World Gold Council Q4 2009

8/14/2019 World Gold Council Q4 2009

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Gold Investment Digest

www.gold.org

Contributors

Juan Carlos Artigas

[email protected]

John Mulligan

[email protected]

World Gold Council

55 Old Broad Street

London

EC2M 1RX

www.gold.org

[email protected]

+44 (0) 20 7826 4700

January 2010

2010 World Gold Council and GFMS Ltd

QUARTER 4 & FULL YEAR 2009

Price trendsThe gold price rose for the ninth consecutive year in 2009 to end the year at

US$1087.50/oz, on the London PM fix, from US$869.50/oz at the end of 2008.

This corresponded to a 25.0% increase in the price of the yellow metal during

2009. The average gold price rose 11.5% to US$972.35/oz, from an average

of US$871.96/oz during 2008.

read more on page 2

Investment trendsInvestors bought another 30 tonnes of gold via Exchange Traded Funds(ETFs) in the fourth quarter, bringing total inflows for the year to 573 tonnes.

GFMS believes the global over-the-counter market was an important source of

new net demand in Q4 2009. They note a strong pick up in OTC activity from

September onwards driven by non-traditional investors taking out long-term

positions. The more speculative end of investment demand also remained

strong, with total non-commercial and non-reportable net long positions on

COMEX increasing by 27.0%, on average, to 22.0 million ounces.

read more on page 5

Market and economic influencesInvestment flows, dollar-hedging, inflation protection, and central bank buying

all played a role in propelling the gold price to new records. Looking into

2010, a growing number of investors are worried about price stability, as the

global economy shows increasing signs of recovery. The large sums of money

supply that reached the market in 2008 are creating concerns that inflation

may be looming. There is a strong, lagged, relationship between changes in

global money supply and changes in the gold price.

read more on page 8

Gold market trendsPreliminary reports on fourth quarter jewellery trends in India suggest a

continuation of the cautious recovery from the low demand levels in Q1 2009,

helped by seasonal factors. Moreover, levels of jewellery recycling have

subsided from the highs experienced at the end of 2008 and beginning of

2009. In China, the outlook remains resilient as the economy recovers, whilst

the US market is still being impacted by higher US$ gold prices. Anecdotal

evidence suggests global levels of recycling remained subdued despite the

rise in the gold price. Separately, the pattern of behaviour among central

banks and official sector institutions continued its recently established trend,

as sales under the third Central Bank Gold Agreement (CBGA3) slowed to

a negligible rate, whilst banks outside of the agreement clocked up another

quarter of net purchases, according to our estimates.

read more on page 10

Key data

Our key data table provides you with a concise summary of gold returns,supply and demand statistics, price volatility and a correlation matrix covering

gold, silver, commodities, equities and bonds.

read more on page 13


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January 2010 2

pushed the yellow metal to record highs. By 2 December,

the gold price had reached a historic high of US$1212.50/

oz, on the London PM fix, rising by 17.5% over the course

of a month. Improved sentiment towards the US economy

partly eased concerns about the dollar and the price of

gold retraced some of the gains, finishing the year at

US$1087.50/oz.

During 2009, the S&P 500 rose by 23.5%, international

equities (as measured by the MSCI World ex US Index)

increased by 29.7%, and emerging market equities (given

by the MSCI EM Index) surged 74.5% as economies

recovered and investor appetite for risk returned. During

the same period, the S&P Goldman Sachs CommoditiesSpot Index (S&P GSCI) rose 50.3%, as demand for

energy and other commodities followed the more positive

tone in the global business cycle. In particular, the price

of oil increased by 84.9% to US$77.20/bbl by the end

of 2009 from US$41.76/bbl the previous year. Conversely,

US Treasuries, as measured by the Barclays Capital US

Treasuries aggregate, dropped 3.8% during the course

of 2009, as investors speculated that the Fed would

eventually lift rates sometime during 2010.

%

90

80

70

60

50

40

30

20

10

0

-10

Chart 2: Relative price performance in 2009

Gold(US$/oz)

BarCapUS

TsyAgg

S&P500

MSCIWorld

exUS

MSCIEM

S&PGSCI

Brentcrudeoil

(US$/bbl)

%

90

80

70

60

50

40

30

20

10

0

-10

Source: Bloomberg, Barclays Capital

Whilst gold returns during 2009 were not as impressive

when compared to other asset classes, on a risk-adjusted

basis the yellow metal showed a much better performance.

PRICE TRENDS

The gold price rose for the ninth consecutive year in 2009

to US$1087.50/oz on the London PM fi x by December

end, from US$869.50/oz at the end of the previous year.

This represented a 25.0% increase in the price of the

yellow metal during 2009. Similarly, the average price of

gold rose 11.5% to US$972.35/oz, from an average of

US$871.96/oz during 2008.

Golds strong performance during the year was supported

by a combination of many factors: first, safe-haven inflows,

especially in the first part of the year; second, investment

demand as investors sought protection against dollar

depreciation as well as possible future inflation; and

finally, a shift in central bank reserve management aswestern central banks slowed gold sales and developing

nations increased their gold reserves.

