www.gold.

org

Gold Investment Digest

October 2010

QUARTER 3 2010
Price trends Contributors
The gold price continued its upward trend during Q3 2010, ending the quarter at
US$1,307.00/oz, on the London PM fix, 5.1% higher quarter-on-quarter. Gold’s Juan Carlos Artigas
average volatility of 13.2% in Q3 was not only lower than previous quarters juancarlos.artigas@gold.org
but remained below that of equity and commodity indices. Concerns over
the health of economic growth in the developed world, quantitative easing, Nitin Tuteja
continued purchases from central banks in emerging markets, healthy jewellery nitin.tuteja@gold.org
consumption in regions like China and usage in technological applications have
all ensured that gold remains a sought after asset. Eily Ong
… read more on page 2 eily.ong@gold.org
Investment trends
Investors bought 28 tonnes of gold in the ETFs we monitor in Q3 2010, bringing Johan Palmberg
their total holdings to a new high of 2,070 tonnes, worth $87 billion. In the johan.palmberg@gold.org
futures market, COMEX gold net long positions remained strong throughout
the quarter as many investors continued to see value in the long gold trade. Louise Street
Similarly, investment demand in bars and coins in North America, Europe, China, louise.street@gold.org
India and the Middle East during Q3 2010, while lower than the second quarter
estimates, remains historically high. Marcus Grubb
… read more on page 6 marcus.grubb@gold.org
Market and economic influences
Economic performance in the third quarter of 2010 was mixed. Many equity World Gold Council
markets rebounded from the low levels seen during Q2, but economic growth 10 Old Bailey
and labour markets in many developed countries remain constrained. Conversely, London
emerging markets have seen upward revisions to their economic growth and EC4M 7NG
inflation estimates. In all, this continues to be supportive of gold investment. In
recent research reports, the WGC has found that gold does not appear www.gold.org
overvalued and that even modest allocations to gold in a portfolio can help investment@gold.org
investors mitigate losses and hedge against tail risks without sacrificing +44 (0) 20 7826 4700
long-term returns.
… read more on page 9
Gold market trends
Preliminary reports in India suggest the first half of Q3 2010 witnessed robust
jewellery sales, supported by a normal monsoon season. The WGC expects
demand to pick-up further in Q4 on the back of the main festive season. In
China and Hong Kong, the gold market appears to have maintained its strong
momentum, suggesting continued positive growth during Q3 2010 relative to
year-earlier levels. Sales by European central banks remained negligible while
their counterparts in emerging markets continued to increase their gold reserves.
… read more on page 13
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 17

© 2010 World Gold Council and GFMS Ltd

 Gold Investment Digest

PRICE TRENDS
The gold price had a strong performance during Q3 2010, Japan and the US continued to make gold an attractive
ending the quarter at US$1,307.00/oz, on the London investment. In particular, statements by Federal
PM fix, compared with US$1,244.00/oz at the end of Q2 Reserve officials and discussions in previous policy
2010. This represented an increase of 5.1% in US dollar meetings regarding their willingness to provide a more
terms, in line with its quarterly average gain over the past accommodative policy to spur economic growth and
5 years which, in turn, reinforces the view that gold’s reactivate the labour market have put pressure on the
appreciation appears steady and measured and does US dollar, increased long-term inflation expectations
not exhibit the same statistical characteristics observed and, consequently, due to its role as a hedging vehicle,
in previous asset bubbles. Indeed, the increase in the pushed up the price of gold. Second, official sector
average gold price during Q3 2010 was more modest, activity continued to be supportive of the gold market
rising by US$30.01/oz (2.5%) to US$1,226.75/oz, from as sales by European central banks remained negligible
US$1,196.74/oz the previous quarter, due to a pullback in while in several emerging markets, including Russia,
price in the early part of the quarter. The gold price had Bangladesh and Thailand, central banks continue to
fallen to US$1,157.00/oz on the London PM fix by 28 July increase their gold reserves. Third, anecdotal evidence
before beginning a steady rise that lasted throughout the suggests that while jewellery consumption has not been
rest of the quarter. The gold price broke through previous immune to higher gold prices in Asia and the Middle
highs, breaching the US$1,300.00/oz level for the first East, there is still healthy activity in the market, especially
time on 29th September. This trend has continued during in China. Moreover, investment activity in those regions
the first half of October, and the gold price has reached continues to grow. Finally, gold usage in electronics and
levels as high as US$1,387.35/oz during intraday trading. other technological applications remains a steady source
of demand for the market.
In line with gold’s long-term supply and demand dynamics,
there are several factors that have kept gold a sought Net inflows into ETFs and other investment vehicles
after asset. First, concerns over the health of economic during Q3 2010 were just a fraction of the record levels
growth in some developed countries, coupled with risks experienced during the second quarter, due in part to a
surrounding potential extensions and expansions of pullback in July. They subsequently increased, for example
quantitative easing measures by central banks in the UK, the gold-backed ETFs we monitor saw net inflows of 54
tonnes during August and September, after experiencing
net outflows of 26 tonnes during July. Similarly, net long
Chart 1: Gold price (US$/oz), London PM fix
positions in gold futures contracts, a measure traditionally
US$/oz
considered to signal speculative investment activity, also
1,400 returned to levels close to those seen during Q4 2009, by
the end of the quarter.
1,300
Developed markets
While the price of gold reached new highs in US dollar
1,200
terms, it fell in most developed markets. G10 currencies
appreciated against the US dollar during Q3 2010
1,100 after many bottomed-out towards the end of Q2 2010.
Following the events that surrounded the European debt
1,000 crisis, investors started to shift their concerns onto the US
economy. Current indicators, such as nonfarm payrolls,
900
consumer confidence and the Philadelphia Fed business
outlook survey point towards a slower path to economic
recovery in the US than anticipated and investors
800
worry about the perverse effects that the extension of
quantitative easing measures may have on the US dollar.
700 Currency appreciation in Europe, Japan, Canada and
D 7

M 7

Ju 8

Se 8

D 8

M 8

Ju 9
Se 9

D 9

M 9

Ju 0

Se 0
10

Australia offset gains in the gold price. Consequently,

0

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gold prices fell by 5.4% in euros, 4.4% in Swiss francs,

Source: LBMA 1.0% in Japanese yen and 7.9% in Australian dollars,

October 2010 2
 Gold Investment Digest

while remaining flat in pound sterling. The gold price S&P 500 and the MSCI World ex-US Index (which is heavily
rose by 1.8% in Canadian dollar-terms as the Canadian weighted towards European equities) increased by
dollar posted a more modest appreciation against its US 10.7% and 15.5% respectively, in US dollar terms. During
counterpart. the same period, the S&P Goldman Sachs Commodities
Spot Index (S&P GSCI) rose by 10.3%, as industrial
demand started to improve in countries like Germany and
Gold performance – Developed Markets China. In particular, the price of oil increased by 10.2% to
Last price US$81.42/bbl by the end of Q3 2010 from US$73.87/bbl
9/30/10 Q3 Max Q3 Min % QoQ % Vol* the previous quarter. On the other hand, the performance
US$/oz 1,307.00 1,307.50 1,157.00 5.1 13.2 of US Treasuries, as measured by the Barclays US
Treasuries Aggregate Index was more measured and
GBP/oz 831.00 831.00 741.33 0.0 15.8
rose only by 2.7% over the quarter.
EUR/oz 959.62 992.04 888.83 -5.4 16.9

