors are increasingly turning to this safe haven

Off late, there has been one of the related events in the gold markets which make us a bit cautious.
Hedge funds are buying gold left, right and center. About 20% of the SPDR Gold Trust ETF’s
(world’s biggest Gold ETF) outstanding stock was owned by hedge funds as of the end of the first
quarter, according to filings. However, the fact that amongst these also present are the hedge funds
that had correctly betted on the sub prime debacle provides us some relief.

Hedge funds usually are absolute return driven, and are quick to enter and exit positions based on
short-term opportunities and hence are a cause of worry in the gold markets currently. Are they
creating positions to hedge against uncertain risks? Are they here to earn potential long-term profits?
Are they looking to earn from the longer term decline from currency devaluations or potential
inflation fear?

If yes, then it would certainly help gold prices. If no, then their hurried exit as and when it comes,
may lead to short-term decline in gold prices.

IMF Gold Sales

IMF is likely to sell 403.3 tonnes of Gold. This selling will have more sentimental effect rather than
actual pressure from higher physical supplies. This change in sentiment can generate price declines
in the short-term but of limited magnitude. The IMF sales approval requires gold to be sold in an
orderly manner over a number of years without disrupting the gold markets i.e. without pressuring
the markets with higher off load at one time. It is also highly likely that these sales happen as an off
market transaction with central banks like Russia, China posing as counterparties willing to grab the
gold; to diversify their dollar reserves.

                                               ~ 19 ~ 
                              The Right Time To Buy Gold Is…NOW!

Central Banks dumping gold heavily

Rising gold prices are a biggest testament of the fact that the paper currencies are being devalued.
Central banks would always want to protect their currencies, and in an effort try to prevent gold
prices from rising exponentially. Central banks have in the past off loaded big quantities of gold in
one go leading to a fall in gold prices. The Gordon Brown sales of gold at the beginning of the
decade are an excellent example of big sales by central banks. But, after that the gold prices were set
in a steady uptrend.

Also, the price of gold may be undermined by Central Bank gold sales inorder to raise funds for
various stimulus programs.

Valuation of Gold
Gold prices are dependent on a number of factors. Prices fluctuate on a variety of cues ranging from
the dollar exchange rate, geopolitical tensions, trade balance figures, inflation expectations, global
interest rates and demand (both physical and investment related).

At the micro level, the factors are even more complicated. The interlinking of currencies and their
relative pricing has a great impact on prices. Gold is internationally priced in dollars. So any
appreciation of a non-dollar currency will make gold cheaper for the holders of that currency.
Depreciation would make gold more expensive. As mentioned earlier, gold is also perceived to be a
store of value in uncertain times – having proved its worth over many millennia. Even during the
past century, paper currency and other financial assets have substantially lost their value during times
of war or political crises. During such testing times, there is a flight to real assets like gold. Gold
prices are also influenced by inflation expectations. The precious metal has traditionally performed
better than inflation. So, when prices of goods and services rise and there is a real risk of a sharp
decline in purchasing power, people prefer to hold their assets in gold. Thus, the benchmark prices of
base metals, energy products and food articles also exert an influence on bullion. Interest rates are
also a major determinant. In normal circumstances, rising interest rates indicate a government move
to clamp down on inflation. U.S. interest rates have an extra significance as it affects the value of the
dollar. Physical and investment demand naturally impact the off-take of gold. On the other side of
the equation, we have mine supply figures, central bank sales and scrap conversions.

To make things even more complicated, these factors act on prices in different ways at different
times. Many of these factors are mutually reinforcing, but they do not act with equal weight. At any
one time, sentiment towards the drivers may change, thereby changing the cocktail of pressures for
or against a firmer gold price. For instance, during some periods, inflation may exert greater
influence on gold prices and at other times, this may exert only a minor impact. Given its history and
tradition, gold moves more on psychological reasons than on purely fundamental factors.

Keeping this in mind, it would be prudent to understand the factors currently capable of exerting a
major impact on the market and focus on them. We believe this would give a realistic conclusion
about the direction of the market.

Care also has to be taken not to treat gold purely as a commodity. Gold holds great appeal as a
substitute for currency. This should be factored into any valuation model. An appropriate model that
also includes gold’s properties as a currency can help better explain the current price of gold and be
more accurate in predicting the future trends. Factors like money supply, relative cross-currency
                                                ~ 20 ~ 
                             The Right Time To Buy Gold Is…NOW!

exchange rates, inflation rates and future expectations exert a greater influence on gold than on other

The recent bull-run in gold is unprecedented and driven by a lot of factors. The evolution of the
financial markets over the past few decades has unfortunately led to a lot of instability in the system.
With the values of various assets remaining uncertain at best, investors are increasingly turning back
to time-tested gold and demand is steadily increasing. Increasing income levels in traditional
consumers like India and China have pushed up consumption. Gold and jewelry manufacturers have
also moved away from tradition and are now aggressively reaching out to customers in untapped
sectors. On the investment side, newer and more cost-effective options like ETFs (Exchange Traded
Funds) and ETCs(Exchange Traded Commodities) are encouraging people to invest at minimal
transaction costs.

Seasonality: Gold prices should also be accounted for seasonal variations. In the recent past, gold
has exhibited a fair amount of seasonality. Higher prices generally prevail from December to March,
mainly due to the strong seasonal trends in oil prices (Global oil demand peaks from November to
January when refiners in the US, Europe and North Asia make heating fuel for the Northern
Hemisphere winter) as well as increased demand for gold during the festive and marriage season in
India and traditional seasonal demand from the Middle East.

On the fundamental side:

Supply Factors:

Supply continued to tighten in 2008 and declined by 1% below 2007 levels to 3,468 tonnes.

