Report on Gold
Content
2011 HEDGE EQUITIES E
HEDGE COMMODITIES RESEARCH REPORT
GOLD
GOLD REPORT
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HEDGE EQUITIES
GOLD REPORT
Contents
Introduction:...................................................................................................................................... 2 Uses & Applications of gold .................................................................................................................. 2 Global Gold outlook............................................................................................................................. 3 Gold database .................................................................................................................................... 4 Global Gold Supply ............................................................................................................................. 5 World Gold Demand ............................................................................................................................ 7 Factors affecting gold prices................................................................................................................. 8 Key global markets ............................................................................................................................. 9
China .................................................................................................................................................................................................... ............................ 9 India ..................................................................................................................................................................................................... .......................... 10
Gold as an investment........................................................................................................................11 Country's official gold holdings in tons as reserves on May 2011..............................................................12 Consumer demand in selected countries ...............................................................................................14 Gold Outlook .....................................................................................................................................15 1 1
HEDGE EQUITIES
GOLD REPORT
Introduction:
Gold is one of the many metals found in the earth’s crust. It has been considered as symbol of wealth in the olden days and has strong cultural linkage to many Asian countries. The color of Gold is one of its most important properties, which attracts and reflects beauty and is used in making of jewelry. Although widespread, many number of refining and extraction processes are required to extract the gold from its ore, as only a minute amount of Gold (.005 units from 1 ton) is extractable from its ore. Gold has been found in huge quantities in the Witwatersrand in South Africa. But recently the resources have declined in South Africa and other countries have started mining of gold. Gold has been a part of the monetary system for most of human history, even as recently as a few decades ago under the Gold Standard. Only relatively recently has it been replaced with a Fiat Currency. The demand for a metal with such historical significance has been ever increasing and is only expected to rise in coming years.
Uses & Applications of gold
Jewellery: Jewellery is one of the major demands for the yellow metal and the demand comes mainly from the India & China which contributes more than 50% of the world jewellery demand. Technology: The increased usage of gold in technology is because of its qualities such as corrosion resistance (which means protecting the part from becoming rusty), good conductor of electricity which is used in microchips & electronic appliances for connecting. Gold is widely used as connectors & wires in various electronic items and reliability is high on the yellow metal. Medicine: Gold’s medicinal importance has been researched many centuries ago & Chinese and Indian people are using gold for the medicinal purposes. Chinese many years ago started using Gold as an important part of the medicines they prepare for small pox, because of the resistance power & the power to protect against bacteria and to protect from skin allergies. In the US, gold had been known for the heart and improved blood circulation. Gold has been used to cure cancers. Nanotechnology: Gold now days are used as catalysts and the gold nano particles has been efficient absorbers of mercury from the water and act as purifiers. Gold has infrared shielding capacity and it has prompted many builders to use it in the exteriors
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HEDGE EQUITIES
GOLD REPORT
windows, which reduce the heat getting inside the building. By adding a gold nano rod to the memory sticks or optical drives can significantly increase the storage capacity, according to research. Space & engineering: Gold has many important qualities such as good reflector of heat & infrared radiation. Gold coating is applied on various items used in space to protect against various radiations that occur which is uncertain. Gold’s resistance to extreme temperatures and corrosion resistance are attracting more engineering uses and the demand is increasing. A gold coati ng on windows provides protection against extreme temperatures. Dental Industry: Gold in recent years has been used extensively in dental applications, due to its resistance to corrosion and is not harmful when it comes to contact with body. Setting up of golden tooth is one of the major uses in the dental industry & seen as status symbol.
Global Gold outlook
Gold has been one of the best performing asset classes for many years and in the last ten years it has given an average return of 16% and the demand has been surging. Gold supply has been increasing for the past two years, especially the mine production which is the major source of gold supply. Demand in the year 2010 reached 3971 tons an increase of 8% over the previous years. The gold supply has been increasing but cannot match the rate at which the demand is growing. The lower ore grade and the fewer mines coming into production are the reasons behind the slower mine growth. The recycled gold has been the other source of supply which contributes around 30% of the total supply and last year there has been decrease in recycled gold supply. The major drivers of gold demand are India and China which contributes around 45% of the total gold demand. The expected number of middle class people in China is 600 million in 2015 and 700 million people in 2020, more than twice the entire population of United States. The rising middle class people will lead to higher jewellery and investment demand. In India approximately 10 million marriages takes place every year, offering gold and wearing gold jewellery in the marriages is a tradition in India, is set to drive the gold demand. Indian gold jewellery accounts for 75% of the total domestic gold demand. The demand from China is set to double in next 10 years supported by the rising middle class and their cultural practices related to gold, according to World gold council. Investment demand from western countries is increasing on concerns of Euro zone debt issues, sluggish US growth and low interest rates. Jewellery & Investment demand is increasing from the countries like India & China because of rising inflation and higher incomes.