US$/oz

1300

1200

1100

1000

900

800

700

Chart 1: Gold price (US$/oz), London PM fix

Jan-

08

Apr-

08

Jul-

08

Oct-

08

Jan-

09

Apr-

09

Jul-

09

Oct-

09

US$/oz

1300

1200

1100

1000

900

800

700

Source: The London Bullion Market Association

In the first part of the year, the gold price fixed in London

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

concerns about the stability of the financial system, risk

aversion and increasing worries over price stability. The

gold price pulled back thereafter as the global economy

started to show signs of recovery. Overall, the price of

gold increased by 7.4% in H1 2009. The second halfexhibited the strongest performance, as concerns

about the dollar outlook, coupled with central banks in

developing economies increasing their gold reserves,


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January 2010 3


Its relatively tame volatility made it more attractive than

both US and international equities, and its return per unit

of risk was comparable, on average, to that of the S&P

GSCI. Emerging market equities and oil, on the otherhand, outperformed versus gold on a risk-adjusted basis.

.

Chart 3: Annual return versus annualised daily

return volatility for various assets, 1/1/09-12/31/09

0 5 10 15 20 25 30 35 40 45 50

Annualised daily return volatility (%)

Annual return

(%)

90

80

70

60

50

40

30

20

10

0

-10

Gold

US Tsy

S&P 500

S&PGSCI

MSCIEM

Oil

MSClex US

1-to-1 ratio

Source: Bloomberg, Barclays Capital, WGC

Commodities Returns

% QOQ % YOY

Gold (US$/oz) London PM fix 9.2 25.0

Silver 3.3 57.5

Palladium 37.6 118.2

Platinum 13.4 57.2

Aluminum 19.2 51.8

Copper 19.7 153.2

Lead 5.1 152.2

Nickel 6.6 71.0

Tin 10.7 61.4

Zinc 34.3 129.4

Brent Oil 14.1 84.9

S&P GSCI Spot Index 13.4 50.3

S&P GS Agriculture Spot Index 14.3 14.7

S&P GS Livestock Spot Index 8.4 2.8

R/J CRB Spot Index 13.1 33.7

DJ UBS Spot Index 14.2 41.2

Source: Global Insight, WGC

Demand for industrial metals continued to rise as the global

economic recovery gathered pace, resulting in double-digit

price growth, both on a quarter-on-quarter and a year-

on-year basis. In Q4 2009, palladium and zinc were the

best performing of the commodities we regularly monitor,

rising by over 37.6% and 34.4% respectively, followed

by copper (19.7%), and aluminium (19.2%). Silver, lead,

and nickel were the worst performers during the quarter,

increasing by 3.3%, 5.1%, and 6.6% respectively, albeit

each posted a solid performance over the year as a whole.

Price volatilityWhilst market volatility has eased relative to 2008, gold

price volatility increased in the fourth quarter to an

annualised average of 19.7% from 15.0% in the previous

quarter. Gold price volatility reached a peak of 26.0% on21 December, measured on a 22-day rolling basis, as the

price of gold fell from its historic peak of US$1212.50/

oz on 2 December to US$1084/oz on 22 December, at

the London PM fix. Although daily fluctuations in the

gold price eased thereafter, price volatility remained high

at 23.0% by the end of the year relative to the previous

quarter which saw record low volatility levels and by

historical standards (golds 20-year price volatility is

around 15.8%). This contrasted with a continuing decline

in volatility in other markets. The VIX index, a market

estimate of future volatility based on the weighted averageof the implied volatilities of a wide range of strikes, eased

Chart 4: Gold & S&P GS Commodity Index

annualised price volatility (22-day rolling, %)

and the VIX Index (level)

Gold(US$/oz LHS)

S&P GSCI (LHS)VIX Index(RHS)

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

%90

80

70

60

50

40

30

20

10

0

Level90

80

70

60

50

40

30

20

10

0

Source: Bloomberg, WGC


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January 2010 4

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

25.5% in the previous quarter. Moreover, daily volatility in

Q4 (on an annualised basis) on the S&P Goldman Sachs

Commodity Index fell to 22.6% on Q4 from 29.6% in Q3.

Nevertheless, gold remained, on average, the least

volatile of the commodities that we monitor with the

exception of the S&P GS Livestock Spot Index. Lead

was the most volatile commodity for the third consecutive

quarter, with an average volatility of 37.8% in Q4, followed

by silver and palladium, which had volatilities of 32.9%

and 32.1% respectively. Crude oil showed a considerable

improvement, dropping to an average 30.5% annualised

volatility in Q4 from 43.2% in Q3.

%

40

35

30

25

20

15

10

5

0

S&PGSLivestock

SpotIndex

Gold(US$/oz)

LondonPMf

ix

DJUBSSpotIndex

Platinum

S&PGSCISpotIndex

Tin

S&PGSAgriculture

SpotIndex

Copper

Aluminum

BrentOil

Zinc

Nickel

Palladium

Silver

Lead

Chart 5: Annualised Q4 2009 volatility for

selected commodities

%

40

35

30

25

20

15

10

5

0



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January 2010 5

Exchange Traded FundsInvestors bought another 30 tonnes of gold via Exchange

Traded Funds in Q4, bringing total inflows for the year

to 573 tonnes. This took the total amount of gold in the

ETFs that we monitor to a record 1,762 tonnes, worth

US$62 billion at the year-end gold price. SPDR Gold

Shares, or GLD as it is known, listed on the NYSE

Arca and cross-listed in Mexico, Singapore, Tokyo and

Hong Kong recorded the strongest inflows during the

fourth quarter, adding 38.3 tonnes, bringing the total to

1,133.6 tonnes (worth US$40.2 billion) in assets. It was

followed by ETFS Physical Swiss Gold Shareswhich

was launched in September 2009 and is listed in the

NYSEadding 6.4 tonnes during Q4 to a total 9.5 tonnesin assets. iShares Comex Gold Trust, or IAU listed on

the NYSE Arca, posted the third strongest gain, adding

4.7 tonnes during the quarter and bringing its total assets

to 79.3 tonnes. ETFS Physical Gold (listed on the London

Stock Exchange) experienced net outflows of 11.2 tonnes

during Q4, although it added 44.2 tonnes overall during

2009. GBS Bullion Securities (listed on the London Stock

Exchange) shed 7.8 tonnes during the quarter, although

it had a net gain of the same amount during the course

of 2009.