In 2008, mine supply was down by 3% as compared with the previous year. Output was severely
affected due to a fall in production in South Africa and Australia. De-hedging, which tends to reduce
total supply, was lower by 18% on a year on year basis and saw a significant slowdown in the second
half of the year as compared to the first and earlier year levels as well. Lower levels of de-hedging
managed to offset the decline in mine supply as compared to previous year as the net mine supply
showed an increase of 1%. Central bank sales witnessed a steep decline with activity remaining
restrained to lowest level seen in earlier years of second Central bank gold agreement (CBGA 2).
The fourth year of CBGA 2 which ended on 26th September 2008 totaled sales of only 357 tonnes;
well under the permitted 500 tonnes and 25% lower than the earlier year. Central bank sales for
calendar year 2008 totaled only to 279 tonnes, a decline of 42%. Scrap supplies were 17% higher in
2008 as compared with previous year. The surge in the prices this year resulted in increased levels of

Mine production from a more optimistic perspective may see a small rise as some new production is
likely to come online. But, it is unlikely to increase significantly as constraints on mining supply are
unlikely to ease. A notable increase in price would be needed to bring more scrap supplies in the
market. We also expect central bank sales to remain at subdued levels.

                                               ~ 21 ~ 
                                 The Right Time To Buy Gold Is…NOW!

                                          Chart: Supply sources in 2008

                     Old Gold
                    Scrap, 31%

                        Official Sector                                          Mine
                          Sales, 6%                                           Supply, 62%

                                                 Source: World Gold Council

                              Chart: Supply sources since 2000 (average)



                                                                                   Supply, 65%

                                                 Source: World Gold Council

Mine Supply:
(Refers to both formal and informal input)

Mine production has been steadily trending downward since 2001, despite the rise in gold prices.
The high costs of mining and the doldrums that gold prices were in for much of the past two decades,
resulted in a drought of mine exploration and development. This lack of infrastructure investment
meant that mining companies were little prepared to take advantage of the price rise. The regulatory
environment is also tightening, leading to delays in setting up and operating new mines.

Mine production further declined by 66 tonnes in 2008, a Y-o-Y decline of 3%, despite prices
reaching record ounce levels. The hierarchy of gold producers undergoes changes with South Africa
slipping lower to No.3 and the USA inching higher to No.2 and China maintaining its lead position.

                                                        ~ 22 ~ 
                            The Right Time To Buy Gold Is…NOW!

                                        Chart: Mine supply
                                   Mine Supply         Average Gold Price
                 2700                                                              1050
                                                                 Declining Trend   950

                 2400                                                              650


                 2100                                                              250
                        95 96 97 98 99 00 01 02 03 04 05 06 07 08
                                         Source: World Gold Council

Overall mine output was constrained largely by sharp declines in South Africa and Australia. South
Africa continued to feel the effects of accidents and power issues that plagued the industry almost
through the year. Australian output was negatively impacted on account of closure of some mining

Furthermore, several new projects delivered disappointing results during 2008 and some small
miners encountered financial problems due to operational difficulties and funding issues. Offsetting
part of these big declines was increased production from Russia and Indonesia.

Early 2009 figures seem to bring some hopes for rising output. World Gold Council provisionally
estimates first quarter 2009 mine production increase of 3% i.e. an increase of 16 tonnes over the
same period in 2008. An increase in mine output can be attributed to higher output from Grasberg
mine in Indonesia and some increases in Russia and China. South African output also showed a
minor uptick on the Q-o-Q number, although the comparison is with a relatively weak first quarter of

Trends in Gold Mine Production

Gold production has been on a declining trend since 2001. Mine output in 2008 was 2,407 tonnes, a
decline of 66 tonnes over 2007. But, as compared to 2001, it’s a decline of 229 tonnes i.e. a decline
of 9%.

At the same time, average price of gold in 2001 was $271 per ounce which has grown to $871 an
ounce in 2008 i.e. an increase of 221%.

                                                 ~ 23 ~ 
                            The Right Time To Buy Gold Is…NOW!

In the last seven years, Gold prices have increased by 221% whereas mine output has declined by

Under normal circumstances, a rising price should encourage miners to produce more. Then, why
has production declined?

Has mine production peaked?

Let us analyse some of the trends in the Gold mining sector…

The pace of new discoveries is getting slower…

                                        Source: GoldFieldsLimited

Historic average to 1995 is that only 75% of discovered ounces are mined.
Even despite newer technologies used for mining, the average resource grade has been declining. In
simple terms, the quality of output from mines has been declining. As of 2007, it stands at 1.10
grams per tonne which means that one needs to extract 1 tonne of rocks/ore to obtain 1.1 grams of
the yellow metal.

                                        Source: GoldFieldsLimited

                                              ~ 24 ~ 
                            The Right Time To Buy Gold Is…NOW!

How long is it possible for the production from maturing mines ,discovered many years ago, to
continue to serve?

It is more concerning as there have been lower discoveries despite increased spending.

                                          Source: GoldFieldsLimited

Exploration effectiveness has been declining…

                                     Source: GoldFieldsLimited

                                                 ~ 25 ~ 
                             The Right Time To Buy Gold Is…NOW!

Declining exploration effectiveness leads to an increase in discovery costs for new gold resources…

                                             Source: GoldFieldsLimited

To add to concerns, over 70% of gold discovered over the past 10 years have been in riskier areas.
Discoveries in areas of higher political risk may either lead to delays; increased cost of production,
higher royalties, production disruptions, nationalization of reserves, or in extreme cases might also
lead to a shutdown of operations.

                                         Source: GoldFieldsLimited

It looks probable that we may see small quantities of new production coming online; a few small
discoveries that would commence production activities over next couple of years. Still on the other
hand, we have existing mines that are showing a decline in productivity and grade ore. The pace of
new mine discoveries and the time required to make them fully functional are currently insufficient
to make any significant additions to mine supply.

New explorations and projects would find it increasingly difficult to fulfill their financing needs in
the backdrop of current financial turmoil, and hence lead to delays or even cancellation of the same,
                                               ~ 26 ~ 
                             The Right Time To Buy Gold Is…NOW!

hampering new supply. Exploration budgets would take a big hit as lending from banks remains
restrained and internal finances would be diverted to more near term projects and working capital
requirements; thereby hampering supply over the long term.

Moreover, China and South Africa, the two largest producers of gold are experiencing electricity
supply bottlenecks, which can affect mining and refining activities. South African production has
also been adversely affected by mine safety legislation and regulations.