CHF/oz 1,281.91 1,317.54 1,208.65 -4.4 14.6

On a risk-adjusted basis, returns of the riskier assets
considered in the analysis outweighed their higher
JPY/oz 109,082.22 109,721.27 100,835.25 -1.0 16.1 volatility. Consequently, US and international equities, as
CAD/oz 1,345.16 1,348.56 1,198.19 1.8 16.2 well as the general commodity complex outperformed
versus gold and US Treasuries.
AUD/oz 1,353.56 1,469.75 1,292.82 -7.9 16.3

Source: LBMA, Bloomberg, WGC Emerging markets

*Annualised quarterly volatility based on daily returns While most emerging market currencies gained ground
against the dollar during the third quarter of 2010, some
of these gains were more modest than their developed
During Q3 2010, some of the risk aversion experienced in market counterparts. In general, emerging market
previous quarters subsided, and while negative investor equities—as measured by the MSCI EM Index—were up
sentiment around economic growth lingered, many of by 17.2% in US dollar terms, the best performance among
the financial assets, that are generally considered riskier, international equity markets, largely driven by a healthier
rose by double digits, while others such as gold and US economic rebound in those economies. While emerging
Treasuries saw more modest gains. On the one hand, the equity markets experienced heavy inflows during the
quarter, some currencies within developing economies
fared better than others. Consequently, on the one hand,
Chart 2: Relative price performance in Q3 2010*
gold prices fell in both Turkish lira and South African rand
% terms, by 3.7% and 4.2% respectively, as they benefited
20
from their trading links with Europe and a slightly better
18 economic outlook.On the other hand, gold continued to
reach new highs in Indian rupee terms, staying above
16
the Rs. 1,775.00/g (approx. Rs. 57,000.00/oz) level for
14 most of the third quarter while posting a modest gain of
1.7% during the period, as the Indian rupee appreciated
12

10
Gold performance – Emerging Markets
8
Last price
6 9/30/10 Q3 Max Q3 Min % QoQ % Vol*
RUB/oz 40,008.58 40,152.83 34,991.15 3.0 15.7
4
TRY/oz 1,892.27 1,954.41 1,749.73 -3.7 15.6
2
CNY/oz 8,743.83 8,744.56 7,843.30 3.6 13.3
0
INR/oz 58,769.26 58,970.67 54,124.46 1.7 12.6
)

y S
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S$ oil

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SC
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bl
Ts U
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5

/b
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G
S$

IW
P

SC

ZAR/oz 9,125.60 9,548.57 8,489.14 -4.2 15.6

ru
S&

P
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S&
M

tc
Ba
d

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M
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Source: LBMA, Bloomberg, WGC

G

Br

* For comparison purposes, gold performance was computed using 5PM EST prices.
*Annualised quarterly volatility based on daily returns
Source: Bloomberg, Barclays Capital

October 2010 3
 Gold Investment Digest

against the US dollar in September. The gold price also rose significantly: palladium, zinc, copper, nickel and
in Russian rouble (3.0%) and Chinese yuan terms (3.6%). aluminium rose by more than 20.0% quarter-on-quarter.
Noticeably, however, a moderate 2.0% appreciation Similarly, extreme periods of drought and flood in some
of the yuan versus the US dollar meant that Chinese parts of the globe, lower than expected crop yields and
consumers did not see the gold price climb as much Chinese consumption kept agricultural commodities well
as their US counterparts. This, coupled with consistent bid, and the S&P Goldman Sachs Agricultural Index
economic growth in the region, has kept gold demand in increased by 31.5%. Gains in some of the precious
China strong not only as an investment vehicle but also for metals were slightly more measured: platinum (8.1%) and
jewellery consumption, as anecdotal evidence suggests. gold (5.1%) had single-digit positive returns, while the
price of silver rose by 17.8%. The smallest price increase
Commodity performance was seen in livestock, as measured by the S&P Goldman
In line with better sentiment among consumers and Sachs Livestock Index which rose only by 3.5% during
investors in developing economies and certain developed the period.
markets relative to the second quarter, demand for
commodities rose during Q3 2010. Consequently, Price volatility
commodity prices increased posting double-digit General market volatility fell during the third quarter of
returns in most instances during the quarter. Noticeably, 2010, following the highly volatile period experienced
demand for industrial metals was especially robust. In during Q2 2010 as a by-product of the European
particular, low inventory levels in Shanghai warehouses sovereign debt crisis and other economic uncertainties
for some metals like copper coupled with speculation around the world. Nevertheless, equity market risk, as
over potential new base metals ETF vehicle launches and measured by the VIX index, remains elevated in relation
an ever increasing demand from China, which, in many to levels seen at the end of 2009 and the beginning
cases contributes a 40% share of total demand, had a of 2010. The VIX Index is a popular measure of the
positive effect on price. During Q3 2010, tin was the best implied volatility and is a weighted blend of prices for
performing commodity, rising by an impressive 41.0%, a range of options on the S&P500 Index. For the gold
followed by lead which rose by 33.8%. Other metals with market, a measured price appreciation translated into
a high degree of exposure to industrial demand rose lower realised volatility. Indeed, gold price volatility
consistently fell during Q3 2010. On average, the
annualised gold volatility during Q3 2010 was 13.2%
Commodities – Returns
% QOQ % YOY % Vol* Chart 3: Gold & S&P GS Commodity Index annualised price
Gold London PM fix (US$/oz) 5.1 31.3 13.2 volatility (22-day rolling, %) and the VIX Index (level)

Silver London fix (US$/oz) 17.8 34.2 23.8 % level

90 90
Palladium (US$/oz) 28.0 91.2 26.5
Platinum (US$/oz) 8.1 27.7 13.0 80 80

Aluminum (US$/t) 20.3 25.0 22.5 70 70

Copper (US$/t) 23.7 31.3 20.2
60 60
Lead (US$/t) 33.8 -0.6 28.5
Nickel (US$/t) 20.4 34.9 27.1 50 50

Tin (US$/t) 41.0 63.1 26.5 40 40

Zinc (US$/t) 25.8 13.7 24.8
30 30
Brent crude oil (US$/bbl) 10.2 20.3 26.1
S&P GS Commodity Index 8.3 4.2 17.8 20 20

S&P GS Agriculture Index 31.3 19.6 23.4

10 10
S&P GS Livestock Index 3.5 10.9 12.3
0 0
DJ UBS Commodity Index 11.6 10.0 12.4
ec 7
Fe -07
Ap -08
Ju -08
g 8
O -08
D -08
Fe -08
Ap -09
Ju r-09
Au -09
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D t-09
Fe -09
Ap -10
Ju -10

g- 0
10
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ct
ec
b

n
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R/J CRB Commodity Index 11.0 10.7 12.4

c

c
O

Source: Bloomberg, WGC Gold (US$/oz; LHS) S&P GSCI (LHS) VIX Index (RHS)

*Annualised quarterly volatility based on daily returns Source: Bloomberg, WGC

October 2010 4
 Gold Investment Digest

compared to 15.8% the previous quarter. Moreover, by

the end of Q3, gold price volatility—as measured on a
22-day rolling basis—had reached record low levels of
8.8%, well below its historical trend of 15.8% over the,
past 20 years. In comparison, the VIX index fell slightly
trading at an average of 24.3% in Q3 2010 up from 26.4%
in the previous quarter, but still higher than levels seen
previously in the year.

