Aurum The future simply awes

January 2010

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Gold needs no introduction!

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Gold : Key Characteristics

Basis of monetary standards maintained by IMF Malleable and ductile metal Good conductor of heat and electricity and not impacted by corrosion Melting point is at 1064.18 C, Boiling Point at 2856 C Industrial applications like : dentistry and electronics Weight measured in troy ounce or grams.

Purity of Gold
Carat is used for measurement of purity of gold. (At times written as karat)

where X is the carat rating of the material, Mg is the mass of pure gold or platinum in the material, and Mm is the total mass of the material.

Caratage Fineness 24 999 22 916 21 875 10 417 9 375

Gold Prices - An Enigma

Gold Price too may determinants

Currency markets

Monetary Policy

US Economic data

Gold Prices Geo-Political Tensions Crude oil/ Energy prices

Mine Supply

Demand in India/ China

The most important price determinant currently is Hedge Fund/ ETF investment in bullion
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Its different. Its a monetary asset.

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Central Banks Treasure

80.00 United States 70.00 60.00 50.00 % of reserves 40.00 30.00 20.00 10.00 0.00 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Germany France Italy Switzerland ECB India

USA is major holder of gold in its national coffers, in value as well as tonnage terms.

CBGA forms a formidable force in price control of the yellow metal.

Gold Reserves (USD million) 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0

Q1 2000

Q1 2007

The above ground stocks as per GFMS estimates are about 155,500 tonnes.

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Fr an ce

Ch in a

Sp ain

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Ru ss ia

St ate s

lan ds

Po rtu ga l

Ja pa n

EC B

In di a

an

eth er

Ta iw

ni te d

Source: GFMS, WGC

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By the tonne .
Gold Reserves (T onnes) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

Q1 2000

Q1 2007

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EC B

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nd

in

Po rtu ga l

et he r

V en ez

itz e

in gd om

St at es

Ch in a

Ja p

Fr a

Ta

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ni ted

Sw

Source: GFMS, WGC

In tonnage terms, US reserves stand largely unchanged, but due to higher prices of gold they have risen to 76% from 54% of total reserves held by the country. 20% or about 30,280 tonnes are world reserves (including IMF) IMF holds about 3,218 tonnes.

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Efficient Frontier Theory

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Efficient Frontier Theory

Portfolio Series of S&P 500 Total Return Index and Toronto Gold & Precious Minerals Total Return Index for the Holding Period of 1971 - 2003, Annual Rebalancing
13%

12%

85% S&P 500 / 15% TSE Gold Essentially the same risk level but significantly higher return average annual return.
Peaks at 35% TSE Gold & Precious Minerals Index

Average Annual Return

11%

10%

100% S&P 500

9%

8%

100% TSE Gold & Precious Minerals Index

7%

6%

0%

5%

20 %

35 %

15 %

Volatility (Standard Deviation)

Commodities An asset class by itself!!

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50 %

30 %

40 %

45 %

10 %

25 %

Nifty Volatility vs Bullion volatility

60.00%

Silver
50.00%

Nifty Gold

40.00%

30.00%

20.00%

10.00%

0.00% 2-Jan-97

2-Jan-98

2-Jan-99

2-Jan-00

2-Jan-01

2-Jan-02

2-Jan-03

silver

nifty

gold

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Global Bullion Market Structure

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Global Bullion Market - LBMA

London Bullion Market - Incorporated in 1987 FSA www.fsa.gov.uk under Financial Services and Markets Act 2000 OTC Market Clearing through LBMA Clearing house Standard dealing amounts between market makers Gold 500 Ounce (15.5 kg) Silver 100,000 Ounce (3215 kg) Good delivery London Gold Bar Size - 400 Ounce (12.5 kg) , 995 fine Silver Bar Size 1000 Ounce (30 kg), 999 fine

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Global Bullion Market Comex

Symbol Expiry Trading Unit Quotation/ Base Value Tick Size Initial Margin Delivery Centers

GC On every 5th of the alternate month (Oct, Dec, Feb, April, June, Aug) 100 troy ounces 1 troy ounce 10 cents per troy ounce $3,375 per contract A designated depository licensed by the exchange.