Increasing mining bottlenecks
Mine Permitting in 1980s                             Mine Permitting Today

Permitting Time- 9 months                            Permitting Time- 6+ years

No environmental or social baseline                  Minimum one year environmental baseline

No state permits                                     3-5 state permits
Federal/Central Environment Assessment               Federal/Central Environment Impact Assessment
(maybe)                                              (required)
Public comment (limited, if any)                     Significant, Multiple Public comment periods

No legal challenges                                  95% probability of legal challenges
                                             Source :Newmont

Higher production costs serve as a floor price:

We have seen production costs increase rapidly over the past few years. Mine costs can be broadly
broken down into labor 50%, energy (electric and diesel) 25%, consumables 15% and other 10%.
Miners have faced a range of cost increases, including unit labour costs, as well as energy and other
raw material, as the weaker dollar has pushed up operating costs outside of the dollar bloc. Even
though, there has been a significant decline in energy costs, miners haven’t been much comfortable
on the costs front. Decline in commodity prices have provided a breather from the huge escalation
seen every year but not enough to cheer. At the same time, reduction in costs on account of product
credits has been lowered, as prices of these by product metals have fallen significantly limiting the
benefit of reduced costs. Over the last few years the sharp rise in cash costs came from a 10% rise in
input costs and a 10% decline in grades mined. The biggest cost category is labor, and after several
decades of underinvestment, labor shortages could support prices if this economic downturn is short

                                               ~ 27 ~ 
                             The Right Time To Buy Gold Is…NOW!

                                    Chart: Gold Cash cost curve

                                              Source: Barrick

Gold supply from by product mines may decline…
A good proportion of mined gold comes as by products from mines producing other metals. It is
estimated that around 440 tonnes of gold production i.e. 16% of mine production comes as a by-
product along with various base metals like Copper, Zinc, Lead, Nickel, etc. The proportion of gold
produced as a by product from copper operations is very significant - contributing an estimated 275
tonnes of the yellow metal.
With the fall in base metal prices, high cost copper producers may find it difficult to survive. If base
metal prices remain low for an extended period, a lot of operations may shut down resulting in a
lower production output of Gold.

Going forward, overall mine supply is likely to increase only marginally, given the few small
discoveries over the past few years that are likely to come online. This increase is unlikely to be
significant as the new mines will face increasing pressure as costs remain more or less elevated and
declines in gold prices would make it difficult to generate sustainable margins. Financing for mine
development and working capital requirements would also face equally bad times amidst the
worsening financial crises faced globally. In the longer term, this high cost environment, scarcity of
supply will change the current supply dynamics, which in turn will trigger an upward pressure on
gold prices.

After the ramp-up in mine supply in the late 1980s and 1990s, mine supply has been falling, and this
is a trend Barrick expects to continue. Peter Munk (chairman and founder of Barrick) on his
company’s AGM held earlier this year highlighted the challenges facing the industry, pointing to 1)
the difficulty of finding new deposits, 2) environmental opposition that was making new mine
development more difficult and 3) resource nationalism threatening to take projects away. And these
comments came from the industry leader.

                                                ~ 28 ~ 
                             The Right Time To Buy Gold Is…NOW!

                           Chart: Mine Production Forecast by Barrick

                                             Source: Barrick

Central Bank Sales:
(Central Bank or official sector sales refer to the gross sales less gross purchases by central banks
and other official institutions. Swaps and the effect of delta hedging are excluded)

Gold was the basis of the monetary system for a long time. Even today, the metal forms a significant
part of the official reserves of central banks. After the ending of the gold standard, central banks
have been reducing the stocks of gold. According to data from World Gold Council, these holdings
accounted for some 18% of total above-ground stocks of gold at end-2008. Given these large
amounts, official sector sales (sales by central banks) do have a huge impact on international prices.
These sales also account for the third largest source of gold, right after mine supply and scrap. The
shift by the official sector from a broadly neutral position in the 1970s and 1980s, to substantial net
sales in the 1990s was a major contributing factor in depressing prices below $300 levels.

IMF has plans to sell around 403.3 tonnes of its gold and has indicated that it hopes to do this
gradually over a period of years and in association with Central Banks Gold Agreements, so that the
sales do not represent a net addition to the quantity of gold the market is already anticipating from
the official sector.

Can it depress Gold prices?
IMF will sell the proposed 403.3 tonnes of gold over the next few years, but is unlikely to pose a big
threat to prices as these sales will be in an orderly manner over a number of years without disrupting
the gold market and within the cap of Central Bank Gold Agreement. It is also highly likely that the
gold may be sold off market to Central banks like China, Russia and Japan, who will be more than
willing to buy in order to diversify their large USD reserves.

                                               ~ 29 ~ 
                                        The Right Time To Buy Gold Is…NOW!

Central Bank Gold Sales under CBGA
We are currently in the last year of the second Central Bank Gold Agreement known as CBGA 2.
The first CBGA capped gold sales by central bank signatories to the agreement to 400 tonnes. The
Second CBGA, which was initiated in September 2004 lasting five years, restricted gold sales to 500
tonnes limit.

                                        Chart: Central Bank Sales and Gold price
                        1300                    Old Gold Scrap         Average Gold Prices             950
                          900                                                                          650

                          800                                                                          550
                          400                                                                          250
                                     95 96 97 98 99 00 01 02 03 04 05 06 07 08
                                                    Source: World Gold Council

Summary of sales identified under CBGA 2

 Tonnes                                               Year 1        Year 2       Year 3      Year 4          Year 5

                                                      2004-05       2005-06      2006-07     2007-08         2008-09
 Eurozone to June 12, 2009                            352.2         385.8        352.8       211             126
  of which:
   European Central Bank to end April,
 2009                                                 47.0          57.0         60.0        72.0            35.5
   Austria to end April 09                            15.0          13.7         8.7         0.0             0.0
   Belgium to end April 09                            30.0          0.0          0.0         0.0             0.0
   France to end April 09                             115.0         134.8        115.1       115             77
   Germany to end April 09                            5.4           5.3          5.1         4.8             0.0
   Netherlands to end April 09                        55.0          67.5         14.0        19.5            9.0
   Portugal to end April 09                           54.8          44.9         0.0         0.0             0.0
   Spain to end April 09                              30.0          62.5         149.3       0.0             0.0
  Country not yet known                                                          0.5         0               5
 Sweden to June 7, 2009                               15.0          10.0         10.0        10.0            9.6
 Switzerland to date                                  130.0         0.0          113.0       137.0           0.0
 Total reported or estimated selling                  497.2         395.8        475.8       358             136
 Remainder possible to September 26 2009                                                                     364
Sales announced to June 16, 2009 .                                                   Source: World Gold Council

                                                           ~ 30 ~ 
                              The Right Time To Buy Gold Is…NOW!

