www.gold.

org

Gold Investment Digest

January 2010

QUARTER 4 & FULL YEAR 2009

Price trends
The gold price rose for the ninth consecutive year in 2009 to end the year at
Contributors
US$1087.50/oz, on the London PM fix, from US$869.50/oz at the end of 2008.
Juan Carlos Artigas
This corresponded to a 25.0% increase in the price of the yellow metal during
juancarlos.artigas@gold.org
2009. The average gold price rose 11.5% to US$972.35/oz, from an average
of US$871.96/oz during 2008.
John Mulligan
… read more on page 2
john.mulligan@gold.org
Investment trends
Investors bought another 30 tonnes of gold via Exchange Traded Funds World Gold Council
(ETFs) in the fourth quarter, bringing total inflows for the year to 573 tonnes. 55 Old Broad Street
GFMS believes the global over-the-counter market was an important source of London
new net demand in Q4 2009. They note a strong pick up in OTC activity from EC2M 1RX
September onwards driven by “non-traditional” investors taking out long-term
positions. The more speculative end of investment demand also remained www.gold.org
strong, with total non-commercial and non-reportable net long positions on investment@gold.org
COMEX increasing by 27.0%, on average, to 22.0 million ounces. +44 (0) 20 7826 4700
… read more on page 5
Market and economic influences
Investment flows, dollar-hedging, inflation protection, and central bank buying
all played a role in propelling the gold price to new records. Looking into
2010, a growing number of investors are worried about price stability, as the
global economy shows increasing signs of recovery. The large sums of money
supply that reached the market in 2008 are creating concerns that inflation
may be looming. There is a strong, lagged, relationship between changes in
global money supply and changes in the gold price.
… read more on page 8
Gold market trends
Preliminary reports on fourth quarter jewellery trends in India suggest a
continuation of the cautious recovery from the low demand levels in Q1 2009,
helped by seasonal factors. Moreover, levels of jewellery recycling have
subsided from the highs experienced at the end of 2008 and beginning of
2009. In China, the outlook remains resilient as the economy recovers, whilst
the US market is still being impacted by higher US$ gold prices. Anecdotal
evidence suggests global levels of recycling remained subdued despite the
rise in the gold price. Separately, the pattern of behaviour among central
banks and official sector institutions continued its recently established trend,
as sales under the third Central Bank Gold Agreement (CBGA3) slowed to
a negligible rate, whilst banks outside of the agreement clocked up another
quarter of net purchases, according to our estimates.
… read more on page 10
Key data
Our key data table provides you with a concise summary of gold returns,
supply and demand statistics, price volatility and a correlation matrix covering
gold, silver, commodities, equities and bonds.
… read more on page 13

© 2010 World Gold Council and GFMS Ltd

 Gold Investment Digest

PRICE TRENDS
The gold price rose for the ninth consecutive year in 2009
to US$1087.50/oz on the London PM fi x by December
end, from US$869.50/oz at the end of the previous year.
This represented a 25.0% increase in the price of the
yellow metal during 2009. Similarly, the average price of
gold rose 11.5% to US$972.35/oz, from an average of
US$871.96/oz during 2008.
pushed the yellow metal to record highs. By 2 December,
the gold price had reached a historic high of US$1212.50/
oz, on the London PM fix, rising by 17.5% over the course
of a month. Improved sentiment towards the US economy
partly eased concerns about the dollar and the price of
gold retraced some of the gains, finishing the year at
US$1087.50/oz.

Gold’s strong performance during the year was supported
by a combination of many factors: first, safe-haven inflows,
especially in the first part of the year; second, investment
demand as investors sought protection against dollar
depreciation as well as possible future inflation; and
finally, a shift in central bank reserve management as
western central banks slowed gold sales and developing
nations increased their gold reserves.
Chart 1: Gold price (US$/oz), London PM fix
US$/oz
1300
During 2009, the S&P 500 rose by 23.5%, international
equities (as measured by the MSCI World ex US Index)
increased by 29.7%, and emerging market equities (given
by the MSCI EM Index) surged 74.5% as economies
recovered and investor appetite for risk returned. During
the same period, the S&P Goldman Sachs Commodities
Spot Index (S&P GSCI) rose 50.3%, as demand for
energy and other commodities followed the more positive
tone in the global business cycle. In particular, the price
of oil increased by 84.9% to US$77.20/bbl by the end
of 2009 from US$41.76/bbl the previous year. Conversely,
US Treasuries, as measured by the Barclays Capital US
Treasuries aggregate, dropped 3.8% during the course
US$/oz of 2009, as investors speculated that the Fed would
1300
eventually lift rates sometime during 2010.

