What’s happening to gold? Place your bets

What’s happening to gold? Place your bets

Maurice GlucksmanJack WoodhouseBianca Granara

London – February 9th, 2012

Disclaimer: WE ARE NOT MAKING ANY INVESTMENT RECOMMENDATION IN ANY FORM

This research has been prepared by Hamilton Ventures LLP (‘Hamilton’). This research material is a marketing communication. It is not Investment research and has not been prepared in accordance with legal requirements designed to promote investment research independence and is also not subject to any prohibition on dealing ahead of the dissemination of Investment research. This research is intended for professional investors only, it is not intended for retail customers as defined by the FSA. This research report should not be distributed to, nor intended for use by any person/entity who is a resident/citizen of, or located in, any jurisdiction where such publication, distribution, availability or use would be contrary to regulation or law, or which would subject Hamilton to any registration/licensing/authorisation within the said jurisdiction. No offer or invitation is made to any person’s resident outside the UK and in particular US persons who are resident in the USA organised under the laws of US or any state, which are prohibited from investing in any products or using any of the services referred to herein.

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Purpose of this presentation

• SHARE SOME OF OUR VIEWS ON HOW SYSTEM

DYNAMICS CAN HAVE REAL IMPACT ON

INVESTMENT

• YOU MIGHT LEARN A LITTLE ABOUT GOLD,

POLITICS AND PREDICTION MARKETS

• WE HOPE TO LEARN SOMETHING FROM YOU


Gold is going up. What’s next?

Gold Prices 1990-Today

Source: US Geological Survey, Kitco, Hamilton Ventures research

1990 2000 Today


Gold Price. The experts say: $1700 - $20,000/oz

Source: Hamilton Ventures research

Mark BristowCEO Randgold

“More upside than downside [in gold price]. Increased demand from new breed of central banks:

emerging markets trying to manage foreign exchange risks”

– Bloomberg (Feb 2012)

Marc Faber

Gold is “Dirt Cheap” — Price Could Reach $10,000 per Ounce –Gloom Doom

and Boom Report (Sep 2011)

“Gold to exceed $12,500 to balance US debt” – King World

News (Jun 2011)

Jim Sinclair

“Why Gold Above $15,000 Per Ounce By 2020 Is Realistic

Without Hyperinflation” – The Daily Capitalist (Jun 2011)

$1,775 - 2,200/oz –Kitco News (Jan 2012)

Alf Field

Correction in Gold is OVER and on Way to $4,500+! –Munknee.com (Jan 2012)

• Widely divergent views

• Intangibles are most often cited as key drivers

• Rarely is supply & demand mentioned


Gold industry is cyclical

Source: US Geological Survey, Kitco, Hamilton Ventures research

Historical Gold Production and Prices


Now you just might know more about the industry than many gold investors...

…you are ready to place a bet


Agenda: 30 minutes

1. DISCONNECT FROM THE INTERNET

2. GIVE US £2 TO PLACE YOUR BET IN TWO PREDICTION MARKETS

3. BET ON GOLD FUTURES

4. RECEIVE MORE INFORMATION ON GOLD

5. BET AGAIN

6. DISCUSS


2012 Republican Presidential Nomination

POLLS

Source: Intrade, Gallup, Hamilton Ventures analysis

TODAY*

*03/02/2012

Romney

Gingrich

Romney

Gingrich

31%

25%

88.8%

4.5%

PREDICTION MARKETS


What will happen next with GOLD?

Source: US Geological Survey, Hamilton Ventures research

1990 2000 Today

Price Nominal US$/oz

2014


Gold price in December 2014:Let’s create our own prediction market. Place your bets . . .

TODAY*

*02/02/2012

$1,760/oz

$3,000+/oz

$2,500 – 2,999/oz

$2,000 – 2,499/oz

$1,500 – 1,999/oz

$1,000 – 1,499/oz

$500 – 999/oz

Source: Kitco

DEC 2014?


