Gold For Beginners: EM Conference CallEdel Tully, Precious Metals StrategyEdel.Tully +44 207 567 6755

Julien Garran, Metals and Mining Research Julien.Garran@ubs.com +44-20-7568 3540

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June, 2010

2ab

Gold’s Bull Run Persists

Source: Bloomberg, UBS

3ab

Assets and loan flow

Local banks lendto local consumers

& businesses

Growth picks up,Asset prices rise

Global central banks’ reserves rise

US authorities reflate

This attracts moreCapital flows

This bids up commodity prices

Raises central bankReserves at commodity

exporters

Capital flows out of the US to

emerging economies

Source: Bloomberg, UBS

4ab

Clock watching

Long; US equities, ‘growth’, bonds,

Short; Commodities,emerging markets

Source: UBS

Risk on

Risk on

Risk off

Risk off

Absolute trades Relative trades

Very positiveemergingmarketsandresources

Very negativeemergingmarketsandresources

1

42

3Reflationary boom

Long; US bonds, US dollarShort; Commodities,

emerging markets

Long; Commodities, emerging markets

Short; dollar, bonds

Long; Commodities, commoditycurrencies, emerging marketsShort; US bonds,

debtor currencies

I nflationary bust

Deflationary bust Disinflationary boom

US$s Out US$s Out

US$s I n US$s I n

5ab

2010 markets impacted by European Sovereign Risk

Eurozone sovereign (10y) spreads over Bunds

Eurozone Sovereign CDS premium (5y senior)

Source: Bloomberg, UBS

Faith in fiat currencies weakens, gold viewed as flight to quality

6ab

Gold in Multiple Currencies

Gold in alternative currencies remains popular trade • YTD: XAUEUR +31%; XUAGBP +23%; XAUUSD +11%

Source: Bloomberg, UBS

7ab

Gold and the USD – a negative relationship no more

• In May, decoupling of traditional gold and USD relationship• Previously, a stronger USD had negatively impacted gold’s direction

Source: Bloomberg, UBS

8ab

Gold versus the UBS Risk Index

• Risk averse market conditions in Q2 – fuels gold strength

Source: Bloomberg, UBS

9ab

The Path to Monetary Policy Normalisation begins…

Source: UBS FX Strategy

RBA and Norges Bank have already raised interest rates• UBS economists expect a US rate hike from September, ECB much later• Rising US interest rates (in particular) without an inflation backdrop could be

negative for gold

0.0

3.0

6.0

9.0

Pe

r C

en

t

2009

G10 Policy Interest Rates

2009 2007

BOJ

SNB

ECB

Riksbank BOC Fed

BOE

RBA

RBNZ

Norges

10ab

Gold and Inflation Expectations

QE actions of 2009 created an inflation potential…

• Prompted gold buying but those expectations now stalled• Some concerns for anticipated inflation remain, but time horizon extended

Source: Bloomberg, UBS

11ab

Emerging Markets are telling an inflation story though…

Era of declining inflation in emerging markets is over• Inflation is largely concentrated in Asia• China and India centred – gold positive

Source: Bloomberg, UBS

12ab

Fiscal Indicators – Past, Present and Predicted – inflation risk?

Government Debt as % of GDP

Government Balance as % of GDP

Source: UBS

13ab

Unstable Debt Dynamics - Potential for Inflation

QE actions of 2009 fuelled significant gold demand

Risk that persistently high levels of public debt will drive down capital accumulation, productivity growth and long term potential growth. 

Long term fiscal imbalances pose significant risk of higher inflation:— Through Debt Monetisation (quantitative theory of money)

– But increasing interest rates to fight inflation equals larger debt burden— Potential to inflate away the real value of debt

BIS Paper: The future of public debt: prospects and implications— “History shows that countries that ran high public debts eventually ended up

with high inflation because governments were unwilling to pay high interest rates”

— Examples of Belgium, Spain and Italy pegging interest rates and resorting to debt monetisation post WW1

14ab

Lack of confidence in monetary system, gold’s moment?