So far, signatories have sold only 136 tonnes of gold in its final year i.e. 08/09. Even during previous
years, signatories undersold their allowed ceiling (they sold 396 tonnes in 05/06, 476 tonnes in 06/07
and 357 tonnes in 07/08).

                       Chart: Central Bank Sales under CBGA2 (in tonnes)

                                         Source: World Gold Council

Although the official sector remains a net seller overall, the sentiment towards gold has changed.
Comments made by central bank officials, as well as the appearance of small-scale purchases by
certain countries, has once again underpinned the importance of gold as an important reserve asset.
This change in sentiment has been boosted particularly on account of the global financial crisis and
credit crunch, which led to the failure of several banks and other financial institutions, resulting in a
crisis of lack of confidence. Gold is a time tested monetary asset which is not subject to
manipulations, possesses excellent diversification properties, holds an intrinsic value and is
invulnerable to default. CPM says that it’s relatively recent discussions with 'numerous' Central
banks suggest that several have displayed an interest in possibly adding gold to their monetary

Sales from the CBGA 2 signatories seems to be easing and they are seen less willing to sell more
gold given the current backdrop of the worsening global crisis. Though, CBGA 2 signatories remain
net sellers, but it looks increasingly likely that there would be significant reduction in amount of gold
sales by them, very similar levels or even lower than that seen in the fourth year i.e. 2007-08.
Outside the CBGA signatories, we have seen small amounts of buying which is likely to continue.
The deterioration of the U.S economy and the follow up money creation to combat the crisis would
lead to depreciation of the U.S currency. This would lead other central banks to seek diversification
and a shift away from the dollar towards more qualitative assets and the biggest beneficiary is likely
to be Gold.

                                                 ~ 31 ~ 
                             The Right Time To Buy Gold Is…NOW!

                               Chart: Central Bank Sales (in tonnes)

                                       Source: World Gold Council

CBGA Renewed - CBGA 3
The ECB and 18 other central banks signed the third 5-year agreement on gold sales (CBGA 3). As
per the press release on the European central banks website, there are 4 important statements in the
agreement 1. Gold remains an important element of global monetary reserves; 2. The gold sales
already decided and to be decided by the undersigned institutions will be achieved through a
concerted program of sales over a period of five years, starting on 27 September 2009, immediately
after the end of the previous agreement. Annual sales will not exceed 400 metric tons and total sales
over this period will not exceed 2,000 metric tons; 3.The signatories recognize the intention of the
IMF to sell 403 metric tons of gold and noted that such sales can be accommodated within the above
ceilings; 4. This agreement will be reviewed after five years.

The annual cap of 400 metric tons is lower than 500 metric tons in the previous agreement. The
agreement is positive for gold as it eliminated the risk that central banks in Europe will dispose gold
in an uncontrolled manner. Indeed, this risk has diminished greatly in recent years. Although, there’s
no need for a new central bank agreement as sales by the signatories have been lower than the
allowable limit. Also, many of the signatories have announced an end of sale by them atleast for the
time being.

China has revealed that it has been secretly buying gold reserves…

China officially declared that it had added 454 tonnes, purchased since 2003, to its reserves totaling
its gold reserves to 1054 tonnes. That sounds like quite a lot, but it amounts to $30.9 billion, just a
fraction of China’s holdings of the U.S. dollar. The newly revealed gold cache accounts for only
about 1.6% of China’s total foreign exchange holdings. China appears to be slowly and quietly

                                                 ~ 32 ~ 
                             The Right Time To Buy Gold Is…NOW!

hedging its bets against a rapid decline or collapse in the value of the U.S. dollar. This re-emphasizes
gold’s role as a monetary asset, and central banks belief and confidence in gold to hedge dollar risks.

Going forward, we believe that central bank activity would remain at subdued levels.
Gold held in central bank reserves worldwide shrank by more than one-sixth over 20 years-from
1989 to 2009. The financial crisis has reminded central-bank chiefs of gold's use as the ultimate
international currency – the only form of money with intrinsic value. Going into 2009, central bank
gold sales have slowed to a crawl. This trend seems likely to continue. The world's second largest
gold-holding central bank – Germany's Bundesbank – commented, "National gold reserves have a
confidence and stability-building function."

A FT report said “sovereign wealth funds are cutting their exposure to the dollar due to increasing
concerns regarding the U.S. financial system and economy. Central banks internationally are doing
likewise and western central banks have sharply decreased their gold sales, while central banks in
Asia, South America and the Middle East are becoming net buyers of gold again”.

Scrap sales:
(Scrap sales refer to gold sourced from old fabricated products which has been recovered and refined
back to bars)

Scrap sales are largely sourced from individual holdings of jewelry. With the surge in gold prices, it
was natural to expect a marked acceleration in the volume of old gold scrap being generated. In
2008, a significant price rise motivated scrap sales with the intent of profit in the developing regions
of the world i.e. Asia and Middle East, which saw a more muted response in 2007. An important
factor in the West was the presence of distress selling triggered by the credit crunch and also a
slowdown in spending was evident. All these factors, along with higher inventory remelt by the trade
due to economic pressures, resulted in higher scrap levels.

Scrap selling has continued its surge in the first quarter of 2009 where Scrap supply almost equaled
mine production for the first time on record.

                           Chart: Supply of Recycled Gold (In Tonnes)

                                          Source: World Gold Council

                                                ~ 33 ~ 
                              The Right Time To Buy Gold Is…NOW!

In the more price-sensitive consumption centers like India, Middle East and Turkey, gold prices have
scaled to new record highs year after year. These traditional markets have been buying a lot of gold
in the past. With gold prices scaling to new record highs, and the returns further augmented by the
depreciating currencies, led to a surge in recycling activity enthused by profit taking motive. Jewelry
exchange is also relatively common when the gold price is high, being a cost-effective way of
updating jewelry pieces for a newer, or simply a different look. The fact that exchange activity has
remained strong in the current environment (buyers have not pulled away entirely) shows an ongoing
interest by consumers in owning jewelry, and suggests that buying activity will return at more
favourable prices.

