gold researcher

7/30/2019 Gold Researcher

http://slidepdf.com/reader/full/gold-researcher 1/84By Er win Lubber s, BS (IT), MS (Finance) Updated on Jan 6, 2013

Financial analysis on money, gold and other precious metals


http://slidepdf.com/reader/full/gold-researcher 2/84

Although the gold price has been rising since the dotcom

bubble burst in 2001, the current financial crisis whichtarted in July 2007 caused a paradigm shift in the gold

market. Central banks in most developed countries began

experimenting with monetary easing programs by

expanding the monetary base and buying debt that was

not possible to sell in the open market. Many investors and

peculators fled to the currency that was able to hold its

value, namely gold. Today, gold is the 4 th most traded

currency.

Nearly 60% of total consumer demand for gold comes

rom India, China, and the Middle East. A global shift in

wealth towards Emerging Markets (EM) should translate to

a strong demand for gold. With the current rise of debt

and currency debasement, EM central banks with large

oreign exchange holdings are diversifying their foreign

currency holdings by adding gold to their portfolios.

n 2011, global production was 2850 tonnes, or 1.6% of theotal gold reserve. Even though Exploration and

Production (E&P) budgets of gold mining companies have

ballooned for some years, new discoveries have become

ncreasingly rare. Besides, the falling supply from South

Africa due to its labor unrest have offset the increase in

production from the US, Canada and Australia. A small

ncrease in the total gold reserve helps gold as currency to

retain its value.

To predict the 2013 gold price, I use a general least

squares regression model. The gold price is the function of

four factors, namely:

1. The quantity of money, captured as the combined

monetary base of the US and Euro Zone in USD.

2. Inflation and opportunity cost, captured as the real

interest rate.

3. Currency factor, captured as the exchange rate of the

USD against a basket of EUR, JPY, RMB and IRP.

4. Uncertainty in financial markets, captured as the

difference in value between BBB and AAA corporate

bond indices.

Different economic scenarios are assumed to make three

gold price estimates. The most likely scenario to occur in2013 is the continuation of monetary easing programs.

And so, the 2013 gold price estimate is $1890 (+11.9%)

under this scenario. According to a stagflation scenario,

which is a bullish gold scenario, the 2013 gold price can be

as high as $2115 (+25.5%). Under this scenario, central

banks increase monetary easing programs and inflation

rises. If the global economy recovers, which is a bearish

scenario for gold, the gold price will fall to $1580 (-6.4%)

by the end of 2013. All monetary easing programs halt,

inflation rises and the USD appreciates under this scenario.

Silver is the primary alternative for gold because its price is

highly correlated to the gold price. Unlike gold, silver has an

industrial use, which makes it more subject to economic

cycles and thus more volatile than gold. In a bull market,

silver outperforms gold but it lacks the safe haven status of

gold. Therefore, it is more suited for active traders than for

long-term investors. The equity of gold producing

companies is another alternative investment. These

companies struggle with the rising cost of production and

the threats of nationalization, causing their equity to

underperform compared to gold investment.



BoJ Bank of Japan

AGG: iShares Total US Bond Market ETF

BS: Balance Sheet

CME: Chicago Mercantile Exchange

CPI: Consumers Price Index

ECB: European Central Bank

EM: Emerging Markets

ETF: Exchange Traded Funds

ETN: Exchange Traded Notes

EU: European Union

EUR: Euro (currency)

EZ: Euro Zone

FED: Federal Reserve Bank

FX: Foreign Exchange

FOMC: Federal Open Market Committee

GDX: Market vectors Gold Miners ETF

GLD: SPDR Gold Trust ETF

HFT: High Frequency Trading

MF: International Monetary Fund

NR: Indian Rupee

PG: Japanese Government Bonds

PY: Japanese Yen

LBMA: London Bullion Market Association

LIBOR: London Interbank Offered Rated

LTRO: Long-term Refinance Operations

MB: Monetary Base

MBS: Mortgage Backed Securities

MRO: Main Refinance Operations

NAV: Net Asset Value

NFP: Non Farm Payrolls

OMO: Open Market Operations

OMT: Outright Monetary Transactions

OTC: Over The Counter

PALL: ETFS Physical Palladium Shares ETF

PBOC: People’s Bank of China

PLLT: ETFS Physical Platinum Shares ETF

RMB: Chinese Renminbi

RRR: Reserve Requirements Ratio

SLV: iShares Silver trust ETF

SPY: State Street SPDR S&P500 ETF

TARP: Troubled Asset Relief Program

US: United States

USD: United States Dollar

VIX: Volatility Index

ZIRP: Zero Interest Rate Policy



Chapter 1GOLD HISTORY

chr onicle the his tor y of gold for r eader s to gain an appr eciation for goldnves tments.

The massive golden funeral mask of Toetanchamon (1223 BC) contains almost 11Kg of gold.

3



Gold has fascinated people since the beginning of recorded

history. Golden ar tifacts from ancient civilizations date back

to the third millenniums BC. Deities and royalty from the

Egyptian, Persian, Greek and Roman empires and those

from Indian dynasties enamored themselves with gold,

associating it with beauty and power. It also acted as a

medium of exchange and store of value among different

kingdoms and across periods.

Although gold was also popular amongst the European

crowned heads and churches, gold rushes of the US,

Canada, Australia, Brazil and South Africa during the 19 th

century captured the imagination of ordinary people. The

upply of gold spread economic wealth to thousands of

prospective gold miners and stimulated global trade andnvestment.

The exploitation of gold in recent history arose from the

premise that a metal must hold its value to be issued out

as money. Europe initially used the silver standard since it

was a more readily available metal. In 1821 England

switched to the gold standard. The Bank of England issued

notes that were fully backed by gold. Most other countriesfollowed suit years later. Economies that had temporarily

abandoned the gold standard during WWI suffered high

inflation rates. When these countries resumed the gold

standard, a larger quantity of money was backed by the

same amount of gold. Soon, it became clear that the

system of the gold standard could not cope with large

sudden shocks in the economy.

The 1944 Bretton Woods agreement was the first system

proposed to govern monetary relations among

independent nations. Under the agreement, the USD was

fully backed by gold at a fixed value of 1/35 th Troy ounce.

After WWII, the US emerged as the creditor of the world

and the largest holder of gold. The USD became the

world’s reserve currency. Thus, all international trade

including crude oil was to be paid in USD. Foreign central

banks that formally used gold could now take advantage of

the USD to back their own currencies. Between 1945 to1971, not only demand for the USD as an asset by foreign

central banks soar but so did demand to convert USD to

physical gold. Soon, the rapid conversion of USD to gold

by foreign central banks made the US gold reserve dwindle

from 20,000t tonnes to 8,133 tonnes.

In 1971 Nixon defaulted on the US gold obligation and,

subsequently, terminated the Bretton Woods agreement.

The USD became a fiat currency, a currency backed by the

future cash flow of the US economy. Fiat money has no

intrinsic value and its quantity is only limited by

regulation and politics. The global economic and political

environment of the 1970s was radically different from what

it is today. The US economy was fueled by cheap oil and

grew much faster than its debt. Given the slow expansion

of the global gold reserve, the US government choose not

to return to the gold standard. Otherwise, deflation would

occur and in turn, economic hardship. And so, national and

foreign investors accepted fiat money as a system of

trading.



Triffin dilemma illustrates the main problem with the USD

being the international reserve currency. The theory states

hat the US must run a trade deficit in order to supply theworld with reserve currency. Its debt increases and, as a

results, becomes more risky. Due to this imbalance of

payments, tension rises between the national monetary

policy and global monetary policies. And so, many foreign

buyers of US debt, including China, Russia and other large

exporting countries, have ceased buying US debt. They

have begun to diversify their FX holdings with gold.

To support the economy and the financial system, central

banks are increasingly intervening in the financial markets.

Their intervention is either direct via monetary easing

programs and Zero Interest Rate Policy (ZIRP), or indirect

via legislation and regulation. All asset classes are impacted

by the injection of massive liquidity from central banks. TheUS and Europe have stalling economies and record

amounts of debt. In spite of this, government bonds trade

at a record low yield and stock indices hover near record

highs. Central banks launch many programs that affect asset

prices. Currently, the Federal Reserve Bank (FED) and the

European Central Bank (ECB) have open-ended programs

to buy debt in exchange for new money.

The New Normal represents a paradigm shift in the

financial markets. It represents a state called financial

repression, where money is transferred from creditors to

debtors. This phenomenon is mainly achieved by negative

real interest rates and debasement of a currency through

monetary easing programs. Another trend of the New

Normal is political gridlock, where politicians squabble

between each other rather than cooperate towards real

solutions. When financial markets force politicians to

intervene, they are forced to formulate last minute

solutions to provisionally resolve the state of affairs. Several

Southern Europe countries have been bailed out and theUS debt ceiling has been raised to only give temporarily

relief. More political gridlock is expected with the

approaching US fiscal cliff and pending Spanish bailout.

The rise of algorithm trading or High Frequency Trading

(HFT) is another trend that increasingly threatens thestability our our markets. Up to 60% to 70% of all stock

trades on the NYSE are generated by computers. Most

algorithms trade on trends in prices. The trend towards

growing automation drives up cross-market correlations

and causes short-term volatility. Central bank interventions

and HFT trading mainly make the market trade in Risk-On

and Risk-Off phases. In a Risk-On phase, investors

anticipate more action from politicians and central banks

and drive up risky assets, like stock, commodities (not gold)

and the Euro. In a Risk-Off phase, investors flee to thesafety of the USD, government bonds and gold. Gold is

seen as a thermometer and a rising gold prices signals a

risk-off phase.



Chapter 2KEY CONCEPTS

Since gold is closely r elated to money, money supply, inflation and inter es t r ates,

define these concepts and intr oduce various measur es for money.

6

Professor Larry Gopnik in the movie “A Serious Man” explains the basics.



Money has three primary functions. It is

a store of value, a standard of payment

and a unit of account. Gold is best suited

as a store of value. Its two other functions are impractical in our

economy. Just try to pay for a

hamburger with a Kruger Rand or

calculate your mortgage in ounces of

gold.

Money Supply Measur ements

The money supply measures the quantity of money. Theres no single correct measurement for the money supply.

The methods to calculate this differ, based on the function

t serves. Below is the most common measurement for

Money Supply:

Money Supply = coins and notes in circulation + the

demand deposits (immediate, accessible bank deposits),

excluding coins and notes in commercial and central bank

reserves

The monetary base (MB) is central bank money, whichorms the basis of which other money is created as credit.

Below is how MB is measured.

MB = coins and notes (circulating in public and in bank

vaults) + commercial banks reserve at the central banks

As of Nov 2012, the MB was $2,656B in US, € 1,617B in

Euro Zone (EZ), and 22,800B RMB in China.

Although no gold coins have been used as money for

decades, the South African Kruger Rand is the most held

and traded among all of the world’s gold coins.

A range of monetary aggregates, stated as M0 to M3, are

employed in the measurement of the money supply. The

exact details for the “M”s vary per country.

I decided to review the US money supply measurement in

this report. The more narrow measurements of the money supply are more controlled by monetary policies of central

banks whereas the broader measurements are set by

financial markets.

M0 = coins and notes in circulation outside central and

commercial bank faults

M0 was $1,126B in US, €868B in EZ and 5,340B RMB in

China as of Aug 2012.

M1 = M0 + demand deposits

M1 was $2,320B in US, € 5045B in EZ and 28,680B RMB

in China as of Aug 2012.

M2 = M1 + saving accounts, money market accounts, retail

money market mutual funds and small time deposits

(under $100,000)

M2 was $10,106B in US, € 8,878B in EZ and 94,370B RMB

in China as of Aug 2012.

M3 = M2 + large time deposits (over $100,000) + money

market funds

M3 was € 8,878B in EZ as of Aug 2012. The FED stopped

reporting M3 in 2006. It claims that it holds no additional

information. But experts maintain that the M3 supply was

growing too fast and the FED had few tools to intervene.

As of Aug 2012, EUR: USD1.2578 and USD:RMB 6.3484.

MONEY SUPPLY

7



nflation is the rise in the general level of prices within aneconomy. The value of money decrease with inflation and

o does the purchasing power of consumers. In effect,

consumers need more money to buy the same goods and

ervices. Most economists agree a low inflation rate is

beneficial for the economy. A rate at or below 2.00%

encourages consumers to spend money but not to lose

aith in the currency.

Hyperinflation is the exponential and perceptibly

“unstoppable” rise in the general level of prices within an

economy. While prices in foreign currencies stay relative

table, the local currency quickly loses value during

hyperinflation. Argentina, Zimbabwe and Iran have recently

experienced hyperinflation. Their central banks created a

massive money supply and, in turn, the broad public lost

aith in their currency.

Deflation is the decrease in the general level of priceswithin an economy. It increases the value of money over

ime. Consumers tend to delay purchases in the hope that

products will be cheaper in the future. This behavior has a

harmful affect on the economy and can lead to a

depression. And yet, deflation is sometimes caused by rapid

advancements in technology and can coexist with growth,

ke it did in US during the 19 th century. Highly indebted

governments use monetary policies to avoid deflation.

Consumers Price Index (CPI) is an important

measurement of inflation. It is the price of a basket of

consumer goods and services paid for by the average USurban consumer. As of Oct 2012, the level was 231, which

indicates130% inflation since Oct 1983.

CPI understates medical and educational expenses and

excludes assets that usually cause bubbles, such as housing

and stock prices. The Core CPI, on the other hand,

excludes food and energy which are volatile items.

Therefore, it accepted as a more stable measurement for

inflation.

CPI tracks the price change of a basket of consumer goods.



Named after the economist John Maynard Keynes

1883-1946), the Keynesian view on inflation states that

changes in the money supply do not directly affect pricing.

nflation is caused by either Demand-Pull inflation, which is

dentified as increased demand due to higher spending, or

Cost-Push inflation, which is characterized by too little

upply to meet demand.

The monetarist view, supported by the likes of Milton

Friedman (1912-2006), states that the growth in the

money supply drives inflation. Monetarists use empirical

evidence to show that throughout history inflation was

always a monetary phenomenon.

The Austrian view star ted in Vienna with the likes of

economists such as Ludwig von Mises (1881-1973). This

view goes a step further than the monetarist inflation view

in that it states that inflation is equal to the increase in the

money supply. Austrians reject empirical methods, claiming

human behavior is too complex and not rational.

They maintain that excess money will

concentrate in certain sectors to form

bubbles, like housing and stock bubbles.

Since the CPI does not include these

bubbles, Austrians find the CPI

misleading.

The primary tool that central banks use to control or

cause inflation is instituting monetary policies. The ECB has

a single mandate: price stability, which is stated as an

inflation rate at or just under 2.00% averaged throughout

the EZ. The FED has a dual mandate of stabilizing pricesand maximizing employment. Like the ECB, the FED targets

an inflation rate at 2.00%.

Why is 2.00% inflation seen as ideal? The FED claims higher

inflation reduces the public’s ability to make long-term

financial decisions and a lower rate could lead to deflation.

John Maynard Keynes

Milton Friedman

Ludwig von Mises

The monetarist view states the

quantity of money multiplied

by velocity of money is equal

o the price level multiplied by

he index real values of

expenditures.



nter es t RatesThe interest rate is a percentage of the principle loan, paid

or compensation of inflation and risks. It is usually quoted

on an annual basis. Its equation can be calculated as:

nter es t r a te = R isk f r ee r ate + def ault r isk + liquidity

pr emium + matur ity pr emium

nterest rates are a crucial part of a central bank’s

monetary policies. By setting a low or even zero interest

rate policy (ZIRP), central banks aim to stimulate

nvestment and economic growth. However, when interest

rates are kept too low and for too long, financial bubbles

can occur, usually in the stock, housing and commodity

markets.

Real Inter es t RatesReal interest rates are the nominal interest rates adjusted

or inflation. Real interest rates can be calculated with the

Fisher equation:

Real inter es t r ate = (1+ nominal inter es t / 1+ inflation) -1

At present most developed countries have a negative real

nterest rate, meaning inflation is higher than the interest

rate. A negative real interest rate reverses money’s role as

a store of value. In essence, it destroys the real value of

fixed income and discourages saving.

Feder al Fund RatesThe US Federal Open Market Committee (FOMC) sets

he Federal Fund Target Rate, which is currently at 0.25%.

Commercial banks loan each other money on a overnight

uncollateralized basis. The average of the interest rates they

charge is the Fed Fund Effective Target Rate. The FED buys

or sells treasuries or other assets to make sure the

effective rate is near the target rate.

INTEREST RATES

London Inter bank Of fer ed RateLondon Interbank Offered Rate (LIBOR) is the average

rate banks in London charge each other. There are many

different rates, periods (overnight to one year) and

currencies. LIBOR is used as the basis for many financial

products and derivatives. LIBOR is similar to the Federal

Fund Effective Rate but has no monetary policies attached

to it. And so, it is preferred by most commercial banks.

However LIBOR also led to the LIBOR scandal, as

discussed in the chapter on gold market manipulation.

Deposit and Discount R ates

Banks are required to maintain reserves, as either cash in

their vaults or reserves with the FED. The amount of

reserves is approximately 10% of the banks liabilities. The

Deposit Rate is the interest paid on these reserve deposits.

The Discount Rate set by the FED, also known as the

Marginal Lending Rate set by the ECB, is the interest rate

used by central banks that loan out money to commercial

banks. Commercials bank use these loans as a last resort

since they usually borrow from each other at lower rates.

Prime and Mor tgage Rates

The Prime Rate is the interest rate banks charge their

preferred customers. It is the basis of most unsecured

consumer loan products, such as credit card loans. An extra

risk premium is added.

The Mortgage Rate is secured lending, since there is

property as collateral. The rate on a long term

government bond is used to determine the mortgage rate

and a premium is added. Since the FED promised to buy

Mortgage Backed Securities (MBS) in the QE3 program,

the spread between a bond and mortgage is very close to

zero.

Table 1 quotes the six US interest rates as of Dec 5, 2012.

Federal fund rate target 0.25%

Federal fund effective rate 0.17%

Discount rate 0.75%

Prime rate 3.25%

30Y Bond rate 2.76%

30Y Fixed mortgage rate 3.38%

10

Table 1. US Interest rates at Dec 5, 2012



US public debt is money borrowed by the US national, state and

ocal governments to finance its deficit, or the difference

between government spending and income generated through

axes. The US debt clock indicates that the US government debt

tands around $16.42T on Dec 31, 2012. This figure is slightly

above the US debt ceiling of $16.39T set on Jan 30, 2012.

