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8/8/2019 MRB Theme Report_Oct26 2010
1/12
Macr oRe se ar chBoar d
Independent Investment Strategy &Consulting
partnersmrbOcobr 26, 2010
Theme RepORt
M R B p A R t N e R S I N C . m w w w . m r b a r n r s . c o m m C o y r i g h 2 0 1 0 ( s f i n a l a g f o r f u l l c o y r i g h )
m th sw so for gold rics will rsis for a whil lon-
gr: monary condiions will rmain xrmly accom-
modaiv, king ral inrs ras low and h major
currncis unaaling. In urn, h idal wav of invs-
mn caial rushing ino gold is unlikly o vanish.
m Nonhlss, sculaiv xcsss ar alrady build-
ing and h ak in gold rics could b abru (similar
o 1980). Nimbl invsors may wish o rid h rnd
highr for now, bu longr-rm invsors should con-
sidr using ric srngh o gradually rim osiions
and rdirc funds ino roduciv asss.
m Goldwillnot proveeectiveatpreservingwealth in
theeventofacceleratinginationordeation.Either
oucom would likly b barish for bullion.
1
Nx thm Ror
The Ination/Deation Debate
tusday, Novmbr 2nd
The Gold Bull Market:Debunking Myths &Timing When To Sell
Gold prices have surged more than vefold from
hir 2001 low of roughly $260/ounc. th macro
and olicy forcs currnly a work hav crad a
sw so for his ass. Indd, i is ossibl ha
gold rics will xrinc a arabolic mov highr
(muchlikethe1979/80episode),giventheoodof
invsmn caial rying o nr his rlaivly il-
liquid mark.
Howvr, i is worrisom ha a mania mnaliy is alrady forming in h gold mark.
th rcious mal is now bing characrizd as a cash quivaln and h rfc ail
riskhedge(i.e.willbenetfromeitherinationordeation).Goldisneitherandshould
no b rgardd as a on-way b. Mos likly, gold will nd u causing a gra dal of
ain for invsors adoing a buy and hold sragy a his oin in h cycl. In fac, long-
rm invsors should considr using ric srngh o gradually rduc xosur and
rdirc funds ino roduciv asss wihin hos conomis ha do no fac cyclical or
srucural hadwinds.
Not A Hedge For Tail Risks
Financial aricians incrasingly rcommnd adding gold o an invsmn orfolio
asaprudentmeasuretohedgeagainstinationand/ordeation(i.e.aninsurancepolicy
youhopeisnotneeded).Someevensuggestthatgoldholdingsincreasediversication.
Unfortunately,goldisnotparticularlyeectiveatpreservingwealthineithertailrisk
scnario, and is corrlaion wih risk ass rics has risn markdly in rcn yars.
Gold should no
b rgardd as ahedgeforination
ordeation
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2M R B p A R t N e R S I N C . m w w w . m r b a r n r s . c o m m C o y r i g h 2 0 1 0 ( s f i n a l a g f o r f u l l c o y r i g h )
mrb Theme RepORt mOcobr 26, 2010
thr is a widsrad and long-hld blif among invs-
ors ha gold movs wih, and ofn in aniciaion of
shiftsinconsumerpriceination.Theabilitytopreserve
walh during riods of rising ric rssurs is crain-
ly an aaling rory, givn ha almos all ohr as-
ss g hammrd during hs isods. Indd, gold
rics surgd during h 1970s whn U.S. and global in-
ationacceleratedtoadouble-digitpace.Bullionprices
thencollapsedalongwiththedisinationarytrendofthe
1980s and 1990s. Howvr, h rlaionshi bwn
goldandinationsubsequentlybrokedown:goldprices
sard rallying in 2001 dsi a coninuaion of h dis-
inationarytailwindintheglobaleconomy(chart 1). th
dcad long divrgnc suggss ha gold is no, or a
las no longr, drivn by xcd ric rssurs.
Similarly, hr sms o b a growing consnsus ha
goldwillalsoprovideinsuranceagainstadebt-deation
siral. I may b ru ha in a coml collas of h
globalnancialandmonetarysystems,goldbars/coins
(no gold etFs or drivaiv roducs) will b a rfrrd
ass, along wih drid food and shoguns. Howvr,
shor of his Armagddon scnario, gold is no aricular-
lyusefulasadeationhedge.Indeed,goldpricesplunged31%duringthenancialmeltdownof2008,whenfears
of drssion scaladd and invsors ricd in ourigh
deation(chart 2). Bullion ourformd many risk as-
ss, bu grossly undrrformd cash and govrnmn
bonds. In his rgard, gold should no b rgardd as a
hedgeagainstdeationorasacash-equivalent.Classify-
ingthisassetasthelatterrunstheriskofaddingsigni -
can volailiy o an invsmn orfolio. Indd, hr
has bn a corrlaion of 0.82 bwn gold and mrging mark quiis ovr h asdecade,asbothhaverespondedtotheebbandowofgloballiquidity.