Financial difficulties have also forced consumers to sell some of their assets, including their jewelry,
to raise much needed cash. However, this was more prevalent in the western markets than in the
non-western markets. Higher recycling activity has emphasized gold’s role as a savings and
investment vehicle and the intrinsic value that gold holds.

                                      Chart: Gold Scrap Sales
                       1300           Old Gold Scrap    Average Gold Prices   950
                       1200                                                   850
                        900                                                   650
                        800                                                   550
                        500                                                   350

                        400                                                   250
                              95 96 97 98 99 00 01 02 03 04 05 06 07 08
                                  Source: World Gold Council, Bloomberg

Going ahead, enhanced scrap facilities in the West and further increase in prices should keep this
element of scrap at a surprisingly higher level. Although, scrap or recycling as a source of supply
rather remains uncertain. With the increase in gold prices, there would be some additional scrap
ready to be sold in the market. It is also highly likely that the gold near the market has been sold in
the recent price spikes seen at the end of last year and early this year. The next surge in recycling
will require much higher gold prices to trigger any action from the owners.

The impact of credit crisis and its recessionary impact may also compel people to hold more hard /
real assets like gold, rather than convert it into cash.

Demand Factors:

Demand has been the major driver of prices, rather than supply side concerns. And this trend is likely
to continue. Demand for gold is still seen to be trending higher, despite the increasing prices. For
2008, identifiable gold demand was 3,659 tonnes; 4% higher than 2007. In value terms it was $101.7
bn, an increase of nearly 29%. In 2008, the first half of the year saw a decline in demand primarily
                                                 ~ 34 ~ 
                             The Right Time To Buy Gold Is…NOW!

due to price increase amidst higher volatility. However, with the decline in prices in the third
quarter, demand rebounded strongly negating the earlier losses in demand. An important aspect on
the demand front is that the spending on gold has increased considerably. Although demand in
tonnage terms has declined but in value terms i.e consumer budgets or amount spent has been
increasing. This signals that consumers are willing to pay a much higher price to buy gold.

             Chart: Gold Demand (1997- 2008) (In tonnes – LHS) (In $US mn – RHS)

                                         Source: World Gold Council

Growing affluence in Asian countries, especially India and China have helped spur demand over
previous years. In 2008, there was a sharp decline in India as higher prices accompanied by higher
volatility acted as a deterrent for increased purchases, whereas China showed a much greater
strength, witnessing growth of more than 18%. Jewelry and investment demands showed robust
strength, but the latter posted impressive growth as investors sought less risky assets and looked keen
to diversify their portfolios turning to gold in search of a safe haven amidst plummeting stock
markets, deteriorating property markets and falling growth. Middle East, another important gold
market, saw a minor decline of 2% in 2008. Buying was more subdued in the first two quarters as
high and volatile prices along with rising inflationary pressure deterred buying, whereas the decline
in prices attracted significant buying interest.

Developed countries like USA, Italy, UK saw heavy declines in jewelry demand amidst the
worsening economic scenario, whereas there was some offsetting on account of buyers seeking safe
haven assets.

Going forward, investor demand will be the dominant force driving gold prices higher. We expect
demand from traditional buyers and emerging nations to continue albeit at a slower pace on account
of high prices and gloomy economic scenario. Jewelry demand in India, China and Middle East is
likely to be hit on account of higher prices. But, there would be spurts in demand on any price

                                                ~ 35 ~ 
                              The Right Time To Buy Gold Is…NOW!

declines acting as a floor for gold price. Given their still relative higher economic growth which
would continue to drive the wealth creation process and thereby induce buying. Liberalization in
China would continue to increase demand from consumers. Increase in Chinese demand can also
come as a surprise for gold markets. Although, jewelry demand would likely take a hit in areas of
U.S, and Europe where the economic outlook calls for deteriorating growth. However, investment
demand will remain robust as investors seek the safe haven of gold in times of turmoil. We have seen
big flows continue in gold ETFs and bars and coin demand has seen unprecedented buying in
different parts of the globe and more so in developed markets.

On the investment side, demand is likely to remain robust given the backdrop of a recessionary
environment, falling asset values and a need for a safe haven to protect wealth. More inflows into
gold as the current investment theme calls for “Hard Assets for Hard Times”, and amongst the pack
of real assets, gold – a time tested asset holds intrinsic value, invulnerable to defaults and not subject
to manipulations- looks more promising.

Jewelry Fabrication:

(Jewelry refers to all newly-made carat jewelry and gold watches, whether plain gold or combined
with other materials. It excludes second-hand jewelry, other metals plated with gold, coins and bars
used as jewelry and purchases funded by the trading in of existing jewelry)

High gold prices and deteriorating economic conditions have resulted in a severe decline in demand
for jewelry. The extent of weakness in jewelry demand has been severe in the early part of 2009 as
compared to what we saw in the whole of 2008. During 2008, demand in tonnage terms slipped by
11% over the previous year. However, spending on gold jewelry purchases remained quite robust,
increasing by 11% to a total of US$ 59.7 bn.

                                       Chart: Jewelry Demand
                       3500            Jewellery Demand        Average Gold Prices   750

                       3000                                                          650

                       2500                                                          550

                       2000                                                          450

                       1500                                                          350

                       1000                                                          250
                              95 96 97 98 99 00 01 02 03 04 05 06 07 08
                                      Source: World Gold Council, Bloomberg

The spreading of the financial crisis across geographies and businesses has led to gloomy economic
conditions, poor credit conditions and depressed consumer confidence levels. This has considerably
reduced discretionary spending and thereby affected demand for gold jewelry. Higher gold prices
have also played a dampener on the demand front. The gold price tested record highs in local
currency terms in several countries. This had a two-fold effect on jewelry demand. Primarily, the

                                                  ~ 36 ~ 
                              The Right Time To Buy Gold Is…NOW!

price rise stifled demand due to the simple fact that it became less affordable – particularly in light of
consumer confidence and disposable income levels being adversely affected by the economic
downturn. The other way in which high gold prices affected demand was gold jewelry’s unique role
as a form of investment in many countries. In markets such as India, Indonesia and some of the
Middle Eastern markets, high prices represented an opportunity for consumers to sell back jewelry
purchases for a profit before buying again at lower prices. The volume of gold jewelry demand in the
first quarter was 24% below the previous year’s levels, equating to a 25% decline in $US value

                                Chart: Indian Gold Demand (in tonnes)

                                           Source: World Gold Council

The decline in jewelry demand was apparent in both western and non-western markets. Traditional
markets like India, Turkey, and Middle East were very badly hit in terms of demand from consumer.
China and Hong Kong were notable exceptions where demand increased by 3% and 8% respectively.
Demand in both countries was aided by the purchasing on the occasion of the Chinese New Year and
other festive events, which usually stimulate spending on gold jewelry gifts.