Government debt is issued by the department of treasury. There

are two forms of US public debt. Treasur y Bills, also known as T-

Bills, have a maturity of up to one year whereas Treasury Bonds

have a longer maturity.

Unfunded liabilities are not included in US public debt. Social

Security, Medicaid and Medicare are the programs with the

argest unfunded liabilities. These unfunded obligations do not

appear on any balance sheet and are not integrated in any official

debt figures. The expenditures of these programs are expected

o rise faster than any other government program due to the

country’s growing senior population. The Wall Street Journalestimates the Net Present Value of the unfunded liability of

Medicare at $42.8T and Social Security at $20.5T. Until they are

called for, guaranteed obligations are also not included in US

public debt. The guarantees on assets of financial institutions,

along with mortgage liabilities of Fannie Mae and Freddie Mac

made in 2008, are examples of guaranteed obligations. If

unfunded liabilities, guaranteed obligations and the current public

debt of $16.42T are combined, the US government has an

estimated total of $87T in liabilities.

As of 2007, the annual budget deficit of the US was

$161B. Every year since 2008, the US has had an annual

deficit exceeding $1T. The 2011 deficit was $1.312T (8.6%

of GDP) then slightly improved to $1.089T$ (6.97% of

GDP) in 2012. With expenses on Social security, Medicaid

and Medicare growing much faster than the economy and

ax revenue, the US is expected to run a large deficit in

he foreseeable future.

n order to limit the amount debt which the departmentof Treasury can borrow, the US Congress has set a debt

ceiling, or the maximum amount of debt the government

can accumulate. Before it approves of increasing the debt

ceiling, Democrats and Republicans must make a deal to

reduce the growth of debt by either raise more taxes or

cut government spending. However, US politicians rather

quabble with each other than reach a solution.

Squabbling politicians during the 2011 debt ceiling crisis.

The US debt reached the debt ceiling of $14.4T on Aug

2011. At the time, US government spending comprised of

40% borrowed money and 60% tax revenues. Political

gridlock threatened US government spending to come to a

halt. After a credit quality downgrade of US government

debt and a minicrash in the financial markets, politicianswere forced to make a compromise. They raised the debt

ceiling to $16.4T.

To control the growing deficit, the US government also

prepared a set of tax increases and spending cuts, which is

now known as the 2012 fiscal cliff. It looks like the 2011

debt ceiling crisis will be repeated in 2013. On Jan 1, 2013,

tax increases and spending cuts will be activated.

As of Dec 2008, the US instituted its Zero Interest RatePolicy (ZIRP). Essentially, US treasury with maturity lower

than the ZIRP period has virtually no interest rate risk. It is

a cash equivalent and has near zero yield. US treasury with

a longer maturity (five to 30 years) does not have this

“protection”. There is high demand for short-term

treasury while that the demand for longer term treasury

dried up. Therefore, the FED was forced to launch

Operation Twist in order to buy US treasury with a longer

maturity and suppress interest rates on them. In 2011, the

FED bought $800B of long-term debt, or 61% of all issuedUS government debt.

The US private sector bought $136B and foreign investors

bought $287B in 2011. Due to the record low interest

rates and weak demand for government debt, the FED

prints new money to buy this debt. Since government

spending is not expected to decrease significantly, it is likely

the FED will remain the largest buyer of US debt. With

$85B per month, the FED will buy a significant percentage

of all new US government debt in 2013.



Eur o Zone DebtThe total government debt of the 17 members of the

Euro Zone (EZ) was € 8.517T on June 2012. This

represented 90% of GDP. The EZ deficit was 4.1% of

GDP in 2011.

The Euro Stat agency compiles a report using each EZ

country’s statistics on government debt. Not only are

hese figures not audited, but the methods in which they

are collected and their report dates vary.

EZ Integr ation Dilemma

While EZ countries share a single currency and set of

monetary policies, they require different monetary policies

and exchange rates. The more austere Northern

European countries including Germany, the Netherlands,

Austria and Finland have export driven economies withow interest rates and are threatened by higher inflation

rates.

The Southern EZ countries such as Greece, Spain, Portugal

and Italy have high interest rates. Because the Euro

currency is valued too high for their economies, these

peripheral countries have trouble competing in the global

market. Investors, except some institutions in Europe, lost

aith in the periphiral countries, especially due to the

elective default on Greek bonds. Virtually no investors in

he open markets buy peripheral debt, forcing theSouthern EZ countries to depend on the ECB for help.

EURO ZONE GOVERNMENT

DEBT

12

Graph 1. Debt to GDP ratio of the US and Euro Zone

50%

60%

70%

80%

90%

00%

0%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

US Debt/GDP

EZ Debt/GDP

Alternative Sour ces of Funding Some of the peripheral countries that run a large deficit

avoid asking for official help from the OMT program.

Because official help would lead to financial scrutiny of the

ECB, they use “alternative” funding, thus forcing pension

funds and commercial banks to buy their debt. Spain

forced its Social Security Reserve Funds to use €65B inreserves to buy risky Spanish government debt. Ireland

used its pension funds to buy shares in nationalized banks

and real estate. To buy its government debt, Greece

exploited its commercial banks.

These Southern EZ countries are afraid massive financial

fraud will be uncovered, which will put an end to the

political careers of the people in charge of asking for help.

Considering these dynamics, the ECB’s OMT program and

therefore ECB’s balance sheet and EZ monetary base

might expand modestly in 2013.

Graph 1 shows the debt to GDP ratio of the US and Euro

Zone. While politicians in the US attempt to spend their

way out of a recession, the EZ tries to implement austerity.

This different approach leads to a growing US GDP but a

stagnant in EZ GDP. What’s more, the US debt is growing

even faster than that of the EZ.



A massive bubble in the Japanese stock and housing

markets peaked in1989. The Japanese government raised

nterest rates which caused the bubble to burst and stock

and housing prices to collapse. The government stepped in

o rescue banks and to stimulate the economy with a large

amount of newly printed JPY. The debt to GDP ratio roseabove 100% in 1997. It has since reached 230% in 2011.

To compare Japan’s debt to GDP ratio with other large

economies, refer to Table 2.

Table 2: Debt to GDP ratio of the

largest economies in 2011

apan 230%

US 99%

EZ 86%

Canada 85%

UK 83%

India 68%

Brazil 66%

China 26%Australia 23%

Russia 10%

Japan… the land of the rising debt.

Japan has a large and growing senior population. Its

national debt is gigantic. Its economy is stagnant. To

stimulate the economy, Japan’s central bank has launched

an endless stream of monetary easing programs.

Unlike the US and EZ, Japan has a high level of household

savings and its citizens and their pension funds are

willingness to buy low risk low yield Japanese Government

Bonds (JGB). However, household saving rates have been

declining for years and are approaching zero. The Bank of

Japan (BoJ) is forced to buy new JGB. Japanese are unable

to buy large quantities of JGBs and yields on JGB are too

low to interest foreign investors.

In Aug 2012, the IMF repor ted “even a moderate rise in

yields would leave the fiscal position extremely vulnerable”.

Therefore, Japan cannot raise its interest rates withoutdestroying its government finances and its economy. In an

attempt to integrate politics and monetary policies, the

newly elected Japanese Prime Minister Shinzo Abe is

attempting to force a 2% inflation target and outright

monetizing of government debt on the once independent

BoJ.



Tab

The financial crises of 2008 exposed the flaws of the

socialist European system of excessive public spending and

high taxation. Margret Thatcher famously said “The

problem with socialism is that you eventually run out of

other people's money.”

Ignoring the rising problems in the European system, the

US is transforming into a society that resembles Europe.

Their large and growing entitlement programs seem

unsustainable in the long run. The US has increased

spending on entitlements which have led to a budget

deficit of over $1T each year since 2008. With interest

rates at a record low, it is impossible to sell such large

quantity of debt on the open market. This is much like

Japan’s situation.

The FED is the buyer of last resort. With its QE3 and QE4programs, the FED currently buys at an annual rate of $1T

of debt. As long as the budget deficit remains high, the FED

must purchase debt to keep the government finances

sustainable. A minority of the FOMC members are against

further monetary easing. As a response, the Evan rule was

introduced to limit the period of monetary easing. It is

unlikely these programs will stop. There are not enough

investors left to buy US debt at current low rates.

The US and EZ have handled the debt crises the same way

Japan did a decade ago. Here are some similarities.

• A growing elderly population

• The growing entitlement spending

• A stagnant economy

• High budget deficit for multiple years and rising debt

• A series of monetary easing programs and zero rate

interest policy

• The lack of structural change due to politicians clinging

to the status quo

• Central banks buy government debt which cannot besold in the open market at current low rates

• The bailout of all financial institutions and large

companies, which creates a zombiefied system

Japan is the best example that a country cannot borrow

itself out of economic hardship or resolve a debt crisis by

issuing much more debt. Without structural changes to

politics and society, the problems are only pushed to the

future. Therefore it seems unlikely that the ZIRP and

monetary easing programs of both the US and the EZ will

come to a halt in 2013.

n all probability, the ECB will buy significantly less debt

han the FED. And so, the expansion of the EZ monetary

base will be modest compared to that of the US. However,

none of the EZ countries have made any progress in terms

of the underlying issues of the debt crisis.

. The combination of rising entitlement spending, an

aging population and a shrinking workforce

2. A ballooning public sector which takes more than 50%

of the GDP, particularly within some EZ countries such

as France

3. High taxes that will suppress economic growth

Therefore, more debt will be issued in the future. With the

record low interest rates, investors appetite for this debt is

ow. Once all alternative sources of funding have been

exhausted, only the ECB will be left to buy the debt. Japans a shining example of how this scenario will appear in the

uture.



A decade ago, high flying CEOs and hedge fund manager s wer e the super s tars of

the financial world. In the pr esent day, the per iod in which the New Normal r eigns,

eader s of centr al banks call the shots in the financial world. Tr ader s and investor s

is ten car efully to these key play er since their ac tions drive the gold pr ice. I explaincentral bank policies and their influence on the money supply and inter est rates in

Chapter 3.

Mario Draghi is the president of the ECB.

Ben Bernanke is the chairman of the US Federal Reserve Board.

Zhou Xiaochuan, the governor of the PBOC, will soon be replaced.

Chapter 3CENTRAL BANKS

15



The Federal Reserve headquarters in Washington D.C.

The FED has a dual mandate of maximizing employment

and stabilizing prices. Its inflation target for stable pricing is

around 2.00% while its employment target is set between

5.20% to 6.00% of the unemployment rate. Although the

FED claims to be an independent organization, the head is

appointed by the US president and during a financial crises,

many of the FEDs decisions seem politically influenced.

The FED consists of the Board of Governors, the Federal

Open Market Committee and Regional Federal Reserve

Banks. The board of Governors consists of seven members

of the board and presidents of 12 regional Federal Reserve

Banks. The regional banks are responsible for implementing

monetary policies and for regulating the commercial banks

n their districts. Ben Bernanke is Chairman of the Board.

He was appointed by the US president for a 14-year term.His term ends Jan 31, 2014.

The Federal Open Market Committee (FOMC) is the

FED’s principal monetary policy body. It sets the monetary

policies of the FED. More specifically, it makes key

decisions about interest rates and the growth of the US

monetary base.

Open Market Operation (OMO) is the buying and selling

of government bonds on the open market to influence

the monetary base and money supply. The FED also uses

OMOs to make sure the Federal Fund Effective Rate is

near the target rate.

When demand for money increases, the FED buys assets,

like government bonds, Mortgage Backed Securities (MBS),

currency or gold in the open market. To pay for theseassets, new money is created and put in the commercial

banks’ reserve accounts, in turn raising the MB and keeping

interest rates stable. The increase of the commercial banks’

reserve is an example of money printing, although this

transaction is completely electronic. When demand for

money decreases, central banks sell assets and decrease

the commercial banks’ reserves and thus MB.

By the end of 2008, the FED lowered the Federal FundsTarget Rate from 5.25% to near zero. By doing so, ZIRP

aims to encourage investments and to allow consumers to

finance large purchases, like housing or cars, at low interest

rates. However, ZIRP destroys the real value of savings and

pensions. And so, it can be called a hidden tax on wealth. It

also helps the US government to finance its growing debt

pile, by keeping interest payments low.

In 2012 the FED pledged to keep the FED Fund Target

Rate near zero until 2015. This pledge has been replaced

by the Evans rule, which states the FED might discontinueZIRP when the unemployment rate is below 6.5% or

inflation above 2.5%.



When the FED wants to stimulate the economy, they

ower interest rates to stimulate demand for credit and

nvestment. When the economy does not recover and

nterest rates are at zero, the FED can expand the MB in

hopes that this money finds it way to the real economy

and expands the money supply. But unlike China’s central

bank, the FED cannot force banks to make new loans.

The FED announced the first Quantitative Easing (QE)

progam in Dec 2008 with QE1. What followed was QE2 in

Nov 2010, Operation Twist in Sep 2011, QE3 in Sep 2012,

ollowed quickly by QE4 in 2013. QE programs target the

wealth effect. They aim to boost stock prices, thus spurring

he public to spend more money if it feels wealthier.

Analogous to the OMO, QE creates new money on the

FED’s balance sheet and buys assets, like government

bonds and MBS, in the open market. In turn, the reserveaccounts of commercial banks grow so they can invest or

oan out the new money.

The side effects of QE include lower interest rates at the

higher end of the yield curve, a declining USD, the

potential for currency wars and the loss of the USD as the

reserve currency of the world. The gold price, and that of

other precious metals, appears to react strongly to QE

programs too. Typically, the anticipation of QE rapidly drives

up the gold price. But, the moment a new QE program is

officially announced, the gold price could have already riseno a large extent. Therefore, investors search for clues in

he FED statement and economic indicators before any

uch announcements.

Troubled Asset Relief Program

Troubled Asset Relief Program (TARP) was signed into law

by U.S. President George W. Bush on Oct 3, 2008 to

address the subprime mortgage crisis. The FED purchased

assets and equity from financial institutions to strengthen

ts financial sector. It was originally authorized to buy $700B but only $431B was actually used.

QE1 and QE2 The goals of QE1 and QE2 differ from OMO. QE1 was

primarily aimed to unfreeze the crashed financial markets

n 2009. QE2 was intended to stimulate the economy and

encourage investors to buy riskier assets in order to drive

up stock prices. Gold prices were very sensitive and

ncreased by 36% during Q1 and by 21% during QE2.

On Sep 2011, the FED started Operation Twist. The idea

was to “twist” the yield curve to bring down longer-dated

securities in an effort to reduce borrowing costs. In effect

the FED bought long-term treasury and matched this by

sales of short-term treasury. This process is called

sterilization and does not expand the FED’s balance sheetand has limited influence on gold prices. Demand from

investors for long term treasury with record low yield is

limited, which is another reason the FED continues to buy

these bonds.

By creating demand for long-term bonds, it was able to

suppress long-term rates that form the basis for all kinds of

loans, like mortgages or corporate debt. Operation Twist

had little impact on the gold price because the FED’s

balance sheet and the MB did not increase.

Unlike the previous QE programs, QE3 targets the

unemployment rate. The FED purchases $40B of agency

MBS per month until the unemployment rate is in the

range of 5.2% and 6.0%. These rates are changed to the

Evans Rule on Dec 12,2012. QE3 is not sterilized and so, it

will expand the FED’s balance sheet and MB. Throughout

2012, QE3 will expand the FEDs balance sheet increased

by $40B per month.

On the Dec 12, 2012 FOMC meeting, the FED announced

that Operation Twist will be extended into 2013. Since the

FED does not have a large amount of short term US

treasury left on its balance sheet, the extended Operation

Twist will be unsterilized. QE4 will buy $45B in long term

treasury per month. QE3 and QE4 combined will add a

massive $85B to the FEDs balance sheet. Therefore, the

name QE4 is a more appropriate term for Operation

Twist.

On the Dec 12, 2012, the FED introduced the Evans Rule,

after the Chicago FED president Charles Evans. This rule

ties future monetary policy to the FED mandate of

maximum employment and price stability. More specifically,

changes or termination of monetary policies such as QE3,

QE4 and ZIRP can be made if the unemployment rate

falls below 6.5% or inflation rises above 2.5%.



Chart 1. Scaled US monetary base, currency in circulation, money supply M1 and M2 and FED balance sheet

As of Nov 2012, the US CPI was 1.8%.

With the large quantity of new money

created by the FED, why does inflation

remain modest?

Low Inflation

Most of the money created by the central bank as reserve

money stays in the reserve accounts of commercial banks

and is not loaned to businesses or consumers. This is the

main reason for low inflation. Hence, it is important to

nvestigate if the money supply, or money in the real

economy, keeps pace with the MB, which is basically central

bank money.

Another reason for low inflation is that the CPImeasurement underestimates medical and educational

cost. Along with energy and food, these costs have seen

he highest increase in price over the last decade. Since the

government can spend money on education and medical

without the limits of market pricing mechanisms, bubbles

can result as predicted by the Austrian view of inflation.

Source: Federal Reserve Economic Data tool (FRED)

US Money Supply Chart 1 displays the MB and money supply M0, M1 and

M2. When TARP was issued in 2008 to provide liquidity to

a frozen interbank lending system, the MB increased

massively. The MB also increased at the start of QE1 on

Nov 3, 2010. QE2 ended on June 30, 2011 and thereafter the MB remained rather stable. Even so, with QE3 and

QE4 now active, a rising MB can be expected in 2013. The

currency in circulation, M1 and M2 modestly changed since

2008.

It appears that the money central banks create does not

find its way into the real economy and does not contribute

to inflation. At least, this is the case for the FED. Because

the FED, unlike the PBOC, cannot set loan targets to

commercial banks.

As discussed in chapter 6, MB has a statistical significant

relationship or a good fit with the gold price. Thus, I

included MB as one of the factors in the regression model

to estimate future gold prices.

18

MONETARY POLICIES’ IMPACT ON FED

BALANCE SHEET

0%

50%

00%

50%

00%

50%

00%

50%

Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

MB

Curr

M1

M2

FED BS



FED GOLD RESERVE

US Gold Reser veThe US government forcefully purchased its US gold

reserve from its citizens and banks in 1933. The reserve

has not changed since it stood at 8,134 tonnes in 1978. In

2011 the gold reserve represented around 75% of the

FED’s foreign currency holdings. It appears that the FED

has no intentions of buying or selling any gold in the

oreseeable future.

4,578 tonnes of the reserve is stored in the US Bullion

Depository of For t Knox, Kentucky. Around 7,000 tonnes

s stored in its underground vault of the Federal Reserve

Bank of New York. The 7,000 tonnes belongs to the US

and foreign nations, such as Germany and the Netherlands,

along with multilateral organizations such as International

Monetary Fund (IMF).