1200 1200
Chart 2: Relative price performance in 2009
1100 1100
% %
90 90
1000 1000
80 80

70 70
900 900
60 60
800 800 50 50

40 40
700 700
30 30
Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

20 20

10 10

0 0
Source: The London Bullion Market Association
-10 -10
In the first part of the year, the gold price fixed in London
Gold (US$/oz)

BarCap US
Tsy Agg

S&P 500

MSCI World
ex US

MSCI EM

S&P GSCI

Brent crude oil

(US$/bbl)

as high as US$989/oz on 20 February, driven by ongoing

concerns about the stability of the financial system, risk
aversion and increasing worries over price stability. The
gold price pulled back thereafter as the global economy
started to show signs of recovery. Overall, the price of
Source: Bloomberg, Barclays Capital
gold increased by 7.4% in H1 2009. The second half
exhibited the strongest performance, as concerns Whilst gold returns during 2009 were not as impressive
about the dollar outlook, coupled with central banks in when compared to other asset classes, on a risk-adjusted
developing economies increasing their gold reserves, basis the yellow metal showed a much better performance.

January 2010 2
 Gold Investment Digest

Demand for industrial metals continued to rise as the global

Commodities – Returns economic recovery gathered pace, resulting in double-digit
price growth, both on a quarter-on-quarter and a year-
% QOQ % YOY
on-year basis. In Q4 2009, palladium and zinc were the
Gold (US$/oz) London PM fix 9.2 25.0
best performing of the commodities we regularly monitor,
Silver 3.3 57.5 rising by over 37.6% and 34.4% respectively, followed
Palladium 37.6 118.2 by copper (19.7%), and aluminium (19.2%). Silver, lead,
Platinum 13.4 57.2 and nickel were the worst performers during the quarter,
Aluminum 19.2 51.8 increasing by 3.3%, 5.1%, and 6.6% respectively, albeit
Copper 19.7 153.2 each posted a solid performance over the year as a whole.
Lead 5.1 152.2
Nickel 6.6 71.0 Price volatility
Tin 10.7 61.4 Whilst market volatility has eased relative to 2008, gold
Zinc 34.3 129.4 price volatility increased in the fourth quarter to an
Brent Oil 14.1 84.9 annualised average of 19.7% from 15.0% in the previous
S&P GSCI Spot Index 13.4 50.3
quarter. Gold price volatility reached a peak of 26.0% on
21 December, measured on a 22-day rolling basis, as the
S&P GS Agriculture Spot Index 14.3 14.7
price of gold fell from its historic peak of US$1212.50/
S&P GS Livestock Spot Index 8.4 2.8
oz on 2 December to US$1084/oz on 22 December, at
R/J CRB Spot Index 13.1 33.7
the London PM fix. Although daily fluctuations in the
DJ UBS Spot Index 14.2 41.2
gold price eased thereafter, price volatility remained high
Source: Global Insight, WGC at 23.0% by the end of the year relative to the previous
quarter which saw record low volatility levels and by
Its relatively tame volatility made it more attractive than historical standards (gold’s 20-year price volatility is
both US and international equities, and its return per unit around 15.8%). This contrasted with a continuing decline
of risk was comparable, on average, to that of the S&P in volatility in other markets. The VIX index, a market
GSCI. Emerging market equities and oil, on the other estimate of future volatility based on the weighted average
hand, outperformed versus gold on a risk-adjusted basis. of the implied volatilities of a wide range of strikes, eased

Chart 4: Gold & S&P GS Commodity Index

Chart 3: Annual return versus annualised daily annualised price volatility (22-day rolling, %)
return volatility for various assets, 1/1/09-12/31/09 and the VIX Index (level)
% Level
Annual return 90 90
(%)
90 80 80
Oil
80 70 70
MSCIEM
70 60 60

60 50 50
S&PGSCI
50
40 40
40
MSClex US 30 30
30
1-to-1 ratio Gold
S&P 500 20 20
20
10 10
10
0 0
0
Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

US Tsy
-10
0 5 10 15 20 25 30 35 40 45 50
Annualised daily return volatility (%) Gold VIX Index
S&P GSCI (LHS)
(US$/oz LHS) (RHS)
.
Source: Bloomberg, Barclays Capital, WGC Source: Bloomberg, WGC

January 2010 3
 Gold Investment Digest

slightly to an average of 23.0% in Q4 2009, down from

25.5% in the previous quarter. Moreover, daily volatility in
Q4 (on an annualised basis) on the S&P Goldman Sachs
Commodity Index fell to 22.6% on Q4 from 29.6% in Q3.

Nevertheless, gold remained, on average, the least

volatile of the commodities that we monitor with the
exception of the S&P GS Livestock Spot Index. Lead
was the most volatile commodity for the third consecutive
quarter, with an average volatility of 37.8% in Q4, followed
by silver and palladium, which had volatilities of 32.9%
and 32.1% respectively. Crude oil showed a considerable
improvement, dropping to an average 30.5% annualised
volatility in Q4 from 43.2% in Q3.