What Drives Gold?
physical gold has many aaling roris. I has a limid suly, is no a liabiliy of
anyon, has svral indusrial uss, and is aaranc has mad i rvrd for jwlry
and h ars for cnuris. Morovr, gold is virually indsrucibl and has boh a high
0
200
400
600
800
1,000
1,200
1,400
0
4
8
1
1
2
1975 1980 1985 1990 1995 2000 2005 2010
Gold Price (LS, $/oz)Global CPI Inflation (RS, %YoY)
Chart 1 Gold:NotAnInationHedge
MRB Partners Inc 2010
Correlation betweengold and infationbroke down earlylast decade
1,200
800
Gold Price ($/oz)
-4
-2
0
2
2007 2008 2009 2010
U.S. 1-Year CPI Swap Rate (%)
Chart 2 GoldDoesNotPreserveWealthDuringPeriodsOfDeation
MRB Partners Inc 2010
Defationscare
-31%
1000
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3M R B p A R t N e R S I N C . m w w w . m r b a r n r s . c o m m C o y r i g h 2 0 1 0 ( s f i n a l a g f o r f u l l c o y r i g h )
mrb Theme RepORt mOcobr 26, 2010
valu-o-siz and valu-o-wigh raio, making i ora-
bl and asy o sor. ths roris ar criical during
convnional wars and rov usful o avoid walh con-
scationbysovereignauthorities.Manyhavealsoused
his rcious mal for ax-avoidanc. tha said, h wo
rimary drivrs of gold rics hav hisorically bn ral
inrs ras and currncy dbasmn.
1) Real Interest Rates
Theination-adjustedrateofinterestthatinvestorsre-
civ for lnding hir caial is h ooruniy cos of
holding gold. Whn ral ras ris i bcoms lss a-
aling o hold gold, givn ha h rcious mal dos
notprovidecashows(coupons,dividends,etc).Chart 3
highlighs his invrs rlaionshi.
During h 1970s, U.S. inrs ras wr consisnly
hld blow h ra of nominal conomic growh. this was
a consqunc of aggrssiv Fd suor during h 1970
and 1974 rcssions, and lagging olicy during h rcov-
ris. th rsul was a liquidiy-fuld conomic xansion ha combind wih srong la-
bor unions, ld o a fairly rdicabl ris in ric rssurs. In urn, ral yilds lungd as
policytrailedtheincreaseininationandinationexpectations,benetinggoldprices.
By h nd of h 1970s, h Fd undr h ladrshi of Chairman paul Volckr bcamdeterminedtobreakthebackofination.Thecentralbankdroveinterestratesdecisive-
ly highr han conomic growh, causing wo srious rcssions and allowing a riod of
sustaineddisinationtosetin.ThedisinationarytailwindwasaidedbyPresidentRea -
gans war agains labor unions. th consqunc was a sik in ral inrs ras and a
collapseingoldprices.TheFedsanti-inationbiaspersisteduntilearlylastdecadewhen
theU.S.experiencedadeationscareintheaftermathofthebursttechbubble.
DuringboththeinationaryanddisinationaryepisodesCPIandgoldpricesmovedto -
ghr, bu i was no h formr ha drov h lar. Boh rsondd o a rsisn dis-
equilibriuminmonetarypolicy.Asnotedabove,inationandgoldpriceshavediverged
in h as and can do so again.
Indd, by 2001 h Grnsan-ld Fd, along wih h ohr major cnral banks, wr
aggressivelyattemptingtofendodeationarypressuresandwillingtoriskover-stim -
ulatinggrowthconditions.Despitepolicybeingaccommodative,consumerpriceina-
tionremainedsubduedduringthersthalfofthe2000s.Nonetheless,realinterestrates
drifd lowr and hld riggr an xlosiv ulg in gold rics.