China has been surprising with positive numbers. What lies ahead?
Chinese gold demand has been rising steadily. This year when most countries saw a fall in gold
demand, the increase in Chinese gold demand has posted positive numbers. Unlike India, higher gold
prices have not deterred Chinese consumers from buying.

Despite the extremely challenging global economic conditions, the demand for Chinese gold is
continuing its rising trend. The 24 carat market, which has been a savings vehicle for Chinese
consumers for some time, has shown the most resilience over recent quarters. This reflects that most
of the purchases made are for investment purposes.

China has the ability to surprise …

Chinese gold production achieved the number one spot in just a matter of a few years. It now mines
more gold than South Africa and U.S.A. Chinese gold production came as a surprise for the gold
markets. Can China do it on the consumption front? China’s economy is booming and it has a
booming middle class with rising per capita incomes and a growing affluence for gold. The Chinese
have been biggest consumer for most of the base metals along with the second largest consumer of
Oil. The current trends were also seen in oil markets in 2003, with lack of large scale discoveries and
                                                 ~ 37 ~ 
                             The Right Time To Buy Gold Is…NOW!

the beginning of increased purchases from China. The increased demand from China came as a
surprise for the markets. Can China’s gold consumption increase significantly to surpass India’s
intake, the largest consumer of gold. China is currently the second largest consumer of gold.
Still, relatively lower per capita consumption, rising trend and the ability of the Chinese markets to
grow exponentially can take markets by a big surprise.

Going forward, reports from various traditional consumption centers suggests that jewelry demand
has picked up in the second quarter, largely in response to a stabilizing of the gold price at levels
slightly below the highs that prevailed during the first quarter. However, given the current
extraordinary global economic circumstances, a recovery in jewelry demand will probably depend
only to some extent on the direction of the gold price. The prospect for many economies is for
growth to deteriorate sharply this year, an outlook that suggests jewelry demand could well remain
under pressure. At the same time, any decline in prices will see huge off-takes from traditional
centers like India. Market sources suggest that a lot of gold was sold in India at levels of 14,000 -
14,500 with a view to buy them later, for a profit, when prices decline. But, they were surprised with
the further rise in prices and were regretting the decision. This shows that any decline in prices
would see a rush of buying from consumers to cover their gold, and also by consumers who were on
sidelines on account of high and volatile prices. Hence, it is highly likely that jewelry demand would
certainly act as a floor price to catch downsides if any.

Industrial and Dental:

(Industrial demand is the first transformation of raw gold into intermediate or final products destined
for industrial use such as gold potassium cyanide, gold bonding wire, sputtering targets and includes
gold destined for plating jewelry. Dental use refers to the first transformation of raw gold into
intermediate or final products destined for dental applications such as dental alloys.)

Industrial demand declined by 11% in terms of spending and 7% in tonnage in 2008 as the global
financial crisis had a considerable impact on the real economy. Demand declined in all the three sub
sectors viz., Electronics, other industrial & decorative segment and dental applications. The growth
rate in this sector was already slowing on account of continuous increase in prices over years and
higher volatility off late.
                               Chart: Industrial and Dental Demand
                       700                                                         1000
                                  Industrial and Dental      Average Gold Prices
                       500                                                         700
                       400                                                         600
                       300                                                         400
                       200                                                         300
                         0                                                         0
                             95 96 97 98 99 00 01 02 03 04 05 06 07 08

                                       Source: World Gold Council, Bloomberg

                                                   ~ 38 ~ 
                              The Right Time To Buy Gold Is…NOW!

Electronics, the largest component of industrial demand, was severely hampered by a lack of
confidence within world markets and a reluctance within the supply chain to commit to
replenishment of inventory as consumption levels waned. The electronics segment, which in recent
years has benefited from a robust global economy and stellar growth across developing countries, is
beginning to indicate an industry under pressure. Demand, particularly in established markets, has
started to cool as a result of the recent financial upheaval. A sharp reduction in consumer spending as
a result of the credit crisis and economic weakness was the primary reasons for the fall in demand.
Demand in Japan, the largest electronics market, slumped almost 15% relative to the previous year
levels as fabricators reduced output, due to an oversupply of semi-conductor related products.
Similarly, weakness was recorded in South Korea and Taiwan, with the former slipping by around
5% as fabricators slowed production lines in response to a lull in finished goods orders.
Other industrial & decorative segments also started wavering. The weakness in this sector was again
driven largely by the sharp fall in Indian off-take. Elevated gold prices and, particularly, price
volatility was the catalyst for the decline, as the demand for jari (a gold thread used in clothing)
remained sensitive to price fluctuations, with many consumers looking to alternatives as a result.

Gold used in dental applications is estimated to have declined as substitution to more affordable or
cosmetically pleasing applications such as base metal alloys and ceramics continued. There has also
been a shift to palladium, reflecting the widening in the discount to gold.

Initial numbers from 2009 show signs of worsening with deterioration in the global economic slump.
Gold demand in industrial and dental applications slumped 31% in Q1 2009 to just 80.2 tonnes.
Electronics off-take, the key component of industrial demand, plummeted 36% as consumer demand
evaporated, while gold used in the other industrial & decorative sector slipped 24%, chiefly as the
result of a near 70% decline in Indian off-take. Elsewhere, dental demand declined by 10% as a
higher gold price encouraged migration to more affordable alternatives. Trends of weakening
demand continue in this year and are likely to continue if there are no signs of revival.

Going forward, the slowdown in economic activity in most parts of the world would continue to keep
the demand under check. Electronics, automotive and the decorative segment are under tremendous
pressure and are pouring in lower demand numbers. In such a scenario, the industrial and dental
segment is likely to see declining growth rates in absence of any major improvement in the global
economic activity. Improvements in demand from this sector would largely depend on the rate of
economic recovery and the effectiveness of government stimulus packages to reignite consumer

Investment Demand:

The historic role of gold has been built on a reputation for protection, rather than profit. Stability and
not volatility was gold’s appeal. Prices were fixed at $20 per oz for over 200 years and then revised
to $35, where it stayed for over 30 years. But the recent price movements could put history to test.