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HEDGE EQUITIES
GOLD REPORT
Gold database
GOLD
GLOBAL PRODUCTION IN TONS(2010) MINE PRODUCTION -2586 RECYCLED GOLD 1645 TOTAL GOLD SUPPLY - 4231
TOP PRODUCERS 1.CHINA14% 2.AUSTRALIA 10% 3.UNITED STATES- 9% 4. SOUTH AFRICA- 7% 5.RUSSIA 7%
5. GERMANY - 5%
GLOBAL CONSUMPTION IN TONS( 2010) JEWELLERY DEMAND - 2017 TECHNOLOGY DEMAND- 466 INVESTMNET DEMAND -1487 TOTAL DEMAND 3971
TOP CONSUMERS 1. INDIA 25% 2.CHINA 18% 3.UNITED STATES-9% 4.MIDDLE EAST - 9%
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MAJOR EXPORT ERS 1. US A17 % 2.
HEDGE EQUITIES AUSTRALIA - 13% 3. PERU7.4% 4.INDONESIA 6.1% 5.CANADA4.4%
MAJ OR IMP ORT ERS 1 . I N
GOLD REPORT DIA - 25% 2.CHINA -15% 3.MIDDLE EAST - 10% 4.GERMANY - 7% 5. TURKEY 4.5%
Source: World gold council, US geological Survey & Hedge Research
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HEDGE EQUITIES
GOLD REPORT T
Country’s share of Mine production in 2010
Global Gold Supply
Papua New Mexico Chile Guinea Brazil 2% 2% Uzbekhistan 2% 3%
The major source of Gold supply is the mine production which contributes around 60% of the world supply and the remaining supply is met through recycled gold. In the last year recycled gold supply has decreased 3% to 1645 tons.
Canad 4% a 4% Ghan a 4% Indonesi a 5%
Other countries 20 % China 14%
China: China is the largest gold producer in the world, with a production 340 tons in 2010. In the year 2007, Chinese output rose to 276 tones increase of nearly 12% compared to previous year; to become the world’s largest producer overtaking South Africa which produced 272 tones. China gold production has increased by 70% for the past decade and the reason behind is the mining industry has received foreign and domestic investment and project numbers have increased as more discoveries have been found. China is the leader in gold mine production and with its existing resources; it may exhaust its gold reserves in other 6 years approximately. The China’s current demand is close to 700 tons and it plays a major part in determining the gold prices in the future. United States: Major mines in United States are present in Alaska and other smaller mines are present in western states. Nearly thirty operations yielded more than 99% of the gold produced in United States. In 2010, the value of mine production was about $8.9 billion. After continuous
Peru 7% Russi a 7% Australi a 10 %
South Africa 7%
Unite d State s 9%
Source: US Geological Survey, Hedge Research decrease in mine production in United States, there was an
HEDGE EQUITIES
Y ear U S Pr im a r yp ro d u ction U S Seco n d a y p ro d u r ction U S Im p s U S ort Exp orts U S Co nsum p tio n 20 00 20 01 20 02 353 335 298 40 41 38 223 193 217 547 489 257 337 257 267
2003 2004 2005 2006 2007 2008 2009
277 258 256 252 238 233 223
44 45 40 44 66 87 92
249 283 341 263 170 231 320
352 REPORT 224 T 257 295 324 277 389 130 519 214 567 183 381 254
GOLD
increase in 2010 to 230 tons from 223 tons in 2009.
Source: US Geological survey, Hedge research
Gold Reserves In tons
South Africa: South Africa once dominating the gold production has now slipped to fourth place after China, Australia, and United states. South Africa has been the global leader in gold production over a century. South Africa saw its output levels declined due to a host of problems such declining ore grades and higher costs South Africa’s mine production has been decreasing the years and in 2009 it produced 198 tons. South mine production has been decreasing over the years, has reserves of 6000 tons which is the second reserves holder. Research all over Africa’s but still largest Source: tons gold third gold US geological Survey, Hedge 6000 5000 3400 30003000 2400 2000
19001700 14001400 120 1 990
Australia: In the year 2009, Australia produced 227 which helped the country to be the second largest procuring country. This surpassed United States to place which produced 223 tons in 2009.At Australian
Gold Mine production in tons
2570 2550 2590 2470 2460 238 0 226 0 2450 2500
price of around A$1250 per ounce, the 227 tons produced in 2009 is worth A$9 billion, making a significant contributor to Australian export earnings. Super pit is a world class deposit situated in Western Australia producing 850,000 ounces of gold every year and the largest open mine pit in Australia Australia has gold reserves of 7300 tons, which is the highest according to the current statistics and is one of the leading exporters of gold. Australia & China are few countries were mine production
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has been increasing but not able to keep in tandem with
the robust demand seen in last few years.