FX (25%)

$134B

Gold (75%)

$403B

2011 US Foreign

currency holding

It has been speculated that The Federal Reserve Bank of

New York stores the largest gold repository in the world.

This regional central bank has been featured in countless

Hollywood heist films and terrorist plots.



The ECB has a single mandate. It manages the Euro to

afeguard price stability. The ECB targets an average

nflation rate of 2.00% throughout the 17 countries that

adopted the Euro currency, otherwise known as the Euro

Zone (EZ). It executes monetary policies to achieve this

arget. The ECB is an institution of the European Union,

which is a political entity. Especially after the appointment

of Mario Draghi as its president, the independence of EU

politics is questionable.

The ECB is integrated with the central banks of the EZ. It

also works together with the central banks of other EU

countries. The ECB Governing Council is the main decision

making body of the ECB and is composed of the six board

members of the Executive Board and the 17 governors of

he national central banks of the EZ member states. The

Executive Board oversees the day-to-day management of he ECB. The current ECB president, Mario Draghi, is also

president of the Executive board.

The ECB Governing Council defines EZ monetary policies

and sets interest rates for which it loans money to EZ

commercial banks. It also helps prepare new countries

oining the Euro.

The ECB provides the bulk of the liquidity in the EZ

hrough short-term repo-contracts in its Main Refinance

Operations (MRO). These contracts are short-term loans

of two weeks to three months. Nearly 1500 EZ

commercial banks can bid for these contracts. Interest

rates can be adjusted to match economic circumstances

because of the short-term nature of these contracts.

f their amount increases then the liquidity in the EZ

ncreases. Banks must provide collateral for the loans, with

EZ government debt being the preferred collateral.

ECB Headquarters in Frankfurt, Germany

The ECB uses Long-Term Refinance Operations (LTRO)

to provide emergency liquidity to EZ banks. These

programs draw on longer term loans of three months to

three years. Banks must come up with collateral, preferably

government bonds, but also some mortgage or asset

backed securities. This collateral forms the only limit on the

amount a bank can borrow from the ECB.

Although LTRO existed since the inception of the Euro in

1998, LTRO “took off ” during the European debt crisis,

with two giant steps. In LTRO1, the ECB provided €489B

to 523 banks in three-year 1% loans on Dec 21, 2011.

Shortly afterwards, in LTRO2, it provided €530B to 800

banks in three-year 1% loans on Feb 29, 2012.

The ECB’s LTRO differs from the FED’s QE. LTRO

provides liquidity in a stalled interbank lending system. QE

targets lower interest rates and economic stimulus.However, their results are similar. Central banks accumulate

government bonds and commercial banks hold more

freshly minted cash in their reserve accounts.



The ECB announced on Sep 6, 2012 that it will make use

of Outright Monetary Transactions (OMT). It buys bonds

from the second hand market to suppress interest rates of

roubled EZ countries. A country must officially request

he ECB for assistance and undergo the financial scrutiny of

he ECB, EU and IMF combined, as known as the Troika.

Spain is widely expected to be the first country in the

program. And yet, Spain has not asked the ECB for

assistance.

Although ECB policies forbid directly aiding EU countries,

Mario Draghi claims that only debt with a maturity of up to

hree years is monetized. ECB interest rate policies cannot

otherwise affect peripheral countries because the markethas a greater influence on rates.

Deposit rate 0.00%

MRO or benchmark rate 0.75%

LTRO rate 1.00%

Marginal lending rate 1.50%

Table 3. ECB rates on Dec 5, 2012

Monetization means converting something into legal

currency. In exchange for freshly printed Euros, periphery

governments transfer their risky debt through commercial

banks to the ECB. The process of indirect debt

monetization is as follows:

1. The ECB creates repo contracts in the MRO or loans in

LTRO program.

2. EZ banks receive cash and put up their government

bonds as collateral.

3. EZ banks have more money in their reserve accounts

and can use this to buy new bonds.

4. Peripheral governments that have trouble selling debt in

the open market sell their debt to those banks.

5. EZ banks have new collateral for new loans at the ECB.

Their profits are generated from the spread between

the government debt yield and the ECB rates.

The ECB does not own the collateral. And so, it does not

publish information on it. However, when a government

would default, it is likely some or all of its commercial

banks will default too. This would leave the ECB with

unpaid loans and worthless collateral on its balance sheet.



Chart 2. Scaled Euro Zone monetary base, currency in circulation(M0) and money supply M1 and M2

While the MB grew in the post Lehman period in order to

provide liquidity to the financial system, the LTRO

operations in Dec 2011 and Mar 2012 had the greatest

impact on the MB in the EZ. After LTRO2 the MB

remained stable.

Most of the money central banks create does not reach

the real economy, thus does not contribute to inflation.

Then why does the gold price have such close relationship

with the balance sheet of central banks and the monetary

base?

Inflation Thr eat

Since investing is about predicting to the future, gold

investors must be more worried about the threat of

inflation, rather than actual inflation. The FED and ECB

currently have record low interest rates. Similarly, their rates on loans and mortgages are at a historical low level.

However, if employment and GDP growth picks up, there

is a lot of liquidity in the reserve accounts ready to enter

the real economy. It is likely inflation will be much higher

than the current reading of 2.0% or 2.5%. In addition, it

may be difficult for central banks to reverse monetary

easing programs. To shrink the MB, they would have to sell

their accumulated bonds in the open market, taking

liquidity out of the economy, which could stall its recovery.

Source. ECB statistical data warehouse

n Nov 2012, the EZ CPI was 2.2%. The ECB, much like the

FED, created a large quantity of new money in recent

years. Is Europe’s situation similar to the US?

Eur o Zone Money Supply Although the ECB does not publish its MB directly, it can

be calculated as:

Monetary Base = Coins and notes in circulation + Current

Account (minimum reserve) + Deposit facility (voluntarily

held reserve).

Chart 2 suggests that the money created by the ECB does

not find its way into the real economy and, thus it does not

contribute to inflation. Both the ECB balance sheet as the

EZ MB have been stabilized since March 2012 and are

decreasing since Sep 2012. This indicates that the ECB has

not been involved in major monetary policies for the mostof 2012.

There are several reasons why commercial banks prefer to

keep money in their reserve accounts. Additional and

tricter regulation since the financial crisis has been set on

he financial industry, forcing banks to keep more money in

reserve. This regulation forced many banks to deleverage,

decreasing both assets and liabilities, while increase the

banks own equity, or financial reserve. Also, consumer

credit and mortgage demand remains weak throughout

he EZ. Demand for corporate loans is also weak sincecorporations are sitting on an increasingly large cash pile

and prefer to delay investments due to the economic and

political uncertainty.

22

MONETARY POLICIES’ IMPACT ON ECB

BALANCE SHEET

0%

50%

00%

50%

200%

250%

00%


Currency

MB

M1M2

ECB Balance Sheet



EURO ZONE GOLD RESERVE

Eur o Zone Gold Reser ven 2011, the ECB and its 17 national central banks

combined held 10,787 tonnes of gold reserve, which is

63.20% of foreign currency holdings. The ECB held only

502 tonnes of gold reserve.

FX (32%)

$215B

Gold (68%)

$454B

2011 combined FX

holding of 5 largest

Euro zone countries

(Ge, Fr, It, Sp, Nl)

23

The ECB Governing Council at meeting in Frankfurt.



Chart 3. US and EZ Monetary base and Balance Sheets in USD on left scale and gold price on right scale

Monetar y easing pr ogr ams ar e massive

iquidity (or capital) injec tions to financial

sys tems. The concept is a euphemism for

money printing and is linked to central

banks, balance sheets, monetary base,money supply and inflation.

The FED and the ECB along with the central banks of

England, Japan, China and Switzerland have made use of

hese programs since 2008. QE, LTRO and economic

timulus packages are examples.

Monetar y EasingA central bank creates new money with which it buys

financial assets such as bonds or MBS in the open markets.

These assets are put on the asset side of the central bank’s

balance sheet. In turn, the money paid for these assets is

deposited in the reserve accounts of commercial banks.

Reserve accounts are a par t of the MB. And so, they are a

ability for central banks. When a commercial bank loans

out money to customers in the form of new credit, it

needs a small amount of that loan in its reserve account.

The new credit is incorporated in the money supply, M1

and M2.

Gold and Monetary Base

Chart 3 displays the Balance Sheet of the FED and ECB,

the combined Balance Sheet and monetary base of the

FED and ECB on the left scale and the gold price on the

right scale. There appears to be a relationship between a

central’s balance sheet, monetary base and the gold price.

The monetary base will be a key factor in the gold price

regression model, as described in Chapter 6.

Source: FED and ECB websites

MONETARY EASING & MONEY

SUPPLY

24

Table 4. Gold price, monetary base and balance sheets of

the US and Europe

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

0

,000

,000

,000

,000

,000

,000

,000


EZ+US MB (B$)

EZ+US BS (B$)

Gold Price

Jul-07 Dec-12 Increase

Gold ($) 661 1,689 155.64%

FED (B$) 874 2,903 232.07%

US MB (B$) 852 2,650 211.02%

ECB (B€) 1,195 3,022 152.87%

EZ MB (B€) 836 1,630 95.01%



China is the most cash rich country in the

world as well as the second largest global

economy. Its central bank, the People’s

Bank of China (PBOC), is secretly among

the largest buyers of gold. The monetary

policies of the PBOC are slightly different

to most central banks. The PBOC is under

control of the Communist Party and can

dictate the Chinese economy through the

commercial banks.

The PBOC has a dual mandate. It is decreed to promote

economic growth and to keep inflation low. It sets

monetary policies and regulates banks in mainland China.

30% of the Chinese CPI consists of food, compared to 8%or the US. Rising food prices are a sensitive subject among

China’s poor. The PBOC monitors food prices closely to

determine if monetary expansion is viable. Since the PBOC

s closely integrated with the politics of the Communist

Party, maintaining harmony in the Chinese society becomes

a crucial objective for the PBOC.

So to keep its society stable, the Chinese government

needs a steady GDP growth to support migration from

rural areas to cities and a low inflation rate. Historically, its

nflation rate averaged 4.23% from 1994 until 2012. As of Nov 2012, the inflation rate in China was 2.0% from a high

of 6.5% in July 2011.

The People’s Bank of China in Beijing

The PBOC is more integrated with politics than other

central banks. The governor of the PBOC is appointed by

the president of China. The PBOC has 9 regional branches

and 18 functional departments, such as the Currency, Gold

and Silver Bureau, the Monetary Policy Department and

Accounting and Treasury Department.

The FED and the ECB can only control interest rates on

the short end of the yield curve. The PBOC controls

interest rates across all maturities.

Comparable other central banks, the PBOC can buy or sell

assets or reverse repo to regulate liquidity in the financial

system.

The PBOC can change the Reserve Requirements Ratio

(RRR), which is the amount of Yuan commercial banks

must keep in their deposit accounts at the PBOC. The RRR

can be increased for excess liquidity to be absorbed.

In the past decade, China ran a massive trade surplus. It

exported more than it imported, which produced a steady

flow of USD in the Chinese financial system. To keep the

RMB pegged to the USD, the PBOC increased both themoney supply and the RRR. These measures kept the RMB

from rising against the USD and enabled the Chinese to

export cheap goods.

China is a majority shareholder of its five largest banks.

And so, the Chinese government controls these banks. It

sets loan targets and expects them to pursue its interests.

The banks act as subsides funding channels, issuing loans to

state-owned-enterprises at a set interest rate. But they are

not critical of the credit quality of their loans. As a part of

the 2008 stimulus package, the banks were forced to

provide massive loans to local government and centrally

planned infrastructure projects of dubious economic value.

The state-owned-enterprises also pursue the political goals

of the Chinese government. They are willing to invest in

negative NPV projects so that the Chinese GDP can grow

but not their own shareholder value.



China requires businesses and individuals to turn over

foreign currency to the government, which ends up on the

balance sheet of the PBOC. The foreign currency reserve

of the PBOC consist of mostly US, EZ and Japanese debt

accumulated over the period of 2000 to 2011 to support

a low exchange rate for the RMB. Of all economies, China

has the largest MB since most foreign currency ends up on

the balance sheet of the PBOC.

Monetary expansions of the FED and the ECB balance

sheets were stimulus driven. But, the expansion of the

PBOC was the outcome of accumulating foreign assets. As

of Sep 2012, China’s trade surplus is valued at $27.7B, a

drop from its Dec 2008 record of 40.09B$.

Even so, there is an outflow of money from privateindividuals trying to escape government control and

artificially low rates on deposits. The Wall Street Journal

estimated this outflow at $225B in the 12 months ending

in Sep 2012. This massive outflow weakens demand for

the RMB and removes the need for foreign exchange

intervention. If China would run a trade deficit, it would

even need to sell some USD nominated assets, causing its

balance sheet to shrink.

As long as the PBOC has no need to expand its balance

sheet and to increase inflation in the near future, it is not

expected to launch any big stimulus package. Then again,

China makes its decisions based on politics and not

economics, so the loan targets to support GDP growth are

likely to be crucial in any monetary decision.

On Nov 9, 2008 the Chinese government launched a 4T

RMB ($586B) stimulus package to help its economy during

he period of the financial crisis. Most of the stimulus was

nvested in infrastructure and social projects. The outcome

can lead to a rise in inflation because these investmentswere made in an economy that was already overheated.

Since the decision was based on political rather than

economic motives, at least 20% of all loans under this

program were written off in 2011.

To promote its export industry, the Chinese government

keeps its currency pegged to the USD and other

currencies. The PBOC announces fixed exchange rates

daily and the market price can only deviate up to 1% fromhis target. When the PBOC runs a trade surplus, foreign

currency accumulates on its balance sheet. USDs are used

as assets so that RMB can be created against them. RMBs

are then placed in the reserve accounts of commercial

banks. The PBOC can raise the RRR to keep inflation in

check and prevent this new money from entering the real

economy.

Chart 4 shows the balance sheet of the PBOC expended

over the period of Jan 2004 and April 2012. The

expansion of the balance sheet came to a halt in 2012.

Nevertheless, the PBOC sits on the largest cash pile ever

accumulated in history as May 2012 with $3.29T.

Chart 4: Balance sheet of PBOC from Jan 2004 to May 2012

Source: Sprach Analyst and People’s bank of China



Since the balance sheet expansion of

the PBOC has come to a halt, it is mor e

meaningful to inves tigate China’s gold

r eserve ins tead of its monetar y policies.

China’s Gold Reser ve My ster y n April 2009 the PBOC last reported its gold reserve at

054 tonnes, or 1.8% of its foreign currency holdings. The

Chinese State Council adviser Ji stated during the same

year, "we suggest that China's gold reserves should reach

6,000 tons in the next three to five years and perhaps

0,000 tons in eight to 10 years”.

Until these targets are met, any report on the official

Chinese gold reserve is not likely to be released, out of

ear of rising gold prices. “China needs to add to its gold

reserves to ensure national economic and financial safety,

promote Yuan globalization and as a hedge against foreign-

reserve risks”, according to Gao Wei, an Chinese official

rom the Department of International Economic Affairs of

Ministry of Foreign Affairs.

China is the world largest gold producer. It produced 380

onnes in 2011. It imports gold but forbids gold exports.Chinese imports from Hong Kong were 438 tonnes in

2011 and grew to 878 tonnes from the period of Jan 2012

o Aug 2012. China also imports directly from gold

producing countries like Australia. According to the

Australian Bureau of Statistics, gold sales to China were

$4.1B (or around 75 tonnes) in the period of Jan to Aug

2012. This figure surpassed coal to become Australia's

econd export product to China after iron ore.

Having a large gold reserve also stabilizes the RMB and

helps China with its goal of promoting the RMB as theworld’s reserve currency. Gold purchases come at the

expense of buying US treasuries and EZ debt, as predicted

n Triffin dilemma.

Gold Reserve

Es timating 2012 Gold Impor tsAccording to 2012TTM, Chinese consumer demand is 814

tonnes. Its gold production as of 2011 was 380 tonnes

and its total 2012 estimated imports are to 1080 tonnes,

of which 100 tonnes comes from Australia. Moreover, the total PBOC gold reserve is expected to increase to 746

tonnes by the end of 2012.

PBOC GOLD RESERVE

Gold

$390B

(11%)

FX holding

$3150B

2015est PBOC

Foreign currency

holding

Gold $30B

(1.52%)

FX holding

$1950B

Apr 2009 PBOC

Foreign currency

holding

27

PBOC Fu tur e ReserveThe PBOC expects to hit its target of 6,000 tonnes in gold

reserves in 2015. This quantity is still a small fraction of the

total FX reserve and is not comparable to that of the US

or EZ countries. The main reason is that the size of foreign

currencies is much larger and is expected to be $3150B as

of 2015. Since China ceased to buy additional US and EZ

debt, gold is expected to increase as a percentage of the

total foreign currency holdings.



Chapter 4 explains the roles of supply and demand on the price of gold. Asian

consumers form the largest part of gold demand, and so, this report focuses on

demand from China and India.

Since recent data is employed, time frames vary in the report. Demand is reported

n quarterly intervals based the trailing twelve month 2012 method (2nd half of

2011 and 1st half of 2012). Supply is reported in annually intervals using 2011 data.

Gold reserve is based on data obtained in Sep 2012.

ndian culture dictates that brides receive dowries in the form of gold jewelry.

Chapter 4GOLD SUPPLY &

DEMAND

28



Gold is a financial investment, not an industrial commodity,

ke crude oil or copper. Most physical demand in gold

comes from consumer use of jewelry, bars and coins and

official sector demand from central banks. A fraction of the

gold demand comes from industrial use, like high-end

electronics for the medical, space and aviation industries

and a small portion goes towards golden teeth.

t is not possible to accurately measure the supply and

demand of gold. Supply and demand statistics are estimates

o match the incremental gold output (flow of gold).

Besides, some large markets such as Indian and Chinese

also have large unofficial markets.

GOLD SUPPLY & DEMAND

TRENDSAn additional problem in measuring the physical gold

market, is that the current reserve of gold, termed the

stock, will never be consumed, unlike other commodities

such as corn or crude oil. The stock-to-flow ratio of gold is

the total reserve of gold compared to the annual amount

of newly produced gold. The ratio for gold is around 60and the ratio for silver is 20 and copper is about 1. Thus, it

is difficult to map the flow of existing gold between buyers

and sellers.

The annual demand and supply of gold barely changed

between 1997 and 2012, as shown on Charts 5 and 6.

In contras, the gold price increased from $280 in Jan 2000

to $1664 in Dec 2012. During this same period, demand

for jewelry declined while gold investments in the form of

bars and coins rose.