Quality Specification

995 purity ; It should be serially numbered Gold bars supplied by LBMA approved suppliers or other suppliers to be submitted along with suppliers quality certificate.

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Global Bullion Market TOCOM

Symbol Expiry Trading Unit Delivery Unit Quotation/ Base Value Tick Size Initial Margin Delivery Centers

Gold 3rd business day prior to delivery day (Delivery day = last day of even month) 1 kg 1 kg JPY/gram JPY 1 per gram JPY 165,000 (approx 7%) A designated depository licensed by the exchange.

Quality Specification

99.99% purity; specified warehouses

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Indian Commodity Exchanges

Multi Commodity Exchange

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Gold MCX Contract Specification

Symbol Expiry Trading Unit Quotation/ Base Value Tick Size Price Quote Initial Margin Delivery unit Delivery Centers Quality Specification GOLD On every 5th of the alternate month (Oct, Dec, Feb, April, June, Aug) 1 Kg 10 gm Re. 1 per 10 gm Ex-Ahmedabad 7% 1 Kg Mumbai and Ahmedabad at designated clearing house facilities of Group4 Securitas 995 purity ; It should be serially numbered Gold bars supplied by LBMA approved suppliers or other suppliers as may be approved by MCX to be submitted along with suppliers quality certificate.

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Gold Near Month Price-Volume Data on MCX

Rs. / 10 gm
11,500

Volume in kg

100,000

10,500

80,000

9,500

60,000
8,500

40,000
7,500

6,500

20,000

5,500

0
M ar-04 Jul-04 Nov-04 M ar-05 Jul-05 Nov-05 M ar-06 Jul-06

Nov-03

VOLUME

MCX

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Correlation studies!!

Rs/10 gm
10500

$/ Troy ounce
750 700

9500

650

Correlation: 0.99
600 8500 550 7500 500

450 6500 400 5500

No v-0 3 J an-0 4 M ar-0 4 M ay-0 4 J ul-0 4 Sep -0 4 No v-0 4 J an-0 5 M ar-0 5 M ay-0 5 J ul-0 5 Sep -0 5 No v-0 5 J an-0 6 M ar-0 6 M ay-0 6 J ul-0 6

350

MCX

COMEX

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Features Indian Bullion Market

Bullion Market players International suppliers Authorised agencies Wholesale traders Jewellers: Domestic and Exporters Retail investors

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Indian Bullion Market Structure

International suppliers Large Bullion Banks including CSFB, MKS Finance, UBS, N M Rothschild, Societe Generale, etc. Active players on the London Bullion Market, COMEX and TOCOM Authorized agencies 14 Banks (Bank of Nova Scotia, ICICI Bank, etc) and 4 agencies (MMTC, STC, PEC & HHEC) Import on consignment basis from Dubai, Switzerland, London No price risk taken by these agencies Commission based business

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Bullion Market Structure

Wholesale traders - 25 Import through authorised agencies and bullion banks Income - Arbitrage and price risk Active players on Comex through unofficial route Jewellers More than 20000 Domestic Buys from wholesale traders Risk management through unofficial channels Margins making charges Exporters Purchase based on gold loan from authorised agencies Price fixing flexibility upto 6 months Margins making charges

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Demand & Supply Overview

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The two sides of a coin.

Source: GFMS Ltd.

1. 2. 3.

Provisional. Excluding any delta hedging of central bank options. This is the residual from combining all the other data in the table. It includes institutional investment other than ETFs & similar, stock movements and other elements as well as any residual error.

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Gold Demand Supply Flow Diagram

1,108 t Scrap Supply

2,279 t Jewellery 324 t Official Sector Sales Annual Flow Supply 2,471 t Mine Production 650 t ETF and Investments Demand 451 t Industrial

-373 t

Producer Hedging

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Is it heading anywhere?