2001 2010
2002
2003
2004
2005
2006
2007
2008
2009
Source: US Geological Survey (USGS), Hedge research
HEDGE EQUITIES
GOLD REPORT
World Gold Demand
Major demand for Gold arises from Investment demand, Jewellery demand, Government reserves & Industry applications. In 2010, the demand for gold was strong in all the four categories and annual demand grew 9% to 3971 tones. Investment demand comprises of Gold bars, coins, ETF’s and physical bar investment gained 56% last year which is really strong growth. Investment demand: One of the new arenas of investment which is getting popular in Asia is Gold ETF and related instruments. Holdings in the world’s largest gold backed ETF, Gold SPDR’s was at 1280.7 tons in 2010 and had a net inflow of 147 tons. 450 0 400 0 350 0 300 0 250 0 200 0 150 0 100 0 50 0 0 Jewellery demand: India is the largest gold jewellery market in the world & the demand in rupee terms almost doubled in 2010 to Rs1.342 trillion ($29.6 billion) from Rs669 billion in 2009. Government reserves: As of March 2011, IMF held 2814 tons of gold & at the time of recent global recession, IMF announced the sale of one eighth of its holdings, 200 tons of which was purchased by India. 372 9 3363 3207
Gold demand in tons
396 5 343 357 1 5 3618 3971
375 3 351 5
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: World gold council, Hedge research Ind y App tions: Gold’s quality of corrosions resistance, medicinal importance resistance extreme
& to
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temperatures is attracting increased number of usages for the yellow metal.
HEDGE EQUITIES
GOLD REPORT
Gold demand segmentation 8% 4% 28 % 49% Jewellery Technology total bar & coin demand ETF's & similar OTC investment
11 %
Source: World gold council, hedge research
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HEDGE EQUITIES
GOLD REPORT T
Factors affecting gold prices
1. Decline of Mine production: Mine production has been in the decline trend in the recent past. Major factors that cause the production to decline are increase in cost of mining, strikes by gold miners, legal formalities, geographical problems and worsening political situations. 2. Inflation and interest rates: Gold has always been one of the best asset classes for hedging against inflation. Rising inflation rates appreciates gold prices as more investor’s start investing in the yellow metal. Gold has an inverse relationship with interest rates and as gold is pegged to the US dollar, the US interest rates affect gold prices to a certain extent. 3. Currency Fluctuation: As gold is denominated in US dollar, it has an inverse relationship with the dollar. When the dollar is weaker, the gold demand increases as it becomes cheaper for other currency holders. 4. Geo political concerns: Whenever there is uncertainty prevailing in the globe, the prices of gold will shoot up. In the recent financial crisis the prices were in uptrend followed by Middle East North African issue (MENA) issue which supported the gold prices. 5. Central bank Demand: US dollar which is considered to be one of the safe asset classes is losing its value in the past few months and central banks have started to increase their proportion of gold in the reserve holdings of their respective countries. 6. Demand for jewellery from the Asian markets especially India & China: India and China has been the major demand drivers of gold. India continued to be one of the strongest gold markets in 2010. Total annual consumer demand for jewellery registered growth of 66% relative to 2009. China was the strongest market for investment demand growth. Annual demand for bars and coins in China totaled 179.9 tons, an increase of 70% year-on-year. 7. Economic data is other major factor which influences the gold prices to certain extent. If macro economic data such as unemployment data, GDP numbers & Home sales are positive, then the gold prices will be sluggish as the economy is growing at good pace. Generally when the economy is growing then the investors will move the funds from the safe assets to the riskier assets, which give higher returns. Is Gold going to become extinct? With the current estimated gold reserves of 51000 tons as per United States geological survey (USGS) and if the current demand of 3971 tons (WGC) remains, the gold reserves will become extinct in other 13 years approximately.
HEDGE EQUITIES
GOLD REPORT
Key global markets
China
Chinese has been accustomed to gold culture and with more rising incomes and growing middle class incomes; the gold demand has reached 700 tons. Chinese gold demand nearly tripled in the last 10 years to around 700 metric tons. China’s demand for gold is 18% of the global demand. China mine production in 2010 increased to 340.80 tons up 8.6% compared to previous year. China is the world’s biggest producer and second largest consumer of gold, but has only 4% of total global gold reserves, according to USGS in 2009.According to that, China may exhaust existing gold mines in six years from now. Chinese demand has been growing steadily with the average growth of 14% every year for the past 10 years. China government has been encouraging its people to invest in gold and as a result they opened Shangai Gold exchange. The demand for all the sectors including technology is expanding at a rapid phase in China as the country is more focused on manufacturing and assembling. Gold usage in industrial sector is gaining year by year and in the future, gold will play an important role in the industry usage, according to World gold council. Factor influencing demand growth in China: Jewellery demand, Investment demand & Inflation fears are the major factors, which is influencing the Chinese investors to invest in gold. The rising crude oil prices and FDI inflows into the country will significantly boost the inflation and investors seek gold for inflation hedge.