0

500

000

500

000

500

000

500

000

500

000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012TTM

Central bank demand

Producers dehedging

Industrial

ETF

Coins&Bars

Jewellery

0

500

000

500

000

500

000

500

000

500

000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012TTM

Sales Central banks

Recycling

Production

Chart 5: Annual gold demand in tonnes

Chart 6: Annual gold supply in tonnes

29

Source: World Gold Council




Consumer demand, including jewelry and coins and bars,

was 3264 tonnes in 2012TTM.

CONSUMER DEMAND

Global demand was 4456 tonnes in 2012 TTM (2H 2011

+ 1H 2012).

Gold consumers in emerging markets

nvest more in jewelry than coins and

bars while consumers from developed

markets do the opposite. Albeit,nvestment in jewelry is also a financial

nvestment in gold.

Eur opeEurope consumed a total of 369 tonnes in 2012TTM. It

was the largest consumer of gold bars and coins at 354

onnes and jewelry demand was negligible at 15 tonnes.

Demand was very low before 2008, but it skyrocketed

when the credit crises started. Virtually all of the gold in

Europe was sent to Germany and Switzerland, possibly to

meet demand by investors from Southern European

countries.

United States

The US market for gold was relatively small with a total of

26 tonnes in 2012TTM. Consumption of jewelry was 80

onnes and gold and coins was 46 tonnes. Although data

on individual investors is unavailable or unpublished by

exchange traded fund (ETF) providers, it can be assumed

hat US investors are more interested in paper gold suchas gold backed ETFs.

India, 765,

23%

China, 814,

25%

Middle East,

343, 11%

Europe,

369, 11%

USA, 126,

4%

Other, 835,

26%

Consumer demand

(Jewelry, bars and coins)

and % of global demand

in tonnes 2012TTM

jewelry

1838, 41%

Bar and

Coin, 1426,

32%

Technology,

440, 10%

ETF, 243,

6%

Central

banks, 509,

11%

Total demand in tonnes

and % of global

2012TTM

IndiaIndia has always been a large gold consumer market. Its

market consumed a total of 765 tonnes or nearly 24% of

the global demand in 2012TTM. 505 tonnes of jewelry was

consumed along with 260 tonnes of coins and bars. Gold

demand has decreased because the gold price in Rupee

increased much more than in USD.

ChinaChina consumed a total 814 tonnes or 25% of the global

market. Demand for jewelry was at 538 tonnes and coins

and bars at 278 tonnes. The Chinese government hoards

gold and encourages its citizens to do the same. The gold

price in Yuan rose significantly less than in USD, increasing

demand.

There could be more room for growth in Chinese

demand. Given, the GDP of China is three times that of

India, China is on its way to overtake India as the largest

gold consumer market in the world.

Middle Eas t and Tur key Most demand comes from the more wealthy Middle East

countries, Turkey, Saudi Arabia and the UAE. Much like

China and India, demand is mainly in the form of jewelry at

229 tonnes and only 114 tonnes in coins and bars.

30



Chart 7. Indian consumer demand in tonnes on the left scale and the gold price in Rupees on right scale

Chart 8. Chinese consumer demand in tonnes on left scale and the gold price in Renminbi on right scale

Compared to gold in USD, the gold price in Rupees increased dramatically from Jul 2007 to Sep 2012. Chart 7 shows

that the demand in the gold price decreased in last the four quarters. The seasonal pattern of a spike in jewelry demand,

where it peaks in 3Q is barely evident. This phenomenon may have been either over-estimated or smoothed out, if the

assumption holds true that customers purchased jewelry long in advance.

A strong Yuan from Jul 2007 to Sep 2012 made the rise in gold prices more modest in China. Chart 8 suggests a trend of

rising demand for both jewelry as coins and bars. Annually, demand is highest in the Q1, mainly due to the seasonaldemand during the Chinese new year.

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

0

50

00

50

200

250

00

50

400

Coins & Bars

Jewellery

Goldprice (Rupee) +258%

0

2000

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6000

8000

10000

12000

14000

0

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00

50

00

50

00

50

00Coins & Bars

Jewellery

Goldprice (RMB)

+127%

31

CONSUMER DEMAND TRENDS



Chart 10 presents European consumer demand in tonnes on the left scale and the gold price in Euro’s on the right scale.

European consumers had little appetite for gold until the financial crises became headline news with the LehmanBrothers bankruptcy. Although the data includes European demand from the EZ, UK and Switzerland, almost the entire

gold demand comes from Germany and Switzerland, perhaps from clients in peripheral countries.

Chart 9. US consumer demand in tonnes on left scale and the gold price in US Dollars on right scale

0

200

400

600

800

1000

1200

1400

1600

0

50

00

50

00

50

00

50

00

Coins & Bars

Goldprice (EUR)

+191%

0

200

400

600

800

1000

1200

1400

1600

1800

2000

0

50

00

50

00

50

00

50

00

Coins & Bars

Jewellery

Goldprice (USD)

+174%

Chart 9 displays US consumer demand in tonnes on the left scale and the gold price in USD on the right scale. US gold

demand has declined for some years. While demand for coins and bars increased after the Lehman Brothers bankruptcy,

demand was steady thereafter. It may be possible that US consumers buy more paper gold like the SPDR GLD ETF.

Chart 10. European consumer demand in tonnes on left scale and the gold price in Euros on right scale

32

CONSUMER DEMAND TRENDS




From the second half of 2011 to the first half of 2012, 59%

consumer demand came from China, India, Turkey and

Middle East and15% came from EZ and US.

ndia and China are the primary countries for the global

gold market. A large part of consumer demand in the form

of jewelry, coins and bars comes from these two populous

countries. EM central banks also have started buying gold

o diversify their foreign currency holdings. The relative shift

of wealth and power from Europe and the US towards

Asia could provide a strong demand for gold in the future.

Gold supply & demand

0

2,000

4,000

6,000

8,000

0,000

2,000

4,000

6,000

USA

Euro Area

China

Asia-Pacific

Middle East

+16

+10%

+60%

+56%

+29%

+136%

+50%

+60%

-3%

+3%

Source: IMF World Economic Outlook Database Oct 2012

Chart 11 shows historical GDP and future estimation of

the most important gold markets. Asia-Pacific include India,

Russia, South Korea, Thailand and Indonesia but excludes Japan and China. Middle East includes Turkey, Saudi Arabia,

UAE, Egypt, Iraq and Iran.

The growth of the gold within the 5-year period between

2007 to 2012 and the growth estimate between 2012 and

2017 is displayed in %. In 2017, the combined Asian

economies will be the size of the US and EZ combined.

EMERGING MARKET DEMAND

Chart 11. Historical and future estimates of GDP of major countries and regions in million USD

33



ewelry demand was 1963 tonnes worldwide in 2011; thus accounting for

almost half of the total gold demand.

ndia represents the biggest market for jewelry. Gold

demand usually peaks during the festival season, starting in

August with Eid and ending in October with Diwali, then

ollowed by the traditional wedding season. This pattern did

not emerge in 2011 according to the quarterly Consumer Demand statistics. Other factors such as the high gold

price along with a low rupee exchange rate made demand

all by 14%. Extreme monsoon rain may also lower the

gold demand. Due to bad harvests, rural consumers have

ess money to purchase gold. Besides, Indians are permitted

o only hold financial assets in Rupees. So, gold is a sound

nvestment to hedge against high Indian inflation.

ndia 567 tonnes in 2011

China

511tonnes in 2011

Consumer demand for jewelry and coins and bars peaks

on the Chinese new year in late Jan or mid Feb, which

supports the seasonal pattern of higher first quarter

demand. Golden jewelry is often bought for wedding

ceremonies and the Chinese new year. Most of it is pure

gold. 75% of urban woman in China own more than one

golden piece. They view gold as an investment and lavishly

spend money on it to display their income or wealth. The

Chinese government also encourages its citizens to buy

gold. Demand was up 13% in 2011, reflecting China’sgrowing wealth.

n 2011, there was a 28% increase in the gold price in USD. jewelry demand remained strong, dipping by 3% since 2010.

Unsurprisingly, most countries with huge jewelry demand from citizens have central banks that started to purchase goldo diversify their foreign currency holdings.

Turkey and Middle East 230

tonnes in 2011

Turkey, Saudi Arabia and UAE have a relatively large gold

emand compared to the size of their economies. And yet,

emand took a dip by 17% in 2011.



Par adigm Shif t in Gold Mar ketSince 2009 a powerful new demand factor in the gold

markets appeared. Several central banks of EMs started to

purchase gold to diversify their foreign currency holdings.

Traditionally, they held reserves primarily in USD, against

which they issued their own currency. However, because

most developed countries have ever increasing debt,monetary expansion and negative real interest rates, the

EM central banks are looking for alternatives. Until 2008

central banks of developed nations were sellers of gold.

Since the threat of a large amount of gold being dumped

n the global market has always existed, central banks of

developed nations suppressed the gold price.

Missing or Unaccounted GoldSome gold purchases are not reported in the demand

data, particularly purchases made by the PBOC, hedgeunds or private purchases. Because of nondisclosure,

hese gold purchases are not a part of the official data

provided by Thomson/Reuters. It is unclear who is selling

his gold. The most likely candidates are central banks of

highly indebted countries.

Central banks are not audited. They can report any figure

hey see fit. Possibly through constructions like leasing out,

repurchase agreements or gold deposits, central banks can

claim the original amount of gold reserve on their balanceheet. All of this without physically holding the complete

gold reserve. Both the FED and ECB claim their gold

reserves include gold deposits and gold swaps.

Gold Reserve

Germany, Austria and the Netherlands, among others, have

most of their gold stored abroad, thus making it even

harder to audit central banks. More public demand for

auditing and repatriating the national gold reserve is heard

in these countries.

Central Bank of RussiaThe Central Bank of Russia (CBR) can be used as an

example to illustrate central bank demand of gold. The

CBR is the world’s largest (officially reported) buyer of

gold, which is most or all locally produced gold. Russia

doubled its reserve from 460 tonnes in 2Q 2008 to 918

tonnes in 2Q 2012. In 2011, it held a total FX reserve of

$497B of which 8.8% was in gold.

Chart 12 suggests there is no relationship between the

CBR’s quarterly purchases of gold and the gold price. The

CBR currently buys gold at a rate of around 100 tonnesper year. The purchases are related to the income of years

of high oil and natural gas exports.

A similar development can be observed at many other EM

central banks like those of Turkey, Saudi Arabia, South

Korea, India, Kazakhstan, Mexico, Philippines, Brazil and Iraq.

These banks all bought gold recently, although in smaller

scale or not as frequently as the CBR. Therefore, central

bank demand is not related to the gold price but it can be

an important factor for a higher future gold price.

CENTRAL BANK DEMAND

0

200

400

600

800

1000

1200

1400

1600

1800

-

10

20

30

40

50

60

70

Q3

2007

Q4

2007

Q1

2008

Q2

2008

Q3

2008

Q4

2008

Q1

2009

Q2

2009

Q3

2009

Q4

2009

Q1

2010

Q2

2010

Q3

2010

Q4

2010

Q1

2011

Q2

2011

Q3

2011

Q4

2011

Q1

2012

Q2

2012

CBR Quarterly demand

Gold price (USD)


Chart 12: CBR quarterly gold demand on the left scale and the gold price in USD on the right scale

35



The gold output is expected to increase with a small

amount in 2012 due to the continued expansion of

exploration and development budgets of global mining

companies. Nearly 64% of the gold supply in 2011 was

new production from mines. South Africa seems to be the

exception. Due to severe labour unrest, its supply will likely

fall in 2012. Not all new gold production is sold on the

open market. For example, China and Russia do not

export gold.

The remaining 36% of gold supply is recycled gold from

mainly old jewelry. When gold prices rise, scrap gold supply

usually picks up. This trend did not occur during the first

half of 2012. With gold price near records at $1750,

consumers felt it could go even higher.

GOLD SUPPLY

0

50

00

50

200

250

300

350

400

China Aus US SA Russia Per u Ghana Canada Indonesia Mexico

Y2010 Y2011

Gone are the days of prospectors finding cherry sized

nuggets with simple tools. In our modern times, gold is

ound as tiny particles in large ore deposits deep down in

he earth. The process of producing gold is increasingly

difficult and expensive which drives up the cost of mining

companies.

Chart 13 shows the top gold producing countries as of

2010 and 2011. China, Australia and the US produced at

east 240 tonnes of gold in 2011. South Africa ranked fifth

after being the world largest gold producer for decades. Its

drop in production is mainly due to its high cash cost, a

erm which will be discussed in further detail in Chapter 8.

Regardless, South Africa holds one of the largest gold

reserves and Anglo Ashanti and Gold Fields which are

South African based gold mining giants have expandedheir global operations.

Chart 13: Annual gold production in tonnes per country

36




Gold Reserve Above Gr oundThomson and Reuters estimated that

he total gold reserve was 171,000

onnes at the end of 2011. This

quantity can fill 3½ Olympic size

wimming pools.

Who are the biggest owners of gold?

With a large demand and long history,

he Indian consumer hold 18,000onnes of gold. Although China is

wealthier than India, gold purchases

are relative new and the Chinese

consumer holds 6,000 tonnes.

ABOVEGROUND GOLD RESERVE

171,000 tonnes

total reserve end of 2011

Gold held in trust for the SPDR Gold trust ETF

8134

4000

3396

2814

2452

2435

1318

1040

937

765

613

558

502

423

383

366

323

310

287

282

0

000

2000

3000

4000

5000

6000

7000

8000

9000

Chart 14: Gold reserve on Sep 2012 in tonnes, China estimated

37

jewelry,84,300, 49%

Central banks,29,500, 17%

Investmens,33,000, 20%

Technology,20,800, 12%

Unaccounted

, 3,600, 2%

Global above ground

reserve 2011 in tonnes




The Grasberg mine in Indonesia is the world’s largest

gold mine with a 2011 production of 63 tonnes of gold.

Source: Respective companies financial statements 2011

Table 5 summaries the 12 largest publicly traded gold

producing companies. In 2011, their annual combinedproduction was 1032 tonnes, which is 36.72% of the global

output. These 12 companies had a combined gold reserves

of 25,205 tonnes. If we assume this would also be 36.72%,

he total underground gold reserve would be 68,646

onnes. This is the amount of gold that is economically

viable to extract at current prices and technology. With

higher gold prices in the future, more gold reserve could

be added. The US Geological Survey estimates the global

underground gold reserve at 100,000 tonnes.

Gold

Production (in

tonnes)

Gold

Reserve

(in tonnes)

Barrick Gold (ABX) 229 4,352

Newmont (NEM)

177

3,073

AngloGold Ashanti (AU) 133 2,351

Goldfields (GFI) 107 2,414

Kinross (KGC) 75 1,947

GoldCorp (GG) 74 2,012

NewCrest 71 2,460

Polysus Gold 45 2,813

Harmony (HMY) 40 1,294

Freeport McMorran (FCX) 33 1,054

Yamana (AUY) 29 530

Eldorado (EGO) 20 903

Total 12 companies 1,032 25,205

World 2,810 68,646

2 Companies share 36.72%

70,000 -100,000s the es timated gold r eser ve s till in the ear th.

36 years

is the expected time that it will take for all gold in the

proven reserve to be mined, given the current extraction

rate. In contrast, it is likely to take 54 years for all the oil in

the proven reserve, including tar sands, to be extracted.

Although the gold price and exploration

budgets rose significantly every year

since 2000, major new discoveries have

been declining since 2006.

The last giant discovery of gold was the Oyu Tolgoi deposit

in Mongolia in 2001. It is to become one of the largest

gold, silver and copper mines in the world with 1275

tonnes of gold reserve. The mine began construction as of

2010. The commencement of operations is scheduled for

2013. Oyu Tolgoi is jointly owned by Ivanhoe mines, Rio

Tinto and the government of Mongolia.

38

Table 5. Gold production and reserves with publicly traded

gold producers

UNDERGROUND GOLD RESERVE



n Chapter 4, I describe the markets in which gold is traded and estimate the total

size of the gold markets. Also I investigate the historical gold price and analyse

whether the gold market is manipulated.

Chapter 5

GOLD MARKETS & ""THE GOLD PRICE

39



The term paper gold is used to describe gold investment

hat does not involve physical gold. It was once a paper

hat was a claim on a certain amount of gold. Nowadays,

most trades are performed on computers and the vast

majority of traded gold does not involve any physicalexchange of ownership.

Gold Bullion refers to gold in bulk, usually in the form of

bars or coins, traded as a commodity. The London Bullion

Market Association (LBMA) represents the bullion market

or gold and silver in London. The majority of all gold and

ilver is traded Over The Counter (OTC). OTC

ransactions are performed between buyers and sellers

outside public exchanges and unreported to the public.The members of the LBMA handle the majority of those

rades between clients, such as central banks, mining

companies and traders.

The London fixing price is used for many large gold

ransactions. It is set twice a day at 10:30 and 15:00 GMT

ime zone. The gold price moves up and down, until

demand and supply are matched, and the price is declared

fixed. All business is conducted on the fixed price.However, since all gold transactions at the LBMA are OTC

and thus unreported, the London fix price can be

manipulated in similar ways as the LIBOR rate is.

London is the city where most of the world’s gold is traded.

Bullion banks are investment banks dealing in large

quantities of gold that handle gold transactions, deposits

and storage. They are also the conduits for central bank

gold transactions. Since gold does not produce any income,

including interest or coupon payments, central banks can

loan their gold supply to third parties for a fee or in the

form of either swaps, lease or buyback constructions. DB,

HSBC, JPM, UBS, Barclays and ScotiaMocatta are bullion

banks of the LBMA that handle gold loans.

A client can hold an unallocated gold account with any

gold bullion bank of the LBMA. The LBMA website states

this account is one “where specific bars are not set aside

and the customer has a general entitlement to the metal. Itis the most convenient, cheapest and most commonly used

method of holding metal.” The website further explains

that “credit balances on the account do not entitle the

creditor to specific bars of gold or silver, but are backed by

the general stock of the bullion dealer with whom the

account is held. The client is an unsecured creditor.”

An unallocated gold account is similar to a checking and

savings account at a commercial bank. A client does not

own the gold deposit but only a claim on it. The bank does

not have all the gold deposits in reserve, but only a

fraction. It can use the deposit for its own purposes.

Since gold at the LBMA is traded OTC, it is difficult to

estimate the size of the total gold market. To validate that

gold is a high-quality liquid asset to the Basel 3 commission,

the LBMA conducted a voluntary survey in 2011. Based on

data obtained on the trading activity of 36 of its 56 full

members, the report claimed that the estimated total

London daily turnover of gold was 174M Oz, or 5400

tonnes, per day. This daily volume represented a value of

$241B. It is larger than the annual physical gold demand.