Gold Price ($/oz)
0
5
1970 1980 1990 2000 2010
U.S. 5-Year Real Bond Yield* (%)
* Deflated by CPI inflation
Chart 3 Gold&RealBondYields
MRB Partners Inc 2010
1200
800
400
200
100
th wo rimary
drivrs of gold
rics ar ral
inrs ras
and currncy
dbasmn
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4M R B p A R t N e R S I N C . m w w w . m r b a r n r s . c o m m C o y r i g h 2 0 1 0 ( s f i n a l a g f o r f u l l c o y r i g h )
mrb Theme RepORt mOcobr 26, 2010
th rally in h gold mark ovr h as dcad has also
bn aidd by h wll-lvisd shif by h major cnral
banksfromination-ghtingtoerringonthesideofrea-
ion, which rducd h uncrainy rgarding h dirc-
ion and lvl of ral inrs ras. Chart 4 shows h dif-
frnc bwn G7 GDp growh and olicy ras as wll as
h cumulaiv ga bwn hm. Whn h cumulaiv
ga is rising sadily, global cnral banks ar simulaing
growh condiions by roviding liquidiy and surssing
ral bond yilds. Convrsly, whn h ga dclins, i is
bcaus cnral banks ar adoing a rsriciv olicy s-
ing and ushing ral ras highr. Gold rics hav gnr-
ally movd wih his masur of liquidiy sinc h Bron
Woodssystemcollapsed in1971 andtheocialprice of
bullion was frd. In his rgard, gold can b characrizd
as a baromr of global liquidiy condiions.
Currnly, global monary auhoriis ar xlicily an-
choring ral inrs ras, wih h Fd sanding rady
o rovid addiional quaniaiv asing, if ndd, o
simula growh condiions and/or conain trasury yilds. Howvr, unlik h 1970s,
if ric rssurs wr o build in h currn nvironmn i is unlikly o b osiiv for
gold. Cnral banks ar agr o simula growh condiions, rovidd ha i dos no
hurttheircredibilitywithregardstoinationtargeting.Expectationsofasustainedriseinpricepressureswouldcausepolicymakerstoshutotheliquiditytapsandpushreal
yilds highr. If monary auhoriis ar sn o b comlacn or if hy fail o rsond
fas nough, bond vigilans will driv u yilds sharly, disruing h rcovry and
causingreneweddeationarypressurestothedetrimentofbullionprices.
Attheotherendofthespectrum,deationarypressuresprovidejusticationforcen-
tralbankstosuppressrealinterestratesbutoutrightdeationwouldbebearishforgold
rics. Alhough nominal olicy ras would say anchord a zro, ral inrs ras by
denitionwouldriseasconsumerpricesfall.Inthisscenario,investorswouldbebetter
obyholdinghigh-qualitygovernmentbondsorsittingoncash.
2) Currency Debasement
Invsors il ino gold during riods whn h global monary sysm is undr hra
orwhengovernmentocialsattempttodebasetheircurrencies.Throughouttheages,
rulrs hav rgularly dbasd hir currncis in ordr o xrac rsourcs from h ub-
lictocoverexpendituresthatcannotbenancedbytaxationorbondissuance.Episodes
of currncy dbasmn hav radiionally occurrd o fund wars and h xansion of
Gold can b
characrizd as
a baromr of
global liquidiy
condiions
1200
800
400
200
100
0
5
G7 Nominal GDP Growth MinusAverage Short Term Rates* (%)
1980 1990 2000 2010
Gold Price ($/oz)
Excess Liquidity**
* Average of G7 eurocurrency rates** Cumulative gap between G7 nominal GDP growth and average eurocurrency rate
Chart 4 Gold&Liquidity
MRB Partners Inc 2010
Bullion prices are sensitive
to swings in global liquidity
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5M R B p A R t N e R S I N C . m w w w . m r b a r n r s . c o m m C o y r i g h 2 0 1 0 ( s f i n a l a g f o r f u l l c o y r i g h )
mrb Theme RepORt mOcobr 26, 2010
mirs. evn during h ra of h gold sandard, convribiliy was morarily sus-
ndd by h Briish govrnmn during h Naolonic Wars and by h U.S. govrn-
mn during h Civil War (chart 5). Govrnmns of all h major combaans also sus-
ndd gold convribiliy in ordr o fund miliary oraions during World War I.