China gold demand, supply & gold prices in (Renminbi RMB/oz)
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HEDGE EQUITIES Source: World Gold Council
GOLD REPORT
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India
India’s demand rose to 963 tons in 2010 compared to 819.7 tons in 2009. India demand for gold is 25% of the total gold demand in 2010 when compared to 16% in 2009. Jewellery demand in 2010 was at 745.7 tons compared to 442.4 tons 120 0 100 0 80 0 in 2009 & investment demand icnreased from 136.1 tons to 217.4 tons. The four southern states of India accounts for 40% of the Indian demand. More than 90% of the gold demand are met by imports. Indian Households hold more than 18000 tons of gold, the largest amount of bullion holdings in the world. The total worth amounts to $840 billion, according to current prices and it is nearly 50% of India’s GDP, according to WGC. This represents 11% of the global stocks and equivalent to nearly half an ounce per capita, which is slightly lower the western markets and signals scope for future growth. India remains the key market for gold and the demand is set to increase and reach 1200 tons by 2020, according to World gold council. India’s demographic trends, the growing middle class and declining age profile are the major factors which will drive the future gold market. India’s gold Exchange traded funds (ETF’s) have seen significant growth and the total holdings were at 13 tons in 2010 when compared to 6 tons in 2009. ETF is not popular in India, but this kind of investment mode is slowly catching up among traditional Indian 60 0 40 0 20 0 0
Indian Gold demand in tons
963.1 70 2 819. 712. 7 2
719.4 710 769.2 617.7 547.3 528
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: World gold Council, Hedge Research
India Jewellery demand in tons & gold prices in ounces
investors. Gold ETF’s in India are allowed to diversify 10% of their assets and remaining is backed by physical gold. Source: World gold council
Gold performance for the past 10 years
Gold as an investment
Bars & coins: One of the most preferred and traditional ways of buying gold is through bars & coins. These can be bought in Jewellery shops, banks & through bullion dealers. Bars generally have lower price premiums than the coins. Investors should be careful when purchasing the bars & coins, make sure you purchase through a reputed jewellery shops or banks. Gold Exchange Traded Funds (ETF): Investing in gold by buying Gold ETF’s is a good option as they are listed in the stock exchanges and one can buy or sell as per their needs. Gold ETF’s trade very close to the actual gold prices and any movements in actual gold prices will be reflected in Gold ETF’s.
Source: Financial Times
Gold Mutual Funds: Gold mutual funds hold portfolios of gold mining companies, invest in physical gold. The gold mutual funds are directly linked to gold price, still having an undue advantage as the mutual funds will diversify at least small part for the portfolio. As the mutual funds will be handled by the fund managers with expertise knowledge will be an added advantage. E-Gold: It is similar to Gold ETF’s, but in E-gold investors can take delivery of gold and the pricing is transparent which tracks the physical gold. E-gold has been launched by National Spot exchange and it is the first of its kind, especially focused on retail investors and E-gold can be converted into physical gold coin/bar. Derivatives: Derivatives such as gold forwards, futures & options are traded on various exchanges around the world. Gold derivatives are traded in Chicago mercantile Exchange CME in US & in India gold futures are traded in Multi commodity exchange (MCX), National commodity & derivatives Exchange limited, National Multi commodity exchange (NMCE) & National spot exchange.
Country's official gold holdings in tons as reserves on May 2011
Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 United States Germany IMF Italy France China Switzerland Russia Japan Netherlands India ECB Taiwan Portugal Venezuela Saudi Arabia United Kingdom Lebanon Spain Austria Jan,2008 8133.5 3417.5 3217.3 2451 2568 600 1113.2 457 765.2 621.4 357.7 563.6 423.6 382.5 356.4 322.9 310 286.8 281.6 280 May,2011 8133.5 3401 2814 2451 2435 1054 1040 789.2 765.2 612.5 557.7 502.1 423.6 382.5 365.8 322.9 310.3 286.8 281.6 280 % Change in holdings 0.00% -0.49% -14.33% 0.00% -5.46% 43.07% -7.04% 42.09% 0.00% -1.45% 35.86% -12.25% 0.00% 0.00% 2.57% 0.00% 0.10% 0.00% 0.00% 0.00% % of Gold reserves Value In Bn US $** 74.60% 70.80% 69.2% 64.90% 1.60% 17.10% 7.50% 3.20% 57.90% 8.20% 29.70% 4.70% 81.00% 60.30% 3.10% 16.00% 28.00% 39.50% 55.60% 396.91 165.97 137.32 119.61 118.83 51.44 50.75 38.51 37.34 29.89 27.22 24.50 20.67 18.67 17.85 15.76 15.14 14.00 13.74 13.66
Note: ** Calculated when Gold prices were at $1525 an ounce
Source: World gold council, Hedge research
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Change in country's gold reserves % from jan 2008 to May 2011
43.07% 42.09% 35.86%
2.57% 0.10 %
-0.49%
-1.45%
-5.46%
-7.04%
-12.25%
-14.33%
China
Russia
India
Venenzula
United Kingdom
Germany Netherlands France
itze
d
ECB
IMF
Source: World gold council, Hedge research
13
Consumer demand for gold in tons
Source: World gold council
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Gold Outlook
Gold is one precious metal with a limited supply which is supported by strong fundamental factors and has given a good run over the past few years. Few of the major factors which is driving up gold prices is increasing demand, especially from India & China, a decreasing resource pile and that supply is not in tandem with the demand. Gold prices have been rising in recent times because of global issues and as most of the governments are reducing their exposure to US Markets and eyeing other asset class such as gold. All these make the gold as an ideal investment candidate to anyone’s portfolio and one can consider adding 5% gold investment to their portfolio.
Last updated on 02/06/2011 Note: This report will be updated on timely manner.