Chart 5: Annualised Q4 2009 volatility for

selected commodities
% %
40 40

35 35

30 30

25 25

20 20

15 15

10 10

5 5

0 0
S&P GS Livestock
Spot Index
Gold (US$/oz)
London PM fix
DJ UBS Spot Index
Platinum
S&P GSCI Spot Index
Tin
S&P GS Agriculture
Spot Index
Copper
Aluminum
Brent Oil
Zinc
Nickel
Palladium
Silver
Lead

Source: Global Insight, WGC

January 2010 4
 Gold Investment Digest

INVESTMENT TRENDS
Exchange Traded Funds GLD options
Investors bought another 30 tonnes of gold via Exchange Trading in GLD options more than doubled in the fourth
Traded Funds in Q4, bringing total inflows for the year quarter of 2009 to a total of 13.7 million contracts from
to 573 tonnes. This took the total amount of gold in the 5.7 million in the third quarter, and it more than tripled
ETFs that we monitor to a record 1,762 tonnes, worth from the same period last year as both call and put
US$62 billion at the year-end gold price. SPDR® Gold option transactions increased. Volumes sharply increased
Shares, or GLD as it is known, listed on the NYSE from an average 132,277 contracts per day in early
Arca and cross-listed in Mexico, Singapore, Tokyo and October to a daily average of 353,521 contracts in the
Hong Kong recorded the strongest inflows during the first half of December, subsequently easing to 212,624
fourth quarter, adding 38.3 tonnes, bringing the total to contracts, on average, by the end of the year, much in
1,133.6 tonnes (worth US$40.2 billion) in assets. It was line with movements in the gold price. Call and put
followed by ETFS Physical Swiss Gold Shares—which volumes peaked on 4 December at 252,897 and 474,108
was launched in September 2009 and is listed in the contracts respectively. Whilst options volume generally
NYSE—adding 6.4 tonnes during Q4 to a total 9.5 tonnes rose as the price of gold increased, the peak coincided
in assets. iShares Comex Gold Trust, or IAU listed on with the largest daily drop in the gold price during Q4,
the NYSE Arca, posted the third strongest gain, adding when the yellow metal fell by 3.8% to US$1161.4/oz from
4.7 tonnes during the quarter and bringing its total assets US$1207.6/oz the previous day. At-the-money implied
to 79.3 tonnes. ETFS Physical Gold (listed on the London volatilities traded in a range of 20.0% to 27.0% on the
Stock Exchange) experienced net outflows of 11.2 tonnes 3-month call and put options; implied volatility reached
during Q4, although it added 44.2 tonnes overall during the low for the quarter on 30 October trading at 20.4%,
2009. GBS Bullion Securities (listed on the London Stock increasing to 27.3% by 9 December, and finally retracing
Exchange) shed 7.8 tonnes during the quarter, although back to 23.0% by the end of the quarter.
it had a net gain of the same amount during the course
of 2009. Gold futures
Comex total non-commercial and non-reportable net
long positions, a proxy for the more speculative end of
Chart 6: Gold ETF holdings in tonnes investment demand, remained strong. The net long position
and the gold price (US$/oz)
Chart 7: COMEX net long on non-commercial &
non-reportable positions on the active gold futures
Tonnes US$/oz
contract (million oz) versus the gold price (US$/oz)
1800 1200
ETFS Physical Swiss Gold Shares (LSE)
ETFS Physical Swiss Gold Shares (NYSE)
Million oz US$/oz
1600 Julius Baer Physical Gold - SWX 1100 35 1200
XETRA-GOLD (Deutsche Böerse)
1400 ETFS Physical Gold (LSE) 1000
GOLDIST (Istanbul Stock Exchange) 30 1100
ZKB Gold ETF - SWX
1200 900
IAU (Amex)
GLD (NYSE) 25 1000
1000 NewGold (JSE) 800
GBS (LSE)
800 GBS (ASX) 700 20 900
Gold PM Fix (US$)

600 600 15 800

400 500
10 700
200 400
5 600
0 300
Apr-03

Dec-03

Aug-04

Apr-05

Dec-05

Aug-06

Apr-07

Dec-07

Aug-08

Apr-09

Dec-09

0 500
Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Data: www.ishares.com; www.exchangetradedgold.com; Gold active net-long

Gold (US$/oz)
www.etfsecurities.com; Zurich Kantonalbank; Finans Portföy; positions (million oz)
www.Deutsche-Boerse.com; www.juliusbaer.com; Global Insight
Chart: WGC, www.gold.org Source: COMEX, Bloomberg