While volatility across the commodity spectrum fell, gold

remained, on average, one of the least volatile of the
commodities that we monitor. Average daily volatility on
the S&P Goldman Sachs Commodity Index fell to 18.8% in
Q3 2010, from 23.4% in the previous quarter on an annual
basis. Nickel was, for the second consecutive quarter, the
most volatile commodity with an average volatility of 28.0%
in Q3 2010. Most other commodities had volatilities over
20.0%, including crude oil with an annualised volatility of
26.3%. The least volatile commodities during the quarter
were platinum (13.1%) and livestock (12.4%).

Chart 4: Annualised Q3 2010 volatility for selected commodities

%
35

30

25

20

15

10

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tin ty x)
PM (U ex

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Br
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Source: IHS Global Insight, WGC

October 2010 5
 Gold Investment Digest

INVESTMENT TRENDS

Exchange traded funds GLD options

The third quarter of 2010 saw a moderation of gold Similar to the activity experienced in gold-backed ETFs,
purchases via exchange traded funds (ETFs) compared options trading declined moderately during the third
to the heavy buying in the second quarter of this year. quarter of 2010. GLD options volume declined 16.1%
Investors bought a collective 28.3 tonnes of gold in the during the quarter to 11.2 million contracts from 13.3
ETFs that we monitor bringing their total holdings to a million in Q2 2010. The volume however was still 96.2%
new high of 2,070.1 tonnes, worth US$87 billion at the higher than the 5.7 million contracts traded in the third
quarter-end gold price. quarter of 2009. Trading volume declined especially
in late July and early August which is the typical quiet
iShares Gold Trust (IAU) listed on the Amex experienced summer holiday period for the markets and was more
the largest net inflows, adding 13.9 tonnes to bring up marked for call options which fell by 33.4% on trading
the total to 99.7 tonnes by the end of the quarter. The activity. On the other hand, the average open interest
ETFS Physical Swiss Gold Shares, listed on the NYSE, increased 17.5% to 4.3 million in the third quarter of 2010
had a net inflow of 9.6 tonnes this quarter, increasing from 3.7 million contracts in the second quarter. Moreover,
its total holdings to 23.4 tonnes. SPDR Gold Shares while trading volume declined in July and August, open
(GLD) listed on the NYSE and cross-listed in Mexico, interest remained strong throughout the quarter. In line
Singapore, Tokyo and Hong Kong experienced net with its historical performance, open interest on call
outflows of 15.7 tonnes this quarter, primarily on the back options accounted for the majority of traded contracts,
of net outflows during July which were partly offset by at an average of 2.6 million contracts during the quarter.
net inflows in August and September. The European- However, open interest in put options experienced the
listed gold ETFs added a collective 20.8 tonnes of gold largest gain, increasing by 21.8% in Q3 2010 relative
to their holdings to a total 577.0 tonnes, lead by Julius to the previous quarter, as investors likely positioned
Baer Physical Gold Fund (listed on the Swiss Exchange) to lock gains on higher gold prices towards the end of
which experienced net inflows of 8.5 tonnes bringing its the quarter.
total to 85.5 tonnes.
Realised volatility declined in the third quarter of 2010.
Chart 5: Gold ETF holdings in tonnes and the gold price (US$/oz)
Performing exactly opposite to the gold price, the
3-month historical volatility crept up in July to 17.2% from
Tonnes US$/oz 15.8% in June, after which it declined steadily through
2,250 1,500
ETFS Physical Swiss Gold Shares (LSE) August and September to end the quarter around
2,000
ETFS Physical Swiss Gold Shares (NYSE) 13.2%. The 3-month ATM (at-the-money) implied
Julius Baer Physical Gold - SWX
XETRA-GOLD (Deutsche Böerse) 1,300 volatility on the other hand declined from 23.6%
1,750 ETFS Physical Gold (LSE)
to 19.0% in July and has remained steady there
GOLDIST (Istanbul Stock Exchange)
1,500
ZKB Gold ETF (SWX)
1,100
throughout the rest of the third quarter. The spread of
IAU (Amex)
GLD (NYSE)
3-month implied volatility over realized volatility was
1,250 NewGold (JSE) very close to the highs of the year at around 6.0%
GBS (LSE) 900
GBS (ASX) implying that there remains a strong demand in the
1,000
Gold PM Fix (US$) options market for protection against volatility in the
750 700 gold market.

500
500
Gold futures
250 Comex total non-commercial and non-reportable net
long positions, a measure of more speculative investment
0 300
demand declined considerably in July and then gradually
D 3
3

Ap 4

D 5

Au 5
06

D 7

Au 7
08

D 9

Au 9
10

increased during August and September. The net long

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Ap

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ultimately gained 1.3 million ounces (39.8 tonnes) to end

Data: www.ishares.com; www.exchangetradedgold.com;
www.etfsecurities.com; Zurich Kantonalbank; Finans Portföy; the third quarter at 30.3 million ounces (941.6 tonnes),
www.Deutsche-Boerse.com; www.juliusbaer.com; LBMA. compared to 29 million ounces (901.9 tonnes) at the
Chart: WGC, www.gold.org end of Q2 2010. On average however, net long positions