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Researched and prepared by: Vignesh S.B.K Junior Analyst Email: [email protected] Under the Guidance of Krishnan Thampi K Head of Research and Strategies Email:
[email protected]
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HEDGE COMMODITIES RESEARCH REPORT
GOLD
GOLD REPORT
0
HEDGE EQUITIES
GOLD REPORT
Contents
Introduction:...................................................................................................................................... 2 Uses & Applications of gold .................................................................................................................. 2 Global Gold outlook............................................................................................................................. 3 Gold database .................................................................................................................................... 4 Global Gold Supply ............................................................................................................................. 5 World Gold Demand ............................................................................................................................ 7 Factors affecting gold prices................................................................................................................. 8 Key global markets ............................................................................................................................. 9
China .................................................................................................................................................................................................... ............................ 9 India ..................................................................................................................................................................................................... .......................... 10
Gold as an investment........................................................................................................................11 Country's official gold holdings in tons as reserves on May 2011..............................................................12 Consumer demand in selected countries ...............................................................................................14 Gold Outlook .....................................................................................................................................15 1 1
HEDGE EQUITIES
GOLD REPORT
Introduction:
Gold is one of the many metals found in the earth’s crust. It has been considered as symbol of wealth in the olden days and has strong cultural linkage to many Asian countries. The color of Gold is one of its most important properties, which attracts and reflects beauty and is used in making of jewelry. Although widespread, many number of refining and extraction processes are required to extract the gold from its ore, as only a minute amount of Gold (.005 units from 1 ton) is extractable from its ore. Gold has been found in huge quantities in the Witwatersrand in South Africa. But recently the resources have declined in South Africa and other countries have started mining of gold. Gold has been a part of the monetary system for most of human history, even as recently as a few decades ago under the Gold Standard. Only relatively recently has it been replaced with a Fiat Currency. The demand for a metal with such historical significance has been ever increasing and is only expected to rise in coming years.
Uses & Applications of gold
Jewellery: Jewellery is one of the major demands for the yellow metal and the demand comes mainly from the India & China which contributes more than 50% of the world jewellery demand. Technology: The increased usage of gold in technology is because of its qualities such as corrosion resistance (which means protecting the part from becoming rusty), good conductor of electricity which is used in microchips & electronic appliances for connecting. Gold is widely used as connectors & wires in various electronic items and reliability is high on the yellow metal. Medicine: Gold’s medicinal importance has been researched many centuries ago & Chinese and Indian people are using gold for the medicinal purposes. Chinese many years ago started using Gold as an important part of the medicines they prepare for small pox, because of the resistance power & the power to protect against bacteria and to protect from skin allergies. In the US, gold had been known for the heart and improved blood circulation. Gold has been used to cure cancers. Nanotechnology: Gold now days are used as catalysts and the gold nano particles has been efficient absorbers of mercury from the water and act as purifiers. Gold has infrared shielding capacity and it has prompted many builders to use it in the exteriors
2
HEDGE EQUITIES
GOLD REPORT
windows, which reduce the heat getting inside the building. By adding a gold nano rod to the memory sticks or optical drives can significantly increase the storage capacity, according to research. Space & engineering: Gold has many important qualities such as good reflector of heat & infrared radiation. Gold coating is applied on various items used in space to protect against various radiations that occur which is uncertain. Gold’s resistance to extreme temperatures and corrosion resistance are attracting more engineering uses and the demand is increasing. A gold coati ng on windows provides protection against extreme temperatures. Dental Industry: Gold in recent years has been used extensively in dental applications, due to its resistance to corrosion and is not harmful when it comes to contact with body. Setting up of golden tooth is one of the major uses in the dental industry & seen as status symbol.
Global Gold outlook
Gold has been one of the best performing asset classes for many years and in the last ten years it has given an average return of 16% and the demand has been surging. Gold supply has been increasing for the past two years, especially the mine production which is the major source of gold supply. Demand in the year 2010 reached 3971 tons an increase of 8% over the previous years. The gold supply has been increasing but cannot match the rate at which the demand is growing. The lower ore grade and the fewer mines coming into production are the reasons behind the slower mine growth. The recycled gold has been the other source of supply which contributes around 30% of the total supply and last year there has been decrease in recycled gold supply. The major drivers of gold demand are India and China which contributes around 45% of the total gold demand. The expected number of middle class people in China is 600 million in 2015 and 700 million people in 2020, more than twice the entire population of United States. The rising middle class people will lead to higher jewellery and investment demand. In India approximately 10 million marriages takes place every year, offering gold and wearing gold jewellery in the marriages is a tradition in India, is set to drive the gold demand. Indian gold jewellery accounts for 75% of the total domestic gold demand. The demand from China is set to double in next 10 years supported by the rising middle class and their cultural practices related to gold, according to World gold council. Investment demand from western countries is increasing on concerns of Euro zone debt issues, sluggish US growth and low interest rates. Jewellery & Investment demand is increasing from the countries like India & China because of rising inflation and higher incomes.