1800

1600

1400

1200

1000

800

600

400

200

0

Chart 6: Gold ETF holdings in tonnesand the gold price (US$/oz)

Tonnes US$/oz

1200

1100

1000

900

800

700

600

500

400

300

Apr-03

Dec-03

Aug-04

Apr-05

Dec-05

Aug-06

Apr-07

Dec-07

Aug-08

Apr-09

Dec-09

ETFS Physical Swiss Gold Shares (LSE)

ETFS Physical Swiss Gold Shares (NYSE)

Julius Baer Physical Gold - SWX

XETRA-GOLD (Deutsche Berse)

ETFS Physical Gold (LSE)

GOLDIST (Istanbul Stock Exchange)

ZKB Gold ETF - SWX

IAU (Amex)

GLD (NYSE)

NewGold (JSE)

GBS (LSE)

GBS (ASX)

Gold PM Fix (US$)

Data: www.ishares.com; www.exchangetradedgold.com;

www.etfsecurities.com; Zurich Kantonalbank; Finans Portfy;

www.Deutsche-Boerse.com; www.juliusbaer.com; Global Insight

Chart: WGC, www.gold.org

GLD optionsTrading in GLD options more than doubled in the fourth

quarter of 2009 to a total of 13.7 million contracts from

5.7 million in the third quarter, and it more than tripled

from the same period last year as both call and put

option transactions increased. Volumes sharply increased

from an average 132,277 contracts per day in early

October to a daily average of 353,521 contracts in the

first half of December, subsequently easing to 212,624

contracts, on average, by the end of the year, much in

line with movements in the gold price. Call and put

volumes peaked on 4 December at 252,897 and 474,108

contracts respectively. Whilst options volume generally

rose as the price of gold increased, the peak coincidedwith the largest daily drop in the gold price during Q4,

when the yellow metal fell by 3.8% to US$1161.4/oz from

US$1207.6/oz the previous day. At-the-money implied

volatilities traded in a range of 20.0% to 27.0% on the

3-month call and put options; implied volatility reached

the low for the quarter on 30 October trading at 20.4%,

increasing to 27.3% by 9 December, and finally retracing

back to 23.0% by the end of the quarter.

Gold futures

Comex total non-commercial and non-reportable netlong positions, a proxy for the more speculative end of

investment demand, remained strong. The net long position

Chart 7: COMEX net long on non-commercial &non-reportable positions on the active gold futurescontract (million oz) versus the gold price (US$/oz)

Million oz

Gold (US$/oz)

US$/oz35

30

25

20

15

10

5

0

Gold active net-longpositions (million oz)

1200

1100

1000

900

800

700

600

500

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Source: COMEX, Bloomberg

INVESTMENT TRENDS


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January 2010 6


reached 28 million ounces by the end of Q4 compared

to 27.5 million ounces at the end of Q3. On average,

net long positions in Q4 increased by 27.0% from 22.9

million ounces on average in Q3. The net long peak of

30.8 million ounces in early December coincided with the

historical high in the gold price of US$1212.50/oz on the

London PM fix, on 2 December. By the end of the quarter,

net long positions fell slightly to 27.9 million ounces, much

in line with movements in the price of gold. Overall, net-

long positions rose on the back of an increment of 29.0%

in long-only positions from Q3, which was partially offset

by a 42.0% surge in short-only contracts during the same

period. Whilst net long positions increased on average

during Q4, the rise was relatively tame compared to the

increment in the gold price, as demand flows for gold

were probably not primarily driven by speculative trading.

OTC marketAccording to research carried out by GFMS on behalf

of the World Gold Council, investor activity in the over-

the-counter (OTC) market picked up strongly from

September onwards, with substantial long positions being

established by hedge funds and other non-traditional

institutional investors in bullion. GFMS believes that a

good part of this demand was longer-term in nature, as

many investors were concerned about future inflation

and the outlook for the US dollar. They find evidence offresh allocations to gold in allocated accounts, as well

as bespoke commodity indices which included gold.

Another part of gold investment was driven by short-

term price gains, with much of the buying in September

and some of these speculative positions closing out as

momentum faltered. Overall, GFMS concludes the OTC

market was an important source of net new demand for

gold in Q4 2009.

