The Case for Gold: Overview on Gold as an Investment

20 November 2012

«Gold as an alternative investment»

By Laurent Mathiot CEO of AurAriA

The Case for Gold

I-Introduction

Laurent Mathiot

Member of The French Institute of Actuaries

MBA Wharton 1993

Former Investment Banker and Wealth Manager

20 Years Experience in Asset Management

Tangible Assets Specialist (Real Estate, Precious Metals…)

Founder & CEO of AurAriA

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Why Invest in Gold ?

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II-I A Safe Haven !

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Gold Does Not Go Bankrupt ! ● Tangible «Hard» Asset ● Nobody’s Liability ● No Credit Risk

Total Control of Investment

II-I A Safe Haven

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Gold protects your purchasing power ! In case of inflation Gold has been stable for centuries when expressed in real goods Famous Study “The Golden Constant” updated in 2009 by The World Gold Council: http://www.goldthe_constant/

Gold is a value asset in times of Quantitative Easing !

II-I A Safe Haven

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Exemple of Hyperinflation in the Weimar Republic…

II-I A Safe Haven

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Gold is a Store of Value ! In a macro-economic context of : ● Low growth ● High unemployment ● Market risks (stocks, bonds, real estate) ● Increasing bankruptcies + «Risk Off» investment philosophy

Investors are seeking no credit risk assets («flight to quality»)

Gold protects against adverse macro risks

II-I A Safe Haven

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Gold does better in crisis situations ! Example : 2008 Crisis with Lehman Brothers bankruptcy ● What happened to financial markets ?

▶ Liquidity issues ▶ Major haircuts ● What happened to Gold? ▶ Value up 40% ▶ Full liquidity ▶ NO haircut

Gold: a top level Athlete !

II-II A Universal Asset

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The Gold Market is one of the most liquid ! ● 100 billions USD of bullion valued on the London Market (N°1 for Gold) ● More Volume than Government Bonds Market such as German Pfandbrief ● Fast growing Markets like Hong Kong & China

Gold: a tangible and liquid asset !

II-II A Universal Asset

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Gold is a Deep Market ! « Market Depht » is the total value of assets owned by market operators ● Estimate for Gold: 10 Trillion USD ● More Depth than Government Bonds Markets

Transactions of any size may be executed without market disruption

Example : 400 tons of Gold sold by IMF in 2010 was «absorbed» seamlessly Counter-example : Silver prices could be temporarily controlled by the Hunt Brothers in 1980 because of the lack of depth of the silver market !

II-II A Universal Asset

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Gold has a universal value ! One of the most followed quotation in the world ! Established in London twice a day by a «fixing» by the London Bullion Market Association via an unchanged ritual since 1919 ! Gold price per oz is published in USD, GBP and EUR on http://www.lbma.org.uk/pages/index.cfm

Valuation of Gold is easy and transparent at any time and in any place

II-III A Strategic Investment

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Gold is a Diversification Asset Portfolios holding traditional financial assets such as stocks and bonds can be diversified by adding gold. Risk factors that may affect the gold price are different in nature from those that affect other assets, thus gold has a low correlation to traditional financial assets, this is why it provides diversification benefits.

Portfolios containing gold are generally more robust and less volatile than those that do not, meaning a better “Risk Adjusted Return”

II-III A Strategic Investment

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Gold protects against «Tail Risk» ▶ An optimal portfolio should feature: ● Performance ● Risk Management via diversification ● Survival skills in case of an extreme adverse event: a «Black Swan» ▶ Gold helps to manage risk more effectively by protecting against infrequent or unlikely but consequential very negative events, referred to as “Tail Risks”, thus providing a wealth’s insurance to its owner ! Source World Gold Council,«Hedging against Tail Risk»: http://www.gold.org/investment/research/thematic_research/wealth_protection

II-IV Gold is NOT overvalued !

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In Historical Value

II-IV Gold is NOT overvalued !

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In Terms of Asset Allocation: ● Average current investors allocation rate to Gold, on a global basis: 1% ! ● Average current Central Banks allocation rate to Gold: 15% ● Average allocation rate to Gold in 1980, at the highest historical price: 25%

(Source: Valcambi)

Gold is far from a «speculative bubble» !