3
HEDGE EQUITIES
GOLD REPORT
Gold database
GOLD
GLOBAL PRODUCTION IN TONS(2010) MINE PRODUCTION -2586 RECYCLED GOLD 1645 TOTAL GOLD SUPPLY - 4231
TOP PRODUCERS 1.CHINA14% 2.AUSTRALIA 10% 3.UNITED STATES- 9% 4. SOUTH AFRICA- 7% 5.RUSSIA 7%
5. GERMANY - 5%
GLOBAL CONSUMPTION IN TONS( 2010) JEWELLERY DEMAND - 2017 TECHNOLOGY DEMAND- 466 INVESTMNET DEMAND -1487 TOTAL DEMAND 3971
TOP CONSUMERS 1. INDIA 25% 2.CHINA 18% 3.UNITED STATES-9% 4.MIDDLE EAST - 9%
4
MAJOR EXPORT ERS 1. US A17 % 2.
HEDGE EQUITIES AUSTRALIA - 13% 3. PERU7.4% 4.INDONESIA 6.1% 5.CANADA4.4%
MAJ OR IMP ORT ERS 1 . I N
GOLD REPORT DIA - 25% 2.CHINA -15% 3.MIDDLE EAST - 10% 4.GERMANY - 7% 5. TURKEY 4.5%
Source: World gold council, US geological Survey & Hedge Research
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HEDGE EQUITIES
GOLD REPORT T
Country’s share of Mine production in 2010
Global Gold Supply
Papua New Mexico Chile Guinea Brazil 2% 2% Uzbekhistan 2% 3%
The major source of Gold supply is the mine production which contributes around 60% of the world supply and the remaining supply is met through recycled gold. In the last year recycled gold supply has decreased 3% to 1645 tons.
Canad 4% a 4% Ghan a 4% Indonesi a 5%
Other countries 20 % China 14%
China: China is the largest gold producer in the world, with a production 340 tons in 2010. In the year 2007, Chinese output rose to 276 tones increase of nearly 12% compared to previous year; to become the world’s largest producer overtaking South Africa which produced 272 tones. China gold production has increased by 70% for the past decade and the reason behind is the mining industry has received foreign and domestic investment and project numbers have increased as more discoveries have been found. China is the leader in gold mine production and with its existing resources; it may exhaust its gold reserves in other 6 years approximately. The China’s current demand is close to 700 tons and it plays a major part in determining the gold prices in the future. United States: Major mines in United States are present in Alaska and other smaller mines are present in western states. Nearly thirty operations yielded more than 99% of the gold produced in United States. In 2010, the value of mine production was about $8.9 billion. After continuous
Peru 7% Russi a 7% Australi a 10 %
South Africa 7%
Unite d State s 9%
Source: US Geological Survey, Hedge Research decrease in mine production in United States, there was an
HEDGE EQUITIES
Y ear U S Pr im a r yp ro d u ction U S Seco n d a y p ro d u r ction U S Im p s U S ort Exp orts U S Co nsum p tio n 20 00 20 01 20 02 353 335 298 40 41 38 223 193 217 547 489 257 337 257 267
2003 2004 2005 2006 2007 2008 2009
277 258 256 252 238 233 223
44 45 40 44 66 87 92
249 283 341 263 170 231 320
352 REPORT 224 T 257 295 324 277 389 130 519 214 567 183 381 254
GOLD
increase in 2010 to 230 tons from 223 tons in 2009.
Source: US Geological survey, Hedge research
Gold Reserves In tons
South Africa: South Africa once dominating the gold production has now slipped to fourth place after China, Australia, and United states. South Africa has been the global leader in gold production over a century. South Africa saw its output levels declined due to a host of problems such declining ore grades and higher costs South Africa’s mine production has been decreasing the years and in 2009 it produced 198 tons. South mine production has been decreasing over the years, has reserves of 6000 tons which is the second reserves holder. Research all over Africa’s but still largest Source: tons gold third gold US geological Survey, Hedge 6000 5000 3400 30003000 2400 2000
19001700 14001400 120 1 990
Australia: In the year 2009, Australia produced 227 which helped the country to be the second largest procuring country. This surpassed United States to place which produced 223 tons in 2009.At Australian
Gold Mine production in tons
2570 2550 2590 2470 2460 238 0 226 0 2450 2500
price of around A$1250 per ounce, the 227 tons produced in 2009 is worth A$9 billion, making a significant contributor to Australian export earnings. Super pit is a world class deposit situated in Western Australia producing 850,000 ounces of gold every year and the largest open mine pit in Australia Australia has gold reserves of 7300 tons, which is the highest according to the current statistics and is one of the leading exporters of gold. Australia & China are few countries were mine production
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has been increasing but not able to keep in tandem with
the robust demand seen in last few years.