Bars and coinsThe latest available data on coin and bar sales corresponds

to Q3 2009 (comprehensive Q4 data will be released inmid-February). Net retail demand for gold, which includes

demand for coins, small bars, medals and imitation coins,

and other retail investment, remained strong during the

third quarter. It rose by 17.9 tonnes to 185.9 tonnes in

Q3 2009 from 167.9 tonnes in the previous quarter, an

increase of 10.7%. This largely reflects a recovery in

investment demand in non-western gold markets, partly

offset by a reduction in net inflows in western markets. The

single biggest inflow during the quarter occurred in China,

followed closely by India, at 26.8 tonnes and 26.0 tonnes

respectively. Whilst the third quarter was not as strong for

the US, Q4 data on American Eagle bullion coin sales from

the US Mint shows a more rosy picture. Demand for 1-ounce

coins increased by more than 27% in the fourth quarter, on

a quarter-on-quarter basis, and total demand for coins

(including smaller denominations) rose by 66.0% relative

to Q3 2009 and by 14.0% relative to Q4 2008, to a record

471,000 ounces (14.6 tonnes) during Q4 2009. Anecdotal

evidence suggests a similar pattern in global coin

demand. Investors wishing to purchase gold coins or smallbars can find a list of retail dealers on our website at: http://

www.invest.gold.org/sites/en/where_to_invest/directory.

000 oz

500

450

400

350

300

250

200

150

100

50

0

Chart 8: American Eagle bullion sales

(in thousands of ounces)

*Includes 1-, 1/2-, 1/4-, and 1/10th-ounce coin sales

1-oz coin sales Total sales*

Q

107

Q

207

Q

307

Q

407

Q

108

Q

208

Q

308

Q

408

Q

109

Q

209

Q

309

Q

409

000 oz

500

450

400

350

300

250

200

150

100

50

0

Source: The United States Mint


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January 2010 7

Lease ratesThe implied gold lease rate is the difference between

the dollar interest rate and the equivalent duration gold

forward ratethe rate at which gold holders are willing to

lend gold in exchange for dollars, also known as the swap

rate. On the one hand, the 3-month US Libor rate remained

very low at 0.25% during the quarter. On the other hand,

the 3-month gold swap rate fell to a low of 0.27% by the

end of October to later rise to 0.42% by mid-December as

the gold price fell from its record highs in early December,

and then back to 0.32% by the end of the quarter, as the

gold price rose slightly again. Consequently, the implied

gold lease rate remained modestly negative.

%

3.0

2.5

2.0

1.5

1.0

0.5

0

-0.5

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

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

%

3.0

2.5

2.0

1.5

1.0

0.5

0

-0.5

Source: Bloomberg, WGC


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January 2010 8


MARKET AND ECONOMIC INFLUENCES

The global economy began to show tentative signs of

recovery in H2 2009 from one of the worst global recessions

since the Great Depression. However, the pace of the

recovery remains uncertain. Whilst some developing

economies, like China, appear to be recovering at a

healthy pace, their developed counterparts, in particular

the US and Europe are far from returning to a normal

rate of growth. In its October 2009 World Economic

Outlook, the IMF reported that after an expected 1.1%

contraction in 2009, the world economy is likely to expand

at 3.1% in 2010, but said advanced economies may only

grow at 1.3% during the course of next year.

In the US, the S&P Case-Schiller Home Price Index roseby 5.3% from its low in April 2009, after having contracted

over 30% from its peak in the summer of 2007. At the same

time, the Institute for Supply Managements manufacturing

and services indices remained above the 50 no change

level by the end of 2009, increasing 70.0% and 25.0%

respectively from December 2008, signalling a better

outlook for growth. After bottoming out in Q1 2009, the

S&P 500 grew by 64.8% to 1115.1 by the end of the year,

from 676.5 on 9 March 2009. Nonetheless, unemployment

remains high at around 10% by December, levels not

seen since 1983, signalling that the recovery may not beas quick as some market participants had anticipated.

Chart 10: US ISM Manufacturing Index (level) and

US unemployment rate (% sa, inverted)

Level

70

65

60

55

50

45

40

35

30

25

20

%

2

3

4

5

6

7

8

9

10

11

12

Jan-80

Jul-83

Apr-85

Oct-88

Apr-92

Oct-95

Apr-99

Oct-02

Apr-06

Oct-09

Unempemployment rate

(RHS, inverted)

ISM Manufacturing

Index (LHS)

Source: Institute for Supply Management, Bureau of Labor Statistics

Similarly, the European economy (UK and the Euro block)

expanded at an annual 1.5% rate in the third quarter

of 2009 and the MSCI Europe Index rose by 86.5% in

US dollar terms between 9 March and 31 December

2009, but unemployment continued to increase, and

had reached 10% by November 2009. In a more

positive tone, Chinas real GDP grew at an annual

rate of 8.9% in Q3 2009 over year-ago levels, and

is expected to grow in excess of 9% in 2010. At the

same time, India grew at an annual rate of 7.9% in Q3,

and is expected to grow at 6.5% in 2010, and the

MSCI Emerging Markets Index more than doubled

(in US dollars) from 475.1 on 2 March to 989.47 by

31 December.

The recovery in the global economy, especially in the

countries like India and China, is likely to play a positive

role in jewellery demand. However, jewellery was not a

primary source of support for the price of gold in 2009.

Investment flows, dollar-hedging, inflation protection, and

central bank buying all played a role in propelling the

yellow metal to successive new highs.

Looking forward to 2010, a growing number of investors

are worried about price stability. The large sums of moneysupply that reached the market in 2008 are creating

concerns that inflationary pressures loom. Investors who

do not believe higher inflation will materialize may still

worry about the dollar outlook.