                                                ~ 39 ~ 
                             The Right Time To Buy Gold Is…NOW!

                                   Chart: Investment Demand
                      1400          Investment Demand        Average Gold Prices   950

                      1200                                                         850

                      1000                                                         750

                       800                                                         650

                       600                                                         550

                       400                                                         450

                       200                                                         350

                         0                                                         250
                             95 96 97 98 99 00 01 02 03 04 05 06 07 08
                                     Source: World Gold Council, Bloomberg

Investment demand in gold has been growing by leaps and bounds. GFMS estimates that jewelry;
traditionally the largest driver accounting for nearly 80% of demand in the 1990s is estimated to be
about 58% during 2008. Gold ETFs in particular have caught the fancy of the investing public. In
2008, the total identifiable gold investment reached nearly $30 bn – an increase of nearly 100% over
the previous year and more than 20 times since the start of this decade.

Investor demand has been a primary driver during the recent gold rally. Overall investment demand
rose sharply in 2008 as the global financial crisis grew. Demand for gold ETFs was also extremely
strong during the year. As per the World Gold Council, ETF gold holdings increased by 321 tonnes
in 2008. At the retail level, growth was also seen in the coins and bars segment with reports of
shortages of physical supply at many important consuming centers of the world. Whether this
unprecedented event was just a fabrication bottleneck or a real shortage of supply remains to be
debated. However, it apparently looks like the suppliers were indeed struggling to keep pace with
demand. The rush in demand was primarily with regard to the objective to protect capital amidst the
collapses in the banking sector raising questions on the safety of bank deposits.

                        Chart: Net Retail Investment Demand (in tonnes)

                                    Source: World Gold Council

                                                ~ 40 ~ 
                             The Right Time To Buy Gold Is…NOW!

Demand flows were mainly from those consumer segments that have long-term horizons. Importance
of gold got re-emphasized on account of the financial and banking crisis; it looks like a shift towards
more real assets - gold benefiting with a larger share of an investor’s portfolio.

                        Chart: European net retail investment (in tonnes)

                                              Source: World Gold Council

                                  Chart: US Investment Demand

                                         Source: World Gold Council

In the Institutional investor segment, activity was mainly dominated by heavy selling from the more
speculative and short-term focused segments. The deterioration in global capital markets and high
levels of uncertainty over the outcome of the crisis led to heightened levels of speculative selling.

                                                ~ 41 ~ 
                             The Right Time To Buy Gold Is…NOW!

 The reasons for unwinding of these investments were 1. Unwinding of long gold-short dollar trades
as the dollar started to gain weight, 2. Liquidation by commodity index investors as the outlook on
commodities deteriorated on account of slowing growth; these indices included gold as an allocation.
3. Redemption pressures, margin calls and losses elsewhere forced funds to liquidate investments in
gold to raise cash as it was one of the few assets which were relatively better off. At the same time,
we even saw some longer term investors allocating more to gold as a means to preserve capital and
hold assets which are free from any credit risk.

                               Chart: Gold ETF Holdings (Tonnes)

                                             Source: World Gold Council

Going forward, the demand for gold as an investment option is only likely to increase. As financial
market worries persist, gold is likely to continue to find favour with the investing community. Asia
continues to be an untapped market for gold ETFs. As the financial markets evolve and greater
numbers of retail investors enter, the demand will only rise for ETFs. Shariah compliant Gold ETFs
are also being launched in the key Middle Eastern markets. Regulatory measures are also helping to
boost overall investment demand for gold. The ability to take gold exposure in China grew after the
China Securities Regulatory Commission announced that it had approved gold futures trading and
the Shanghai Futures Exchange launched futures trading on January 9, 2008.

We also believe that as central banks around the world drive interest close to zero levels, print more
money and implement other measures to revive the economy, this situation can potentially lead to
higher inflation over the long-term and can help gold trend upwards. As the U.S continues its drive
of massive money creation resulting in debasement of the dollar over the long-term would also help
gold as it bears an inverse relation with the dollar.

After witnessing one of the worst financial crisis and the resulting recession, investors have realized
the value of gold in their portfolio and this in turn has led buyers to add more gold to protect their
portfolio as a safe haven option.

But on the other side, increased investment demand is also likely to push up volatility.

Investment Demand seems to be the driving force behind gold prices and the trend is likely to
continue in the future. However, this source of demand remains highly uncertain and difficult to
predict. Since 2000, investment demand has grown at a CAGR of 24% although there has been a

                                               ~ 42 ~ 
                             The Right Time To Buy Gold Is…NOW!

high volatility in terms of year on year figure. During the same period, gold prices have increased at
a CAGR of 15%. Investment demand has grown at a much faster rate more recently. In 2008, it grew
by 74% and in the first quarter of 2009 it grew by 248%. Going forward, we believe gold prices will
increase in light of increased investments, but the quantum of flows may depend on multiple factors
which at best are difficult to predict.

We hereby examine different scenarios of varied investor demand and its impact on gold prices. We
have considered three scenarios for Investment Demand.
       i.      High Growth @ 30%
       ii.     Stable Growth @ 15% and
       iii.    Declining Growth @ -5%

                       Chart: Investment growth and Gold prices Forecast
                 3000                 High Growth

                 2500                 Stable Growth

                 2000                 Declining Growth

                         2000 2002 2004 2006 2008 2010 2012
                              Source: World Gold Council, Bloomberg, Quantum Estimates

The 2013 forecast for a high investment growth scenario yields us a gold price estimate of $3,000 per
ounce, which can be possible if we were to witness a scenario of hyper inflation and dollar collapse
where investors would rush to grab all the gold available irrespective of the prices, as there would be
a serious loss of confidence in the system and paper currencies.

A stable growth environment gives a price forecast of nearly $1,500 by 2013. And the declining
growth rate gives a price estimate of $725 an ounce but this scenario looks highly unlikely to occur.

Producer De-hedging:

(Net producer hedging – This refers to the change in the physical market impact of mining
companies’ gold loans, forwards and options positions.)