October 2010 6
 Gold Investment Digest

in the third quarter of 2010 decreased by 4.7% relative Bars and coins
to the second quarter. Overall, both long-only and Preliminary estimates suggest private investor bar demand
short-only positions decreased over the quarter. in Europe and North America during Q3 2010 was a robust
Long-only positions declined by 4.8% on average during 50 tonnes; while lower than the second quarter estimates,
Q3 2010 relative to the previous quarter, and short- it is in line with activity observed in other categories of
only contracts showed a 5.4% decline during the same investment demand. Similarly, investment activity in China
period. While the price of gold fell from record highs remains high. Physical delivery at the Shanghai Gold
in July and then made new successive highs in the Exchange has totalled 591 tonnes in the first 9 months
month of September, net long positions remained strong of the year and anecdotal evidence suggests continuing
throughout the quarter as many investors continue to see strong demand for retail investment products. In Vietnam,
value in the gold trade. preliminary estimates indicate that net retail investment
during the third quarter has increased to 18 tonnes, 44%
Chart 6: COMEX net long on non-commercial & non-reportable higher than in Q2 2010, as market participants used gold
positions on the active gold futures contract (million oz) versus to hedge against currency devaluation. As demand has
the gold price (US$/oz) continued to rise, the premium for local bars increased so
that by the end of September the State Bank of Vietnam
Million oz US$/oz
40 1,400 lifted import restrictions to bring local prices more in
line with international price levels. In India and Middle
1,300
35 East, anecdotal evidence suggests that retail investment
1,200 remains a steady source of demand for the gold market.
30

1,100
25 In the US, third quarter data on American Eagle bullion coin
1,000 sales from the US Mint shows a slight decrease in demand
20 relative to the second quarter. Demand for 1-ounce coins
900
and fractional amounts in Q3 2010 was 282,000 ounces
15
800 (8.8 tonnes), compared to 402,000 ounces (12.5 tonnes)
10 in Q2 2010. Investors wishing to purchase gold coins or
700
small bars can find a list of retail dealers on our website at:
5 600 http://www.invest.gold.org/sites/en/where_to_invest/directory.
0 500
Chart 7: American Eagle bullion sales
07

07

08

8
08

09

9
09

10

0
10
-0

-0

-0

-1
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p-

n-

p-

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ay

ay

ay

ay
Ja

Ja

Ja

Ja
Se

Se

Se

Se
M

Gold active net-long positions (million oz) Gold (US$/oz) ’000 oz

500
Source: COMEX, Bloomberg, WGC
450

OTC market 400

According to research carried out by GFMS on behalf of 350

the World Gold Council, activity in the over-the-counter
300
(OTC) market was similar to that of other gold investment
vehicles. Trading volume in the OTC market subsided 250
during the first part of the quarter, in part due to the usual
200
seasonal lull. September, in contrast, saw a distinct pick-
up in OTC market trading by funds going long gold, in part 150
through high strike price call options. Although anecdotal
100
evidence points to continued purchases of gold in
allocated bullion accounts during this time, it appears 50
there has been a greater willingness to use derivatives
0
to gain a leveraged exposure to gold price gains in line
Q 07
Q 07
Q 07
Q ’07
Q 08
Q ’08
Q 8
Q 08
Q 09
Q 09
Q 09
Q 09
Q 10
Q 10
0
’0

’1
’
’
’

’
’
’
’
’
’
’

with the net-long observed in the futures market. GFMS

1
2
3
4
1
2
3
4
1
2
3
4
1
2
3
Q

estimates that, as whole, net OTC investment during the 1-oz coin sales Total sales*
*Includes 1-, 1/2-, 1/4-, and 1/10th-ounce coin sales
quarter reached a decent level but was nonetheless
softer than in the previous quarter. Source: The United States Mint

October 2010 7
 Gold Investment Digest

Lease rates speculative positions, has helped drive up the back end
The implied gold lease rate is the difference between the of the futures curve and increase the gold forward rate,
US Dollar LIBOR and the equivalent duration Gold Forward even as spot prices have been rising. This has led to
Offered Rate (GOFO), the rate at which gold holders are several instances of negative implied lease rates.
willing to lend gold in exchange for US Dollars (also known
as the swap rate). The 3-month implied gold lease rate ended
Chart 8: Implied 3-month gold lease rate
the quarter slightly negative at -0.14%. Both components
declined in the third quarter with the 3-month US Dollar
%
LIBOR declining from 0.53% to 0.29% and the 3-month
3.0
GOFO declining from 0.57% to 0.43%. The 3-month
GOFO went down to 0.32% in the middle of August.
2.5

The primary reasons why implied gold lease rates have

2.0
been flat to negative since Q3 2009 are the presence of
a low policy rate environment, functioning credit markets,
1.5
de-hedging by producers and high gold futures demand.
Most developed world central banks have lowered rates
1.0
drastically in the last few years and continue to maintain
an extremely low policy rate environment, reflected in
LIBOR rates. Producer de-hedging is another important 0.5

factor to consider which helps explain negative implied

gold lease rates. De-hedging was around 222 tonnes in 0.0

the last two quarters of 2009 and is expected to be in

excess of 125 tonnes over the course of 2010. Last but -0.5
not least, both the net long position and the open interest
07

7
07

08

8
08

09

9
09

10

0
10
-0

-0

-0

-1
n-

p-

n-

p-

n-

p-

n-

p-
ay

ay

ay

ay
Ja

Ja

Ja

Ja
Se

Se

Se

Se
in the futures market remain near all-time highs indicating
M

M
strong demand for physical gold by investors. In addition,
gold futures demand, evidenced by expanding net long Source: Bloomberg, WGC

October 2010 8
 Gold Investment Digest

MARKET AND ECONOMIC INFLUENCES

The third quarter of 2010 was marked by mixed economic In the US, inflation remains low, but its evolution will
news around the world. Markets across Europe started depend on how long interest rates are kept at current
to recover from the low levels experienced around the levels and how quickly the Fed can act to lift them once
sovereign debt concerns while the euro, the pound inflation takes hold. Thus, the potential for an extended
sterling and the Swiss franc, among others, appreciated period of low rates has increased long-term inflation
against the US dollar; however, the road to recovery expectations as measured by break-even rates based
remains uncertain. The outlook for Japan is also unclear, on Treasury Inflation-Protected Securities (TIPS) and
and low economic growth lingers. Similarly, the picture nominal Treasury yields. Consequently, the Fed also
in the US seems less rosy than it was a few months ago. has to manage the risk that leaving rates low for too long
After an initial recovery, the labour market has turned may increase the likelihood of higher inflation in the longer
dormant—the unemployment rate remains high and term. In a study published in February 2010 titled
temporary government jobs have not translated into full- Linking Global Money Supply to Gold and to Future
time private sector employment—and the outlook for Inflation the WGC finds that there is a direct link between
the US dollar remains negative. Against this backdrop, global money supply and the price of gold. Moreover,
developed market central banks have signalled their after an extended period of broad money contraction,
intention to extend and potentially expand the quantitative the trend has started to reverse and the monetary base
easing measures that were put in place during the recent to increase.
financial crisis. In particular, the Bank of England, the
Bank of Japan and the Federal Reserve appear ready Furthermore, there is evidence that gold is an indicator
to make monetary policy more accommodating in order of higher money velocity and, thus, increasing future
to spur growth in their economies. This, in turn, had a inflation. This, in turn, justifies some investors’ concerns
positive impact on global risk assets, including cyclical that quantitative easing policies which have resulted
commodities such as oil and industrial metals. At the in rapid money supply growth could eventually lead to
same time, US Treasuries also observed positive, albeit higher inflation. Moreover, higher inflation expectations,
lower, returns, as rates are already close to historical lows. coupled with a large trading deficit and record levels of