During our meetings and in surveys we conducted at

conferences throughout the second half of 2009, we

found that investors who hold gold, on average, have

allocations of 5-7% in their portfolio. Yet, overall assets

under management in gold remain low. As of Q3 2009, we

estimate that only about 1.1% of global assets are invested

in gold, compared to other alternative investments whichcorrespond to about 4.4% of assets. There is, therefore,

ample scope for growth.

For example, of those investors surveyed, almost

half (45%) were planning to increase their gold

exposure, and only 1 respondent was planning to

reduce it. More than two-thirds of investors cited gold

being an inflation and dollar hedge as their primary

reasons for holding the yellow metal, and about half

used it for portfolio diversification. Less than a quarter of

those investors were using gold as a vehicle to expressa tactical view, in line with other signs that many of

the investment flows into gold have tended to be more

strategic in nature.


9/14


January 2010 9

Chart 11: Global assets under managment asof Q3 2009 (est. total US$81.5 trillion)

Alternatives**

5%

Gold

1%

Global Equities*

44%

Global Fixed Income*

50%

* Estimated using world equity and bond index data and adjusting for data overlaps

** Includes hedge funds, private equity, real estate, and commodities (excluding gold)

Source: JPMorgan, Barclays Capital, HFR, GFMS, FTSE/EPRA, BIS

There is a solid rationale behind viewing gold as an

inflation hedge. In an upcoming WGC report (Linking

Global Money Supply to Gold and to Future Inflation,

to be released on 1 February 2010), we find that money

supply is related to the price of gold. As the money supply

increases, the gold price tends to rise (with a lag of about

6 months). Moreover, we find that changes in the US

money supply do not solely explain the changes in

the price of gold. On the contrary, gold is impacted

by many factors world-wide and as such, money

supply changes in places like India, Europe, and Turkey

also have an effect on its performance. The report also

discusses the role gold has as an indicator of future

velocity of money, and consequently of future inflation.

Moreover, gold tends to provide a hedge against inflation

over the long run. Even relative to the period from 1979 to

1981 in which high inflation coupled with geopolitical risk

(the invasion of the US embassy in Iran, as well as the

Iran-Iraq war) exacerbated a high and short-lived spike

in the price of gold, the yellow metal currently trades

around fair value.

Chart 12: Real gold price (US$/oz),December 2009 prices

US$/oz

2000

1800

1600

1400

1200

1000

800

600

400

200

0

1979-1981 average

(at December 2009 prices)

Jan-70

Nov-72

Sep-75

Jul-78

May-81

Mar-84

Jan-87

Nov-89

Sep-92

Jul-95

May-98

Mar-01

Jan-04

Nov-06

Sep-09

Source: Bloomberg, Bureau of Labor Statistics, WGC


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January 2010 10


GOLD MARKET TRENDS Please note that data on jewellery and industrial demandare released with a lag; the latest available data is forQ3 2009. Data for the fourth quarter of 2009 will be releasedin mid-February 2010.Jewellery

During the third quarter, global jewellery demand

continued to recover from the depressed levels recorded

in Q1. Global demand totalled 473.5 tonnes, a 17%

increase on the previous quarter and a 39% gain from

the Q1 low, despite a 6% rise in the US$ price over that

six month period.

The comparison with year-earlier levels is considerably

different, showing a 30% decline, albeit when compared

with an exceptionally strong Q3 2008. In volume terms,

the third quarter total of 473.5 tonnes is the weakest

third quarter result this decade. Meanwhile, the value

measure of demand tells a somewhat more positive

story, suggesting that the long run upward trend in the

value of gold jewellery consumption has, so far, not

been threatened. This tends to confirm the view that

consumers around the globe continue to harbour a deep-

seated desire to own gold and are prepared to allocate

significant amounts to spending on jewellery.

The high levels of the gold price that prevailed during the

third quarter were a major factor in suppressing jewellery

demand across virtually all markets. The decline in golddemand was almost universal, with the exception of

mainland China where tonnage increased by 8% from Q3

2008. Demand in India, Middle East, and Turkey declined

in Q3 2009 by 42%, 34%, and 54% respectively year-on-

year. Meanwhile, jewellery demand in the US dropped by

17% in Q3 2009 relative to the same period last year.

Preliminary reports on fourth quarter trends in India

suggest a continuation of the cautious recovery from

the low levels of demand seen in early Q1, helped by

seasonal factors such as Diwali and the wedding season.Moreover, fresh gold imports for the quarter are expected

to be significantly higher than a very weak Q4 2008.

In the Middle East, demand is likely to have remained

subdued, particularly in Dubai. In China, the outlook

remains resilient as the economy recovers, whilst the US

market is still being impacted by higher US$ gold prices.

Anecdotal evidence suggests global levels of recycling

remained subdued despite the rise in the gold price.