M Prod ction ine u 1000 900 800 700 U /troy ou SD 600 500 400 300 200 100 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 0 1000 500 1500 tonne M Prod ction ine u Price (C M Fu res) O EX tu 2500 2000 3000

Source: GFMS

Top Producing Countries (% share, GFMS 2004) : South Africa (14%), United States (11%), Australia (10%), China (9%), Russia (7.4%), Peru (7%)

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The Big Guys!

Company Barrick Newmont Anglogold Ashanti Goldfields Harmony Gold Corp 2004 4.958 6.988 5.829 4.406 3.157 0.628

Production (Moz) 2005 2006 5.46 8.643 6.5 5.9 6.166 5.635 4.488 4.074 2.386 2.965 1.136 1.693

2007 Q1 2 1.342 1.330 -0.579 0.558

2007 Q2 1.96 1.448 1.349 -0.527 0.546

Source: Annual Reports, Bloomberg, GFMS

Barrick Gold acquired Placer Dome in FY 06 Newmont adopts no gold hedging policy Mine production has been steady

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Cash Cost of Mines on the rise

Company

Cash Costs (USD/troy ounce) 2005 2006 2007 Q1 Barrick 214 227 282 Newmont 237 304 421 Anglogold Ashanti 281 308 332 Goldfields 331 358 -Harmony 433 380 445 Gold Corp 110 160 181
Source: Annual Reports, Bloomberg, GFMS

2007Q2 280 433 333 -655 133

Cash costs include:

Production costs Royalty costs Marketing costs Excludes capitalised costs, depreciation, amortisation Also excludes. mine closure costs

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Producer Hedging
Gold is leased by central banks and other holders to commercial/bullion banks and earns a return in line with gold lease rate. With respect to producer hedging, bullion banks contract to buy gold forward from mining companies. To fund the purchase, the bullion banks sell an equivalent amount of gold and proceeds are invested at money market rates. This brings metal to the active market and hence hedging is sometimes referred to as accelerated supply. The above ground supplies being large, the gold lease rate is lower than the money market rate encouraging bullion banks to sell gold and invest in money market instruments. The market is implicitly biased towards producer hedging and speculator selling. Hence the gold market is a contango market.

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Is it Eureka or Euro?

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Correlation with Euro

1400 G old 1200 1000 800 600 400 200 1997 1998
Source: Bloomberg, JMFCL

1.80 Eu ro 1.60 1.40 1.20 1.00 0.80 0.60 2009 2010

1999 2000 2001 2002

2003 2004 2005

2006 2007 2008

1. 2.

The correlation is found to be strong between Gold and Euro Typical range: 0.7 0.8

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Correlation with South African Rand

10 40 10 20 10 00 80 0 60 0 40 0 20 0 M ar-97 M ar-98

G old

ZAR

1 6 1 4 1 2 1 0 8 6 4 2

Year* 1997 2001 2002 2003 2004 2005 2006

Correlation -0.10 -0.54 -0.51 -0.05 0.55 0.61 0.35

M ar-99

M ar-00

M ar-01

M ar-02

M ar-03

M ar-04

M ar-05

M ar-06

M ar-07

M ar-08

M ar-09

Source: JMFCL, Bloomberg

* - correlation from the specific year till Aug 31, 2007.

Source: Bloomberg, JMFCL

1. 2. 3.

Majority of mining happens in South Africa Primary influence on cash costs of mines Appreciating Rand pushes up cash costs, since gold is finally traded in USD

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Correlation with Dollar Index

1400 G old 1200 1000 800 600 400 D ollar Ind ex 145.00 135.00 125.00 115.00 105.00 95.00 85.00 75.00

Year* Dec-1985 2001 2002 2003 2004 2005 2006

Correlation -0.59 -0.81 -0.74 -0.69 -0.53 -0.48 -0.85

200 65.00 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Bloomberg, JMFCL

Source: JMFCL, Bloomberg

* - correlation from the specific year till August 31,2007.