On major aal of gold is ha i hls rsrv walh and urchasing owr during
riods of currncy dbasmn. Govrnmns ar no abl o maniula h suly of
h rcious mal, hr is no rining rss aachd o i, and i canno b downgrad-
d by a raing agncy. Gold has bn subjc o incrass in suly du o nwly found
dosis or incrasd roducion, alhough on balanc his has bn rlaivly gradual
hroughou h cours of hisory (wih a fw noabl xcions). Looking ahad, hr
is vidnc o suggs ha h sock of gold will only incras modsly. Whil h hory
of ak gold is subjc o dba, h ac of nw discovris has dclind markdly
ovr h as 10-15 yars. producion has also slowd, wih gold ouu dclining in sv-
ral ky roducrs, including Souh Africa and Russia.
In modrn ims, gold has bn ricd in U.S. dollars and is aricularly snsiiv o
swings in h U.S. xchang ra (chart 6). Currncy dbasmn layd a suoring rol
during h gold bull mark of h 1970s. th U.S. xandd currncy in circulaion
raidly hroughou h 1960s and 1970s. Combind wih h ailwind from falling ral
interestrates,thepreciousmetalskyrocketedfromanarticiallydepressedocialprice
of $35/ounc o a ak of $850/ounc by 1980.
-4
0
4
8 CPI Inflation* (%YoY):
U.K.
0
10
1800 1825 1850 1875
U.S.
* Shown as a 4-year moving average
Chart 5 CurrencyDebasementDuringWartime
MRB Partners Inc 2010
Gold Price ($/oz)
-160
-140
-120
-100
1980 1985 1990 1995 2000 2005 2010
U.S. Trade Weighted Currency* (Inverted)
* Source: IMF
Chart 6 GoldPrices&TheU.S.Dollar
MRB Partners Inc 2010
1200
800
400
200
Invsors hid in
gold whn gov-
rnmns am
o dbas hir
currncis...
...hr is no
rining rssfor bullion
Napoleonic War
AmericanCivil War
Weak U.S. dollar has provideda tailwind for gold
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mrb Theme RepORt mOcobr 26, 2010
thr is crainly an incniv in h currn backdro for
govrnmns who hav issud local currncy dnomina-
d db o dbas hir xchang ras in ordr o as
themassivescalburdenstheyface.SomearguetheU.S.
is subly aming his, alhough h growh of currn-
cy in circulaion has rmaind vry subdud. evidnc of
policymakers in anycountry intentionally inating their
way ou of slf-crad roblms would almos crainly
lad o a sovrign db crisis. th accomanying lndrs'
srik would rquir currn accoun balancs o shrink
abruly and rsul in ainful conracionary forcs wihin
h domsic conomy. th major cnral banks ar all
wll awar of his risk and hav no rsord o h rining
rsss in rcn yars. Narrow mony suly has mush-
roomd bu h vas majoriy of his has bn a ris in
banking sysm rsrvs. Currncy in circulaion has only
accound for a small rcnag of h incras (chart 7).
Final Word:Real interest rates and currency debasement
are the primary drivers of gold prices. While both can lead
to periods of ination, it is not the latter that drives the
price of the precious metal. In fact, contrary to most in-
vestors, we expect that a rise in ination would ultimately
prove bearish for gold. It would either be met with tightermonetary policy and higher real interest rates, or a disrup-
tive spike in bond yields as xed income investors force the
authorities to respond with discipline.
In A Sweet Spot, But
th currn macro backdro is vry suoriv of gold
and should lad o furhr ric arciaion. Monary
auhoriis across h glob ar forcfully aming
toreatetheireconomies.Themajorcentralbanksare
commid o k inrs ras anchord nar zro for
h forsabl fuur and h Fd is willing o ngag in anohr round of quaniaiv
easing,ifneeded,tostaveoacontractioninconsumerprices.Actualdeationwouldbe
a barish dvlomn for gold rics (as discussd abov) bu h aggrssiv am
by olicymakrs o rvn i from occurring is osiiv as i has draggd down h n-
ir couon curv, causing ral inrs ras o lung ino ngaiv rriory (chart 8).
th macro
backdro is
bullish for gold
12
14
16
18
20
22
2003 2004 2005 2006 2007 2008 2009 2010
Commercial Bank ReservesCurrency In Circulation
Developed Economies*:Monetary Base Components (% of GDP)
* Includes: Australia, Canada, Euro Area, Japan, New Zealand,
Norway, Sweden, Switzerland, U.K. & U.S.