Tonnes (LHS) US$ bn (RHS)

Tonnes800

700

600

500

400

300

200

100

0

US$ bn20

18

16

14

12

10

8

6

4

2

0

Q105

Q305

Q106

Q306

Q107

Q307

Q108

Q308

Q109

Q309

Chart 13: Jewellery demand in tonnesand US$ billions

%

20

10

0

-10

-20

-30

-40

-50

-60

Chart 14: Tonnage growth in jewellery demand

by country (Q3 09 vs. Q3 08, % change)

India

China

Hon

gKong

Taiwan

Japan

In

donesia

Vietnam

Saud

iArabia

Egypt

UAE

OtherGulf

Turkey

Russia

USA

ItalyUK

%

20

10

0

-10

-20

-30

-40

-50

-60

Source: GFMS

Source: GFMS


11/14


January 2010 11

GOLD MARKET TRENDS

Industrial and

dental applicationsGold demand for industrial and dental applications

remained fragile in the third quarter, slipping 11% to just

under 100 tonnes. Despite this sizeable decline, there

were some positive signs that demand may be picking

up in some sectors, which was reflected in a quarter-on-

quarter rise of 6%. Electronics off-take, which accounts

for almost 70% of the total, declined by 10% compared

with Q3 2008, which many regard as a reasonable

result considering the weakness of the global economic

environment. Moreover, in recent months there has beena notable increase in reports from industry bodies that

perhaps the worst is over and off-take is set to recover

from the severe slump recorded in early 2009, especially

in the semiconductor and consumer electronics

industries. Elsewhere, gold used in the other industrial

and decorative sector fell by 19% on a yearly comparison,

and dental demand fell by 6% over the same period.

Tonnes

120

100

80

60

40

20

0

Chart 15: Industrial demand by category (tonnes)

Dentistry Other Industrial Electronics

Tonnes

120

100

80

60

40

20

0

Q106

Q306

Q107

Q307

Q108

Q308

Q109

Q309

Source: GFMS

SUPPLY

Tonnes

0

-25

-50

-75

-100

-125

-150

-175

-200

Chart 16: Net producer hedging (tonnes)

Q

106

Q

306

Q

107

Q

307

Q

108

Q

308

Q

109

Q

309

Tonnes

0

-25

-50

-75

-100

-125

-150

-175

-200

Mine productionMine production showed an increase during the third

quarter, reaching 670 tonnes. The 6% quarterly increase

matched the 6% increase over year-earlier levels, helped

by increases in mine output in Indonesia (which almost

doubled its production in Q3 2009 from the Q3 2008),

China, and Russia. Still, the outlook for gold mining

production remains flat, with ageing mines in the traditional

mining hubs, a dearth of major new gold discoveries in

recent years and increasing lead times in bringing new

projects on stream.

The other element of producer activity, de-hedging,

increased sharply after several relatively muted quarters,

resulting in a considerable contraction in Q3 total gold

supply. Producer de-hedging totalled 105 tonnes,

compared with just 31 tonnes the previous quarter

and 53 tonnes in Q3 2008. The main contributor was

Barrick, which announced in September that it planned

to eliminate its entire hedge position over the next year

(its fixed price contracts amounting to 3 million ounces at

that time). During the third quarter, de-hedging by Barrickalone amounted to 78 tonnes, whilst AngloGold Ashanti

bought back a further 15 tonnes as it completed a hedge

book restructuring that was underway at the end of June. Source: GFMS

Please note that the data on mine production is releasedwith a lag; the latest available data is for Q3 2009.

Data for the fourth quarter of 2009 will be released inmid-February 2010.


12/14

January 2010 12


SUPPLY

The official sector

The fourth quarter of 2009 was an interesting one for the

official sector. Separately, the pattern of behaviour among

central banks continued its recently established trend,

as sales under the third Central Bank Gold Agreement

(CBGA3) slowed to a negligible rate, whilst banks and

official sector institutions outside of the agreement

clocked up another quarter of net purchases, according

to our estimates

The most significant development of the quarter was

the announcement by the Reserve Bank of India (RBI)that it had bought 200 tonnes of the IMFs 403 tonnes

of planned gold sales. The move boosted the RBIs gold

reserves to 558 tonnes and lifted the proportion of gold

in total reserves to 6.4% from 4.0% prior to the sale. The

RBI announcement was followed swiftly by the news that

Sri Lankas central bank purchased 10 tonnes of gold

from the IMF in a transaction that tripled its holdings of

gold, which now stand at 15.3 tonnes and account for

over 22% of total reserves. Finally, the Bank of Mauritius

announced that it had purchased a further 2 tonnes,

doubling the banks holdings to 3.9 tonnes.

In approving the sale of 403 tonnes of gold in September,

the Executive Board of the IMF committed to conducting

a programme of sales in a way that would not disturb

the market. In keeping with this intention, these off-

market transactions had no impact on the net supply

of or demand for gold in the market. Nevertheless, they

signalled a clear desire among central banks to maintain

an allocation to gold. The announcements from India,

Mauritius and Sri Lanka made clear that the purchases

were designed to restore the balance of gold in their

reserve asset portfolios, which had declined over time asgold reserves failed to keep pace with increasing foreign

exchange reserves.

These transactions, together with the ongoing

programmes of gold purchases by the central banks of

Russia and China reaffirm golds role as a key element of

global monetary reserves as well as a growing recognition

of golds unique properties as a monetary asset and as a

protector of wealth.