II-IV Gold is NOT overvalued !

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Gold allocation rate of Chinese consumers has tripled in 5 years !

New Demand: Emerging Markets Rush to Gold ! The Case of China National priority to accumulate Gold: ● China became n°1 producer of Gold ● All production is taken by the State ● Massive buying via Hong Kong on Gold international markets ● China taking stakes in global Gold mining ● 2009 : Gold Market opens to individuals

II-IV Gold is NOT overvalued !

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In Monetary Terms

II-V Asset of Last Resort

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A Monetary Asset Gold has always played an important role in the international monetary system: For hundreds of years gold was money, Gold coins circulated for many centuries ! Later there was an explicit link between gold and paper money, with paper being exchangeable for gold on demand. The gold exchange standard was a period of stability whereby countries tied their currencies to the US dollar, which was in turn tied to gold. Since the end of the gold exchange standard on August 15, 1971, it remains a cornerstone reserve asset accounting for 15% of total official reserves. Furthermore, gold has been playing an increasing role among private investors, supported by growing demand from emerging markets, in particular China and India. Gold’s lack of credit or counterparty risk, coupled with the deterioration of sovereign credit, has encouraged investors and global exchanges to increasingly use gold as a source of high quality collateral.

II-V Asset of Last Resort

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Gold as Collateral Gold is increasingly being used in the financial system as a source of high-quality collateral. Its lack of credit risk and countercyclical behaviour make it ideal for this purpose. The European Market Infrastructure Regulation now permits Central Counterparty Clearing Houses throughout Europe to accept gold as collateral. Gold’s use as collateral at banks is also growing.

II-V Asset of Last Resort

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Reasons for this new status of Gold: Financial markets are lacking «Risk Free» Assets to bring as collateral of an ever increasing volume of debts Sovereign bonds are no longer considered «Risk Free» and losing AAA

Gold has the features of a «High Quality Liquid Asset»: ● No default risk ● Store of value ● High liquidity ● Universal valuation

Gold is coming back as a Reserve and Collateral Asset

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How to invest in Gold?

III-I Paper or Physical ?

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«Paper Gold»: ownership without holding it means counterparty risk ! ● ETF’s ● Funds ● Trading platforms Bullion: ownership + holding ● Coins ● Bars

Don’t let anyone between you and your Gold: Get physical !

III-II Storage

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Secured Storage Option makes sense for large amounts BUT: ● With a leading precious assets operator ● With a permanent access under your name ● With well insured premises ● Out of the traditional banking system Example: Malca Amit has worldwide safe vault locations

Fully secured bullion

III-III Asset Allocation

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What is the optimal Gold allocation ? World Gold Council numerous studies demonstrate a stable range of: 5% to 10% of Total Net Worth http://www.gold.org/investment/research/ ● 10% in case of acute financial crisis

III-III Asset Allocation

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Gold is a Foundation Asset

III-III Asset Allocation

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Enhancing Portfolios !

III-IV Management

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A long term investment approach is better than trading ! ● Long term bullish trend BUT ● Short term volatility generates risk for market entry & exit Active management would be a «Gold Accumulation Plan» ● Savings turned into Gold on a regular basis ● Gold can be allocated to a retirement plan such as IRA Benefits : ● Stay away from speculative pressures ● Reduce market timing risk ● Benefit from a secular trend

III-V Practical Recommendation

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Current Optimal Allocation= 10%

5% in Coins: (from 1/10 to 1 oz) as direct holding to provide emergency liquidity if needed

5% in 999’9 fine Gold Bars (from 100 grams to 1 Kilo) as secured storage If possible in various international locations

IV Conclusions

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▶ Gold is definitely relevant in today’s financial crisis context ! ▶ Gold brings stability to any investor, from modest savers to institutionals ! ▶ Gold has a low opportunity cost since interest rates are close to zero ! ▶ Gold is a wealth’s insurance that you can’t afford not to have ! ▶ Gold could turn out to be a bonanza if its monetary role extends !

Invest in Gold !

Contact

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AurAriA Investment Gold

Laurent Mathiot Founder & CEO

[email protected]

Laurence Primard COO

[email protected]