January 2010 5
 Gold Investment Digest

reached 28 million ounces by the end of Q4 compared Q3 2009 from 167.9 tonnes in the previous quarter, an
to 27.5 million ounces at the end of Q3. On average, increase of 10.7%. This largely reflects a recovery in
net long positions in Q4 increased by 27.0% from 22.9 investment demand in non-western gold markets, partly
million ounces on average in Q3. The net long peak of offset by a reduction in net inflows in western markets. The
30.8 million ounces in early December coincided with the single biggest inflow during the quarter occurred in China,
historical high in the gold price of US$1212.50/oz on the followed closely by India, at 26.8 tonnes and 26.0 tonnes
London PM fix, on 2 December. By the end of the quarter, respectively. Whilst the third quarter was not as strong for
net long positions fell slightly to 27.9 million ounces, much the US, Q4 data on American Eagle bullion coin sales from
in line with movements in the price of gold. Overall, net- the US Mint shows a more rosy picture. Demand for 1-ounce
long positions rose on the back of an increment of 29.0% coins increased by more than 27% in the fourth quarter, on
in long-only positions from Q3, which was partially offset a quarter-on-quarter basis, and total demand for coins
by a 42.0% surge in short-only contracts during the same (including smaller denominations) rose by 66.0% relative
period. Whilst net long positions increased on average to Q3 2009 and by 14.0% relative to Q4 2008, to a record
during Q4, the rise was relatively tame compared to the 471,000 ounces (14.6 tonnes) during Q4 2009. Anecdotal
increment in the gold price, as demand flows for gold evidence suggests a similar pattern in global coin
were probably not primarily driven by speculative trading. demand. Investors wishing to purchase gold coins or small
bars can find a list of retail dealers on our website at: http://
OTC market www.invest.gold.org/sites/en/where_to_invest/directory.
According to research carried out by GFMS on behalf
of the World Gold Council, investor activity in the over-
the-counter (OTC) market picked up strongly from Chart 8: American Eagle bullion sales
September onwards, with substantial long positions being (in thousands of ounces)
established by hedge funds and other ‘non-traditional’ ’000 oz ’000 oz
500 500
institutional investors in bullion. GFMS believes that a
good part of this demand was longer-term in nature, as 450 450
many investors were concerned about future inflation 400 400
and the outlook for the US dollar. They find evidence of
350 350
fresh allocations to gold in allocated accounts, as well
as bespoke commodity indices which included gold. 300 300
Another part of gold investment was driven by short- 250 250
term price gains, with much of the buying in September
200 200
and some of these speculative positions closing out as
momentum faltered. Overall, GFMS concludes the OTC 150 150
market was an important source of net new demand for 100 100
gold in Q4 2009. 50 50

0 0
Bars and coins
Q1 ’07
Q2 ’07
Q3 ’07
Q4 ’07
Q1 ’08
Q2 ’08
Q3 ’08
Q4 ’08
Q1 ’09
Q2 ’09
Q3 ’09
Q4 ’09

The latest available data on coin and bar sales corresponds

to Q3 2009 (comprehensive Q4 data will be released in
mid-February). Net retail demand for gold, which includes 1-oz coin sales Total sales*
demand for coins, small bars, medals and imitation coins,
*Includes 1-, 1/2-, 1/4-, and 1/10th-ounce coin sales
and other retail investment, remained strong during the
third quarter. It rose by 17.9 tonnes to 185.9 tonnes in Source: The United States Mint

January 2010 6
 Gold Investment Digest

Lease rates
The implied gold lease rate is the difference between
the dollar interest rate and the equivalent duration gold
forward rate—the rate at which gold holders are willing to
lend gold in exchange for dollars, also known as the swap
rate. On the one hand, the 3-month US Libor rate remained
very low at 0.25% during the quarter. On the other hand,
the 3-month gold swap rate fell to a low of 0.27% by the
end of October to later rise to 0.42% by mid-December as
the gold price fell from its record highs in early December,
and then back to 0.32% by the end of the quarter, as the
gold price rose slightly again. Consequently, the implied
gold lease rate remained modestly negative.

Chart 9: Implied 3-month lease rate (%)

% %
3.0 3.0

2.5 2.5

2.0 2.0

1.5 1.5

1.0 1.0

0.5 0.5

0 0

-0.5 -0.5
Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Source: Bloomberg, WGC