2001 2010
2002
2003
2004
2005
2006
2007
2008
2009
Source: US Geological Survey (USGS), Hedge research
HEDGE EQUITIES
GOLD REPORT
World Gold Demand
Major demand for Gold arises from Investment demand, Jewellery demand, Government reserves & Industry applications. In 2010, the demand for gold was strong in all the four categories and annual demand grew 9% to 3971 tones. Investment demand comprises of Gold bars, coins, ETF’s and physical bar investment gained 56% last year which is really strong growth. Investment demand: One of the new arenas of investment which is getting popular in Asia is Gold ETF and related instruments. Holdings in the world’s largest gold backed ETF, Gold SPDR’s was at 1280.7 tons in 2010 and had a net inflow of 147 tons. 450 0 400 0 350 0 300 0 250 0 200 0 150 0 100 0 50 0 0 Jewellery demand: India is the largest gold jewellery market in the world & the demand in rupee terms almost doubled in 2010 to Rs1.342 trillion ($29.6 billion) from Rs669 billion in 2009. Government reserves: As of March 2011, IMF held 2814 tons of gold & at the time of recent global recession, IMF announced the sale of one eighth of its holdings, 200 tons of which was purchased by India. 372 9 3363 3207
Gold demand in tons
396 5 343 357 1 5 3618 3971
375 3 351 5
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: World gold council, Hedge research Ind y App tions: Gold’s quality of corrosions resistance, medicinal importance resistance extreme
& to
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temperatures is attracting increased number of usages for the yellow metal.
HEDGE EQUITIES
GOLD REPORT
Gold demand segmentation 8% 4% 28 % 49% Jewellery Technology total bar & coin demand ETF's & similar OTC investment
11 %
Source: World gold council, hedge research
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HEDGE EQUITIES
GOLD REPORT T
Factors affecting gold prices
1. Decline of Mine production: Mine production has been in the decline trend in the recent past. Major factors that cause the production to decline are increase in cost of mining, strikes by gold miners, legal formalities, geographical problems and worsening political situations. 2. Inflation and interest rates: Gold has always been one of the best asset classes for hedging against inflation. Rising inflation rates appreciates gold prices as more investor’s start investing in the yellow metal. Gold has an inverse relationship with interest rates and as gold is pegged to the US dollar, the US interest rates affect gold prices to a certain extent. 3. Currency Fluctuation: As gold is denominated in US dollar, it has an inverse relationship with the dollar. When the dollar is weaker, the gold demand increases as it becomes cheaper for other currency holders. 4. Geo political concerns: Whenever there is uncertainty prevailing in the globe, the prices of gold will shoot up. In the recent financial crisis the prices were in uptrend followed by Middle East North African issue (MENA) issue which supported the gold prices. 5. Central bank Demand: US dollar which is considered to be one of the safe asset classes is losing its value in the past few months and central banks have started to increase their proportion of gold in the reserve holdings of their respective countries. 6. Demand for jewellery from the Asian markets especially India & China: India and China has been the major demand drivers of gold. India continued to be one of the strongest gold markets in 2010. Total annual consumer demand for jewellery registered growth of 66% relative to 2009. China was the strongest market for investment demand growth. Annual demand for bars and coins in China totaled 179.9 tons, an increase of 70% year-on-year. 7. Economic data is other major factor which influences the gold prices to certain extent. If macro economic data such as unemployment data, GDP numbers & Home sales are positive, then the gold prices will be sluggish as the economy is growing at good pace. Generally when the economy is growing then the investors will move the funds from the safe assets to the riskier assets, which give higher returns. Is Gold going to become extinct? With the current estimated gold reserves of 51000 tons as per United States geological survey (USGS) and if the current demand of 3971 tons (WGC) remains, the gold reserves will become extinct in other 13 years approximately.
HEDGE EQUITIES
GOLD REPORT
Key global markets
China
Chinese has been accustomed to gold culture and with more rising incomes and growing middle class incomes; the gold demand has reached 700 tons. Chinese gold demand nearly tripled in the last 10 years to around 700 metric tons. China’s demand for gold is 18% of the global demand. China mine production in 2010 increased to 340.80 tons up 8.6% compared to previous year. China is the world’s biggest producer and second largest consumer of gold, but has only 4% of total global gold reserves, according to USGS in 2009.According to that, China may exhaust existing gold mines in six years from now. Chinese demand has been growing steadily with the average growth of 14% every year for the past 10 years. China government has been encouraging its people to invest in gold and as a result they opened Shangai Gold exchange. The demand for all the sectors including technology is expanding at a rapid phase in China as the country is more focused on manufacturing and assembling. Gold usage in industrial sector is gaining year by year and in the future, gold will play an important role in the industry usage, according to World gold council. Factor influencing demand growth in China: Jewellery demand, Investment demand & Inflation fears are the major factors, which is influencing the Chinese investors to invest in gold. The rising crude oil prices and FDI inflows into the country will significantly boost the inflation and investors seek gold for inflation hedge.