89% of it was traded at the spot price, probably in

unallocated gold accounts.



A Gold Future Contract is an agreement for the delivery

of physical gold at a specific date for a specific price. Gold

utures trade at different exchanges. The largest

commodity futures exchange trading gold is The Chicago

Mercantile Exchange group (CME) and its divisions

COMEX and NYMEX. Smaller exchanges are found inmost of the world’s financial centres such as Tokyo,

Shanghai and Dubai.

A gold future at the CME has an underlying value of 100

Oz. By the end of Nov 2012, the future was worth an

estimate of $172,000. At expiration of the future, 100 Oz

of gold must be delivered by the short seller to the long

holder of the contract. To avoid physical delivery the vast

majority of contracts are sold before expiration. There is

till a small number of gold futures traded in the open

outcry system, where traders in colourful jackets shove andcream for orders in a pit. However, around 97% is traded

on Globex, which is the CME’s electronic trading system.

Unlike other commodities, gold futures are solely driven by

he spot price and the interest rate. Since interest rates are

always positive, the gold future market is always in

contango, a situation where longer dated contracts have a

higher price than shorter dated contracts. At present, the

amount of contango is around 0.70% of its annual

underlying value. Future contracts require a small amount

usually around 10%) of the underlying value in margin,

held in cash or a cash equivalent like US treasury.

CME Headquarters in Chicago

Jan 2012-Nov 2012 Contracts Million oz Billion USD

Comex Gold Futures 179,374 17.94 29.91

Comex Gold Options 37,733 3.77 6.29

Total CME Gold 217,107 21.71 36.20

Comex Silver Futures 54,398 271.99 8.45

Comex Silver Options 6,861 34.31 1.07

Total CME Silver 61,259 306.30 9.52

Jan 2011-Nov 2011 Contracts Million oz Billion USD

Comex Gold Futures 201,190 20.12 31.49

Comex Gold Options 40,800 4.08 6.39

Total CME Gold 241,990 24.20 37.88Comex Silver Futures 81,926 409.63 14.55

Comex Silver Options 8,833 44.17 1.57

Total CME Silver 90,759 453.80 16.12

Table 6. Average daily volume of Gold and Silver Futures

and Options traded on the CME/COMEX

Unlike equity, where the total profit or loss depends on

how much the stock goes up or down, futures are a zero

sum game, where total losses equal total profits.

Underlying futures is the concept of open interest, which is

the amount of long and short contracts that investors hold.

The CME website repor ts open interest. On Dec 10, 2012,480,000 gold future contracts on the CME represented

48M Oz or 1500 tonnes of gold. However, the traded

volume must be determined to estimate the size of the

global gold market.

Table 6 compares the average daily volume of gold and

silver traded on the CME in 2011 and 2012. The gold

futures market shrank slightly in the one year period. The

amount of gold futures decreased by10%. But, due to its

higher gold price in 2012, it decreased by 4.4% in USD

terms. The silver market shrank significantly in the one year period. It also shrank as a percentage of the gold market.

While the silver future market was 42.56% of the gold

market in 2011, it decereased to 26.30% in 2012.



GOLD ETF MARKET

Gold Backed Exchange Traded FundsGold backed Exchange Traded Funds (ETFs) are publicly

traded investment funds that track the price of gold minus

their expenses. With the money invested in these funds,

the funds manager buys gold bullion and stores it in a

custodians bank’s vault. Gold backed ETFs can be bought

on many stock exchanges these days, including those in

New York, London, Johannesburg , Melbourne, Hong Kong,

Tokyo and Singapore. On Dec 4, 2012 the total amount of

gold held by all gold backed ETF’s was 2623 tonnes.

SPDR Gold Trust

The SPDR Gold Trust (GLD) is the largest of all gold

backed ETFs and receives the most media attention. GLD

s managed by State Street Global Advisors for an annual

fee of 0.40%. Usually around 96% money is invested in

gold bullion. On Dec 31, 2012, GLD had a Net Asset Valueof $72.24B, representing 1350 tonnes of gold. Its average

daily volume at the NYSE was 17.56M contracts, or

.756M Oz of gold, in 2011. The volume dropped with

43% to 9.95M contracts, or 0.995 M Oz of gold in 2012.

Chart 15 shows the price of a share in GLD and the

amount of gold in reserve in tonnes in the period of Jul

2007 to Dec 2012. At the start of the Q1 and Q2

programs, the reserve increased and thereafter it remained

stable. The price of gold seems to have little impact on the

total demand of GLD.

42

Alternatives to SPDR Gold TrustOther gold backed ETFs include:

• ETF Securities Swiss Gold Shares (NYSE:SGOL)

• ETF Securities Physical Asian Gold Shares

(NYSE:AGOL)

These alternatives differ from GLD in that GLD stores its

gold in the US, SGOL stores its gold in Zurich vaults and

AGOL in Singapore vaults.

Exchange Tr aded NotesAccording to US regulation, ETFs must invest in the

products they promote. For this reason, ETFs with the

name gold in them must invest in physical gold bullion.

Exchange Traded Notes (ETN) are mainly issued in Europe

and these restrictions do not apply to ETNs. ETNs can

invest in gold future contracts or a total return swap tomimic a gold bullion investment. They can be engineered

to have more leverage or go short on a gold investment.

However, when a financial derivative is held instead of gold

bullion, an extra layer of risk is introduced, namely counter

party default risk. In case of default of the counterparty,

investors in an ETN could be left with little or no money.

The following are examples of ETNs:

Powershares DB Gold ETN (NYSE:DGL),

Powershares DB Gold Double Long ETN (NYSE:DGP)

Powershares DB Double Short ETN (NYSE:DZZ).

Chart 15. The price of a share in the GLD ETF on the left scale and the total gold reserve of GLD in tonnes

on the right scale

0

200

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800

1,000

1,200

1,400

1,600

0

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60

80

100

120

140

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GLD Price

GLD Tonnes of Gold



SIZE OF GOLD MARKETS

43

Measur ing the Gold Mar kett is not possible to accurately measure the total size of the

gold market, which is defined by its daily traded volume.

The majority of the gold market is OTC and the data

available to the public is fragmented over many exchanges

and products. Thus, I estimate the gold market from datahat is accessible and ignore different time frames, sources

and methods.

Table 7 reports the gold traded volume and market (i.e.

hare) from the following sources of information.

. The daily volume of gold traded was obtained from

the Q1 2011 LBMA survey.

2. The average daily volume of gold futures and options,

spanning Jan 2011 to Nov 2011 was retrieved from

the CME website.

3. The Gold ETF volume, which is estimated to be twice

the volume of the State Street SPDR Gold ETF in

2011, was retrieved from the spdrgoldshares.com

website.

4. Other data was derived from Reuters/GFMS 2012.

Based on estimates from Table 7, I conclude that:

1. The OTC gold market at the LBMA is far larger than the

publicly traded gold future market at the CME. The

Gold ETF market is neglible.

2. The 2011 annual physical gold demand of 4500 tonnes

is dwarfed by the daily traded gold volume of 204M Oz

or 6330 tonnes. Every trading day an amount larger

than the annual physical demand is traded.

Large investors can buy gold at the LBMA and sell gold

futures on the CME for hedging or arbitrage opertunities.

Because only the large sell order is visible to the public,

some may assume that the gold price is manipulated. That

said the gold market may be manipulated. And so, follow

up research on the issue will be reported soon.

Table 7. Daily and annual gold traded volume in million Oz

Daily Volume

Annual

Volume Share

BMA (1Q 2011) 173.71 43,776 83.50%

ME/COMEX 2011 24.20 6,072 11.58%

old ETFs 2011 3.51 885 1.69%

thers 2011 6.77 1,692 3.23%

otal gold volume 208.19 52,424100.00%



The foreign exchange market, also referred to as forex, FX

or currency market, is the market in which currencies are

nternationally traded. Since FX market is a global, it is open

24 hours a day. Most trades take place in Tokyo, Londonand New York. The exact size of the FX market is difficult

o obtain as most currency is traded OTC. Still, it is by far

he largest of all financial markets.

n 2010, the Bank of International Settlements (BIS)

conducted the “Triennial Central Bank Survey 2010” to

study the size of the FX market. The average traded daily

volume in the FX market, including spot transactions and

derivatives, was estimated at $4.0T. To compare the

currency market with the gold market, I report the most

raded currencies on the FX market on Table 8.

For the estimation of the daily turnover in gold estimation, I

used the average traded volume of gold in Oz of 2011 and

multiplied that with the average gold price of 2010.

The estimated daily traded volume of gold represents a

daily value of $255B in 2010. If gold is viewed as a

currency, this quantity makes it the world’s 4th most traded

currency. Because of the enormous size of the gold market,gold must be thought of more as a currency than as a

precious metal.

Gold is often considered as a currency. It has the currency

code XAU, which is not to be confused with the gold

mining index with the same code. Many investment banks

trade gold at their currency trading desks instead of their

commodity trading desks. As mentioned in Chapter 3,

central banks consider their gold reserve a part of their

foreign currency holdings.

Since the volume of paper traded gold is much larger than

physically traded gold, the gold price is set on the

electronic markets and not the physical gold trade. In

Chapter 6, I will determine that factors driving the gold

price such as interest rates, inflation and the money supply

also drive the currency trade.

The first characteristic of the gold currency is that it pays

0% interest, which is slightly lower than the 0.18% on the

short-term US treasury on Nov 2012. The second is that

is that its supply increased in 2011 with a modest 1.6%,while the USD M1 and M2 increased at 18.03% and

9.83%, respectively.

Table 8. Daily currency average turnover in USD billion

USD Billion Year

USD:EUR 1,101 2010

USD:JPY 568 2010

USD:GBP 360 2010

255 2010-2011

USD:AUD 249 2010

USD:CAD

182

2010

USD:CHF 168 2010

EUR:JPY 111 2010

EUR:GBP 109 2010

Turnover stock at NYSE 1,509 2011



NOMINAL & INFLATION ADJUSTED GOLD PRICE

1980 Gold SpikeThe gold price hit a peak of $835 on Jan 18, 1980. If it was

adjusted for inflation, the price would be $2463 on Sep

2012. But the world in 1980 was very different from 2012.

The US was still involved in the cold war. Russia was in

open warfare in Afghanistan. The outfall of the Iranian

revolution influenced the global oil and financial markets.

Government overspending and an oil price spike caused

nflation to run rampantat at 14% as of Jan 1980. To

combat inflation, the FED raised interest rates. The FEDFund Rate was at a record 17.9% on April 1980. The gold

price lost half it value in the following year as the US

plunged into a recession.

2011 Recor d Pr iceOn Sep 5, 2011 the gold price set a record high in nominal

terms of $1895. Unlike 1980, where the gold price shot up

like a bullet, a slower trend running for a decade led to this

2011 record. Unlike the gold price collapse after the 1980

spike, it is expected to go up again in the near future. The

gold price can reach the $1895 level again, but it might

have difficulty breaking this price level.

$2473Inflation adjusted Gold Price in Jan 1980, stated in

today's (Nov 2012) USD

Source: Federal Reserve Economic Data tool

Chart 16: Nominal gold price and inflation adjusted (US CPI) gold price in USD

To understand the current and future gold price, I looked

at the historical gold price first. The gold price before 1971

s of limited value. It was not set in the free market and

hus relatively stable. In the inflationary 1970s, gold was in a

bull market that lead to a speculative spike in 1980. What

ollowed was the collapse of the bull market and a long

bear market in the 1980s and 1990s. Ever since the dot

com bubble burst in 2001, the gold price has steadily risen.

45

0

200

400

600

800

000

200

400

600

800

000

200

400Gold Nominal

Inflation Adjusted



0

200

400

600

800

000

200

400

600

800

000

Gold (USD)

+174%

0

200

400

600

800

1,000

1,200

1,400

1,600

Gold (EUR)

+191%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Gold (Yuan)

+127%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

Gold (Rupee)

+258%

GOLD PRICE IN MAIN CURRENCIES

The USD is the world reserve currency,

thus the gold price is set in USD. But to

determine how the gold price is affected

n other currencies, I examine the five-

year gold price in USD along with Euros

(EUR), Chinese Yuan (RMB) and Indian

Rupee (INR).

Charts 17 to 20 confirm that gold in all currencies

ncreased from Jul 2007 to July 2012. Therefore, I can

conclude that currencies are an important factor in the

gold price. But the return on gold in local currencies

varies. For example, there is a +127% change in the gold

price in Yuan and a +258% change in Rupee. And so, it isikely that other factors drive the gold price too.

Most global consumers buy gold in currencies other than

the USD. It is difficult to determine the impact of the

fluctuating exchange rates on gold demand. Some

consumers may delay purchases. Others may buy

cheaper substitutes such as silver. And a few may consider

the higher prices as proof of a good investment.

Source : World Gold Council

46

Chart 17: Gold price in USD

Chart 18: Gold price in Euros

Chart 20: Gold price in Rupees

Chart 19: Gold price in Yuan



According to Wikipedia, “market manipulations a deliberate attempt to interfere with the

free and fair operation of the market and

create artificial, false or misleading

appearances with respect to the price of, or

market for, a security, commodity or currency”. Market manipulation is prohibited

under section 9 of the US Security Exchange

Act of 1934. Similar market manipulation

prohibition rules are set by the European

commission. The LIBOR scandal and CentralBank Manipulations of all asset markets are

the largest of an endless stream of reported

financial market manipulations. They paint apicture that all financial markets are rigged by

both commercial banks and governments.

LIBOR ManipulationThe LIBOR scandal is the largest manipulation in the

financial markets uncovered. It fits exactly with the

definition of manipulation. Banks reported a higher or

ower LIBOR interest rate than the actual used rate. LIBOR

s the average interest rate that London banks charge each

other. And, it is used as a basis for en estimated $350T in

derivatives.

Although the Financial Times only printed about it on Jul

27, 2012, the scandal can be traced back as far as two

decades ago. It involved most of the major European and

American banks. Barclay’s Bank was identified as the ring-

eader. The manipulation may have happened with the

knowledge of the Bank of England too.

Central Bank ManipulationsCentral Banks openly intervene or try to indirectly

nfluence the prices of all asset markets. The market for

debt is influenced directly by the central banks, who keep

he short term interest rates near zero and buy an

enormous quantity of Treasuries and MBS. Equity,

commodity and currency markets are influenced indirectly

by the influx of huge sums of artificially created money

hat finds its way to these markets. Although performed

openly by central banks, these actions can still be classified

as manipulation.

Investors in precious metals must understand that all financial markets are manipulated. The

correct question is to what extend are gold

and silver markets manipulated ? The silver

markets, which is much smaller and more

volatile than the gold market is probably theeasiest and most severely manipulated.

However, it is likely that gold markets are

manipulated to a certain extent as well.

Gold Market Manipulation Since both central banks and commercial banks are

involved in some form of market manipulation, it is

necessary to investigate to the extend that the gold and

silver markets are manipulated. There is cer tainly noshortage of stories. Those based on proven cases and

others just bizarre rumours.

There are a few topical stories on the manipulation of gold

and silver markets. Naked short selling of gold, which is the

selling of gold derivatives without owning any physical gold,

can be easily done on a large scale using unallocated gold

accounts at the LBMA and/or gold futures at exchanges

such as the CME/Comex. It is simple for central banks or

large commercial banks to offset the rising price of physical

gold by short selling paper traded gold, such as gold future

contracts.

JP Morgan and HSBC ManipulationOn Apr 2010 a former Goldman Sachs trader publicized

his assertion that JP Morgan and HSBC manipulated the

gold and silver markets. By working together, the two banks

suppressed silver futures by naked shor t selling. With a

lower silver price, their large short position in call options

on silver declined in value, thus creating huge profits for

the two banks. After the market is “broken”, many investors dumped their long positions to prevent further

losses or were forced to sell after a margin call. This

allowed the two banks to cover their short position. An

investigation by the US commodity Futures Trading

Commission (CFTC) ensued with the CFTC reporting that

on Nov 2009, HSBC and JP Morgan held 43% of the

commercial net short position in gold and 68% in silver at

the CME/COMEX. The two banks were short 123,331

gold future contracts and 41,318 silver future contacts

against a negligible long position.



n Chapter 6, I create a model using regression analysis to estimate the gold price

based on 4 factors. Then I develop three scenarios with input for this model and

estimate the gold price for the end of 2013.

Chapter 6

GOLD PRICE

REGRESSION MODEL

48



Gold is a rather rare commodity and so, as investment, it

has unique properties.

. Unlike other commodities, gold has virtually no

industrial use and is not physically consumed.

2. Because there is small and stable annual gold

production, the gold price is shielded from sudden

increases seen in other commodities such as iron ore

or natural gas.

3. Physical gold has no default risk, unlike equity or fixed

income.

4. Physical gold does not rust, degrade or perish over

time, making it suited as a long-term store of value.

5. A small physical size of gold represents a large value,

making it relatively cheap to store.

6. Like most commodities, gold does not provide any cashflow from which its value can be derived. Cash flow

includes income from coupon payments and dividends.

For these reasons, gold is not dependent on economic

cycles. Its value must be derived from other factors and

heir future estimation. I will analyze and quantify which

actors drive the price of gold in this chapter

General least squares regression analysis is a statistical

approach that researchers employ to model relationships

between variables. I make use of an exploratory approach

to construct and test regression models in order to

estimate the 2013 gold price.

The gold price is the dependent parameter in my models.

I make use of the monthly average of the daily 3PM

London fixing price as the gold price. To uncover which

factors have the greatest impact on the gold price, I use

several independent parameters. To measure goodness of

fit for each model, I use the coefficient of determination,

also called the R squared measure of goodness of fit. Also,

all factors must be statistically significant at the significant

level below 5%

The gold regression model uses historical monthly data

from the period of July 2007 to Nov 2012. 2012 is the 5 th

year of the financial crisis, which is a combination of the US

mortgage crises and European sovereign debt crises. Its

onset can be traced back to August 2007, when BNPParibas blocked its investors from withdrawing from three

of its hedge funds.

I draw on monthly data for this study since some of the

factors, like the CPI index and US monetary base, are

published monthly and bimonthly. When data, such as the

gold price is published more frequently, the monthly

average is used, not the end of the month observation.



Chart 21: Gold price, the monetary base (MB) and the 12 month moving average of the MB

QUANTITY OF MONEY FACTOR

Quantity of Money Chart 21 suggest that the gold price and monetary base

ncreased by more than 150% over a five year period of

uly 2007 to Dec 2012. As discussed in the chapter on

government debt, it is unlikely that the current monetary easing policies of central banks will cease in the foreseeable

uture. Although the increase in the MB has stabilized in

2012 , with the FED expected to buy a massive $1T in

2013, an expanding money supply can drive the gold price

higher in 2013 and beyond.