January 2010 7

MARKET AND ECONOMIC INFLUENCES
The global economy began to show tentative signs of
recovery in H2 2009 from one of the worst global recessions
since the Great Depression. However, the pace of the
recovery remains uncertain. Whilst some developing
economies, like China, appear to be recovering at a
healthy pace, their developed counterparts, in particular
the US and Europe are far from returning to a “normal”
rate of growth. In its October 2009 World Economic
Outlook, the IMF reported that after an expected 1.1%
contraction in 2009, the world economy is likely to expand
at 3.1% in 2010, but said advanced economies may only
grow at 1.3% during the course of next year.
In the US, the S&P Case-Schiller Home Price Index rose
by 5.3% from its low in April 2009, after having contracted
over 30% from its peak in the summer of 2007. At the same
time, the Institute for Supply Management’s manufacturing
and services indices remained above the “50 no change”
level by the end of 2009, increasing 70.0% and 25.0%
respectively from December 2008, signalling a better
outlook for growth. After bottoming out in Q1 2009, the
S&P 500 grew by 64.8% to 1115.1 by the end of the year,
from 676.5 on 9 March 2009. Nonetheless, unemployment
remains high at around 10% by December, levels not
seen since 1983, signalling that the recovery may not be
as quick as some market participants had anticipated.
Chart 10: US ISM Manufacturing Index (level) and
US unemployment rate (% sa, inverted)
Level
70
65
60
55
50
45
40
35
30
25
20
Jan-80
Jul-83
Apr-85
Oct-88
Apr-92
Oct-95
ISM Manufacturing
Index (LHS)
Source: Institute for Supply Management, Bureau of Labor Statistics
January 2010
Gold Investment Digest
Similarly, the European economy (UK and the Euro block)
expanded at an annual 1.5% rate in the third quarter
of 2009 and the MSCI Europe Index rose by 86.5% in
US dollar terms between 9 March and 31 December
2009, but unemployment continued to increase, and
had reached 10% by November 2009. In a more
positive tone, China’s real GDP grew at an annual
rate of 8.9% in Q3 2009 over year-ago levels, and
is expected to grow in excess of 9% in 2010. At the
same time, India grew at an annual rate of 7.9% in Q3,
and is expected to grow at 6.5% in 2010, and the
MSCI Emerging Markets Index more than doubled
(in US dollars) from 475.1 on 2 March to 989.47 by
31 December.
The recovery in the global economy, especially in the
countries like India and China, is likely to play a positive
role in jewellery demand. However, jewellery was not a
primary source of support for the price of gold in 2009.
Investment flows, dollar-hedging, inflation protection, and
central bank buying all played a role in propelling the
yellow metal to successive new highs.
Looking forward to 2010, a growing number of investors
are worried about price stability. The large sums of money
supply that reached the market in 2008 are creating
concerns that inflationary pressures loom. Investors who
do not believe higher inflation will materialize may still
worry about the dollar outlook.
%
During our meetings and in surveys we conducted at
2 conferences throughout the second half of 2009, we
found that investors who hold gold, on average, have
3
allocations of 5-7% in their portfolio. Yet, overall assets
4 under management in gold remain low. As of Q3 2009, we
5 estimate that only about 1.1% of global assets are invested
6
in gold, compared to other alternative investments which
correspond to about 4.4% of assets. There is, therefore,
7
ample scope for growth.
8
9
For example, of those investors surveyed, almost
half (45%) were planning to increase their gold
10
exposure, and only 1 respondent was planning to
11 reduce it. More than two-thirds of investors cited gold
12 being an inflation and dollar hedge as their primary
reasons for holding the yellow metal, and about half
Apr-99
Oct-02
Apr-06
Oct-09
used it for portfolio diversification. Less than a quarter of
those investors were using gold as a vehicle to express
Unempemployment rate
a tactical view, in line with other signs that many of
(RHS, inverted)
the investment flows into gold have tended to be more
strategic in nature.
8
 Gold Investment Digest

also have an effect on its performance. The report also

Chart 11: Global assets under managment as discusses the role gold has as an indicator of future
of Q3 2009 (est. total US$81.5 trillion) velocity of money, and consequently of future inflation.

Alternatives** Gold
Moreover, gold tends to provide a hedge against inflation
5% 1% over the long run. Even relative to the period from 1979 to
1981 in which high inflation coupled with geopolitical risk
(the invasion of the US embassy in Iran, as well as the
Iran-Iraq war) exacerbated a high and short-lived spike
in the price of gold, the yellow metal currently trades
around fair value.
Global Equities*
44%
Global Fixed Income*
Chart 12: Real gold price (US$/oz),
50%
December 2009 prices

US$/oz
2000

1800

* Estimated using world equity and bond index data and adjusting for data overlaps 1600
** Includes hedge funds, private equity, real estate, and commodities (excluding gold)
1400 1979-1981 average
(at December 2009 prices)
1200
Source: JPMorgan, Barclays Capital, HFR, GFMS, FTSE/EPRA, BIS
1000

There is a solid rationale behind viewing gold as an 800

inflation hedge. In an upcoming WGC report (“Linking 600
Global Money Supply to Gold and to Future Inflation”,
400
to be released on 1 February 2010), we find that money
supply is related to the price of gold. As the money supply 200
increases, the gold price tends to rise (with a lag of about 0
Jan-70
Nov-72
Sep-75
Jul-78
May-81
Mar-84
Jan-87
Nov-89
Sep-92
Jul-95
May-98
Mar-01
Jan-04
Nov-06
Sep-09
6 months). Moreover, we find that changes in the US
money supply do not solely explain the changes in
the price of gold. On the contrary, gold is impacted
by many factors world-wide and as such, money
supply changes in places like India, Europe, and Turkey Source: Bloomberg, Bureau of Labor Statistics, WGC

January 2010 9
 Gold Investment Digest

GOLD MARKET TRENDS Please note that data on jewellery and industrial demand
are released with a lag; the latest available data is for
Q3 2009. Data for the fourth quarter of 2009 will be released
Jewellery in mid-February 2010.