Chart 7 QEHasBeenUsedToSupportBanks,NotDebaseCurrencies
MRB Partners Inc 2010
1,250
1,000
750
Gold Price ($/oz)
0
1
2
2005 2006 2007 2008 2009 2010 2011
Implied Real 5-YearGovernment Bond Yield* (%)
* Nominal 5-year government bond yield minus 5-year CPI swap rate
Chart 8 OpportunityCostOfGoldIsExtremelyLow
MRB Partners Inc 2010
The bull run has been
turbocharged bynegative real yields
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7M R B p A R t N e R S I N C . m w w w . m r b a r n r s . c o m m C o y r i g h 2 0 1 0 ( s f i n a l a g f o r f u l l c o y r i g h )
mrb Theme RepORt mOcobr 26, 2010
Moreover,giventhatdeationisconsideredalegitimate
risk, bond invsors ar no ricing in monary ighn-
ing (h wo-yar yild is nar a rcord low) and vigilans
ar no forcing h long-nd of h curv highr.
Inrsingly, h global banking crisis has bn osiivfor gold rics:
m I has rquird unrcdnd quaniaiv asing as
themonetaryauthoritiesattempttoprovidesucient
liquidiy o banking insiuions (i.. driving inrs
ras lowr).
m th brokn monary ransmission mchanism in much
of h dvlod world mans ha h liquidiy ha has
bn crad is no raching h ral conomy (chart 9).
Thus,inationrisksarelimited,yetmoneyischeap.
m th uncrain oulook is curbing crdi dmand b-
caus businsss ar hsian o xand. this limis
h comiion h govrnmn facs for h xising
poolofdomesticsavingsandpreventsacrowdingouteect,whichwouldforcereal
inrs ras highr across h curv.
m Srucural hadwinds and rlaivly wak growh in h U.S., Jaans and euroan
conomis ar also lading o downward rssur on h major currncis. Alhough
mos of h major cnral banks would lik a char xchang ra, w doub any will
acivly ursu currncy dbasmn. Nonhlss, invsors ar sking alrnaivs
andthesoftU.S.dollarisbenetinggoldprices.
Successfulpolicyreationmayalsobeinitiallypositiveforgoldprices,giventhatthema-
jor cnral banks lan o lag h curv and allow h conomic rcovry o gain racion.
However,evidenceofasustainedexpansionoranywhiofpricepressuresbuildingwould
soon caus ral yilds o rach highr, rmoving a criical ailwind for gold rics. Sron-
gr global growh momnum may also riggr a rvival in riva scor crdi dmand.
Euphoria Is Worrisome
th currn macro nvironmn is vry suoriv of gold, laving onial for a manic
blowoinpricesbeforetheuplegcomestoanend.Nonetheless,investorsshouldbe
carful no o g caugh u in h uhoria ha is currnly building. Alhough gold dos
no hav any convnional valuaion yardsick, hr is vidnc ha froh is building:
th global
banking crisis has
bn osiiv for
bullion rics by
drssing ral
inrs ras
0.8
0.9
1.0
Developed Economies*:
Money Multiplier**
4
6
8
2000 2002 2004 2006 2008 2010
Broad Money Supply (%YoY)
* Includes: Australia, Canada, Euro Area, Japan, New Zealand,Norway, Sweden, Switzerland, U.K. & U.S.
** Broad money supply divided by monetary base
Chart 9 BankingCrisisJustiesAggressivePolicySettings
MRB Partners Inc 2010
Stillbroken!
Liquidity notreaching realeconomy
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mrb Theme RepORt mOcobr 26, 2010
m Price Appreciation: Gold prics hav surgd o an all
im high, jumping 32% ovr h pas yar and mor
han 100% sinc hir 2008 lows. th prcious mal
is now mor han $600/ounc abov is hisorical up-
ward sloping rnd (chart 10). evn whn rmoving
h U.S. dollar impac by using a global currncy, or
SDR1, gold prics ar 66% abov hir hisorical rnd.
Alhough ras of chang wr vn mor srchd
by h im prics pakd in 1980 in comparison o
oday, rcn pric acion dos suggs ha mania
forcs ar building.
m Real Prices: th ral pric of gold is alrady 2.5 san-
dard dviaions abov is pos-Bron Words avr-
ag (chart 10, boom panl). thos bullish on hprcious mal ofn poin ou ha ral gold prics
rachd a whopping $2120/ounc in 1980, suggsing
room for dramaically furhr upsid. Whil ru, on
mustkeepinmindthatthefnalspikehigherdoubled
ral gold prics in a mar of a coupl monhs. And h opping ou procss did no
las vry long bfor prics bgan wha would b a 70% collaps in ral rms. thus,
nimbl invsors wih h abiliy and disciplin o s sops may hav h abiliy o
capitalizeona temporaryspikeinprices.Longer-terminvestorswithlessexibility
willhavediculty.