Chart 9: Performance of various asset classes in local currency Chart 10: Gold (US$/oz) versus US trade-weighted dollar index
(Q3/Q2 2010 % change)

% US$/oz level
14 1400 120

12
1200 110

10
1000 100

800 90
6

600 80
4

2 400 70

0
200 60
)

ex

ro
U
K
oz

rie

rie
at

lin

u
IU

IE
d
/

eg

/e
su

su

r
S$

In

te

M 7

M 8
Ja 9
10
SC

Ja 4
SC

Se 00

Ju 1
M 2

M 3

N 5
Se 5
06
S$

N 00
gr
ea

ea

/s
(U

l-0
-0

-0
-0
0
l-0

-0

0
-0
IU

U
M
Ag

S$
M

n-
Tr

Tr

-
p-

n-

p-
n-

ay

ar
fix

ar
ov

ay

ov

Ju
FX
SC

U
S

ro
ilt

Ja
PM

FX
G

Eu

M
ap

ap
n

ap
Lo

rC

Gold (US$/oz; LHS) US TWD (RHS)

r

rC
Ba

Ba
d

Ba
ol
G

Source: Barclays Capital, MSCI Barra, WGC Source: LBMA, Bloomberg

October 2010 9
 Gold Investment Digest

debt outstanding, have put pressure on the US dollar, is expected to grow at a similar pace in 2010 and 2011.
which has seen a consistent depreciation against major Given the importance of both India and China for the gold
currencies since the beginning of Q3 2010. These two jewellery market (collectively, more than 45% of global
factors have provided further support for gold investment jewellery demand in 2009), economic recovery tends to
demand, as it is generally known to be an effective be accompanied by a positive outlook for gold. However,
currency and inflation hedge. in the case of India, higher gold prices, as the rupee had
a more modest appreciation, hampered the ability of
Emerging markets continued with a more positive tone consumers to access the gold market at a higher rate.
during Q3 2010. Equity markets in general showed positive Nevertheless, gold remains an effective and accessible
returns of over 15% and economic growth continues at savings vehicle.
a healthy pace. For example, the Chinese economy is
expected to grow at around 9.5% in 2010 and 8.5% in 2011
according to a the World Bank. However, China has not
escaped unscathed: headline inflation has been rising and
the People’s Bank of China (PBoC) recently announced its
decision to raise interest rates for both deposits and lending
rates to control it. Coupled with a measured appreciation of
the yuan against the US dollar, Chinese growth is likely to have
only a moderate deceleration. Moreover, in August, ministers
of the PBoC announced a program called “The Proposals
for Promoting the Development of the Gold Market”, a
signal of the government conviction to support growth in the
gold market.

Chart 11: Chinese real GDP growth (%YoY) and CPI inflation
(%YoY)

% %
14 10

12 8

10 6

8 4

6 2

4 0

2 -2

0 -4
9

02

03

10
-9

-0

-0

r-0

-0

-0
n-

p-

n-
ec

ar

ct
Ju
Ap
Ju

Ja

Ja
Se

O
M
D

China real GDP China CPI inflation

(%YoY; LHS) (%YoY; RHS)
Source: National Bureau of Statistics, China Economic Information Net

Similarly, India’s growth also remains resilient. For

example, official figures show that in the previous quarter
(2Q 2010), real GDP grew at 8.5% for the second
consecutive quarter as investment in infrastructure,
exports, and industrial output continue to expand, and it

October 2010 10
 Gold Investment Digest

While reserve managers and investors are increasingly compared with a range of different assets including equity
recognising the strategic case for including gold in indices and hard assets like oil. It also demonstrated
a portfolio due to its diversification benefits and the that there is ample scope for continued robust growth in
protection it can afford against macroeconomic risks, gold market demand, due among other reasons, to the
successive new records in the gold price have increased strength of emerging markets, a fundamental shift in the
concerns that gold may be overvalued relative to other behaviour of central banks.
assets. Some investors and market commentators have
even questioned whether the gold market is in a “bubble”. Moreover, the WGC also explored the role that gold plays
In a recent report entitled The10-year gold bull market to help manage risk more effectively in a portfolio by
in perspective, the WGC explored this question and protecting against infrequent or unlikely but consequential
using econometric tools analysed the recent negative events, often referred to as “tail risks’. In Gold:
developments in the gold market. Unambiguously, the Hedging against Tail Risk, the WGC shows that gold can
results showed that gold price developments do not be an integral part of cost-effective strategies which
resemble the statistical characteristics of past bubbles, provide protection without sacrificing return for both
including those of the US housing market, the Nasdaq short- and long-term investors. For example, it finds that
technology bubble, and the Japanese Nikkei equity unlike other assets, gold tends to exhibit lower volatility for
market bubble. Additionally, the report found that the negative returns than it does for positive returns and that
gold price is consistent with its long-run average-level gold also tends to have little correlation with many asset

Chart 12: Indentifying Bubbles: Z-scores of or Rolling Returns (LHS) and Rolling Annual Returns using quarterly data (RHS)

Gold Prices (US$/oz) (1975-2010) US Nasdaq Composite (1975-2010)

Z-score % Z-score %
3.00 160 3.00 100
140 80
2.50 120 2.50
60
100
2.0 80 2.0 40
60 20
1.50 1.50
40 0
20
1.00 1.00 -20
0
-40
0.50 -20 0.50
-40 -60
0.00 -60 0.00 -80
6

6
2

0
6

6
-0

-0
-8

-8

-9

-0

-8

-8

-9

-0
-7

-7
ar

ar
ar

ar

ar

ar

ar

ar

ar

ar
ar

ar
M

M
M

M
M

Case Shiller 10 City US House Price Index (1987-2010) Japanese Nikkei Equity Index (1975-2010)
Z-score % Z-score %
3.00 40 3.00 40

30 30
2.50 2.50
20 20
2.0 2.0
10 10

1.50 0 1.50 0

-10 -10
1.00 1.00
-20 -20
0.50 0.50
-30 -30

0.00 -40 0.00 -40

6

6
2

0
6

6
-0

-0
-8

-8

-9

-0

-8

-8

-9

-0
-7

-7
ar

ar
ar

ar

ar

ar

ar

ar

ar

ar
ar

ar
M

M
M

M
M

Z-score Rolling Annual Returns (RHS)

Source: Bloomberg, WGC

*Only positive values are plotted for Z-scores. The graphs are consistently truncated at a maximum z-score of three to make it easier to see the
results of the most recent events as that is the period of interest. Bubble period maximum z-scores are as follows: Gold in Q2 1980, 4.9;
Case Shiller 10 city index in Q3 2005, 2.25; Nasdaq in Q1 2000, 2.75; Nikkei in Q2 1986, 3.33.