During the third quarter, global jewellery demand

continued to recover from the depressed levels recorded Chart 13: Jewellery demand in tonnes
in Q1. Global demand totalled 473.5 tonnes, a 17% and US$ billions
increase on the previous quarter and a 39% gain from Tonnes US$ bn
the Q1 low, despite a 6% rise in the US$ price over that 800 20
six month period.
18
700

The comparison with year-earlier levels is considerably 16

600
different, showing a 30% decline, albeit when compared 14
with an exceptionally strong Q3 2008. In volume terms, 500 12
the third quarter total of 473.5 tonnes is the weakest
400 10
third quarter result this decade. Meanwhile, the value
measure of demand tells a somewhat more positive 300
8
story, suggesting that the long run upward trend in the 6
value of gold jewellery consumption has, so far, not 200
4
been threatened. This tends to confirm the view that
100 2
consumers around the globe continue to harbour a deep-
seated desire to own gold and are prepared to allocate 0 0
Q1 ’05

Q3 ’05

Q1 ’06

Q3 ’06

Q1 ’07

Q3 ’07

Q1 ’08

Q3 ’08

Q1 ’09

Q3 ’09
significant amounts to spending on jewellery.

The high levels of the gold price that prevailed during the
third quarter were a major factor in suppressing jewellery Tonnes (LHS) US$ bn (RHS)

demand across virtually all markets. The decline in gold

demand was almost universal, with the exception of Source: GFMS
mainland China where tonnage increased by 8% from Q3
2008. Demand in India, Middle East, and Turkey declined
in Q3 2009 by 42%, 34%, and 54% respectively year-on- Chart 14: Tonnage growth in jewellery demand
year. Meanwhile, jewellery demand in the US dropped by by country (Q3 ’09 vs. Q3 ’08, % change)
17% in Q3 2009 relative to the same period last year.
% %
20 20

Preliminary reports on fourth quarter trends in India 10 10

suggest a continuation of the cautious recovery from
the low levels of demand seen in early Q1, helped by 0 0
seasonal factors such as Diwali and the wedding season.
-10 -10
Moreover, fresh gold imports for the quarter are expected
to be significantly higher than a very weak Q4 2008. -20 -20
In the Middle East, demand is likely to have remained
subdued, particularly in Dubai. In China, the outlook -30 -30

remains resilient as the economy recovers, whilst the US -40 -40

market is still being impacted by higher US$ gold prices.
Anecdotal evidence suggests global levels of recycling -50 -50
remained subdued despite the rise in the gold price.
-60 -60
India
China
Hong Kong
Taiwan
Japan
Indonesia
Vietnam
Saudi Arabia
Egypt
UAE
Other Gulf
Turkey
Russia
USA
Italy
UK

Source: GFMS

January 2010 10
 Gold Investment Digest

GOLD MARKET TRENDS Chart 15: Industrial demand by category (tonnes)

Industrial and Tonnes Tonnes

dental applications 120 120

100 100
Gold demand for industrial and dental applications
remained fragile in the third quarter, slipping 11% to just
80 80
under 100 tonnes. Despite this sizeable decline, there
were some positive signs that demand may be picking
up in some sectors, which was reflected in a quarter-on- 60 60
quarter rise of 6%. Electronics off-take, which accounts
for almost 70% of the total, declined by 10% compared 40 40
with Q3 2008, which many regard as a reasonable
result considering the weakness of the global economic 20 20
environment. Moreover, in recent months there has been
a notable increase in reports from industry bodies that 0 0
perhaps the worst is over and off-take is set to recover

Q1 ’06

Q3 ’06

Q1 ’07

Q3 ’07

Q1 ’08

Q3 ’08

Q1 ’09

Q3 ’09
from the severe slump recorded in early 2009, especially
in the semiconductor and consumer electronics
industries. Elsewhere, gold used in the other industrial Dentistry Other Industrial Electronics
and decorative sector fell by 19% on a yearly comparison,
and dental demand fell by 6% over the same period. Source: GFMS

SUPPLY Please note that the data on mine production is released

with a lag; the latest available data is for Q3 2009.
Data for the fourth quarter of 2009 will be released in
Mine production mid-February 2010.

Mine production showed an increase during the third

quarter, reaching 670 tonnes. The 6% quarterly increase
matched the 6% increase over year-earlier levels, helped Chart 16: Net producer hedging (tonnes)
by increases in mine output in Indonesia (which almost
doubled its production in Q3 2009 from the Q3 2008),
Tonnes Tonnes
China, and Russia. Still, the outlook for gold mining 0 0
production remains flat, with ageing mines in the traditional
mining hubs, a dearth of major new gold discoveries in -25 -25
recent years and increasing lead times in bringing new
-50 -50
projects on stream.
-75 -75
The other element of producer activity, de-hedging,
increased sharply after several relatively muted quarters, -100 -100

resulting in a considerable contraction in Q3 total gold -125 -125

supply. Producer de-hedging totalled 105 tonnes,
compared with just 31 tonnes the previous quarter -150 -150
and 53 tonnes in Q3 2008. The main contributor was
-175 -175
Barrick, which announced in September that it planned
to eliminate its entire hedge position over the next year -200 -200
(its fixed price contracts amounting to 3 million ounces at
Q1 ’06