1. 2.

Base = 100.00; March 1973, after dismantling of Bretton Wood. Weighted average of a collection of foreign currencies relative to the dollar, namely Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Canadian Dollar (CAD), Swedish Kroner (SEK) and Swiss Franc (CHF). Exhibits negative correlation

3.

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Correlation with Crude Oil

1 0 .0 40 0 1 0 .0 20 0 1 0 .0 00 0 80 0 0 .0 60 0 0 .0 40 0 0 .0 20 0 0 .0 0 0 .0 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9

10 0 6 .0 10 0 4 .0 10 0 2 .0 10 0 0 .0 8 .0 0 0 6 .0 0 0 4 .0 0 0 2 .0 0 0 0 0 .0

Year* 2006 2007 2008 2009

Correlation 0.24 0.92 0.58 0.76

Source: JMFCL, Bloomberg

* - correlation year wise

Source: Bloomberg, JMFCL

1. 2.

Primary influence on cash costs of mines Rise in energy prices pushes up cash costs, since 15% of cash costs can be attributed to diesel purchases

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ETF The extra terrestrial

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Stupendous growth in Assets Under Management (tonnes)

800 Lyxor- LSE 700 GBS - ASX Street T racks-NYSE New Gold - JSE iShares COMEX (IAU)

600

500

Tonnes

400

300

200

100

0 Dec-03

Mar-04

Jun-04

Sep-04

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Source: Bloomberg, www.exchangetradedgold.com, www.ishares.com

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Macro economic factors

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Data releases and market cues!

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GDP
1200.00 1000.00 800.00 600.00 400.00 200.00 0.00 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Source: Bloomberg, JMFCL

20 15 10 5 0 -5 -10

Recessions in USA
December 1969-November 1970

Limited chance for US heading for a negative QOQ GDP growth rate US Fed says moderate growth developing

November 1973-March 1975 January 1980-July 1980 July 1981-November 1982 July 1990-March 1991 March 2001-November 2001
Source: Bloomberg, JMFCL

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Interest Rate
900 800 700 600 USD/troy ounce 500 8 400 300 200 100 0 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005
1400 20

US CPI YOY

Gold Price

16 14 12 10

6 4 2 0

1200

% change in CPI

The price of gold is a reflector of inflation expectation of the market.

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As real interest rates turn negative, the price of gold is seen to rise during that period.

1000 10 800 5 600

Wall street talks about possibility of a Fed rate cut by end of 2007. With domestic consumption undeterred, crude oil at high levels, this would be further reduce real interest rates.

0 400 -5

200

0 -10 19691971 19731975 19771979 198119831985 19871989 19911993 19951997 19992001 20032005 20072009

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US Economy numbers

GDP ISM Employment Producer Price Index Retail Sales Consumer Sentiment Housing starts Durable Goods order Trade balance
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GDP

C+I+G+X-M = GDP (Macroeconomics) Durable goods = 15% of C Non durable goods = 30% of C Services = the rest of C 20% of GDP = Investment

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GDP

Residential Non Residential Change in business inventories

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GDP

18% of GDP = fed,state and local govt spending 35% of G = Federal Spending Defence Aircrafts,weapons Social Security Medicare

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ISM Mfg index

Industrial growth in US Institute for Supply Management Directly from executives of 400 industrial companies A slide towards 40 indicates recession is at hand.