October 2010 11
 Gold Investment Digest

classes, thus making it a strong candidate for portfolio study shows that in 18 out of 24 cases (75%) analysed,
diversification. It also shows that, conversely to other portfolios which included gold outperformed those which
assets which are typically considered diversifiers, gold’s did not. In particular, it calculated that in the period
correlation to other assets tends to change in a way that between October ’07 and March ’09, an asset allocation
benefits portfolio returns. similar to a benchmark portfolio (50-60% equities, 30-40%
fixed income, 5-10% alternative assets) which included
Chart 13: Weekly-return correlation between equities, gold and
an 8.5% allocation to gold, was able to reduce the total
commodities when equties move by more than 2 standard loss in the portfolio by almost 5% relative to an equivalent
deviations; Jan ’87-Jul ’10 portfolio without gold.

Chart 14: Loss on a US$10 million investment during the recent

financial crisis in the period from October '07 to March '09 on a
S&P 500 portfolio with similar allocation to a benchmark portfolio
return
more US$ mn
than +2s 3.6

Reduction of US
3.4
$470,000

3,2

S&P 500 3.0

return
less 2.8
than -2s
2.6

2.4
-0.5 -0.25 0 0.25 0.5

Correlation between Correlation between 2.2

S&P 500 and gold (US$/oz) S&P 500 and S&P GSCI
2.0
Source: LBMA, Bloomberg, WGC Loss in a US$10 million portfolio
without an allocation to gold with an allocation to gold (9%)
Note: Portofolio weights obtained to maximize risk-adjusted returns on cash, US and international Treasuries, high grade
As an investment, gold’s role extends beyond affording and high yield bonds, emerging market debt, and US, EAFE and emerging market equities, commodities and gold.

protection in extreme circumstances. It has been shown Source: LBMA, JP Morgan, Barclays Capital, MSCI Barra,
that including gold in a portfolio can reduce the volatility of Standard & Poor’s, WGC
a portfolio without necessarily sacrificing expected returns.
Indeed, there is a strong case for an allocation to gold as
The report finds that portfolios which included gold an asset class on its own merits. Gold is part commodity,
not only delivered better risk-adjusted returns, but that part luxury consumption good and part financial asset
they can also help to reduce the Value at Risk (VaR) of and, as such, its price does not always behave like other
an investment. Specifically, it demonstrated that even asset classes and especially other commodities. Gold
relatively small allocations to gold, ranging between 2% also has other unique characteristics that make it very
and 9%, help reduce the weekly 1% and 2.5% VaR of useful in periods of financial distress. As such, investors
a portfolio by between 0.1% and 18.5% based on data who hold gold only in the form of a commodity index are
from December ’87 to July ’10. Moreover, looking at likely to be under-allocated because gold’s weight in
past events typically considered to be tail risks, such as typical benchmark commodity indices tends to be small,
Black Monday and the recent 2007-2009 recession, the usually between 2% and 6%.

October 2010 12
 Gold Investment Digest

GOLD MARKET TRENDS Please note that data on jewellery and industrial demand
are released with a lag; the latest data is for Q2 2010.
Data for the third quarter of 2010 will be released in
mid-November 2010.
Jewellery
Global jewellery demand totalled 408.7 tonnes during Chart 15: Jewellery demand in tonnes and US$ billions
the second quarter, declining 5% from year-earlier levels.
This was the smallest decline in the rolling four-quarter Tonnes US$ bn
performance since the first quarter of 2008, indicating 800 20
a deceleration in the pace of decline in global jewellery
18
demand. Expressed in US$ value terms, jewellery demand 700

totalled $15.7bn, 23% higher than the $12.8bn level in Q2 16

2009. Jewellery off-take was lower across most markets, 600
14
with just a handful of countries bucking the trend to post
500
an increase over Q2 2009. However, a consideration of 12
global jewellery demand in value terms paints a different
400 10
picture, with a few markets experiencing a decline in the
US$ value of gold jewellery off-take. 300
8

6
At the country level, the south-east Asian markets of 200
Thailand, Indonesia and South Korea sustained the 4

worst falls in Q2 gold jewellery demand as consumers 100

2
in these markets proved to be particularly susceptible to
0 0
the high price level. Gold jewellery demand in India, the

0
7
5

9
5

’0

’1
’0
’0

’0

’0

’0

’0

’0

’0
’0

largest jewellery market, was little changed from year-

1
3
3

1
1

Q
Q
Q

Q
Q

earlier levels, down just 2% at 123 tonnes. The Middle Tonnes (LHS) US$ bn (RHS)
East region had a mixed quarter, with Saudi Arabia
Source: GFMS, WGC
(+5% YoY) witnessing a rise in gold jewellery demand
as the improved domestic economic scenario boosted
consumption, while the other Gulf group of countries
underperformed markedly (-25% YoY). Hong Kong
recorded the largest rise in tonnage jewellery demand Chart 16: Tonnage growth in jewellery demand by country
(Q2 ’10 vs. Q2 ’09, % change)
(+34% YoY) as it recovered from the very weak levels of
Q2 2009, when demand was badly affected by swine flu. %
Elsewhere in the Greater China region, mainland China 40

saw demand for gold jewellery increase by 5% YoY to

30
75.4 tonnes. In Japan, gold jewellery demand grew by
15% compared with Q2 2009, buoyed by the improving 20
economic background. Jewellery demand across
Europe and North America continued to suffer from the 10
combination of record gold prices at a time of continued
economic uncertainty. The exception to this was Russia, 0
where gold demand recovered to 16.3 tonnes from 13.9
tonnes a year earlier, an increase of 17%. –10

–20
Preliminary reports on demand trends in India suggest that
while the third quarter is traditionally the annual off-peak
–30
season, the first half of Q3 2010 witnessed robust sales
in both rural and urban markets, supported by a normal –40
monsoon season. However, with prices staying above the
Ru ng
ud Ja sia
ra n
C ia
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U a
SA

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U n

Th nes a
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Eg AE
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nd
et K

In Ko ulf
i A pa

n
di

e
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So the Ita
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y
hi

iw

do r
Ko

rk
s

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Rs 1,775.00/g (approx. Rs 57,000/oz) level for most of the

g

h
on

O
H

Sa

third quarter, jewellery sales seem to have contracted in

September. The WGC expects demand to pick-up further Source: GFMS

October 2010 13
 Gold Investment Digest

in the fourth quarter with the commencement of the main the automotive industry. Much of this growth has been led
festive season from early October until November (Diwali- by the developing world, in particular China and India.
Dhanteras festival). In the Middle East, anecdotal evidence According to the North American based Semiconductor
suggests that jewellery demand softened during Q3 2010 Industry Association (SIA), global sales of semiconductors
on the back of the seasonal effect of Ramadan falling in May (the latest data available) were stronger by almost
in August coupled with higher price levels thereafter. 48% over the corresponding month in 2009. Finally, gold
In China and Hong Kong, the gold market appears to used in dental applications, which account for less about
have maintained its strong momentum, and preliminary 10% of industrial demand, declined by a further 6% in Q2
evidence suggest expected positive growth during Q3 to a new record low, as substitution to alternatives, such
2010 relative to year-earlier levels. In the US, growth in as ceramics and base metals, continued to erode the use
imports during July and August provided a more positive of gold in this segment.
picture in retail activity, while the bridal category, which
proved to be the strongest performing category during Preliminary reports on Q3 2010 activity indicate that, while
the recession, continues to recover. The WGC expects the industrial sector continues to recover and remains a
that Q4 will show positive growth for gold jewellery sales steady source of demand, it is still feeling the effect of
versus year-earlier. a longer path to economic recovery especially in
developed markets.