Q3 ’06

Q1 ’07

Q3 ’07

Q1 ’08

Q3 ’08

Q1 ’09

Q3 ’09

that time). During the third quarter, de-hedging by Barrick

alone amounted to 78 tonnes, whilst AngloGold Ashanti
bought back a further 15 tonnes as it completed a hedge
book restructuring that was underway at the end of June. Source: GFMS

January 2010 11
 Gold Investment Digest

SUPPLY Top 40 Official Gold Holdings*

Tonnes % of reserves**
The official sector 1 United States 8,133.5 68.7%
2 Germany 3,407.6 64.6%
3 IMF 3,005.3 1

The fourth quarter of 2009 was an interesting one for the 4 Italy 2,451.8 63.4%
official sector. Separately, the pattern of behaviour among 5 France 2,435.4 64.2%
central banks continued its recently established trend, 6 China 1,054.0 1.5%
as sales under the third Central Bank Gold Agreement 7 Switzerland 1040.1 29.0%
(CBGA3) slowed to a negligible rate, whilst banks and 8 Japan 765.2 2.0%
9 Netherlands 612.5 52.0%
official sector institutions outside of the agreement
10 Russia 607.7 4.7%
clocked up another quarter of net purchases, according
11 India 557.7 6.4%
to our estimates 12 ECB 501.4 19.6%
13 Taiwan 423.6 4.1%
The most significant development of the quarter was 14 Portugal 382.5 83.8%
the announcement by the Reserve Bank of India (RBI) 15 Venezuela 356.4 35.7%
that it had bought 200 tonnes of the IMF’s 403 tonnes 16 United Kingdom 310.3 15.2%
of planned gold sales. The move boosted the RBI’s gold 17 Lebanon 286.8 26.5%
reserves to 558 tonnes and lifted the proportion of gold 18 Spain 281.6 34.6%
in total reserves to 6.4% from 4.0% prior to the sale. The 19 Austria 280.0 52.7%
RBI announcement was followed swiftly by the news that 20 Belgium 227.5 31.8%
21 Algeria 173.6 3.8%
Sri Lanka’s central bank purchased 10 tonnes of gold
22 Philippines 154.7 12.1%
from the IMF in a transaction that tripled its holdings of
23 Libya 143.8 4.6%
gold, which now stand at 15.3 tonnes and account for
24 Saudi Arabia 143.0 10.2%
over 22% of total reserves. Finally, the Bank of Mauritius 25 Singapore 127.4 2.3%
announced that it had purchased a further 2 tonnes, 26 Sweden 125.7 8.6%
doubling the bank’s holdings to 3.9 tonnes. 27 South Africa 124.8 10.5%
28 BIS 120.0 1

In approving the sale of 403 tonnes of gold in September, 29 Turkey 116.1 5.2%
the Executive Board of the IMF committed to conducting 30 Greece 112.4 71.5%
a programme of sales in a way that would not disturb 31 Romania 103.7 7.4%
the market. In keeping with this intention, these off- 32 Poland 102.9 4.4%
market transactions had no impact on the net supply 33 Thailand 84.0 2.1%
34 Australia 79.9 6.0%
of or demand for gold in the market. Nevertheless, they
35 Kuwait 79.0 11.4%
signalled a clear desire among central banks to maintain
36 Egypt 75.6 7.4%
an allocation to gold. The announcements from India,
37 Kazakhstan 74.5 12.0%
Mauritius and Sri Lanka made clear that the purchases 38 Indonesia 73.1 3.9%
were designed to restore the balance of gold in their 39 Denmark 66.5 2.8%
reserve asset portfolios, which had declined over time as 40 Pakistan 65.4 15.8%
gold reserves failed to keep pace with increasing foreign Source: IMF, national data, WGC
exchange reserves. * This table was updated in December, 2009 and reports data available at that
time. Data are taken from the International Monetary Fund’s International
Financial Statistics (IFS), December 2009 edition, and other sources where
These transactions, together with the ongoing applicable. IFS data are two months in arrears, so holdings are as of October
programmes of gold purchases by the central banks of 2009 for most countries, September 2009 or earlier for late reporters. The table
does not list all gold holders: countries which have not reported their gold
Russia and China reaffirm gold’s role as a key element of holdings to the IMF in the last six months are not included, while other countries
are known to hold gold but they do not report their holdings publicly. Where
global monetary reserves as well as a growing recognition
the WGC knows of movements that are not reported to the IMF or misprints,
of gold’s unique properties as a monetary asset and as a changes have been made. The countries showing as having 0.0 tonnes of gold
report some gold but less than 0.05 tonnes to the IMF.
protector of wealth.
** The percentage share held in gold of total foreign reserves, as calculated by
the World Gold Council. The value of gold holdings is calculated using the
end-October gold price of $1040.00 per troy ounce (there are 32,151 troy
ounces in a metric tonne). Data for the value of other reserves are taken from
IFS, table ‘Total Reserves minus Gold’.
1
BIS and IMF balance sheets do not allow this percentage to be calculated. In
the case of any countries, up to date data for other reserves are not available.