China gold demand, supply & gold prices in (Renminbi RMB/oz)
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HEDGE EQUITIES Source: World Gold Council
GOLD REPORT
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India
India’s demand rose to 963 tons in 2010 compared to 819.7 tons in 2009. India demand for gold is 25% of the total gold demand in 2010 when compared to 16% in 2009. Jewellery demand in 2010 was at 745.7 tons compared to 442.4 tons 120 0 100 0 80 0 in 2009 & investment demand icnreased from 136.1 tons to 217.4 tons. The four southern states of India accounts for 40% of the Indian demand. More than 90% of the gold demand are met by imports. Indian Households hold more than 18000 tons of gold, the largest amount of bullion holdings in the world. The total worth amounts to $840 billion, according to current prices and it is nearly 50% of India’s GDP, according to WGC. This represents 11% of the global stocks and equivalent to nearly half an ounce per capita, which is slightly lower the western markets and signals scope for future growth. India remains the key market for gold and the demand is set to increase and reach 1200 tons by 2020, according to World gold council. India’s demographic trends, the growing middle class and declining age profile are the major factors which will drive the future gold market. India’s gold Exchange traded funds (ETF’s) have seen significant growth and the total holdings were at 13 tons in 2010 when compared to 6 tons in 2009. ETF is not popular in India, but this kind of investment mode is slowly catching up among traditional Indian 60 0 40 0 20 0 0
Indian Gold demand in tons
963.1 70 2 819. 712. 7 2
719.4 710 769.2 617.7 547.3 528
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: World gold Council, Hedge Research
India Jewellery demand in tons & gold prices in ounces
investors. Gold ETF’s in India are allowed to diversify 10% of their assets and remaining is backed by physical gold. Source: World gold council
Gold performance for the past 10 years
Gold as an investment
Bars & coins: One of the most preferred and traditional ways of buying gold is through bars & coins. These can be bought in Jewellery shops, banks & through bullion dealers. Bars generally have lower price premiums than the coins. Investors should be careful when purchasing the bars & coins, make sure you purchase through a reputed jewellery shops or banks. Gold Exchange Traded Funds (ETF): Investing in gold by buying Gold ETF’s is a good option as they are listed in the stock exchanges and one can buy or sell as per their needs. Gold ETF’s trade very close to the actual gold prices and any movements in actual gold prices will be reflected in Gold ETF’s.
Source: Financial Times
Gold Mutual Funds: Gold mutual funds hold portfolios of gold mining companies, invest in physical gold. The gold mutual funds are directly linked to gold price, still having an undue advantage as the mutual funds will diversify at least small part for the portfolio. As the mutual funds will be handled by the fund managers with expertise knowledge will be an added advantage. E-Gold: It is similar to Gold ETF’s, but in E-gold investors can take delivery of gold and the pricing is transparent which tracks the physical gold. E-gold has been launched by National Spot exchange and it is the first of its kind, especially focused on retail investors and E-gold can be converted into physical gold coin/bar. Derivatives: Derivatives such as gold forwards, futures & options are traded on various exchanges around the world. Gold derivatives are traded in Chicago mercantile Exchange CME in US & in India gold futures are traded in Multi commodity exchange (MCX), National commodity & derivatives Exchange limited, National Multi commodity exchange (NMCE) & National spot exchange.
Country's official gold holdings in tons as reserves on May 2011
Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 United States Germany IMF Italy France China Switzerland Russia Japan Netherlands India ECB Taiwan Portugal Venezuela Saudi Arabia United Kingdom Lebanon Spain Austria Jan,2008 8133.5 3417.5 3217.3 2451 2568 600 1113.2 457 765.2 621.4 357.7 563.6 423.6 382.5 356.4 322.9 310 286.8 281.6 280 May,2011 8133.5 3401 2814 2451 2435 1054 1040 789.2 765.2 612.5 557.7 502.1 423.6 382.5 365.8 322.9 310.3 286.8 281.6 280 % Change in holdings 0.00% -0.49% -14.33% 0.00% -5.46% 43.07% -7.04% 42.09% 0.00% -1.45% 35.86% -12.25% 0.00% 0.00% 2.57% 0.00% 0.10% 0.00% 0.00% 0.00% % of Gold reserves Value In Bn US $** 74.60% 70.80% 69.2% 64.90% 1.60% 17.10% 7.50% 3.20% 57.90% 8.20% 29.70% 4.70% 81.00% 60.30% 3.10% 16.00% 28.00% 39.50% 55.60% 396.91 165.97 137.32 119.61 118.83 51.44 50.75 38.51 37.34 29.89 27.22 24.50 20.67 18.67 17.85 15.76 15.14 14.00 13.74 13.66
Note: ** Calculated when Gold prices were at $1525 an ounce
Source: World gold council, Hedge research
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Change in country's gold reserves % from jan 2008 to May 2011
43.07% 42.09% 35.86%
2.57% 0.10 %
-0.49%
-1.45%
-5.46%
-7.04%
-12.25%
-14.33%
China
Russia
India
Venenzula
United Kingdom
Germany Netherlands France
itze
d
ECB
IMF
Source: World gold council, Hedge research
13
Consumer demand for gold in tons
Source: World gold council
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Gold Outlook
Gold is one precious metal with a limited supply which is supported by strong fundamental factors and has given a good run over the past few years. Few of the major factors which is driving up gold prices is increasing demand, especially from India & China, a decreasing resource pile and that supply is not in tandem with the demand. Gold prices have been rising in recent times because of global issues and as most of the governments are reducing their exposure to US Markets and eyeing other asset class such as gold. All these make the gold as an ideal investment candidate to anyone’s portfolio and one can consider adding 5% gold investment to their portfolio.
Last updated on 02/06/2011 Note: This report will be updated on timely manner.
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Researched and prepared by: Vignesh S.B.K Junior Analyst Email: [email protected] Under the Guidance of Krishnan Thampi K Head of Research and Strategies Email:
[email protected]
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