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Employment situation

Unemployment rate
Indicated as a level

Non farm payrolls

Indicated as a change

Average work week Average hourly earning

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Producer Price Index

PPI Commodities CPI commodities and services Consumer goods excluding food and energy = 40% of PPI PPI ex-food and energy known as core PPI. Impact of PPI

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Retail Sales

Sales inclusive of auto sales Indicative of future GDP growth Durables and Non durables Volatile and hard to estimate data

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Consumer Sentiment

Feel good factor Expenditure on big ticket items Univ of Michigan Sentiment Index Monthly telephone survey of 500 consumers Consumer confidence (conference board)
5,000 households across country

Consumer confidence adjusts for seasonal adjustments

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Housing starts

Most Americans have biggest investment in real estate (their own home) Bureau of Census Dept of Commerce Housing is direct bolster to stock markets But inflation could be a concern Hence interest rate scenario..

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Other Statistics

Jobless claims Employment cost index Current Account Balance

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Who has signed it?

Name of Central Bank European Central Bank Banca d'Italia Banco de Espaa Banco de Portugal Bank of Greece Banque Centrale du Luxembourg Banque de France Banque Nationale de Belgique Central Bank & Financial Services Authority of Ireland De Nederlandsche Bank Deutsche Bundesbank Oesterreichische Nationalbank Suomen Pankki Schweizerische Nationalbank Sveriges Riksbank Country ECB Italy Spain Portugal Greece Luxembourg France Belgium Ireland Netherlands Germany Austria Finland Switzerland Sweden Reserves (tonnes) 642 2452 377 383 112 2 2689 228 6 641 3423 289 49 1290 156

In the interest of clarifying their intentions with respect to their gold holdings, the undersigned institutions make the following statement: 1. Gold will remain 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 programme of sales over a period of five years, starting on 27 September 2004, just after the end of the previous agreement. Annual sales will not exceed 500 tons and total sales over this period will not exceed 2,500 tons. 3. Over this period, the signatories to this agreement have agreed that the total amount of their gold leasings and the total amount of their use of gold futures and options will not exceed the amounts prevailing at the date of the signature of the previous agreement. 4. This agreement will be reviewed after five years.

Source: ECB, GFMS

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Recent Activity
Year 1 2004-05 352.2 47.0 15.0 30.0 115.0 5.4 55.0 54.8 30.0 15.0 130.0 497.2 Year 2 2005-06 385.8 57.0 13.7 0.0 134.8 5.3 67.5 44.9 62.5 10.0 0.0 395.8 Year 3 2006-07 288 60.0

Eurosystem announced by June 12, 2007 of which: European Central Bank to date Austria to end Apr 2007 Belgium to end Apr 2007 France to end Apr 2007 Germany to end Apr 2007 Netherlands to end Apr 2007 Portugal to end Apr 2007 Spain to end May 2007 Country not yet known Sweden to M ay 31 2007 Switzerland Total reported selling so far Remaining possible to Sept 26, 2007

77.0 14.0 122 15 5.7 0.0 294 206

Sources: IMF, International Financial Statistics; ECB Weekly Financial Statement; announcements and data from individual countries.

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The witchcraft

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Bullish vs Bearish
Bullish factors Change in policy of central banks with regard to diversification of assets. Prevalent dehedging in the gold mining industry on expectations of higher metal prices Volatile price surge in the energy basket (especially, hurricane impact) Growth in demand from emerging economies Labour disputes at mines in South Africa Appreciation of South African Rand Uncertainty in Middle East Slowdown in US consumer spending Slowdown in US Business expenditure Changes in hedging policy of gold mines Official sector sales/intentions Monetary stance by central bankers (surprise element) Liquidation of carry trade

Bearish factors

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Argentum The white metal

January 2009

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Silver The poor cousin of gold!

800 Gold prices (USD/troy ounce) Silver Prices

16

700

14

600

12

500

10

400

Year 2004 2005 2006 2007

Source: JMFCL

Correlation 0.70 0.87 0.80 0.38

300

200 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07

Source: Bloomberg, JMFCL

Silver exhibits poor correlation, this year. Recent sharp fall to USD 11.06/troy ounce further distorts the above statistical relationship.