January 2010 12
 Gold Investment Digest

KEY DATA
Gold price Demand (Q4 08-Q3 09)
Q1 09 Q2 09 Q3 09 Q4 09 % % Value %
Gold price 907.80 920.90 960.26 1098.79 Tonnes change1 yoy ($ bn) yoy
(London PM fix, $ average) Jewellery 1769 -10% -20% 50.6 -18%
(% qoq) 14 1 4 14 Identifiable investment 1502 -11% 69% 42.7 71%
of which ETFs
(% yoy) -1.7 2.8 10.3 36.7
and similar products 658 -14% 115% 19.0 123%
Source: Global Insight, WGC Industrial and Dental 363 -3% -20% 10.5 -18%
Source: GFMS, WGC
Volatility (%) to end-December 2009
1-month 3-month 6-month 1-year Supply (Q4 08-Q3 09)
Gold (US$) 21.7% 19.7% 17% 21.3% % % Value %
Tonnes change1 yoy ($ bn) yoy
Source: Global Insight, WGC
Mining output 2527 1% 5% 72.8 9%
Net producer hedging -160 … … … …
Market capitalisation Total mine supply 2367 0% 17% 68.2 22%
Value ($ bn) Official sales 57 -63% -82% 2 -83%
Above-ground stocks of gold 2 5,758 Recycled gold 1528 4% 35% 44 38%
Source: GFMS, WGC
ETFs (as at 31 Decemberr 2009) 3
62.3
Notional value of net long non-commercial and non-reportable 1
The quarterly % change in rolling annual totals.
positions reported by CFTC, gold futures (at 29 December 2009) 31 2
Based on 2008 volume and Q4 2009 average gold price.
3
Data: www.exchangetradedgold.com; www.etfsecurities.com; www.ishares.com;
Source: Global Insight, WGC Zurich Kantonalbank; Finans Portföy; www.Deutsche-Boerse.com; www.juliusbaer.com

Performance
MSCI Dow Jones UBS S&P GS Bank of England Dow Jones/ Barclays Capital
S&P World Commodity TR Commodity Gold Effect Exchange Wilshire Global Treasury
500 ex-US Index Index (spot) Rate – USD REIT Index Index – USD
1 month 1.93% 1.59% 1.98% 0.87% -7.51% 3.92% 6.47% -6.07%
3 months 6.04% 2.44% 9.03% 8.42% 9.21% 1.09% 7.89% -2.32%
6 months 22.59% 22.27% 13.66% 6.51% 16.37% -4.47% 44.48% 5.15%
1 year 26.46% 33.67% 18.91% 13.49% 25.04% -5.66% 21.03% 2.08%
Volatility (1 year) 27.18% 24.82% 25.05% 34.17% 21.28% 9.93% 69.05% 10.69%
Data: Global Insight, WGC, Barclays Capital; Index data is based on Total Returns unless not applicable

Correlations (3 years ending 25 September 2009, weekly returns)

BarCap/ BarCap/ BarCap/ Dow Jones/
S&P GS DJ UBS MSCI DJ Global High Yield US Wilshire 3-month
Commodity CRB Commodity World Industrial S&P Wilshire Treasuries Bond Credit REITS T-Bill
Gold Silver Oil Index Index Index excl. US Average 500 5000 Index Index Index Index Yields
Gold 1.00
Silver 0.83 1.00
Oil 0.35 0.42 1.00
S&P GS Commodity Index 0.38 0.40 0.86 1.00
CRB Index 0.26 0.38 0.60 0.67 1.00
DJ UBS Commodity Index 0.43 0.47 0.74 0.93 0.75 1.00
MSCI World excl. US 0.13 0.27 0.50 0.57 0.62 0.62 1.00
DJ Industrial Average -0.09 0.04 0.30 0.38 0.42 0.41 0.82 1.00
S&P 500 -0.05 0.10 0.34 0.43 0.44 0.46 0.85 0.98 1.00
Wilshire 5000 -0.03 0.12 0.35 0.44 0.46 0.47 0.86 0.97 1.00 1.00
BarCap/Global Treasuries Index 0.34 0.32 0.08 0.06 0.08 0.08 0.09 -0.21 -0.16 -0.16 1.00
BarCap/High Yield Bond Index 0.07 0.14 0.19 0.11 0.28 0.11 0.03 -0.03 -0.01 -0.01 0.05 1.00
BarCap/US Credit Index -0.10 0.01 0.04 0.01 0.23 0.05 0.20 0.02 0.05 0.05 0.47 0.38 1.00
Dow Jones/Wilshire REITS Index -0.01 0.00 0.09 0.02 0.03 0.01 -0.01 0.01 -0.02 -0.02 0.18 0.10 0.22 1.00
3-Month T- Bill Yields -0.19 -0.05 0.14 0.14 0.19 0.13 0.27 0.17 0.22 0.23 -0.09 0.12 -0.01 -0.07 1.00
Data: Global Insight, Barclays Capital, WGC; Index data is based on Total Returns unless not applicable

January 2010 13
 Gold Investment Digest

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January 2010 14