“The main thing we miss today is universal money. Gold fulfilled this role from the time of Augustus to 1914. The absence of gold as an intrinsic part of our monetary system makes our century, the one that has just past, unique in several thousand years …

I firmly believe gold will be a part of the international monetary system sometime in the twenty first century. ”Robert MundellNobel Laureate in EconomicsAcceptance Speech—December 1999

Getting Specific on Gold Fundamentals

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16ab

Central Bank Gold Sales: 2009 = Historic Year

• Change in multi-decade official sector approach• Overall net sellers of 41 tonnes in 2009, but net buyers in Q2, Q3 and Q4• One of the largest fundamental shifts in this market

Source: GFMS, WGC, UBS

17ab

Makeup of Gold Official Sector Reserves

Source: WGC, UBS

Asia significantly underweight Gold

18ab

CBGA3 – Limited Sales to Date, IMF dominated

Source: WGC, UBS

19ab

Not just the official sector which has altered its gold course In 2009, gold investment demand was larger than jewellery demand

— the first occasion since 1980

Jewellery fabrication represented just 43% of global mine production

Investment angle takes up the slack— Gold price heavily dependant on investor sentiment; supply and demand

balances of limited importance

Main players this year:— Official Sector: continued IMF selling, but overall buying dominated trend— Investors: getting longer— Jewellery holders: priced out of the market— Potential for scrap supply to dampen rallies— Fundamentals of limited importance; externalities of economic forces will

drive gold

20ab

Gold Primary Mine Supply

• Mine supply typically follows a downward trend• Increased 7% in 2009 due to new projects• But Q1 2010 South African gold production fell 12.4% YoY• Henry Tax implications - expect lower mine supply

Source: GFMS, UBS

21ab

Jewellery Demand – the negative trend extends

Source: GFMS, UBS

22ab

Jewellery Sales in Traditional Hubs Decline

• Current gold price prohibitively expensive• India reflective of other regional hubs

Source: Bloomberg, UBS

23ab

As jewellery demand diminishes, investors now dominate

• Sharp surge in investment is the primary catalyst for rising gold price

Source: GFMS, UBS

24ab

Producer Hedging – Story Unchanged

• Global Hedge Book at 236 tonnes end 2009• Anticipate limited demand from this avenue going forward

Source: GFMS, UBS

25ab

Scrap Supply – record high in 2009

• With current gold price, expect scrap supply to resemble 2009• This will act to curtail rallies

Source: GFMS, UBS

26ab

Gold – Through the Investment Lens Macroeconomic forces and sovereign crisis have prompted heightened investor flow

–> significant safe haven demand for gold

Investment demand is the strongest driver — Through all investment vehicles: Futures, OTC, ETFs, Bars and Coins.

The fear trade: coin and small bar demand— Reflects concern over debt position of many industrialised nations, inside and outside

Europe

The diversification trade

The Armageddon trade

Diversification within diversification – increased enquiries about allocated / segregated metal

Underpinning the market:— Official Sector see-change: from net sellers to net buyers— Medium term threat of inflation

27ab

Intense ETF buying in May – new record high

• After a slow Q1, ETF buyers have returned in force• May inflows equal 4.8 moz, largest monthly creation since Feb 09

Source: UBS; WGC, ETFS, ZKB, and others

28ab

ETFs – Drilling down in on a daily basis

• Rolling monthly increase hit 5.34 moz on June 3, levels not seen since March 09• Closely aligned to demand for physical metal – bars and coinsSource: UBS; Bloomberg, WGC, ETFS, ZKB, and others

29ab

Comex Net Longs Get Longer

• Comex speculators /investors near record net long position • Following March’s liquidation, one way path has been followed

Source: CFTC, Bloomberg, UBS

30ab

US Mint Coin Sales - May volume highest since 1999

Replicated across Mints & UBS sales - reflection of the fear trade

Source: US Mint, Bloomberg, UBS

31ab

Gold Train continues – Short Term Thoughts

Investment demand persists— ETF inflows at all time high— Comex net longs near all time high— Persistent coin and small bar demand

Jewellery demand sluggish

Scrap supply risk— In May, this helped to stall gold’s rally; similar to Q1 2009— $1250 appears to be a significant supply point

So long as fears surrounding the world’s debt baggage remain heightened and sovereign risk concerns continues, gold should benefit

Threat of gold caught in cross-fire of another extreme de-risking event— Buy on dips

Forecast $1300/oz in one-month; $1200 in three months

32ab

Looking further out

Gold to average $1135/oz this year, $1250 in 2011— Expect new high in H2 2010— Exchange investment demand to remain firm— Jewellery demand at current prices to fall, scrap to rise— Extension of safe haven demand— Central banks as net buyers

Anticipate greater diversification flows

Inflation threat to grow

So long as fears surrounding the world’s debt baggage remain heightened and sovereign risk concerns continues, gold should benefit