Top 40 Official Gold Holdings*Tonnes % of reserves**

1 United States 8,133.5 68.7%

2 Germany 3,407.6 64.6%3 IMF 3,005.3 1

4 Italy 2,451.8 63.4%

5 France 2,435.4 64.2%

6 China 1,054.0 1.5%

7 Switzerland 1040.1 29.0%

8 Japan 765.2 2.0%

9 Netherlands 612.5 52.0%

10 Russia 607.7 4.7%

11 India 557.7 6.4%

12 ECB 501.4 19.6%

13 Taiwan 423.6 4.1%

14 Portugal 382.5 83.8%

15 Venezuela 356.4 35.7%

16 United Kingdom 310.3 15.2%

17 Lebanon 286.8 26.5%

18 Spain 281.6 34.6%

19 Austria 280.0 52.7%

20 Belgium 227.5 31.8%

21 Algeria 173.6 3.8%

22 Philippines 154.7 12.1%

23 Libya 143.8 4.6%

24 Saudi Arabia 143.0 10.2%

25 Singapore 127.4 2.3%

26 Sweden 125.7 8.6%

27 South Africa 124.8 10.5%28 BIS 120.0 1

29 Turkey 116.1 5.2%

30 Greece 112.4 71.5%

31 Romania 103.7 7.4%

32 Poland 102.9 4.4%33 Thailand 84.0 2.1%

34 Australia 79.9 6.0%

35 Kuwait 79.0 11.4%

36 Egypt 75.6 7.4%

37 Kazakhstan 74.5 12.0%

38 Indonesia 73.1 3.9%

39 Denmark 66.5 2.8%

40 Pakistan 65.4 15.8%

Source: IMF, national data, WGC

* This table was updated in December, 2009 and reports data available at that

time. Data are taken from the International Monetary Funds International

Financial Statistics (IFS), December 2009 edition, and other sources where

applicable. IFS data are two months in arrears, so holdings are as of October

2009 for most countries, September 2009 or earlier for late reporters. The table

does not list all gold holders: countries which have not reported their gold

holdings to the IMF in the last six months are not included, while other countries

are known to hold gold but they do not report their holdings publicly. Where

the WGC knows of movements that are not reported to the IMF or misprints,

changes have been made. The countries showing as having 0.0 tonnes of gold

report some gold but less than 0.05 tonnes to the IMF.

** The percentage share held in gold of total foreign reserves, as calculated by

the World Gold Council. The value of gold holdings is calculated using the

end-October gold price of $1040.00 per troy ounce (there are 32,151 troy

ounces in a metric tonne). Data for the value of other reserves are taken from

IFS, table Total Reserves minus Gold.1 BIS and IMF balance sheets do not allow this percentage to be calculated. In

the case of any countries, up to date data for other reserves are not available.


13/14


January 2010 13

Gold price

Q1 09 Q2 09 Q3 09 Q4 09Gold price 907.80 920.90 960.26 1098.79(London PM fix, $ average)

(% qoq) 14 1 4 14

(% yoy) -1.7 2.8 10.3 36.7


Volatility (%) to end-December 20091-month 3-month 6-month 1-year

Gold (US$) 21.7% 19.7% 17% 21.3%


Market capitalisationValue ($ bn)

Above-ground stocks of gold 2 5,758

ETFs (as at 31 Decemberr 2009) 3 62.3

Notional value of net long non-commercial and non-reportablepositions reported by CFTC, gold futures (at 29 December 2009) 31


PerformanceMSCI Dow Jones UBS S&P GS Bank of England Dow Jones/ Barclays Capital

S&P World Commodity TR Commodity Gold Effect Exchange Wilshire Global Treasury500 ex-US Index Index (spot) Rate USD REIT Index Index USD

1 month 1.93% 1.59% 1.98% 0.87% -7.51% 3.92% 6.47% -6.07%

3 months 6.04% 2.44% 9.03% 8.42% 9.21% 1.09% 7.89% -2.32%

6 months 22.59% 22.27% 13.66% 6.51% 16.37% -4.47% 44.48% 5.15%

1 year 26.46% 33.67% 18.91% 13.49% 25.04% -5.66% 21.03% 2.08%

Volatility (1 year) 27.18% 24.82% 25.05% 34.17% 21.28% 9.93% 69.05% 10.69%

Data: Global Insight, WGC, Barclays Capital; Index data is based on Total Returns unless not applicable

Demand (Q4 08-Q3 09)

% % Value %Tonnes change1 yoy ($ bn) yoy

Jewellery 1769 -10% -20% 50.6 -18%

Identifiable investment 1502 -11% 69% 42.7 71%

of which ETFsand similar products 658 -14% 115% 19.0 123%

Industrial and Dental 363 -3% -20% 10.5 -18%

Source: GFMS, WGC

Supply (Q4 08-Q3 09)

% % Value %Tonnes change1 yoy ($ bn) yoy

Mining output 2527 1% 5% 72.8 9%

Net producer hedging -160

Total mine supply 2367 0% 17% 68.2 22%

Official sales 57 -63% -82% 2 -83%

Recycled gold 1528 4% 35% 44 38%

Source: GFMS, WGC

1 The quarterly % change in rolling annual totals.2 Based on 2008 volume and Q4 2009 average gold price.3 Data: www.exchangetradedgold.com; www.etfsecurities.com; www.ishares.com;

Zurich Kantonalbank; Finans Portfy; www.Deutsche-Boerse.com; www.juliusbaer.com

KEY DATA

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

BarCap/ BarCap/ BarCap/ Dow Jones/S&P GS DJ UBS MSCI DJ Global High Yield US Wilshire 3-month

Commodity CRB Commodity World Industrial S&P Wilshire Treasuries Bond Credit REITS T-Bill

Gold Silver Oil Index Index Index excl. US Average 500 5000 Index Index Index Index Yields