And the winners are: $1,500 – 1,999/oz

$1798/oz

Source: Kitco, CME Group

Comex Gold Futures 2 Feb 2012


The birth of our model

Mountain of data

Analyst

Adding everything up is essential

Industry is undergoing structural changes

Some market responses to price seem predictable

There are several known unknowns

A handful of key observations/ relationships


Most analysts ignore 66% of supply: We’re adding everything up

Historical Gold Supply by Source

Source: ABN Amro, World Gold Council, Hamilton Ventures research

3374

40484231

An

alyst Focu

s

Mystery Mines

Recycling

Analysed Mines


Mix of supply and demand is changing rapidly: one example of structural change

Source: World Gold Council, Hamilton Ventures research


More ‘fast’ supply and ‘fast’ demand

F A S T

F A S T

S L O W

S L O W

Price Volatility will be

impacted



Old world New World

Supply and demand slow moving

Half of supply and demand is fast

Opaque fragmented markets ETFs, COMEX

Poor information More than you can possibly digest

Well understood sources of supply

Diverse and Mysterious Supply

Sovereigns and reserves well aligned All out of whack

Structural changes

Past is a poor guide to the

future


Predictable market response: correlation of recycling with price

Asian Financial

Crisis

Global Financial

Crisis

Asian Financial

Crisis

Global Financial

Crisis



Known unknown: Analysed mines say they will keep expanding. Will they?

Gold Mine Production Forecast 2011 – 2015

Source: Standard Chartered Equity Research

17171861

19952145 2208


Trust us, there is a model

Confidential


Our model in more detail: helps us think through the impact of structural changes

‘Predictable’ Behaviour

Known Unknowns Price is a

Key Driver

Impacted by Structural ChangeSimulated Scenario Input

Price

Supply

Analysed Mines

Mystery Mines

Recycled Gold

Demand

Jewellery

Technology

Investment

Recycling

Sovereign ?

Key OutputPhantom demand

Consequence of everything else

Confidential


22

The simulation closely replicates historical market trends

Investment Demand Jewellery Demand

Technology Demand Recycled Supply

ModelData

60 M

45 M

30 M

15 M

02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Time (Year)

100 M

75 M

50 M

25 M

02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Time (Year)

20 M

15 M

10 M

5 M

02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Time (Year)

60 M

45 M

30 M

15 M

02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Time (Year)


Mines Supply200 M

150 M

100 M

50 M

02000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Time (Year)

Analysed Mine Supply oz/YearMystery Mine Supply oz/Year

One Possible Future Scenario (of many)

Price peaks at $2500 and repeats 1980s Mines deliver on their production plans

Analysed

Mystery

4,000

3,000

2,000

1,000

02000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Time (Year)

gold price used : Mines supply grows 5% CAGR Sovereigns steady $/ozSovereigns keep buying150 M

100 M

50 M

0

-50 M2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Time (Year)


Too much gold

TOTAL Demand has to nearly double to keep inventories in

balance

‘Phantom’ Stocks would have to accumulate by 20,000

tonnes in 9 years = 2.5x US Sovereign Holdings

Phantom Demand must explode Significant Phantom Stocks result400 M

300 M

200 M

100 M

02000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Time (Year)

Jewellery

Technology

InvestmentPhantom

80,000

60,000

40,000

20,000

02000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Time (Year)

US Sovereign Holdings: 8,133 tonnes

Other Sovereign Holdings

Phantom

Confidential


What gold price do you bet would balance supply & demand?

PLACE YOUR BETS!

$3,000+/oz

$2,500 – 2,999/oz

$2,000 – 2,499/oz

$1,500 – 1,999/oz

$1,000 – 1,499/oz

$500 – 999/oz


IN THIS SCENARIO: $1000/oz

Gold price must drop to $1,000Jewellery demand goes up

Technology demand goes up

Less investor demandRecycled supply goes down

4,000

3,000

2,000

1,000

02000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Time (Year)

100 M

75 M

50 M

25 M

02000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Time (Year)

40 M

32.5 M

25 M

17.5 M

10 M2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Time (Year)

60 M

45 M

30 M

15 M

02000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Time (Year)

100 M

75 M

50 M

25 M

02000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Time (Year)

Confidential


Summary

Please Collect your Winnings

• Gold supply is like a dormant volcano erupting every 30 years

• Another eruption may be imminent

• An integrated approach helps identify eruption signals

• The right amount of modelling, together with other

techniques, yields timely insights and decisions

• DO NOT INVEST BASED ON THIS PRESENTATION!

Confidential Confidential


What’s happening to gold? Place your bets

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