To identify the best measure for the quantity of money in

he regression equation, I put to the test different variables,

namely: monetary base, balance sheet of central banks and

money supply M0, M1 and M2. The MB and balance sheets

of central banks can increase dramatically in a day andremain at that level for a prolonged period. To smoothen

hese sharp upturns, I employ a 12 month moving average

MA-12).

The combined MB of the US and EZ, stated in USD, has a

robust relationship with the gold price. The balance sheet

of the FED and/or the ECB has a less significant

relationship. The money supply, captured as M0, M1, M2,has no statistical significant relationship with the gold price.

80%

00%

20%

40%

60%

80%

00%

20%

40%

60%

80%


Gold

MB

MB MA-12



REAL INTEREST RATE FACTOR

Real Inter est R ateThe real interest rate is a factor related to the gold price.

n this study, the real interest is calculated using the Fisher

equation with the one-year US government treasury bill

1Y Treasury) as the interest rate and the annual changen the US CPI Index as the inflation rate.

The gold regression model confirms that the real interest

rate has a statistically significant relationship with the gold

price. But, inflation rate and interest rate, individually, have

a weaker relationship with the gold price in the

regression equation. Chart 22 shows how the shifts in the

real interest rate are influenced by inflation and 1 Year

Treasury over a twelve year period of Jan 2000 to Nov

2012.

.00%

.00%

.00%

.00%

.00%

.00%

.00%

.00%

1Y Treasury

CPI Inflation

Real interest rate

Chart 22: Real interest rate in the period 2000 to 2012

51

Since gold provides no income, periods of negative real

interest rates lower the opportunity cost of holding gold.

During the 1970s, the US had negative interest rates and the

period after 2008 has also had long negative interest rates.Both periods also have a rising gold price. Conversely, the

positive real interest rates of the 1980s and 1990s triggered

the gold price to decline. Therefore the real interest rate has

a reverse relationship with the gold price.



CURRENCY FACTOR

Cur r ency Fac tor Gold has a reverse relationship with the exchange rate of

the USD against other currencies. If the USD strengthens

against the EUR (e.g. lower value for EUR:USD or higher

value for USD:EUR), then it is more costly for European

nvestors to buy gold nominated in USD. In turn, the gold

price is expected to decrease. In addition, when the USD

strengthens, it will be more in demand as a safe haven

asset, at the cost of other safe haven assets such as gold.

Gold is traded globally in USD and so, the currency factor

n my regression model measures the exchange rate of

the USD against a basket of currencies. The widely used

USD index (NYSE:DXY), a basket of EUR 57.6%, JPY

13.6%, GBP 11.9%, CAD 9.1%, SEK 4.2%, CHF 3.6%) is too

biased towards European countries.

Chart 23: Performance of four currencies against the USD in the July 2007 to October 2012 period

Chart 23 shows the performance of the USD against the

currencies of the largest economies and/or gold markets:

Euro, Japanese Yen, Chinese Renminbi and Indian Rupee. To

capture the currency factor in the regression models, I

tried several different combinations of currencies in thecurrency basket.

Basket4

Basket4 has the best fit for the regression model. The

currency factor measures the monthly change in the

USD value of a basket of four currencies, weighed

according to their GDP in 2011. The basket consists of

44.85% Euro (32.67 EUR), 26.85% Chinese Renminbi

(203.41RMB), 21.59% Japanese Yen (2620.72 JPY) and

6.72% Indian Rupee (270.57 INR).

60%

70%

80%

90%

00%

0%

20%

30%

40%USD:EUR

USD:YEN

USD:RMB

USD:INR

USD:Basket4

52



The uncertainty in financial markets is another factor

related to the gold price. One common measure of

uncertainty or market risk is the yield spread between BBB

and AAA corporate bonds. Another common measure is

he Volatility Index (VIX) of the S&P500. However, these

wo common measures are not statistically linked to the

gold price.

also measured market risk using the annual change of the

value difference between two distinct indices, namely,

“Merrill Lynch total return index BBB Corporate bonds”

and “Merrill Lynch total return index AAA Corporate

bonds” . This measure better captures the market risk actor because it is statistically related to the estimated

gold price. However, the measure is a negligible factor.

The physical supply and demand of gold does not produce

a good fit in the regression model. I assume that the size

of the physical gold market is too small compared to thepaper traded gold market to make an impact on gold

prices. It seems that the gold price is influenced by the

paper gold market, which treats gold as a currency.

Therefore, I dismiss the momentum factor in my final

regression model.

Momentum is an important factor in setting the price in

many assets classes. It means that the current price isdependent on the price of a previous period and explains

an extended period of rising or falling prices. I capture it as

a one-month to 12 month price lag. None of the different

lags had any explanatory power in my regression

equations. Therefore, I dismiss the momentum factor in my

final regression model.



In and Out of Sample PeriodsTo make sure the gold regression model is valid, the model

is constructed using data in the in sample period from July

2007 to Dec 2011. To check if the gold regression model

will make accurate estimations, the data for the out-of-sample period from Jan 2012 to Nov 2012 is used to

estimate the gold price. This estimate is compared to the

observed gold price.

Curve fitting can find the optimal result in a data set based

on statistics instead of good modeling. However, when the

model is employed, it can produce unrealistic estimates.

Therefore, the out-of period data is used to test the

accuracy of the model.

All variables where significant at or below the 5%significance level. They also passed standard tests for serial

correlation, heteroskedasticity and collinearity.

GOLD PRICE REGRESSION MODEL

The equation above uses the following parameters:

. %Ch GOLD is the percentage change in the average monthly gold price, set in the 3PM London fixing price.

2. %Ch REALRATE is the monthly percentage change in the real interest rate, calculated as the YTM on the 1Y US T-bill

minus the annual inflation rate as measured by the US CPI Index.

3. %Ch BASKET4 is the monthly percentage change in the value of the USD:Basket4.

4. %Ch MB-12 is the monthly percentage change in the combined monetary base of the US and EZ (converted to

USD), measured as a 12 month moving average.

5. %Ch BONDSPREAD is the annual percentage change in the value of the BAML Total return index BBB corporate

bonds minus BAML Total return index AAA corporate bonds.

After experimenting with different

factors that are considered to be drivers

of the gold price, my gold regression

model proves that the quantity of money is the biggest driver of the gold

price. Other factors such as exchange

rates, inflation and interest rates shift the

price within a certain bandwidth.

Because there is no end in sight to

monetary easing, the quantity of money

factor can drive gold prices higher in2013 and beyond.

(%Ch GOLDt) = -3.0384*(Ch REALR ATEt) - 0.9616*(%Ch BASK ET4t)

+ 0.7207*(%Ch MB-12t) + 2.63E-05*(Ch BONDSPREADt)

R ²=0.4112, Adjusted R ²=0.3759, n=54

54



Chart 24: The observed and estimated gold price in the in sample period

Chart 25: The observed and estimated gold price in the out of sample period

55

The monthly average observed gold price and the

estimated gold price are illustrated in Charts 24 and 25,

or the in-sample period and out of sample period,

respectively.

The actual gold price is more volatile than the estimatedgold price. On Dec 2012, the out-of-sample estimate was

2.64% higher than he observed gold price. The small

difference between the estimated and observed gold price

ndicates that the model is reliable and can be used to

predict the future gold price.

FIT OF ESTIMATION

500

550

600

650

700

750

800

Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12

Gold 3pm fixing

Gold estimated

1653

1689

1733

0

200

400

600

800

000

200

400

600

800

000

Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

Gold 3pm fixing

Gold es timated

1513

1652

665

The difference between the observed and estimated gold

price can partially be attributed to the FEDs introduction

of the Evens rule in Dec 2012. This rule couples monetary

policies with inflation and unemployment. Where

previously investors expected 3 years of continuation of

the current monetary policies, this now becomes

uncertain, surprising the gold price. However, this is not

quantifiable and thus is not included in the gold regression

model.



The model to estimate the gold price is

not very intuitive. Several steps are

necessary to estimate its price.. The change in the real interest rate must be calculated

based on estimations for short-term interest rates andinflation.

2. The change in the USD value of the currency basket 4

must be calculated based on estimations for the rate of

the USD against the EUR, RMB, JPY and INR.

3. The increase in the MB, both in the US and the Euro

Zone, must be estimated. The EZ MB must be

converted to USD and added to the US MB. Next, the

12 Month Moving Average of the combined MB must

be calculated.

4. The value Merrill Lynch corporate bond total return

index BBB minus AAA must be calculated.

The following are the December 2012 starting values for

the 2013 estimation:

• Average gold price: $1688.53 /oz

• Quantity of Money: MB US: $2650B, MB EZ: 1626B€

and the combined 12M moving average: $4809B

• Inflation and Interest Rates: CPI Nov 1.77%, 1YTreasury: 0.16%, Real Interest Rate: -1.57%

• Market Risk Meaures: Bond AAA index: 545.2 and Bond

BBB index: 674.6, Indice difference: 129.41

• Basket4 value of 89.39, based on exchange rates:

USD:EUR 0.7624, USD:JPY 83.64, USD:RMB 6.233,

USD:INR 54.67

56

GOLD PRICE ESTIMATES

The general view is based on the following assumptions:

. The FED BS increases to $3923B. US MB increases to $3582B (remains 91% of BS).

2. The ECB BS increases to € 3472B. EZ MB increases to €1873B (remains 54% of BS).

3. The Combined MB increases to $6375B. The MA12 increases to 5583 (+16.8%).

4. USD remains almost unchanged (+0.34%) against a basket of 4 currencies, EUR:USD=1.30, JPY, RMB, INR unchanged

5. Real interest rate remains unchanged at -1.61% (0% change). 1Y Treasury remains at 0.18% and inflation at 1.8%.

6. The BBB-AAA bond spread remains unchanged at 129 points (0% change).

$1890 (+11.9%)

GENER AL VIEW

The most expected scenario is a

continuation of current developments. A deal for the US fiscal cliff is made and will not plunge the

US economy in a recession, partly due to an increase in

monetary easing. The FED buys $85B per month of assets

hroughout 2013.

The EZ will not break up. Greece does not leave and Spain

does not request a sovereign bailout. The ECB starts

buying periphery debt with its OMT program at an annual

rate of 450B€. Inflation remains at 2.25% and short-term

nterest rates remain at 0.18% in the US and the EZ. The

EUR:USD is stable at 1.30 throughout 2013 and the USDtrengthens slightly against a basket of currencies. The bond

ndex value difference remains unchanged to reflect no

change in risk.

If current trends continue, then the goldprice will remain below the important

resistance value of $1890, the nominal

record price set in 2011.

At the end of 2013, the gold price will be:



ECONOMIC R ECOVERY, bear ish gold scenario

$1580 (-6.4%)

A global economic recovery will likely be a

negative scenario for the gold price. A global

recovery will be led by the US, with the USD strengthening

against all currencies in the Basket4. The EUR:USD willdecrease to 1.20. Inflation will increase to 2.5%, while

hort-term interest rates remain at 0.25%.

Higher inflation and decreased economic pressure will lead

o a halt of all monetary easing programs. The balance

heet and monetary base in the US and EZ will remain

table (but shrink in USD terms). Finally, the bond index

value difference will decrease with 80 points to reflect the

ower risk.

The bearish gold scenario is based on the following assumptions:

. The FED BS remains $2903B. US MB remains at $2650B in 2013 (91% of FED BS).

2. The ECB BS remains stable at €3022B. EZ MB remains stable at 1630B€ in 2013 (54% of BS).

3. The Combined MB decreases to $4614B. The MA12 increases to 4704 (-1.6%).

4. USD strengthens (+7.3%) against a basket of 4 currencies (EUR:USD=1.20, USD:RMB=6.50, USD:JPY=90.00,

USD:INR=60.00).

5. Real interest rate decreases with (-0.64%) to -2.25%. 1Y treasury increases to 0.25% and inflation increases to 2.5%.

6. The BBB-AAA bond index value decreases with 80 points (-38%).

57

2013 would see gold pr ices near the 2012

low $1540. At the end of 2013, the gold

pr ice will be:

GOLD PRICE ESTIMATES

$2115 (+25.2%)

STAGFLATION, bullish gold scenar io

The stagflation scenario sees inflation

picking up to 2.50% with no economic

growth. Central banks have to step up their monetary

easing programs to prevent a depression, which would lead

o an depreciating USD. The FED will continue to buy

$85B of assets per month. The ECB will buy an annual

B450€ of bonds in its OMT program and Spain will need

B500€ bailout. The USD will decrease in value against the

EUR and JPY, but remain stable against the RMB and INR.

The bond index value difference will increase to reflect

more uncertainty.

The bullish gold scenario is based on the following assumptions:

. The FED BS increases to $3923B. US MB increases to $3582B (remains 91% of BS).

2. The ECB BS increases to €3972B. EZ MB increases to €2142B (remains 54% of BS).

3. The Combined MB increases to $7273B. The MA12 increases to $6015B (+25.8%).

4. USD weakens (-4.4%) against a basket of 4 currencies (EUR:USD=1.40, EUR:JPY=78.00, USD:RMB=6.23,

USD:INR=54.67).

5. Real interest rate decrease with (-0.79%) to -2.40%. 1Y Treasury at 0.10% and inflation increases to 2.50%.

6. The BBB-AAA bond index value increases with 200 points (+55%).

2013 would see the end of the

consolidation phase of the gold pr ice since

2011, as it br eak s thr ough the impor tant

psychological bar rier of $2000. At the end

of 2013, the gold price will be:



The alternative valuation methods used

are based on highly uncertain estimates

and assumptions. The function of the

alternative valuations is to see if the

estimates based on the gold regressionmodel are in the correct range.

An alternative valuation method for gold, is to look at

he gold standard as it was defined in the Bretton

Woods period. One can ask the hypothetical

question, what if the total global money supply would

be backed by the global gold reserve? Since the

definition of the money supply is very broad, I will usehe monetary base (MB), like in the Bretton Woods

period.

The global money supply can estimated using the nine

argest economies combined (EZ counted as one),

which represent 72.68% of GDP in 2011. Given that

hey have a combined MB of $11,243B, I extroplate

hat the global MB is worth $15,450B.

The global MB divided by the gold reserve of 171,000

Tonnes or 5,387 M oz brings the gold price to $2,871/Oz.The MB was considerably lower before 2008, then the

monetary base ballooned. The current high MB makes this

valuation somewhat unrealistic.

However, central banks do not own the complete global

gold supply. They hold only 30,563 tonnes of gold in Sep

2012. Given this quantity, the gold price would be

$13,450/Oz

The total gold reserve is not as important of a factor to

valuate the gold standard as the annual growth rate of the

gold supply. To have a stable gold standard, the growth of

the gold supply (1.6% as of 2011) must match the growth

in the global population (1.1% as of 2011) along with the

growth in global labour productivity (2.5% in 2011).

If a country’s gold supply grows slower than these two

measures, there would be too little money, which would

result in deflation. To counter this scenario, central banks

would decrease the gold reserve per currency unit. They

would be able to once again manipulate the money supply,

which would defeat the purpose of the gold standard.

The abovementioned situation creates a great arbitrage

opportunity for a spectulator who is trading long gold and

short currency. The spectulator waits for the central bank to devaluate the amount of gold per currency unit. Then,

he sells his gold for a large amount of currency.

However, with the continues growth in debt of almost all

governments, along with money debasements, it would not

be impossible that people loose confidence in the

monetary system and demand the return of some form of

gold standard.

10,350 USD/Oz

Based on 8134 tonnes reserve,

$1778.50 gold price,

MB 2011: $2,653B

6,700 USD/Oz

Based 10,787 tonnes reserve,

EUR:USD 1.30,

MB 2011: €2,276B

28,500 USD/Oz

Based on 4000 tonnes est. reserve,

USD:RMB 6.35,

MB 2011: Yuan 22,800B

13,450 USD/Oz

Based 30,563 tonnes reserve,

MB 2011:€

15,450B



1,568 USD/Oz

Based on Gold/ Brent ratio of 15.40

0

5

10

15

20

25

30

35

Gold / Brent ratio

The US Energy and Information Administration (EIA)

estimates an average Brent crude price of $103 in 2013

based on sluggish global growth. Although oil prices are

more difficult to accurately predict than gold prices,

Chart 26: Gold price per Oz divided by Brent crude price per barrel

How many barrels of Brent crude

can 1 Oz of gold buy? Both

commodities are expected to risewith higher inflation.

Gold / Br ent ValuationGold and Oil share some characteristics, such as

performing well in times of high inflation and uncertainty.

Although the two commodities are slightly correlated

0.35), crude oil is mainly dependent on economic cycles

as shown in Chart 26.

The average Gold / Brent ratio for the period of 1990 to

2012 average is 15.40. It is either driven by gold strength

or oil weakness at different periods. Thus, the gold/brent

valuation is not very reliable for estimating the gold price.

59

At the end of 2013, the gold price will be:

GOLD/BRENT VALUATION



GOLD INVESTMENT RISKS

Phy sical gold does not have counter-

par ty r isk . Theor etically, paper gold has

this risk bu t no futur e contrac t or ETFs

traded in the US has defaulted so far.

Phy sical-backed ETFs ar e a r elatively new inves tment categor y, which makes it

dif ficult to quantif y the associated risks.

However, all types of gold inves tments

have market r isk , which means a dr op in

the gold pr ice.

Economic Recover y

ronically, an improving economy is the biggest risk for gold

nvestments. Since US monetary policies are linked to

nflation and employment with the Evans rule, investors are

unsure if or when the ZIRP, QE3 and QE4 programs will

be terminated. However with a total government debt of

over $16T and a annual deficit of over $1T in 2012, it is

unlikely the government can afford to put a halt to all these

programs.

Economic recovery in Europe could mean periphery

countries such as Spain can issue new bonds in the

nternational market without the support of the ECB and

ts OMT program. An end to the various monetary easing

programs stops the expansion of the MB, which the biggest

actor driving a higher gold price.

Str onger USDSince the US leads most global recoveries, the USD is likely

o strengthen against most other currencies. The USD can

also strengthen during a global financial crash because it iseen as a safe haven. A stronger USD is expected to drive

down the gold price..