m Investor Positioning: N sculaiv osiions ar a cyclical xrms and bullish con-
snsus masurs ar hovring around 80% (chart 11). Grand hs masurs hav
bn lvad for much of h bull-run and do no rovid usful iming signals. Non-
hlss, currn radings suggs ha hr is onial for a violn rvrsal in rics
onc h macro backdro urns lss favorabl for his ass (i.. ral inrs ras ris).
m Demand Composition: Invsmn dmand for gold (aricularly from etFs) has risn
dramaically in rcn yars and is having a marial imac on rics, givn h rla-
ivly limid suly of his rcious mal. Table 1 from h World Gold Council high-
lighs ha from h bginning of 2007 unil h nd of 2010 Q2, 13,152 onns of nw
gold suly has nrd h mark. Of his, roughly 2/3 was urchasd o cra nw
roducs (jwlry as wll as indusrial and dnisry alicaions). th rmaining 1/3 has
bn allocad o invsmns, which is xcionally high from hisorical sandards.
1SpecialDrawingRights(SDRs)arenancialinstrumentscreatedbytheIMFin1969andissuedperiodi-cally in nw ranchs sinc hn. SDRs rrsn a claim on IMF mmbr counris accouns wih hIMF. Currnly, SDRs ar comosd of 44% U.S. dollars, 34% uros, 11% yn and 11% U.K. ounds.
Gold Price ($/oz)
500
1,000
1,500
2,000
1970 1980 1990 2000 2010
Real* Gold Price ($/oz)
* Deflated by CPI inflation
Post-Bretton Woods Trend/Mean+/- 1 Standard Deviation(for both panels)
Chart 10 BullionPrices:TechnicallyStretched!
MRB Partners Inc 2010
1200
800
400
200
100
Sculaiv
xcsss ar
building in h
gold mark
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mrb Theme RepORt mOcobr 26, 2010
Rmarkably, invsmn dmand coninus o in-
cras raidly, raching 55% of suly (including min-
ingproduction,ocialsectorsales,andrecycledgold)
las quarr. pu anohr way, invsmn dmand is
now roughly quivaln o oal mining roducion.
In urn, gold rics ar bing forcd highr in ordr o
crowd ou jwlry, indusrial and dnal dmand, wll
as o nic individuals o rcycl hir xising jwlry.
In 2010 Q2, rcycld gold surassd jwlry dmand!
thus, vulnrabiliy is building, givn h rducion in
fundamnal dmand. prics could sik from hr if
investmentowscontinuetoincrease or dro sharly
if invsmn dmand wans. W susc h formr
condiion will rsis for a whil longr.
m Producer Hedging: Insad of locking in currn ric-
s, gold roducrs hav virually sod hdging.
Som of his dcision has bn in rsons o invs-
ors sking socks ha ar ur lays on gold rics.
Regardless,thisisanindicationofcorporateovercondenceinthecontinuedstrength
of rcious mal rics. Indd, gold comanis hav a oor hisorical rcord in im-
ing hir hdging aciviis (i.. should b sn as a conrarian indicaor).
m Anecdotal: There are also a signicant number of anecdotal signs that the gold
mark is bcoming frohy. ths includ h widsrad anion h rcious mal
isgettinginthenon-nancialpress,thesharpincreaseinthenumberofcash-for-gold
infomrcials, and h inroducion of gold vnding machins in svral counris,
including Grmany and h U.S.
Supply (Tonnes) 2007 2008 20092010
Q1
2010
Q2
Total
2007-Q'2
Mine Supply 2,029 2,058 2,322 586 644 7,639
Official Sector Sales 484 232 30 - 38 - 8 700
Recycled Scrap Gold 982 1,316 1,673 350 496 4,817Total Supply 3,494 3,605 4,024 897 1,131 13,151
Demand (Tonnes) 2007 2008 20092010
Q1
2010
Q2
Total
2007-Q'2
Jewellery 2,417 2,193 1,759 502 406 7,277
Industrial and Dental 465 439 373 103 107 1,487
Investment Including (ETFs) 612 973 1,892 292 618 4,387
Total Demand 3,494 3,605 4,024 897 1,131 13,151
Table1 GoldMarket:SupplyAndDemandComposition*
Invsmn
dmand is now
quivaln o
mony roducion
75
50
25
1,200
800
400
Gold Price ($/oz)
1995 2000 2005 2010
Bullish market sentiment (%)
Chart 11 InvestorsPositionedForHigherPrices
MRB Partners Inc 2010
Lots ofgold bulls
* Source: World Gold Council
8/8/2019 MRB Theme Report_Oct26 2010
10/12
10M R B p A R t N e R S I N C . m w w w . m r b a r n r s . c o m m C o y r i g h 2 0 1 0 ( s f i n a l a g f o r f u l l c o y r i g h )
mrb Theme RepORt mOcobr 26, 2010
Inrsingly, valuaions for gold quiis sm somwha mor aaling. Global gold
sock rics hav dramaically laggd h ric arciaion in h undrlying commod-
iy in rcn yars. par of his is srucural, givn ha h craion of gold etFs has ro-
vidd invsors wih a liquid and rlaivly asy mans o add h rcious mal dircly
o hir orfolios (rahr han using gold comanis as a roxy). th divrgnc is also
rlad o dclining rsrv ouus and highr roducion coss for gold comanis.
