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LBMA/LPPM Precious Metals Conference 2013
Summary
Edel Tully
UBS
Opening Session
Welcome one and all….Stewart Murray, David Gornall, Peter Smith
Keynote Speech 1: Post-Crisis Challenges to Central Bank
Independence
Salvatore Rossi, Bank D’Italia
• CB independence is paramount
• Threatened by pursuit of financial market stability
• Financial and price stability are complementary objectives, one requires the
other
• GFC prompted CBs to adopt wide ranging measures to avoid a collapse of
the financial system
• But undesirable (fiscal) side effects…..CBs have seen their balance sheet
expand enormously, implies higher risks. While reserves are still “reserves”,
financial market loses have threatened reputational risk which could lead to
interference
• Therefore, hugely important to communicate to the public – case in post the
OMT
• CBs need to communicate, effectively; be accountable and transparent
• Gold – special role in reserve mgt, diversification, safe haven etc etc
Keynote Speech 2: Is Europe Wasting a Good Crisis?
Francesco Papadia, Chairman, Primary Collateralised Securities
• It is a complex crisis; On The Brink Theory
• Monet and Padoa-Schioppa – each crises an occasion for progress
• A crisis is the ultimate proof that something is broken and should be fixed
• Reactive versus Proactive
• The complex nature calls for a more reactive policy response
• There are institutional limitations – technical and political difficulties
• There has been some progress…
• Euro area policy response has moved in the right direction, with sufficient
speed
• But the challenge continues
• Adjustment fatigue in peripheral countries
• Institutional innovation fatigue
• North-South Europe divide and lack of growth
Session 2: Precious Metals Short-Term Investment
Chair: Tom Kendall
Algorithmic Trading Facts & Fantasies
Scott Kerson, Head of Commodities, AHL/Man Systematic
Strategies, Man Group PLC
• History, need to go back to 1950’s, and Edward Thorpe’s observation that a
deck of cards has memory. Casinos loved him….
• Who’s going to win – human or machine? (Scott v Scott)
• Virtual traders outperform by playing the averages
• Algo exhibits wider distribution, but skewed to the left
• Trading desk has narrower distribution – less volatility at a cost
• At least 30% of all US equity market volumes are traded by machines, with some
estimates suggesting 60% or more
• Commodities traders increasingly adopt algorithms – In electronic commodities
futures execution, algo share is estimated to have doubled in the last 2 years to
40%
• Human fares better in less liquid markets, such as palladium
• Small orders for machines, larger for human
• 1 January 1994 to 30 June 2013
• Source: Man database.
© Man 2013 7
The final result
• Lower costs mean higher returns
0
20
40
60
80
100
120
140
Realis
ed s
lippage (
base y
ear
index =
100)
Slippage yield
Algorithmic Trading Facts & Fantasies
Execution aim is to lower slippage to least
possible amount, therefore increasing
returns, typically machines beat humans
Options for Outperformance – Managing the Challenges of
Volatility and Duration
Patrick Green, Director, Commodities Trading, Barclays
• 2013 has been a year of extremes in volatility trading
• Within 3 weeks at the start of April, the range in 1m implied vols exceeded the full
year range for 2012 (10.5% to >30%)
• Skew for puts reached all-time highs as price fell below $1200 (1y 25 delta risk
reversal reached -4%)
• Why use options?
• Yield enhancement
• Directional views
• Volatility trading
• Portfolio hedging
• Tail risk hedging
• Financial planning
• Who uses options?
• Miners/Producers
• Consumers
• Refiners
• Institutional investors (real
money, hedge funds)
• Central banks
• Retail/Private banking
The Gold Price is an Equation of Investors Demand. Platinum
Group Metals Share More Fundamentals!
Christoph Eibl, CEO, Tiberius Asset Management AG
• Gold
• The key message is saturation of consumer demand
• 2000 gold story – not many investors held gold; 2013: not many that don’t hold
gold
• Short-term money behaves similarly to long-term money – different beta
• Bearish gold for 4+ years
• Platinum
• Impacted less by long-term investment products
• Short-term money is part of its lifeline
• Easier to predict in terms of logical fundamentals (rather than fear and greed)
• Commodities – examines via a relative value lens, who will outperform
Driver of the ETF and its Future
Daniele Sabato, ETF Sales Trader, Flow Traders
Three generations of commodities indices:
• First Generation – Long-only indices without paying much attention to the fundamentals of
backwardation and contango
• Rebalance infrequently
• Fully collateralised – total return depends on futures returns and collateral yields
• Hold liquid contracts at the front-end of the term structure
• Heavily weighted towards energy
• Second Generation – Long-only indices but there is an attempt to lessen the negative blow on
performance of contango while exploiting backwardation
• Enhance roll – chooses a liquid contract located in the mid- to far-end of the futures curve
• Constant maturity – it invests in a number of contract months across the futures curve
• Implied roll yield – dynamic approach to choosing the contract with the highest implied roll yield
• Third Generation – Long-short indices; try to capitalise on both the price appreciation associated
with backwardation and the price depreciation related to contango
• Momentum – price continuation to determine long and short positions
• Term structure – considers shape of the curve
• Market neutral
• Fundamental/Rule based – fundamental forecasts and technical signals
11
Periodic Table of Returns
Past performance is no guarantee of future results, and diversification/asset allocation doesn’t ensure a profit or guarantee against a loss. Asset class represented: Large
Caps (S&P500 Index), Small Caps (Russell 2000 Index), Growth (Russell 3000 Growth Index), Value (Russell 3000 Value Index), Developed Countries (MSCI EAFE Index),
Emerging Markets (MSCI Emerging Markets Index), High Yield (Bank of America Merrill Lynch US High Yield Index), Investment Grade Bonds (Barclays US Aggregate Bond
Index), Real Estate (NAREIT Equity-Only Index), Commodities (DJ-UBS Commodity Index). Source: Ibbotson Associate, Standard & Poor’s, Bloomberg as of 6/30/2013
Last Minute Addition…..India
Shekar Bandari, Kotak Mahindra Bank
• Short-term gold demand dependent on:
• Number of marriages; Monsoon season, Government Policy
• Gold is not monetised in India – “it is bought and kept in lockers”.