Fiscal Clif f The US Fiscal Cliff is the end of temporary tax brakes,

including Payroll tax cuts and Bush income tax cuts, the

introduction of new taxes related to Obama care and the

decrease in government spending. These rules were set in

place during the 2011 negotiations on raising the debt

ceiling, for the reason that deficit spending should not run

out of control. Unless a deal is made between Democrats

and Republicans, the Fiscal Cliff scenario will automatically

be enabled on Jan 2013. If the program is unchanged, it

could have an enormous drag on the economy, thus

plunging the US into a recession. On Jan 2th 2013 a deal

has been made to delay the fiscal cliff decision with 2

months.

Current political gridlock makes it difficult for US politicians

to reach an agreement beforehand. The Fiscal Cliff iscombined with raising the debt ceiling from its current

value of $16.4T. In the summer of 2011 this led to a

mini-crash, which was actually bullish for the gold price.

Therefore these events are a gray swan, a known future

event with a unknown outcome for the economy and the

gold price.

India and China’s Slowing demand

The slowing growth of the Indian and Chinese economies,which account for half of the consumer demand, can

decrease the global demand of gold along with the price of

gold. Also taxing gold imports, trade or possession might

decrease demand. For example, on Jan 17, 2012, India

doubled its import tax on gold and silver from 2% to 4%.

Since India is the largest gold consumer market and

imports most of its gold, the tax raise could hurt demand

and thus gold prices.

60



A financial bubble is an asset trading far above its intrinsic

value and historical average with high volume. Bubbles

often take several years of high price increases to spike up

o a record high. Prices are unsustainably high and soon

elling starts, followed by panic and a collapse in the price.A bubble can occur because the majority of investors do

not recognize them as such. Bubbles can be easily

dentified only in hindsight.

Bubbles are driven by two basic human emotions: greed

and fear. The Japanese stock and housing or US dot com

bubbles were driven by greed. The gold price bubble in

970-1981 was driven by fear of high inflation and money

debasement.

n 1841, the Scottish journalist Charles Mackey wrote the“Extraordinary Popular Delusions and the Madness of

Crowds”. The book explains the bubble phenomenon.

Although it is more than a century old, its description of

he bubbles, such as the Dutch Tulip mania, follow the same

patterns as bubbles today. History is filled with other

bubbles. Some recent examples include the gold price

bubble of 1970 to1981, Japan housing and stock bubble of

970 to1992, US dot com bubble of 1990 to 2002, Crude

oil of 2001 to 2009 and US housing of 1970 to 2009.

A bubble usually has four distinctive phases.

1. Stealth phase: The asset is undervalued and trading

volume is low.

2. Awareness phase: Investment in the asset starts to get

attention of professionals, but not the public. Prices are

rising but still near the intrinsic value of the asset.

3. Mania phase: Many investors chase the asset, which is

detached from its fundamental value. Theories crop up

with the justifications of “this time it’s different”. This

must be accompanied by a substantial price increase.

4. Blow-off phase: Investors realize they held an asset far

above its intrinsic value and demand at the same time

as prices collapse.

The 4 phases of a financial bubble

Currently, the gold price is at the end of the awarenessphase or start of the mania phase. Gold prices have not

seen extreme volatility, but prices have been steadily rising

over the past decade. More news on gold is appearing in

the media and the idea of a gold investment is starting to

take root with the public psyche of developed nations.

Conversely, Asian and Middle Eastern consumers have a

long tradition of gold investment and are very aware of

gold investments.

When central banks lose faith in each other and want to

invest in larger gold reserves instead of foreign currencies

and debt, the gold price is bound to move to the mania

phase.



Chapter 7 explains sever al inves tment alternatives to gold. The best k nownalternatives ar e other pr ecious metals such as silver and platinum. Although ther e is

ndus tr ial demand for these subs titute metals, their mar kets ar e of ten much smaller

than the gold market. Silver has ear ned the name Devils Metal by silver traders

because of its high volatility and small and easily manipulated mar ket. The other

alternative is to inves t in equity of gold pr oducing companies. If their r evenues

ncr ease fas ter than their costs, then these companies can be sound inves tments.

However, r ising budgets for explor ation and development and higher cash cos t candes tr oy pr ofits.

Chapter 7ALTERNATIVE GOLD INVESTMENTS

62

American Eagle silver coins are the most held silver coin and still minted today.



Silver DemandDemand for silver remained stable in the last decade,

hovering around 24,000 tonnes per year. For centuries,

ilver has been valued as jewelry and viewed as investment

n the form of coins, medals and silverware. But is less

perceived as a financial asset compared to gold. Silver is

mainly used for industrial purposes. Compared to other

precious metals, silver has the highest electrical

conductivity. And so, it is often used in electronics. Silver

also has one of the highest optical reflectivity. It is used in

mirrors and a technique called silver photography. A cell

phone contains around 0.2gr and a laptop 0.75gr. A solar

panel, a growing source of renewable energy, holds even

more silver, almost 20gr. It is the largest growing sector in

ilver demand.

0

5,000

0,000

5,000

20,000

25,000

30,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Scrap silver

Net Gov Sales

Mining

0

5,000

0,000

5,000

20,000

25,000

30,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Coins&Medals

Silverware

Jewelerry

Photo

Industrial

Unlike gold, only a small fraction of silver is recycled back.

Due to its modest price, many consumers in EMs can buy

silver. But, demand from central banks is relatively small.

Silver Supply Most silver is produced as a by-product of processing and

smelting copper, gold and lead-zinc ore. But as of late, silver

mines have begun production due to its steady price

increase. Around 400,000 tonnes of silver reserve remains

underground.

EMs like Peru and Poland hold the largest supply. Mexico is

the top producer of silver.

Source: The Silver Institute

Chart 28: Annual silver demand in tonnes

63

Chart 27: Annual silver supply in tonnes



Chart 29: Price of SLV ETF in USD

Silver as a Cur r ency Silver can be viewed as a currency, just like gold. Silver

currency code is XAG. However, the silver market is

maller than the gold market and silver is not the store of

value and save haven metal that gold is.

Silver Trus t ETFt is hard to get information on the OTC silver market.

Unlike gold, the LBMA has never published any information

on the OTC silver trade. Judging by the volume silver

utures trade at the CME, the silver futures market is much

maller than the gold futures market. However, there is a

decent volume in the iShares Silver Trust ETF (NYSE:SLV).

This ETF is the largest silver backed investment fund. In

Dec 2012, SLV held 9900 tonnes in physical silver worth

$11B.

On Apr 2006, the price of a share in the SLV ETF was

equal to the price of 1 Oz of silver. On Dec 2012, the

price difference is $1.08 because of the annual

management fee of 0.50%, which is deducted from the

price of the ETF.

Silver Pr ice ManipulationSince the value of the silver market is relative small

compared to the gold market, it has a long history of price

manipulation. The US government bought silver to support

its miners until 1945 and started selling it until the US

government ran out of supply in 2002. More information

can be found in the chapter on gold market manipulation.

64

Chart 29 shows the price of the SLV ETF in USD since its

inception in April 2006. SLV crashed significantly in 2008,

wiping of half of the price. SLV recovered strongly during

the QE1 and QE2 programs to reach a speculative high of

48.35 in 2011.

0.00

5.00

0.00

5.00

0.00

5.00

0.00

5.00

0.00

5.00

0.00

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

SLV

Lehman

10.95

QE1

10.19

End QE1

17.14

QE2

24.25

End QE2

33.84

High

48.35QE3

33.61



0

5

0

5

0

5

0

5

0

5

0

5


Gold / Silver Ratio

Investors use the Gold/Silver ratio as a method to validate

whether silver is cheaper or more expensive than gold.

The ratio measures the amount of Oz of silver that can be

bought for 1 Oz of gold. In this research study, it is

calculated as:

Gold/Silver ratio = London 3PM fixing gold price / Londonfixing silver price Over the last three decades, the ratio has swung wildly. The

lowest ratio of 31.44 was recorded on Apr 28, 2011 when

the price of silver rose to a record of $48.70 / Oz. The

highest ratio was recorded on Oct 16, 2008 during the

Lehman Brothers bankruptcy when the silver price

collapsed to $9.99.

In general, Gold/Silver ratio rises in times of uncertainty

because investors flee to the safety of gold. In times of economic recovery, the ratio drops because investors sell

gold to buy more risky assets and industrial demand for

silver rises.

Its average ratio from the Jul 2007 to Dec 2012 period

was 57.46. On Dec 31, 2012, the ratio was 55.56 which

indicates silver is fairly valued compared to gold.

Chart 30:The Gold / Silver Ratio in the period July 2007 to Dec 2012

65

The silver price is highly correlated

with the gold price. However, it is

ess suitable as a store of value than

gold. It has a relatively low value per ounce. It takes more space to store

silver. And unlike gold, it oxides

over time. And because it has

significant industrial use, its price is

more dependent on economic

cycles. These characteristics makesilver behave like a combination of

gold and industrial metals.

55.56Gold: / Silver R atio

on Dec 31, 2012



n and Out of Sample Per iodsThe methodology of creating the silver regression model is

imilar to the gold regression model. The model is created

using data from the in-sample period which spans July

2007 to Dec 2011. To make sure the silver regression

model is accurate, I use the out of sample period from Jan

2012 to Nov 2012 to estimate the silver price. This

estimate is then compared to the observed silver price.

draw on monthly data for this study since the factors are

published monthly. All variables where significant at the 5%ignificance level. They also passed standard tests for serial

correlation, heteroskedasticity and collinearity.

66

(%ch SILVER) = 1.5544*(%ch GOLD) + 0.4864*(%ch SP500)R ²=0.6370, Adj R ²=0.6300, n=54 ( July 2008 to Dec 2011)

The silver price was estimated using a

regression model with two factors. The

gold price captures the investment side

of silver, while the S&P500 Index

captures the industrial demand for silver.

The regression model suggests that silver is both a

precious metal due to its robust relationship with the gold

price and an industrial commodity because of its strong

relationship with the S&P500. Because the factor 1.55 on

he change in the gold price, it is implied that the silver

price is more volatile than the gold price.

The equation above uses the following parameters:

. % Change SILVER is the percentage change in the average monthly London fixing silver price.

2. % Change GOLD is the percentage change in the average monthly 3 p.m. London fixing gold price.

3. % Change SP500 is the percentage change in the S&P500 Index.



The observed monthly average London fixing silver price and the estimated silver price are illustrated in Charts 31 and

32, for the in-sample period and out of sample period, respectively.

For the out-of-sample period, the estimated silver price is higher in every month than the actually observed silver price.

On Dec 2012 the silver price estimation was 11.21% higher than the gold price. Although the silver regression model had

a better fit of data than the gold regression model, as measured by the R ² , the out-of-sample period shows the silver

regression model to be inaccurate. I will attempt to improve the accuracy of the silver regression model with follow up

research.

67

Chart 31: The actual and estimated average monthly silver price in the in sample period

Chart 32: The actual and estimated average monthly silver price in the out-of-sample period

0

5

10

15

20

25

30

35

40

45

Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

Silver London fixing

Silver Estimate

12.91

30.41

26.21

26

27

28

29

30

31

32

33

34

35

36

37

38

Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oc t-12 Nov-12 Dec-12

Silver London fixing

Silver Estimate

35.55

31.96

29.32



The most likely scenario for the silver price is the continuation of current trends.

. The gold price increases 11.9% to $1890/oz.

2. The S&P 500 increases 4% to the 2012 high at 1480.

GENER AL VIEW

The bearish scenario for silver is based on the bearish scenario of gold.. The gold price decreases -6.4% to $1580/oz.

2. The S&P 500 rises 10% to the all time high of 1565

ECONOMIC R ECOVERY, bear ish gold scenario

The bullish scenario for silver is based on the bullish scenario of gold. . The gold price increases 25.5% to $2115/oz.

2. The S&P 500 falls -15.6% to 1200, near the 2011 low

STAGFLATION, bullish gold scenar io

68

Chapter 7 estimates the silver price at the end of 2013 based on the silver

regression model. Unlike the gold regression model, the silver regression model is

easy to use. It is dependent on two intuitive factors, the change in the gold price

and the change in the S&P 500. In Dec 2012, the average silver price was 31.96 and

the average S&P 500 index value was 1422.

At the end of 2013, the silver price will be:

Silver $38.50 /Oz (+20.5%)


Silver $30.40 /Oz (-4.9%)


Silver $42.10 / Oz (31.7%)



The most likely scenario is the continuation of current trends.

. The gold price increases to $1890/oz.

2. The Gold / Silver Ratio is 57.46, which is the average of the July 2008 to Dec 2012 period.

GENER AL VIEW

With higher global economic growth, gold is sold by investors in pursuit for more

risky assets and the industrial demand for silver increases. These factors bring down

the Gold / Silver Ratio to a record low value.. The gold price decreases to $1580/oz.

2. The Gold / Silver Ratio is 31.44, which is the lowest of the July 2008 to Dec 2012 period.

ECONOMIC R ECOVERY

A scenario with no economic growth and increasingly large monetary easing

programs drives investors to the safety of gold. Silver along with other risky assets

will drop in value, pushing the Gold / Silver ratio to a record high.. The gold price increases to $2115/oz.

2. The Gold / Silver Ratio is 83.79, which is the highest of the July 2008 to Dec 2012 period.

STAGFLATION

69

An alternative silver price estimate model is based on the Gold / Silver Ratio. The three gold scenarios are used as a

basis to set the gold price. An average, high and low value for the Gold / Silver Ratio is then used in the different

cenarios to estimate the silver price.

The Economic Recovery Scenario and the Stagflation Scenario predict silver prices that are the opposite of the silver

price estimates calculated with the silver regression model. By looking at the historical prices, gold and silver usually

move in the same direction, which makes the alternative silver price estimates less realistic than the estimates from the

ilver regression model.


Silver $32.85 /Oz (+2.8%)


Silver $50.30 /Oz (+57.5%)


Silver $25.25 / Oz (-21.0%)



113

76

36

Catalysator

Jewelry

Others

Platinum investments are more volatile than gold because

of their stronger association to global economic growth,

mainly the car industry. Platinum prices can react to specific

circumstances, like unrest or nationalization treats of South

African mines.

nvestments in platinum can be made by purchasing

platinum proof coins or platinum backed ETFs. The largest

platinum ETF is ETF Securities Platinum backed ETF

NYSE:PPLT), which is backed by platinum bullions and had

Net Asset Value of $770M in Dec 2012.

nvestors have the choice of purchasing

other precious metals aside from gold

and silver. The Platinum Group Metals

(PGM) of Platinum, Palladium and

Rhodium are often found in the same

ore and have similar uses. They can react

to very specific factors which make

them unsuited for most investors.

Platinum is a small market and the

markets in Palladium, Rhodium, Osmium

and Iridium are vir tually non-existing.

Platinum InvestmentPlatinum is much more rare than gold. South Africa

contains 80% of the worlds platinum reserve. In 2010, 245

onnes was produced. The metal is used in catalytic

converters of cars and jewelry.

Platinum can be har d to dis tinguish

f r om Silver or Palladium

Palladium InvestmentPalladium is similar to platinum and used mainly in catalytic

converters of cars and electronics. South Africa and Russia

produce almost the complete supply. Although its cheaper

to use other metals, palladium can be used in jewelry to

create “white gold”.

One can investment in palladium by purchasing Palladium

coins or Palladium backed ETFs, like ETFS Physical

Palladium (LSE:PHPD) or ETFS Palladium Shares

(NYSE:PALL). By the end of 2012, PALL had a Net Asset

value of $501M, backed by Palladium bullions.

Rhodium Inves tmentUnlike Platinum or gold, Rhodium is not metal-like.

Surprisingly, it is brittle and thus not suited for coins.

Rhodium production was less than 30 tonnes in 2010, of

which 80% came from South Africa.

More than 80% of all Rhodium is used in catalytic

converters. It is used in white gold to give it a shiny surface

and also in fibre optical cables. Rhodium can be salvaged

from used uranium but the procedure is complex and

expensive.

Rhodium is a by-product of the PMG and shares the same

investment characteristics as Platinum. There is no efficient

way to invest in Rhodium. Kitco sells Rhodium with a $100spread on a $1250 price.

70



The XAU and HUI indices are used for

benchmarking the gold producing

ndustry. The GDX is an ETF that gives

nvestors exposure to a broad range of

gold mining companies.

The Philadelphia Gold and Silver Index (NYSE:XAU) is a

gold and silver mine index. The XAU index consists of 16

publicly traded companies on the NYSE. These companies

are active in gold and silver mining. The index is a market

cap weighted index. It holds a large position in FCX, which

s primarily a copper producer.

The index is used for reference and investments in the

XAU index (and the Gold Bug index) can only be done

with options.

The NYSE/ARCA Gold Bug Index (NYSE:HUI), referred to

as HUI, is an alternative index to the XAU. It is a basket of

unhedged gold companies traded on the NYSE. HAU does

excludes gold and silver producing companies that hedge

gold production longer than 1.5 years. While the twoindices are highly correlated, the biggest difference is that

the HUI does not hold FCX. Having unhedged gold

producers, it is likely that HUI will outperform the XAU

during periods of increasing gold prices.

A Mozambican gold miner



GOLD MINE ETFS

Gold Miner s ETF GDXThe XAU and HUI indices are for reference and cannot be

used as an investment. There are alternatives to these

ndices. Investors can buy the basket of all shares of the

XAU and HUI indices on the NYSE. A more convenient

alternative is the Van Eck Market vectors Gold Miner ETF

NYSE:GDX). Compared to other gold mining ETFs, GDX

s the only one with good liquidity and thus cheap to trade.

XAU HUI GDX

Barrick Gold (ABX) 21.98% 15.21% 13.43%

GoldCorp (GG) 14.92% 13.59% 12.15%

Newmont (NEM) 14.13% 10.41% 9.03%

Kinross (KGC) 7.73% 4.27% 4.49%

AngloGold Ashanti (AU) 6.55% 4.49% 4.69%Agnico-Eagle (AEM) 4.65% 4.61% 5.11%

Yamana (AUY) 3.47% 4.49% 5.16%

Goldfields (GFI) 3.98% 4.53% 4.25%

Randgold Res (GOLD) 2.34% 3.98% 4.69%

Buenaventura (BVN) 0% 5.39% 4.50%

Harmony (HMY) 3.13% 4.37% 2.06%

Silver Wheaton (SLW) 1.05% 0% 5.20%

Eldorado (EGO) 0% 0% 4.25%

Freeport McMorran (FCX) 12.92% 0% 0%

Total 83.93% 75.34% 79.01%

72

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0.20

0.22

0.24

0.26

XAU / Gold

Chart 33: Gold & silver index XAU divided by the gold price

Chart 33 shows the amount of gold in Oz that one unit of

he XAU index can buy. The decreasing amount indicates

hat gold mining stock is underperforming a gold

nvestment. There is little reason to believe this will change

n the near future.