Nvrhlss, hr is room for a las a arial cach-u has in h monhs ahad
(las s our Ocobr 8hMonthly Asset Allocation Strategyfor furhr dails).
When To Sell?
Wih h gold mark bcoming frohy, a rudn sragy would b o scal back osi-
ions bfor a clar barish cas can b mad. Invsors should ay clos anion o
h following as a warning ha h macro landsca is bginning o shif unfavorably for
gold rics:
m Real interest rates rise materially: Our viw is ha ral yilds hav limid downsid
from currn lvls (for furhr dails las s our Ocobr 5hTheme Report, Gov-
ernment Bonds: Not A Bubble, But). Howvr, cnral banks ar aggrssivly rying
o rvn, or a las ca, any yild backu. A shif away from his dovish sanc or
failur o anchor bond yilds would caus a shakou in gold rics.
m Evidence of a robust global recovery: Our bas cas is ha h global conomy will
xrinc a susaind, albi subdud rcovry. Signs ha condiions ar marially
imroving would nd downward rssur on ral inrs ras, and allvia concrnsof currncy dbasmn. evidnc of imrovmn in U.S. consumr snding would
b mos crucial o h rcovry hsis. thus, w coninu o closly monior consumr
condenceandemploymentindicators.Sofar,theleadinggrowthindicatorsarestill
roviding no indicaion ha condiions ar abou o acclra marially.
m Monetary transmission mechanism repairs: Signs of haling in h global banking
sysm and crdi channls would b osiiv for h conomic oulook and as h
nd for aggrssiv olicy suor. Indd, h major cnral banks would b forcd
o rvrs cours and soak u xcss liquidiy if mony mulilirs and monary ag-
grgas sard o imrov. So far, hr is vry lil indicaion of such a shif.
m Private sector credit demand strengthens: th corora scor is halhy in mos
countriesbutlackscondenceandishesitanttoexpandoperations.Asbusinessesbe-
comemorecondentinthesustainabilityofearningsandwillingtoborrowinorder
o ursu caial xndiur lans, ral inrs ras will b ushd highr. this will
boh incras h ooruniy cos of gold and incras h invsmn aal of ro-
duciv asss. Currnly, riva scor crdi dmand rmains vry wak.
I is rudn o
bgin scaling
back osiions
bfor h macro
backdro urns
ngaiv for
bullion
prics ar now
crowding ouradiional
dmand
8/8/2019 MRB Theme Report_Oct26 2010
11/12
11M R B p A R t N e R S I N C . m w w w . m r b a r n r s . c o m m C o y r i g h 2 0 1 0 ( s f i n a l a g f o r f u l l c o y r i g h )
mrb Theme RepORt mOcobr 26, 2010
m Ination expectations build: A h momn, boh invsors and olicymakrs ar
xatedondeationrisks,whichinouropinionisthegreaterthreatinthecurrenten -
vironment.Nonetheless,thefocuscouldshiftabruptlybacktoinationaseconomic
concrns as, givn h uncrainy and angs crad by unrcdnd olicy su-
port.Centralbankswillnotallowinationexpectationstoescalateforverylong.To
monior his risk, w rfr o wach CpI swa ras, which rmain nar cyclical lows.
m U.S. dollar sentiment rms: Gold rics rmain invrsly corrlad wih h U.S. dol-
lar and hav bn urbochargd by h highnd concrn of currncy dbasmn.