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Gold Silver Ratio

1600 Gold prices (USD/troy ounce) 1400 Silver Prices (cents/troy ounce) Gold - Silver Ratio

85.00

80.00

75.00 1200 Barclays ETF

70.00

1000

65.00

800

60.00

600

55.00

50.00 400 45.00 200

40.00

0 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07

35.00

The successful launch of Barclays ETF has skewed the gold silver arbitrage indicator. The USD 7/troy ounce USD 8/troy ounce metal is now being valued above USD 10/troy ounce.

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Stupendous growth in Assets Under Management (tonnes) - ETFs

Gold:

600

Street Tracks-NYSE

500 400

300 200

100 0 Nov-04

Feb-05

May-05

Aug-05

Nov-05

Feb-06

May-06

Aug-06

Nov-06

Feb-07

May-07

Aug-07

Source: www.exchangetradedgold.com

Street tracks (NYSE) :

514.21 tonnes (USD 10.87 billion)

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Stupendous growth in Assets Under Management (tonnes) - ETFs

Silver:
5000 ishares Silver 4500 4000 3500 3000 2500 2000 1500 1000 500 0 Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Source: www.ishares.com

ishares Silver :

4297 tonnes (USD 1.62 billion)

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The ETF phenomenon cushions prices!

5000

14

Implied Net Investment (tonnes)

4000

Silver (USD/troy ounce)

12

3000 2000 1000 0 -1000 -2000 -3000 2 -4000 -5000 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 0 6 10

Source: GFMS, JMFCL

The average silver prices have shown a rise above the usual USD 5/troy ounce to USD 10 USD 12/troy ounce. Implied net investment has turned positive with the successful launch of Barclays ETF.

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Demand Supply Balance Sheet

2002 S upply (tonnes) M ine Production Net Government Sales Old Silver scrap Producer Hedging Implied Net Disinvestment Total S upply Demand (tonnes) Fabrication Industrial Applications Photography Jewellery and Silverware Coins and M edals Total Fabrication Net Government Purchases Producer de-hedging Implied Net investment Total Demand
Source: GFMS, JMFCL

2003 18693 2818 5711 --27221

2004 19296 2068 5636 311 -27312

2005 19956 2115 5826 470 -28363

2006 20096 2417 5847 --28360

18553 1841 5816 -641 26851

10581 6354 8161 983 26080 -771 -26851

10911 6000 8516 1107 26531 -650 40 27221

11455 5630 7707 1316 26108 --1204 27312

12730 5126 7763 1263 26885 --1477 28363

13374 4535 6995 1238 26142 -212 2006 28360

ETF demand visible

Other Demand drivers:

Silver jewellery from India and China (10% contraction in 2006) Industrial usage driven by global economic growth rates. (5% growth in 2006)

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Industrial Demand of Silver Do we see growth?

Electrical and electronic applications
Multi layer ceramic capacitors (MLCCs) Cell phones High end military applications Plasma display panels (PDPs)

Brazing alloys and solders

70:30 silver- palladium alloys 75:25 and 80:20 gaining acceptance due to higher prices of palladium WEEE directives in Europe would eventually ban lead solders Demand for tin-silver-copper solders

Solar panels Fuel cells Catalysts

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Indian Industrial Demand of White Metal

Miscellaneous 20%

Plating 24%

Foil 6%

Solders and Brazing 8% Electrical 18%

Jari 12% Pharmacy and Chemicals 12%

Source: GFMS (2005), JMFCL

Industrial demand close to 13% of world industrial demand, ranking 5th in industrial demand Burgeoning middle class would boost this demand McKinsey Global Institute expects average incomes in India to triple by 2025

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Thank You!!
For further information mail us at vickysajnani@yahoo.com

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Is silver overpriced as compared to the yellow metal?

85.00 Gold - Silver Ratio 80.00

75.00

70.00

65.00

60.00

55.00

50.00

45.00

40.00

35.00 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07

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Voodoo

View: Sideways with bullish bias Target: USD 700/troy ounce Advice: Buy on a correction to USD 655/troy ounce

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Books for Economic indicators

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