A commodity recovery you can see and believe Presentation ... · likely provide strong support to gold prices likely provide strong support to gold prices yp g pp g p US 10 yr TIPS

The Goldman Sachs Group, Inc.

Presentation HeadingA commodity recovery you can see and believePresentation HeadingA commodity recovery you can see and believeAs DM growth improves in 2011, shortages likely to become more visible

January 2011

Jeffrey Currie Goldman Sachs International +44-(0)20-7774-6112 [email protected]

The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html.

Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Precious metals and the pricing of debasement

The currency of last resort - over long periods of time the price of gold is relatively stable around £500/tozp g y($750/toz)

2009 GBP/toz

Goldman Sachs Global Investment Research 3

Source: US Geological Service (USGS), GFMS and GS Global ECS Research.

“Gold as a commodity” is driven by real interest rates

Left axis: $/toz; right axis: % yield (inverted)

0 301 500 0.30

0.45

0.601,400

1,500

0.75

0.90

1 05

1,300

1.05

1.20

1.351 100

1,200

1.50

1.65

1 801,000

1,100

1.80

1.95900


Source: COMEX and Goldman Sachs Global ECS Research.

Gold price US 10 year TIPS yield (right axis, inverted)

This relationship has a very long history as gold is an alternative store of value, as it has no other uses making it the best currency of last resort

Left axis: $/toz; right axis: % yield



The “wedge” between gold prices in real rates is the ETF monetary demandy

Left axis: $/toz; right axis: % yield

0.0

0.51,400

1,500

1.01,200

1,300

1.5

2.01,000

1,100

2.5

3 0

800

900

3.0

3.5600

700

Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10



Gold COMEX US 10-yr TIPS (RHS, inverted)

Asian benchmark crudes have strengthenedrelative to WTI ….Monetary demand from the gold-ETFs has put upward pressure on gold prices, closing the gapp p g p , g g p

million toz

60

50

60

40

30

10

20

0Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10


Source: The gold-ETFs and GS Global ECS Research.

Gold held by ETF

Speculative flows respond to changes in US real interest rates, highlighting their importance, g g g p

Left axis: million/toz; right axis: % yield

0.035 0.0

0.5

1.025

30

35

1.5

2.015

20

2.5

3.05

10

3.5

4.0-5

0

4.5

5.0-15

-10

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10


Source: GS Global ECS Research.

Net speculative length US 10-yr TIP (RHS, inverted)

When will the Fed hike? US real interest rates will lik l id t t t ld i

When will the Fed hike? US real interest rates will likely provide strong support to gold priceslikely provide strong support to gold pricesy p g pp g p

US 10 yr TIPS yield Front-month gold price% per annum 2010 USD/toz

0.00 18320.50 16001.00 13971.50 12202 00 10662.00 10662.50 9313.00 8133.50 7104.00 620


Source: CFTC, Goldman Sachs & Co., Goldman Sachs Global ECS Research.

Industrial commodities and the pricing of scarcity

The capacity constraints did not disappear, but instead were eased by weak demandy

Million b/d

100

90

100Global production

capacity

70

80

50

60

Global output

By 2011 the market is back to capacity

constraints

40

50

20

30


Source: IEA, GS Global ECS Research

In 2010 a combination of weather events and technological issues pushed agriculture to capacity

Index 1960 = 1003.5

3.0Demand

In the past, demand growth has been met throughyield growth. However , the strong demand growth

2.5

yield growth. However , the strong demand growthahead will create a need for substantial acreage expansion.

1.5

2.0 Yield

1.0 Acreage

0.5 Forecast


Source: USDA , FAO, Goldman Sachs ECS Research.

0.065 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

The investment cycle slowed in 2009 and 2010 which will likely compound capacity issues in 2011

Average cash return among oil integrated companies

20%

16%

18%

20% But policy constraints put a cap on further increases

and on the ability to attract capital, regardless of price The revenge of the old

12%

14%

16%increases

geconomy creates a rise in

returns, which attracts capital back to the sector

8%

10%

4%

6%

Poor returns in the 1990s caused capital to be

0%

2%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010E

redirected into the new economy


Source: Goldman Sachs Equity Research

Real cash return over cash invested 5y rolling average 40 year average

The collapse in commodity demand was driven by the decline in GDP, not higher prices, which suggests that, decline in GDP, not higher prices, which suggests that, as the economy continues to recover, so will demand

Percent change year-over-year – GDP on left axis

4

5

5

6

2

3

3

4

0

1

1

2

‐2

‐1

‐1

0

‐4

‐3

‐3

‐2

2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1


Source: IEA, GS Global ECS Research.