An imrovmn in invsor snimn oward h currncy (which will likly awai
rmerU.S.economicdata)willpresentaheadwindforthepreciousmetal.
m Technicals: Gold is havily radd using chnical indicaors, much lik h currncy
mark. thrfor, invsors should ay clos anion o ric rnds and momnum
indicaors. Mos of hs masurs ar srchd, bu could rach mor xrm lvls
a h o of h bull mark.
Final Word: The sweet spot for gold prices will persist for a while longer. The recovery re-
mains fragile and deationary pressures will linger, encouraging the authorities to keep
monetary conditions extremely accommodative. In turn, the tidal wave of investment capi-
tal rushing into the market is unlikely to vanish anytime soon.
Nonetheless, speculative excesses are building. The peak in gold prices when it eventually ar-
rives could be abrupt and followed by a violent shakeout (similar to 1980). Nimble investors
may wish to ride the trend higher for now, but longer-term investors should consider using
price strength to gradually trim positions and redirect funds into productive assets.
Provided that global authorities can avoid debt-deation (as we expect), then this is a great
environment for risk assets and currencies in markets which do not face structural or cyclical
impediments. In fact, there are many productive assets in the emerging world and commodity
markets with less froth and better valuations than gold. For further details on this topic, please
see our September 24thTheme Report, Goldilocks Is Dead: Proting In An Unbalanced World.
Phillip ColmarGlobal Sragis & parnr
phillip.colmar@mrbpartners.com
Signs of susaind
conomic growh
and imroving
mony mulilirs
will b warnings
for gold
th ak in h
bull mark could
b abru andfallowd by a
violn shakou
8/8/2019 MRB Theme Report_Oct26 2010
12/12
Macr oRe se ar chBoar d
Independent Investment Strategy &Consulting
partnersmrb
12M R B p A R t N e R S I N C . m w w w . m r b a r n r s . c o m m C o y r i g h 2 0 1 0
Ocobr 26, 2010
Copyright 2010, MRB Partners Inc. All rights reserved.
th informaion, rcommndaions and ohr marials rsnd in his documn ar rovidd for informaionpurposesonlyandshouldnotbeconsideredasanoerorsolicitationtosellorbuysecuritiesorothernancialinstrumentsorproducts,nortoconstituteanyadviceorrecommendationwithrespecttosuchsecuritiesornancialinstrumentsorroducs. this documn is roducd for gnral circulaion and as such rrsns h gnral viws of MRB parnrs Inc.,anddoesnotconstituterecommendationsoradviceforanyspecicpersonorentityreceivingit.
this documn is h rory of MRB parnrs Inc. and should no b circulad wihou h xrss auhorizaion of MRBparnrs Inc. Any us of grahs, x or ohr marial from his ror by h rciin mus acknowldg MRB parnrsInc. as h sourc and rquirs advanc auhorizaion.
MRBPartnersInc.reliesonavarietyofdataprovidersforeconomicandnancialmarketinformation.Thedatausedinthisror ar judgd o b rliabl, bu MRB parnrs Inc. canno b hld accounabl for h accuracy of daa usd hrin.
Montreal1001 Squar-Vicoria
Bloc e - Sui 510
Monral, Qubc
Canada H2Z 0A4
tl 514.558.1515
Londontokn Hous
12 tokn Hous Yard
London, eC2R 7AS
Unid Kingdom
tl +44 (0) 20 7073 2792
For mor informaion, las conac:
Chris Sandeld, Commercial Director & Partner
chris.sandeld@mrbpartners.com
MRB Partners is a nwly-formd indndn
investment research and consultancy rm,scializing in roviding o-down global ass
allocaion advic and idas o invsmn managrs
around h world. W dvlo invsmn sragy
and rcommndaions by idnifying h ky
srucural and cyclical hms driving h global
conomy and ass marks, uilizing rigorous and
comrhnsiv roriary forcasing modls
and indicaors, whil lvraging h xnsiv
experience of our senior sta. The core of our
hilosohy is srong, inraciv and rsonalizd
arnrshis o suor our clins invsmn
dcision-making rocss.
prvious Theme Reports
Set Sail, Don't Bail:China's Growth Wave ContinuesOctober 19, 2010
Oil Is The Next Emerging Market PlayOctober 12, 2010
Government Bonds: Not A Bubble, But...October 5, 2010
Goldilocks Is Dead:Profiting In An Unbalanced WorldSeptember 24, 2010
The Next Investment Bubble:
Now Its The Emerging Worlds TurnSeptember 17, 2010
to rciv any of hs rors las conac
our clin srvics.
www.mrbarnrs.com m clientservices@mrbpartners.com
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