Industrial applications Chart 17: Industrial demand by category in tonnes

Tonnes
Gold demand for industrial and dental applications 120
showed signs of further recovery in the second quarter,
registering a 14% increase over Q2 2009. Electronics
demand, which bore much of the brunt of the economic 100

downturn in 2009, was the chief driver of this rise, buoyed

by ongoing inventory restocking and fresh demand for 80
new technologies.

60
The electronics segment, which dominates industrial
demand for gold, registered another robust rise in Q2
2010 in a clear indication that the industry is continuing 40
to recover from the recession led losses sustained in
early 2009. Following the 40% jump in Q1 2010 off-take,
20
demand in Q2 rose by almost 25% from year-earlier
levels, with demand for the first six months of 2010
increasing by more than 30% on H1 2009. Demand for 0

semiconductors (produced using gold bonding wire)

6

0
’0

’0

’0

’0

’0

’0

’0

’0

’1
1

1
3
Q

Q
Q

has continued to rise, with numbers boosted by sales

Electronics Other industrial Dentistry
of personal computers, mobile phones and corporate
information technology, plus a modest rise in demand from Source: GFMS

October 2010 14
 Gold Investment Digest

SUPPLY Please note that data on mine production and recycled

gold are released with a lag; the latest data is for Q2 2010.
Data for the third quarter of 2010 will be released in

Mine production and mid-November 2010.

recycled gold
The supply of gold in the second quarter of 2010 Chart 18: Mine production and recycled gold supply in tonnes
totalled 1,131.4 tonnes, a rise of 18% from the second
quarter of 2009. Mine production increased by 3% Tonnes
to 658.5 tonnes, from 637 tonnes in the same period 700
a year earlier as a raft of new operations either came
online or ramped up production. Australian production 600
contributed the bulk of the increase in output as
Newmont’s Boddington mine completed its first year 500
of production. Further positive contributions came
from Mexico, where Agnico Eagle ramped up its 400
Pinos Altos operation, and Argentina, with Barrick’s
expansion of its Valadero mine. Offsetting the impact of
300
these developments was a 32% decline in production
at Indonesia’s Grasberg mine due to lower ore grades
200
resulting from mine sequencing and a 32% decline in
production at Peru’s Yanacocha for the same reason.
100

Net producer de-hedging dwindled to insignificant

levels during the second quarter, dipping to just 15.0 0

8
6

0
6

tonnes from 31.1 tonnes in the second quarter of 2009.

’0
’0

’0

’0

’0

’0

’0

’1
’0

3
3

1
1

Q
Q

Q
Q

The outstanding global hedge book has now reduced Mine production Recycled gold
to around 195 tonnes. AngloGold Ashanti continued to
Source: GFMS
reduce its hedge book and has announced its elimination
in early October. Chart 19: Net producer hedging in tonnes

The high price environment encouraged an increase in Tonnes

recycling activity during the second quarter and supply 0
from that source reached 496 tonnes, 35% up on year-
earlier levels and the second highest quarterly number -25

for recycled gold. Recycling activity among Western

-50
consumers has been on a gradually rising trend and
the higher price level ensured that profit-taking in these
-75
markets was marginally higher than year-earlier levels.
However, a geographic segmentation reveals that the bulk -100
of this scrap supply came from non-Western markets,
notably the Middle Eastern and East Asian markets. In -125
these markets, the rise in supply of recycled gold during
the second quarter was a reaction to higher gold prices. -150

-175

-200
8
6

0
6

’0
’0

’0

’0

’0

’0

’0

’1
’0

3
3

1
1

Q
Q

Q
Q

Source: GFMS

October 2010 15
 Gold Investment Digest

The official sector Top 40 Official Gold Holdings*

Tonnes % of reserves**
September 26, 2010, marked the end of the first year of 1 United States 8,134 72.1
the third Central Bank Gold Agreement (CBGA3). Sales 2 Germany 3,403 67.4
from Eurozone banks during the year amounted to just 3 IMF 2,907 1)
6.7 tonnes, the lowest annual sales figure under any of 4 Italy 2,452 66.2
the Agreements, demonstrating a reduced for disposing 5 France 2,435 65.7
of gold reserves. In September 2009, the Bundesbank 6 China 1,054 1.5
announced that it would limit sales during the first 12 7 Switzerland 1,040 15.1
months of the agreement to 6.5 tonnes for the purpose of 8 Japan 765 2.7
minting coins; however, they actually sold only 5.2 tonnes. 9 Russia 726 5.7
Elsewhere, the central banks of Greece and Malta each 10 Netherlands 613 55.8
11 India 558 7.4
sold negligible amounts.
12 ECB 501 25.9
13 Taiwan 424 4.1
IMF gold sales included within CBGA3 have reached 88.3
14 Portugal 383 79.6
tonnes. This is in addition to the 222.0 tonnes of gold sold in
15 Venezuela 364 48.5
off-market transactions to central banks. The most recent 16 Saudi Arabia 323 2.7
of these off-market deals was completed in September, 17 United Kingdom 310 15.6
with Bangladesh buying 10.0 tonnes. This leaves 93.0 18 Lebanon 287 25.2
tonnes remaining for sale from the total allocation of 19 Spain 282 35.9
403.3 tonnes, although future IMF data releases are likely 20 Austria 280 54.3
to show that further sales were conducted in September 21 Belgium 228 33.8
and October. At the current rate, the IMF is likely to 22 Philippines 176 13.5
complete its sales by early next year. 23 Algeria 174 4.2
24 Libya 144 5.1
The Bank for International Settlements (BIS) gold holdings 25 Singapore 127 2.3
have increased by 45.0 tonnes since the end of Q1, 26 Sweden 126 8.7
suggesting that the BIS continues to increase the amount 27 South Africa 125 10.9
28 BIS 120 1)
of gold it is holding as collateral for loans to commercial
29 Turkey 116 5.6
banks. The bulk of these swaps were conducted between
30 Greece 112 76.5
December 2009 and March 2010, as the European sovereign
31 Romania 104 8.7
debt crisis was unfolding. These on-going transactions
32 Poland 103 4.2
provide a clear example of gold’s effectiveness in 33 Thailand 100 2.5
providing liquidity during periods of financial distress. 34 Australia 80 7.0
35 Kuwait 79 1)
The Central Bank of the Russian Federation bought a 36 Egypt 76 7.7
further 22.0 tonnes of gold in September, bringing the 37 Indonesia 73 3.5
total addition to Russia’s gold reserves year-to-date 2010 38 Kazakhstan 70 9.5
to 118.0 tonnes. The Bank of Thailand also purchased 39 Denmark 67 3.1
15.6 tonnes of gold in July. As the country’s foreign 40 Pakistan 64 14.9
currency reserves have been growing rapidly in recent Source: IMF, national data, WGC
years, this purchase helped to restore the proportion of * This table was updated in September 2010 and reports data available at
that time. Data are taken from the International Monetary Fund’s International
gold in Thailand’s total reserve portfolio. Financial Statistics (IFS), September 2010 edition, and other sources where
applicable. IFS data are two months in arrears, so holdings are as of July 2010
for most countries, June 2010 for earlier for late reporters. The table does not
The Governor of the Saudi Arabian Monetary Agency list all gold holders: countries which have not reported their gold holdings to
(SAMA) has confirmed that the increase of 180 tonnes 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 the WGC
in the country’s gold reserves announced in June did knows of movements that are not reported to the IMF or misprints, changes
not represent a recent purchase of gold, but rather a have been made.
** The percentage share held in gold of total foreign reserves, as calculated by
reclassification of gold it already owned into the category the World Gold Council. The value of gold holdings is calculated using the
of official reserves. Finally, in a move designed to reduce end-July gold price of $1169.00 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
smuggling, the State Bank of Vietnam announced a ‘Total Reserves minus Gold’.
partial lifting in its ban on gold imports. 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.