Gold hedging means that producers enter into a contract to sell gold in the future; they commit their
future production. Producers traditionally hedged their gold production to lock in prices and protect
their overall margins. While this was a prudent and conservative option, the flip side was that most
producers were unable to benefit from the gold price boom.

                                                    ~ 43 ~ 
                             The Right Time To Buy Gold Is…NOW!

With all indicators showing that gold prices are likely to go higher in the future, producers have
changed their strategy and seem willing to take on greater risks.

Most producers have already unwound a significant portion of their hedge book. Dipping mine
output could also be a catalyst. If a producer hedges more gold than he is able to produce, he would
suffer substantial losses if prices rise.

                                  Chart: Producer De-hedging
                      3500          Jewellery Demand         Average Gold Prices   750

                      3000                                                         650

                      2500                                                         550

                      2000                                                         450

                      1500                                                         350

                      1000                                                         250
                             95 96 97 98 99 00 01 02 03 04 05 06 07 08
                                    Source: World Gold Council, Bloomberg

Increased de-hedging means that gold producers are buying back their delivery commitments,
thereby decreasing the effective supply. The pace has picked up in recent years. From a net level of
 -86 tonnes in 2005, the volumes moved to -373 tonnes in 2007 and -400 tonnes in 2008.

                                    Source: World Gold Council

Going forward, we expect that producer dehedging is likely to continue. Many mining companies
have indicated that they intend to move to unhedged production. The extent of the dehedging

                                                ~ 44 ~ 
                             The Right Time To Buy Gold Is…NOW!

however is likely to slow down, as the current size of the total hedge book of all the producers stands
at less than 483 tonnes at the end of 2008. If the prices fall lower, there is a possibility that there
might be opportunistic cuts by bullish producers who have comfortable cash positions. Investors
wanting an exposure to gold via equities do not like gold producers with any hedge positions as it
does not allow them to tap the complete upside of the yellow metal. At the same time, we might also
witness some fresh hedging being put in place. In the recent sell off in equities including gold mining
stocks, some of the influential money restricting mining companies might have moved out and
provide the company management to take a free call on whether hedging would be the viable option.
Given the current financial crisis, it has become increasingly difficult for these companies to obtain
debt financing without a hedging program in place as it increases the risk and there are heightened
levels of risk aversion seen in the investor community.
Dehedging will surely continue going forward, but would be comparatively restrained on a net basis.
It still looks more likely that dehedging would remain on the demand side of the equation.

Summing up, we remain positive on Gold. The macro-economic and supply-demand drivers point to
a continued increase in gold prices. We do not believe that there is a ‘bubble’ developing in gold.
The relatively high prices seen over the past year are supported by fundamental factors. Broad
themes that would drive gold prices are dollar depreciation, rising inflation and diversification of
investments and reserves to gold. Geopolitical flashes will be equally supportive as and when any
such event intensifies. On a very conservative basis, we expect gold prices to move beyond record
prices set in 2008 and climb to levels above $1,300/oz by 2012. Remember, that this is a
conservative estimate.

                                   Chart: Demand Supply Model

                                      Supply                       Demand
                                      Surplus / (Deficit)          Gold price






                          2000    2002       2004           2006     2008       2010   2012
                                       Source: Bloomberg, Quantum

What recent patterns indicate…
Going by the recent price trends, gold has shown a higher sensitivity to the changes in demand
supply equilibrium. If we factor only these recent behavioral patterns in our demand supply model to
arrive at future gold price, we get much higher price forecasts. This approach yields us a gold price
estimate of prices reaching above $1,700 by 2012.
                                                  ~ 45 ~ 
                              The Right Time To Buy Gold Is…NOW!

A more positive approach

An optimistic scenario for gold prices wherein any of the factors described above intensify, may lead
prices to climb above $1,500. Any strengthening of the demand supply gap or changing macro-
economic dynamics would lead to gold trending even higher. If circumstances turn worse, like if
there’s loss of faith in paper currencies or there’s hyper inflation - Zimbabwe style - then we would
not at all be surprised if gold prices more than double in value from current levels or even increase to
$2,000 – 2,500 levels like it did in the 1980s given its positive fundamentals. As our high investment
scenario also forecasts, prices could climb to near $2,400 levels by 2012.

From an investor’s perspective, the volatilities and price dips in gold prices have been worrying.
There may be short-term volatilities but gold prices are clearly trending upwards. Given the positive
fundamentals, it would be prudent to stay invested to reap benefits of the long-term increase in gold
prices. Also, given gold’s historically low correlation to other assets and its reputation of being a
store of value, an allocation of gold would be invaluable. So we suggest, continue to accumulate gold
and make the most of any declines in the market. We reiterate that gold’s fundamentals still make it a
very attractive investment.

Gold Supply and Demand:
                                    2005      2006     2007     2008    2009*   2010*    2011*    2012*
Mine supply                        2,550      2,481    2,478    2,416   2,435    2,460    2,484   2,497
Net producer hedging                (86)      (373)    (444)    (358)   (180)    (100)     (80)    (50)
Total mine supply                  2,464      2,108    2,034    2,058   2,255    2,360    2,404   2,447

Official Sector Sales               662        367      484      246     280      320     320      350

Old Gold Scrap                      886       1,107     958     1,215   1,100    1,000    900      880

Total Supply                       4,012      3,582    3,476    3,519   3,635    3,680    3,624   3,677

Jewellery                          2,707      2,283    2,404    2,186   1,967    1,869    1,962   2,061
Industrial and Dental               431        458      462      436     405      410      422     434
Sub total above fabrication        3,138      2,741    2,866    2,622   2,373    2,279    2,384   2,495

Investments                         593        659      685     1,184   1,641    2,019    1,918   1,907
Net Retail Investments              385        399      432      863     992     1,112    1,056   1,088
ETFs and Similar                    208        260      253      321     648      908      862     819

Total Demand                       3,731      3,400    3,551    3,805   4,014    4,298    4,303   4,402

Surplus / Deficit                   281        182      (76)    (286)   (378)    (618)    (678)   (725)
Average Gold price                  445        605      697      872     982     1,224    1,271   1,305

                                               ~ 46 ~ 
                                   The Right Time To Buy Gold Is…NOW!

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                                                        ~ 47 ~ 

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