2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1

World real GDP growth Projected real GDP growth World Oil demand growth

Three emerging themes that are likely to dominate commodity pricing in 2011 and beyondy p g y

1.Supply differentiation. Differentiation between commodities driven by the extent of supply constraints that will likely drive greater price dispersion across the commodity complex i.e. the end of Btu convergence;end of Btu convergence;

2.Resource realignment. Emerging markets are being forced to bid away scarce commodities from the developed economies, especially when supply constraints are more restrictive, which

f f f f fshifts the focus away from the sustainability of higher prices and towards the sustainability of higher growth;

3.Macroeconomic relevance Increasing macroeconomic correlations as resource realignment3.Macroeconomic relevance. Increasing macroeconomic correlations as resource realignment will likely increase the relevance of the commodity prices and supply to the broader macroeconomic environment.


Commodities with more restrictive supply constraints and greater leverage to emerging market demand growth have more positive outlooks: CCCP

Differential between change in China & India net imports (2007 – 2011E) and change in G3 net imports (2007 – 2011E), measured as % of 2010 global supply, vertical axis; China & India net imports (2011E) as % of 2010 global supply, horizontal axis; Spare capacity rate, bubble size

PGM35%

40%

25%

30%

Tin15%

20%

25%

Coal

Copper

ZincLead Cotton

Soybean10%

15%

CrudeNatGas

Aluminum Nickel

Corn

Wheaty = 0.7513x + 0.0144

R² = 0 7194

0%

5%


Source: Goldman Sachs Global ECS Research.ce: DOE.

R = 0.7194-5%

-5% 0% 5% 10% 15% 20% 25% 30% 35% 40%

Resource realignment has been the most pronounced in copper, which has seen the largest reductions in DM demand already

Copper demand in kmt


Source: Brook Hunt, GS Global ECS Research

RegAC

I Jeffrey Currie hereby certify that all of the views expressed in I, Jeffrey Currie, hereby certify that all of the views expressed in this report accurately reflect my personal views, which have not been influenced by considerations of the firm's business or client relationshipsrelationships.


DisclosuresDisclosuresJanuary 4, 2011

Disclosures

Global product; distributing entities

The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs, and pursuant to certain contractual arrangements, on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy.

Thi h i di i t d i A t li b G ld S h & P t A t li Pt Ltd (ABN 21 006 797 897) b h lf f G ld S h i C d b G ld S h & CThis research is disseminated in Australia by Goldman Sachs & Partners Australia Pty Ltd (ABN 21 006 797 897) on behalf of Goldman Sachs; in Canada by Goldman Sachs & Co. regarding Canadian equities and by Goldman Sachs & Co. (all other research); in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs & Partners New Zealand Limited on behalf of Goldman Sachs; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union.

European Union: Goldman Sachs International authorised and regulated by the Financial Services Authority has approved this research in connection with its distribution in theEuropean Union: Goldman Sachs International, authorised and regulated by the Financial Services Authority, has approved this research in connection with its distribution in the European Union and United Kingdom; Goldman Sachs & Co. oHG, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also distribute research in Germany.


Disclosures

General disclosures

This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment.

Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business g , g g, g , g grelationships with a substantial percentage of the companies covered by our Global Investment Research Division. Goldman Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org).

Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research.

W d ffili t ffi di t d l l di it d dit l t ill f ti t ti h l h t iti i t i i l i d b llWe and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research.

This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur Fluctuations in exchange rates could have adverse effects on the value or price of or income derived from certain investmentscapital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.

Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at http://www.theocc.com/about/publications/character-risks.jsp. Transactions cost may be significant in option strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request.

All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our research by third party aggregators. For all research available on a p y gg g , p y p y gg gparticular stock, please contact your sales representative or go to http://360.gs.com.

Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY 10282.

Copyright 2010 The Goldman Sachs Group, Inc.

No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent


p y ( ) p , p p p y y y ( ) pof The Goldman Sachs Group, Inc

Documents

A commodity recovery you can see and believe Presentation ... · likely provide strong support to gold prices likely provide strong support to gold prices yp g pp g p US 10 yr TIPS