Gold 1.00

Silver 0.83 1.00

Oil 0.35 0.42 1.00

S&P GS Commodity Index 0.38 0.40 0.86 1.00

CRB Index 0.26 0.38 0.60 0.67 1.00

DJ UBS Commodity Index 0.43 0.47 0.74 0.93 0.75 1.00

MSCI World excl. US 0.13 0.27 0.50 0.57 0.62 0.62 1.00

DJ Industrial Average -0.09 0.04 0.30 0.38 0.42 0.41 0.82 1.00

S&P 500 -0.05 0.10 0.34 0.43 0.44 0.46 0.85 0.98 1.00

Wilshire 5000 -0.03 0.12 0.35 0.44 0.46 0.47 0.86 0.97 1.00 1.00

BarCap/Global Treasuries Index 0.34 0.32 0.08 0.06 0.08 0.08 0.09 -0.21 -0.16 -0.16 1.00

BarCap/High Yield Bond Index 0.07 0.14 0.19 0.11 0.28 0.11 0.03 -0.03 -0.01 -0.01 0.05 1.00

BarCap/US Credit Index -0.10 0.01 0.04 0.01 0.23 0.05 0.20 0.02 0.05 0.05 0.47 0.38 1.00Dow Jones/Wilshire REITS Index -0.01 0.00 0.09 0.02 0.03 0.01 -0.01 0.01 -0.02 -0.02 0.18 0.10 0.22 1.00

3-Month T- Bill Yields -0.19 -0.05 0.14 0.14 0.19 0.13 0.27 0.17 0.22 0.23 -0.09 0.12 -0.01 -0.07 1.00

Data: Global Insight, Barclays Capital, WGC; Index data is based on Total Returns unless not applicable


14/14

J 2010 14


A WEALTH OF INFORMATION

The indispensable source of information for investing in goldwww.marketintelligence.gold.orgThe World Gold Council invites you to explore the Market

Intelligence section of its website, one of the most

comprehensive sources of information about the gold

market and golds strategic investment properties. The

information is housed in four sections of the site: Market

Knowledge, Investing in Gold, Research & Statistics, and

Gold as a Reserve Asset.

Market Knowledge

Investors new to gold are encouraged to read theoverviews of how the gold market functions and the

principal components of supply and demand: Central

banks, derivatives markets, industrial users, investors,

jewellery consumers, mining companies and recyclers of

gold scrap.

Investing in Gold

Learn about golds unique properties that enable

investors to employ this asset to manage portfolio risk

and preserve capital.

Gold Research & Statistics

Access a vast library of research and information,

including golds historical prices, central bank reserve

statistics, quarterly supply and demand data for gold,

as well as correlation and volatility charts and tables.

Academic and private sector research addresses avariety of subjects related to gold, such as inflation and

the US dollar.

Gold as a Reserve Asset

Learn why central banks and multilateral organisations

such as the IMF hold gold as a reserve asset.

DisclaimerThis report is published by the World Gold Council (WGC), 55 Old Broad Street, London EC2M 1RX, United Kingdom. Copyright 2010. All rights reserved. This report is the property of WGCand is protected by U.S. and international laws of copyright, trademark and other intellectual property laws. This report is provided solely for general information and educational purposes. Theinformation in this report is based upon information generally available to the public from sources believed to be reliable. WGC does not undertake to update or advise of changes to the informationin this report. Expression of opinion are those of the author and are subject to change without notice. The information in this report is provided as an as is basis. WGC makes no express or impliedrepresentation or warranty of any kind concerning the information in this report, including, without limitation, (i) any representation or warranty of merchantability or fitness for a particular purposeor use, or (ii) any representation or warranty as to accuracy, completeness, reliability or timeliness. Without limiting any of the foregoing, in no event will WGC or its affiliates be liable for any decisionmade or action taken in reliance on the information in this report and, in any event, WGC and its affiliates shall not be liable for any consequential, special, punitive, incidental, indirect or similar

damages arising from, related or connected with this report, even if notified of the possibility of such damages.

No part of this report may be copied, reproduced, republished, sold, distributed, transmitted, circulated, modified, displayed or otherwise used for any purpose whatsoever, including, withoutlimitation, as a basis for preparing derivative works, without the prior written authorisation of WGC. To request such authorisation, contact [email protected]. In no event may WGC trademarks,artwork or other proprietary elements in this report be reproduced separately from the textual content associated with them; use of these may be requested from [email protected]. This report is not,and should not be construed as, an offer to buy or sell, or as a solicitation of an offer to buy or sell, gold, any gold related products or any other products, securities or investments. This report doesnot, and should not be construed as acting to, sponsor, advocate, endorse or promote gold, any gold related products or any other products, securities or investments.

This report does not purport to make any recommendations or provide any investment or other advice with respect to the purchase, sale or other disposition of gold, any gold related products orany other products, securities or investments, including, without limitation, any advice to the effect that any gold related transaction is appropriate for any investment objective or financial situation ofa prospective investor. A decision to invest in gold, any gold related products or any other products, securities or investments should not be made in reliance on any of the statements in this report.Before making any investment decision, prospective investors should seek advice from their financial advisers, take into account their individual financial needs and circumstances and carefullyconsider the risks associated with such investment decision.

Issued by:

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www.gold.org

Tel: +44 (0)20 7826 4700Fax: +44 (0)20 7826 4799

World Gold Council Q4 2009

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