October 2010 16
 Gold Investment Digest

KEY DATA
Gold price Demand (cumulative Q3 2009-Q2 2010)
Q4 ’09 Q1 ’10 Q2 ’10 Q3 ’10 % % Value %
Gold (US$/oz); Tonnes QOQ1 YOY1 ($ bn) YOY1
London PM fix average 1,099.63 1,109.12 1,196.74 1,226.75
Jewellery 1,881 -1% -5% 65.7 19%
% QOQ 14.5% 0.9% 7.9% 2.5%
Identifiable investment 1,229 31% -28% 44.1 -8%
% YOY 38.4% 22.1% 29.8% 27.8% of which ETFs
Source: LBMA, WGC and similar products 391 149% -49% 14.6 -33%
Industrial and Dental 410 3% 9% 14.4 37%
Volatility2 (%) to end-September 2010 Source: GFMS, WGC
1-month 3-month 6-month 1-year
Gold (US$/oz) 8.8% 13.2% 14.5% 17.0% Supply (cumulative Q3 2009-Q2 2010)
Source: LBMA, WGC % % Value %
Tonnes QOQ1 YOY1 ($ bn) YOY1
Market capitalisation Mining output 2,623 1% 5% 91.9 31%
Value (US$ bn)
Net producer hedging -262 - - -8.9 -
Above-ground stocks of gold 3 6,531.5
Total mine supply 2,324 0% 4% 76.3 23%
ETFs (as at 30 September 2010) 4 87.0
Official sales -70 -1% -149% -2.5 -161%
Notional value of net long non-commercial and non-reportable
positions as reported by CFTC gold futures (at 30 Sept 2010) 39.6 Recycled gold 1,546 9% -3% 5.5 22%

Source: GFMS, LBMA, CFTC, WGC Source: GFMS, WGC

Performance
Gold BarCap US MSCI World DJ UBS Brent crude oil Dow Jones/Wilshire Trade-weighted
(US$/oz) Treasury Aggregate S&P 500 ex-US Commodity Index (US$/bbl) REITs Index US$

1 month 4.9% 0.0% 8.9% 9.6% 7.3% 9.6% 4.4% -4.2%

3 months 5.3% 2.7% 11.3% 16.2% 11.6% 10.2% 13.2% -6.7%
6 months 17.5% 7.5% -1.4% 0.6% 6.2% 0.1% 8.5% -2.4%
1 year 29.8% 7.3% 10.2% 4.6% 10.0% 20.3% 30.1% -0.1%
Volatility 2 (1-year) 17.0% 4.5% 19.0% 19.6% 16.9% 29.2% 31.2% 7.7%
Source: IHS Global Insight, Barclays Capital, WGC; performance calculations based on total return indices where applicable

Correlations (3 years ending 24 September 2010, weekly returns)

BarCap BarCap BarCap DJ/
Trade Brent S&P GS R/J DJ UBS BarCap US US US High DJ MSCI Wilshire
Gold -weighted crude oil Commodity CRB Commodity 1-3 month Treasury Credit Yield Industrial Russell World REITs
(US$/oz) US dollar (US$/bbl) Index Index Index T-bills Index Index Index S&P 500 Average 3000 ex-US Index
Gold (US$/oz) 1.00
Trade-weighted US dollar -0.45 1.00
Brent crude oil (US$/bbl) 0.35 -0.48 1.00
S&P GS Commodity Index 0.35 -0.58 0.94 1.00
R/J CRB Index 0.38 -0.62 0.88 0.97 1.00
DJ UBS Commodity Index 0.4 -0.63 0.82 0.94 0.98 1.00
BarCap 1-3 month T-bills 0.06 -0.01 0.00 0.00 -0.04 -0.07 1.00
BarCap US Treasury Index 0.06 -0.01 -0.34 -0.33 -0.33 -0.30 0.19 1.00
BarCap US Credit Index -0.07 -0.22 -0.08 -0.03 -0.01 0.03 -0.06 0.62 1.00
BarCap US High Yield Index -0.08 -0.38 0.34 0.41 0.43 0.44 -0.25 -0.29 0.40 1.00
S&P 500 -0.05 -0.44 0.44 0.48 0.50 0.48 -0.2 -0.42 0.01 0.65 1.00
DJ Industrial Average -0.09 -0.39 0.40 0.43 0.45 0.43 -0.18 -0.41 -0.01 0.62 0.98 1.00
Russell 3000 -0.04 -0.45 0.45 0.49 0.51 0.49 -0.20 -0.42 0.01 0.66 1.00 0.98 1.00
MSCI World ex-US 0.11 -0.71 0.53 0.61 0.64 0.64 -0.22 -0.29 0.17 0.69 0.85 0.82 0.86 1.00
DJ/ Wilshire REITs Index -0.01 -0.33 0.31 0.32 0.34 0.33 -0.08 -0.39 -0.04 0.51 0.79 0.75 0.80 0.62 1.00
Source: IHS Global Insight, Barclays Capital, WGC; performance calculations based on total return indices where applicable

1
Quarter-on-quarter and year-on-year % change in rolling 4-quarter totals 3
Based on 2009 volume and Q2 2010 average gold price
2
Annualised daily return volatility 4
Source: Respective ETF providers

October 2010 17
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October 2010 18