Table 9. Overview of most positions for the XAU and

HAU indices and GDX ETF in 2011



To determine if an investment in a gold producing

company is a good alternative for a gold investment, I first

had to determine how gold mines are valuated. Valuating

mining companies is different from valuating most other

companies. After a certain period, a gold mine is depleted.

As a consequence, traditional valuation ratios such as P/E

can be misleading. If a mining company has a P/E of 10 and

dividend payout ratio of 50%, an investor can earn his

nvestment back in 20 years. If a mine is depleted in 8

years, the payout ratio can be considerably reduced.

VALUATING GOLD PRODUCING COMPANIES

73

Cash Cos tTo valuate a mining company, a relatively easy method is

examine the cash cost of a company. This cost is the price

of extracting 1oz of gold from the ground without

overhead costs (Depreciation and General & Admin) and

nclude exploration, royalties, administration cost etc. Since

gold is sold on the global market for the same price, the

company with the lowest cash cost is expected to make

he highest profits. However, the gold reserve a company

holds is its most valuable asset and is unaccounted for in

he cost.

The cash cost is the cost necessary for a mining company

o produce 1oz of gold, excluding its overhead and

depreciation and depletion cost. Labour usually accounts

or half of the cash cost. Rising cash cost puts a downside

protection on the gold price. When cash cost is higher

han the gold price, company will halt production until the

gold price increases.

Net Asset ValueA more inclusive method to valuate a mining company is

o estimate its Net Asset Value (NAV), which is the Net

Present Value (NPV) of its future cash flows and other

balance sheet items. The future Free Cash flow for each

mine is based on an estimated future gold price, future

costs, annual production rate and gold reserve. To calculate

he NPV of these cash flows, a discount rate must include

various risks including financial risk (bankruptcy), political

risk (nationalization and strikes) and geological risk

earthquakes or floods).

No investor wants to pay more for a mining company than

the worth of its NAV. But it is common for the Price /

NAV to hover around 1.5 to 2.5. This ratio is based on the

leverage effect of gold mines. When the gold price

increases by 20% from $1500 to $1800 and a company’scash cost remains at $600, its profit margin increases by

33% from $900 to $1200. Therefore, this leverage must be

included in the valuation. The following are steps to make a

realistic valuation when buying a mining company:

1. If the market value of a company is higher than its NAV,

the investment is a speculation that the gold price will

increase.

2. Apply the Black Sholes option pricing model to

calculate an “option value” for the gold reserve.

3. Add the option value to the NAV.

Nationalization

Argentina, Venezuela and Bolivia have recently nationalized

companies. Recently, politicians in South Africa have

threatened nationalization. It can be difficult to quantify the

threat of gold mine nationalization. When the gold price

rises, so does the envy of some politicians. As the gold

price increases, the chance that a government will

nationalize the mine directly, or indirectly through high

royalties, may increase too.

Gold Pr ice SpeculationInvesting in gold mine stock is in effect the act of

speculating on a rise in the gold price. During the period of

June 2007 to Sep 2012, an investment in gold had a

superior return and lower volatility than an investment in

mining stock. Therefore, it can be assumed that investing in

assets designed to speculate on the gold price, namely

Gold Futures, Gold ETFs or options on those, is a better

investment than stock.



compar e the his tor ical per formance and charac teris tics of a gold inves tment to

the main alternatives, silver and equity in gold producing companies in Chapter 8.

The purpose for this compar ison is to discover the r eturn and associated r isk of

these investments and to deter mine is they ar e a safe haven inves tment. In or der to

do so, I compar e gold, silver, mining equity, the S&P500 index and the AGG Bond

ndex ETF.

Chapter 8

INVESTMENT PERFORMANCE

74



Gold Per for mancechoose ETFs for all asset classes to impartially compare

precious metals, equity of mining companies and equity

and bond indices.

. GLD: State Street SPDR Gold Trust ETF2. SLV: iShares Silver Trust ETF

3. GDX: Van Eck Market vectors Gold Miners ETF

4. SPY State Street SPDR S&P 500 ETF

5. AGG iShares Total US Bond Market ETF (previous

known as Lehman Bond index)

The return on these ETFs include management fees and

have their paid out dividends reinvested.

Chart 34 displays the performance of these five ETFs.

While most asset classes collapsed after the LehmanBrothers bankruptcy in 2008, the gold price and bond

ndex decreased only modestly. Both gold and bonds

recovered quickly by the end of 2008, while other asset

classes only bottomed in march 2009. Equity, both in the

broad S&P500 index and the gold mine index, had the

worst performance, with a minimal gain in the 5½ year

period.

GOLD PERFORMANCE

Chart 34: Relative performance of gold and comparable investments in the period July 2007 to Dec 2012

75

25%

50%

75%

00%

25%

50%

75%

200%

225%

250%

275%

300%

325%

350%

375%


Gold (GLD)

Silver (SLV)

Mining stock (GDX)

S&P500 (SPY)

Bond index (AGG)

249%

232%

140%

118%

104%



Silver has different characteristics to that of gold. It has

many industrial uses, thus more dependent on economic

cycles than gold. The silver market is much smaller than the

gold market, which result in larger price swings. These

actors make silver more volatile, thus a riskier investment.

Silver characteristics can benefit investors. Chart 35

lustrates that silver outperforms gold in a bull market but

ilver prices plunge in bear markets, lacking the safe haven

tatus of gold. Active traders can switch between gold and

ilver to take advantage of bull and bear markets. However,

ong term stable investors should prefer gold over silver.

Chart 35: Annual return on several assets

40%

30%

20%

10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2007 2008 2009 2010 2011 2012

GLD

SLV

GDX

SPY

AGG



However, nationalizing any asset drives out investment.

Instead of fully nationalizing, governments can raise levies,

or force a majority of ownership to a national company.

Nationalization makes investing in mining companies less

desirable for investors, in turn, decreasing the value of the

companies.

Rising labor cost causes mining equity to underperform. As

soon as workers see record high gold prices, they demand

more reimbursement and can go on strike, like in South

Africa in Sep 2012. Unrest usually suppresses the gold

production and also profits of mining companies. But

unrest can increase the price of the affected commodity,

like gold or platinum.

Equity in gold and silver producing companies lag behind

he price of gold and silver for several reasons.

The increasing cash cost of mining companies is one

reason. A long time ago, easy to reach gold was mined.

The remaining gold ore is of an increasing lower quality,

containing less gold per tonnes of ore. Hence, the cost of

abor and energy to produce an Oz of gold is much higher

han just a decade ago. It is unlikely the cash cost will

decline in the future.

The increasing exploration budgets and capital expenditure

s another reason. Companies need to develop new mines

o replace the depleted older mines. These budgets grow

aster than the gold price, hurting the profits of miningcompanies.

The envy factor is noteworthy reason for mining

companies lag behind the price of gold and silver. Hedge

und manager Hugh Hendry clarifies the envy factor

effortlessly. “There is no rationale for owning gold mining

equities. It is as close as you get to insanity. The risk

premium goes up when the gold price goes up. Societies

are more envious of your gold at $3000 than at $300. And

here is no valuation argument that protects you against

he risk of confiscation.”

Labor unrest at Lonmin’s Marikana platinum mine, where clashes

in pursuit of higher pay resulted in 34 deaths.



Gold is thought of as purely a financial investment or

urrency. Conversely, base metals have only an industrial

urpose. Base metals are represented by the Powershares

Base Metals Fund (NYSE:DBB), which consists of Copper,

Aluminum and Zinc future contracts.

The correlation matrix below shows the spectrum of

metals ranging from gold to base metals. Silver and

latinum have a higher correlation with gold. Palladium and

opper are more correlated to base metals.

Gold Silver Platinum Palladium Copper

Base

Metals

Brent

Crude S&P500 GDX EUR:USD Bonds

Gold 1.00 0.80 0.72 0.55 0.26 0.25 0.35 0.03 0.80 0.40 -0.04

Silver 0.80 1.00 0.72 0.65 0.44 0.46 0.49 0.29 0.76 0.45 0.05

Platinum 0.72 0.72 1.00 0.79 0.60 0.64 0.56 0.52 0.70 0.46 -0.08

Palladium 0.55 0.65 0.79 1.00 0.61 0.64 0.52 0.61 0.62 0.41 -0.16

Copper 0.26 0.44 0.60 0.61 1.00 0.91 0.50 0.53 0.42 0.39 0.00

Base Metals 0.25 0.46 0.64 0.64 0.91 1.00 0.51 0.56 0.42 0.43 0.04

Brent

Crude 0.35 0.49 0.56 0.52 0.50 0.51 1.00 0.43 0.45 0.39 -0.03

S&P500 0.03 0.29 0.52 0.61 0.53 0.56 0.43 1.00 0.35 0.34 0.18

GDX 0.80 0.76 0.70 0.62 0.42 0.42 0.45 0.35 1.00 0.47 0.00

EUR:USD 0.40 0.45 0.46 0.41 0.39 0.43 0.39 0.34 0.47 1.00 0.11

Bonds -0.04 0.05 -0.08 -0.16 0.00 0.04 -0.03 0.18 0.00 0.11 1.00

Correlation matrix based on weekly returns between July 2007 and Dec 2012

The GDX mining equity ETF has a higher correlation with

gold than the S&P500. Hence, gold is the main driver of

the price of mining stock rather than the broad stock

market.

Bonds, as represented by the AGG ETF, have no

correlation with precious and base metals. In Chapter 9, I

explain why bonds are a good asset to diversify a

commodity based portfolio.



The three major statistical methods to measure and

quantify the financial risk of an investment are Standard

Deviation (Stdev), Value at Risk (VaR) and the SP ratio.

Stdev shows how spread-out the measured data is from

the average (mean) or expected value. In finance, Stdev

measures volatility, or how much returns can differ fromthe mean over a given period. VaR quantifies the

maximum potential loss over a period with a certain

probability. It is often used in risk management.

Most investors guard against an investment with higher

expected returns when the risks associated with it rise

even faster. Since the returns of the investment must be

compared to the associated risks, performance is calculated

using a r isk adjusted return. The SP ratio is the best

measure to assess financial performance.

The SP ratio = (Return – RF-rate) / Standard d ev iat ion

79

Table 10: Risk adjusted returns of several investments

RISK ADJUSTED RETURNS

Gold and bonds, which are represented by the AGG ETF,

had the best SP ratios during the 2007 and 2012 period.

Silver had a return to similar gold but with a higher

volatility. Gold mining equity, such as the S&P500 equity

index, had a poor SP ratio.

Bonds have a reverse relationship with interest rates.

During the 2007 to 2012 period, interest rates dropped

considerably. Thus, bonds profited from the decrease in

interest rates. Since interest rates dropped at a record low,

they have little room to drop further. And so, I expect that

in 2013 the return on AGG to be less favorable.

Weekly Data 7/6/2007 to 12/31/2012

GLD SLV GDX SPY AGG

Return 18.16% 16.57% 3.04% 0.74% 6.36%

Stdev 20.52% 38.87% 42.18% 23.08% 6.63%

0D VaR 95% -5.99% -10.74% -12.94% -6.59% -1.19%

Sp ratio 0.88 0.42 0.07 0.03 0.94



Chart 36: Relative performance of several assets during the 2011 debt ceiling mini-crash

80

GOLD AS SAFE HAVEN

80%

85%

90%

95%

00%

05%

10%

15%

20%

GLD

SLV

GDX

SPY

AGG

2011 US Debt Ceiling Mini Crashn the summer of 2011, US politicians were in a dead-lock

on the issue of raising the debt ceiling to $16.4T. Their

political indecisiveness triggered a downgrade of US debt

by the S&P. While investors fled to the safety of gold and

bonds, most other assets including silver and mining

tocks plunged. Although the problem was related to theUS government and USD, the USD and US treasuries did

not depreciate. Therefore, gold had the status of a safe

haven, just like treasuries and the USD.

Gold as a Safe Haven

Chart 36 illustrates the relative performance of five assets

ncluding gold, silver, mining stock, S&P500 and bond

ndex over the one month period of Jul 18, 2011 to Aug

7, 2011. Based on relative performance along with risk

measurements and characteristics, I conclude that goldand bonds are safe havens. They protect an investors

capital in troubled times. Silver is not a safe haven. While

t is highly speculative, silver can outperform other asset

classes in a bull market. Since 2013 is expected to be a

gold and silver bull market, active traders can use silver as

a speculative alternative to gold. Finally, gold mining

equity, like other equity is not a safe haven. Gold mining

equity should not be considered as an alternative to a

gold investment.



Supply and demand characteristics look favourable for the

gold price. Strong demand from consumers of EMs

outstrips stagnant demand in developed economies. Above

and beyond the shift in wealth to EMs, central banks in

hose countries buy increasingly large amounts of gold todiversify their investments. Supply is likely to increase only

modestly in 2013. Supply disruption and nationalization

hreats, such as those that arose in South African, can easily

go global. Indonesia and South American mines are

particularly vulnerable to unrest. Nonetheless, supply and

demand factors have a limited impact on gold prices

compared to that of monetary polices.

nstitutional investors view gold as a currency and trade itat their currency desks. Central banks report on their gold

reserves as part of their foreign currency holdings. Gold as

a currency pays no interest but act as a reliable store of

value. Since the electronic or paper traded gold market is

very large compared to the physical gold market, prices are

determined on the electronic market and driven by factors

such as inflation and interest rates, money supply, currency

rates and financial market risk.

There are many similarities between the current financialcrises in the US and Europe and the situation in Japan a

decade ago. Therefore, it seems likely that the US and

Europe will continue on the “Japan scenario”, with endless

monetary easing programs, ZIRP and a stagnant economy.

These factors should keep demand for gold as a currency

high throughout 2013.

By the end of 2013, the estimated gold price will be $1890

per oz. (+11.9%). The price increase in 2013 is mainly due

to the ongoing monetary easing policies of the FED and

the ECB. If central banks halt their monetary easing

programs and the economic recovery picks up, the goldprice is expected to decline to $1580 per Oz (-6.4%). In a

stagflation scenario, where central banks increase their

monetary easing programs, the gold price will rise to

$2115 per oz (+25.5%).

The gold price does not show the characteristics of a

bubble. Although its steady rise of the last decade suggests

that it is at the end of the awareness phase and bordering

the mania phase. In the short-term, between the end of

2012 to early 2013, a higher than average volatility in the

gold price is expected. The US fiscal cliff, debt ceiling andpossible Spanish sovereign bailout are possible reasons for

the volatility.

For the long term investor, gold is a better investment than

popular alternatives such as silver or gold mining equity.

Since July 2007, silver had a similar return to gold but it was

much more volatile. It is not a safe haven and silver prices

plunge in a bear market. However, silver outperforms goldin a bull market, making it suitable for active traders. Since

2013 is seen as a bull market for gold, silver can be used as

a more speculative alternative. With the continuation of

monetary easing policies and the S&P 500 index increasing

modestly , the silver price is estimated at $38.50 /oz

(+20.5%) at the end of 2013.

Equity in gold producing companies should not be

considered as an alternative for gold. Rising cash cost and

nationalization treats/ risks make an investment in mining

equity underperform an investment in gold. Mining equity isalso not a safe haven. Finally, an investment in a gold

producing company which is valued higher than its NAV is

essentially a speculation on the increase of the gold price.

Buying gold, gold ETFs or gold future contracts are better

methods to speculate on an increasing gold price.



Mr. Erwin Lubbers, has been a financial analyst and trader with a

focus on commodities, energy and mining companies since 2006. He

received a Masters in Financial management from the Erasmus

Rotterdam School of Management in 2011. He has the Dutchnationality and currently lives in Cape Town, South Africa. Feel free

to contact me at:

[email protected]

www.linkedin.com/pub/erwin-lubbers/24/6b4/b72

This document is featured and updated on my website. For more

information, please visit:

www.goldresearcher.com

would like to thank my wife Dr. Maha Golestaneh for her impeccable English and

putting long hours in editing this document. I would like to thank Tyler Durden for

many great articles, giving me a better insight in the gold markets.

Disclosure

The Author of this GoldResearcher, Erwin Lubbers, is a independent, self employed analyst and trader.

He is not compensated by any company or individual to provide opinion on specific companies or

products. His blogsite goldresearcher.com does not feature any advertisement. Erwin trades long

positions in Gold and Silver Futures, along with short or long positions in EUR:USD.

Disclaimer With respect to ETFs, mining equities, futures, options, warrants and other products, please refer to

your broker or financial advisor as these are regulated financial products. The inclusion of a particular firm does not constitute the endorsement or recommendation of that firm. Goldresearcher has not

examined the financial condition of any firm that may appear in this document. Consumers are advised

to verify all purchase and sale terms and conditions, payment procedures, pricing and costs of other

services offered by a particular vendor. Goldresearcher provides no investment advice or offer any

opinion on the suitability of precious metals, equity or ETF investments. This document does notconstitute an offer to sell or a solicitation to buy. Precious metals markets are volatile. An investment in

precious metals provides no interest or yield. As with any investment, consumers should check with their financial professional regarding suitability, tax consequences and other pertinent matters involving

their own particular financial circumstance, before making an investment.



Supply & Demand data from World Gold Council and Thomson / Reuters GFMS websites

www.gold.org/investment/research/regular_reports/gold_demand_trends/

Gold price in USD, EUR, RMB, Rupee from World Gold Council and Thomson / Reuters GFMS websites

www.gold.org/investment/statistics/gold_price_chart/

Prices of Gold Indices and ETFs from Yahoo Financefinance.yahoo.com/

Several articles about the history and general information of precious metals from Wikipedia

en.wikipedia.org/wiki/Gold

en.wikipedia.org/wiki/Silver

Several articles on website Zerohedge

www.zerohedge.com

Macro economic data, interest rates and inflation from Federal Reserve Economic Data FRED toolresearch.stlouisfed.org/fred2/

GDP of specific countries, IMF World Economic Outlook Database

www.imf.org/external/ns/cs.aspx?id=28

FED, ECB Balance sheet from respective ECB and FED website

dw.ecb.europa.eu/browse.do?node=bbn129&

www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

FED press release Dec 12, 2012 regarding Operation Twist and ZIRP

www.federalreserve.gov/newsevents/press/monetary/20121212a.htm

nformation on polices of the PBOC

www.alsosprachanalyst.com/

LBMA 2011 Gold turnover survey

www.lbma.org.uk/assets/Loco_London_Liquidity_Surveyrv.pdf

BIS Triennial central bank survey 2010

www.bis.org/publ/rpfxf10t.htm

CME volume and open interest reports

http://www.cmegroup.com/wrappedpages/web_monthly_report/Web_Volume_Report_CMEG.pdf

gold researcher

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