• This is the focus of the government, meeting India’s demand for gold internally,
80/20 rule
• Temples in India can serve demand for 10 years
• Trust is needed
• Government and Central Bank need to ensure deficit is under control, gold is
part of that solution
• Watch out for elections next May
• Demand – cultural, habit – is strong, issue is with the supply side
Session 3: Precious Metals Long-Term Investment
Chair: John Reade
Stand and Deliver! The Way Forward For Gold Mining
Equities
Charles Carter, Executive Vice President, AngloGold Ashanti Ltd.
• The changing correlation between gold and miners
Stand and Deliver! The Way Forward For Gold Mining
Equities
Charles Carter, Executive Vice President, AngloGold Ashanti Ltd.
• Industry challenges:
• Project execution
• Regulatory
• Labour/community
• Capital allocation
• Capital and operating cost pressures have dominated
• Rising capital intensity and declining production
• Balance sheets under pressure
• Increasing impairments
• Back to basics: Capital Discipline and Cash Flow Optimisation
• Focusing on returns, cash flow and consistent performance
• Controlling costs – lower overhead cost structure
• Move away from growth at any cost thinking
• Not returning to hedging any time soon
• It’s a case of survival of the fittest, but this all takes time
Physical Investment – Unshakeable Faith?
David Madge, President, A-Mark Precious Metals Inc.
• Investors in small bars and coins are loyal and have strong appetite for
physical metal
• Some products have supply issues – particularly silver
• Fabrication capacity limitations – delicate balance between ability to respond
to high demand and having idle capacity when things are slow
• No sustained periods of secondary market liquidations for precious metal
coins and small bars
• Overall demand should remain strong
• Germany – unclear impact of proposed VAT increase to 19% from 7 % on silver
bullion coins
• China – secondary market needed, but tax still high on bullion coins
A Portfolio Approach to Generating Alpha from Gold
Jeremy Baker, Portfolio Manager, Harcourt Investment Consulting
AG, Zurich
• Reasons behind gold as an investment theme
• Unprecedented levels of balance sheet expansion
• Negative real interest rates
• Alternative to USD, EUR & JPY due to currency devaluation
• Increased CB purchases
• Long-term supply imbalance
• Late 2011, 2012 changed to more active trading of gold, not taking LT
position – issue is predicting the direction and investor sentiment (not
forecasting the price)
• Adding alpha
• Portfolio alpha – large price moves, mean reversion, low/negative correlation
across different commodities, roll yield optimisation
• Many sources of alpha opportunities through tactical strategies – macro, micro
and technical variables
South African Investors’ Approach to Precious Metals: are
ETFs a Substitute for or a Hedge against Mining Equities?
Vladimir Nedeljkovic, Head Investments Absa CIBW
In case you missed it, NewPlat holds 680 koz platinum
2nd biggest SA ETF, largest Pt ETF globally
Mainly Insti investors, listed in April 2013
Where would the platinum price be trading without this?
What does it say about forecasted deficits in the platinum market?
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13
ETFS UK ETFS US Absa NewPlat ZKB
Global Pt ETFs
South African Investors’ Approach to Precious Metals: are
ETFs a Substitute for or a Hedge against Mining Equities?
Vladimir Nedeljkovic, Head Investments Absa CIBW
Key Driver:
- Regulatory treatment
• Domestic investment
• Pension funds – Regulation 28: 5% allocation to
platinum, 10% to gold
• FSB Notice 19: CIS (mutual funds) can invest up to
10% (max commodity exposure) in gold and platinum
ETFs/ETNs, but only physically backed
- Palladium ETF next on the menu
- Rhodium possibility?
Session 4: Official Sector
Chair: Terrence Keeley
Terrence Keeley, Blackrock
have been muted/ negated by market timing
Source: World Gold Council
Official Sector Gold Activity 2002-12
Selling Low, Buying High
Average sale: $498 Average purchase: $1624
CB changes in tons, yoy
Marked-to-market losses and
volatility are not the only
problem with Gold. Other
asset classes – like
inflation-linked bonds,
equities, real estate and even
cash – have superior
diversification and liquidity
benefits. For these reasons,
many central banks are now
prioritizing other assets
classes over Gold
-547
-620
-479
-663
-365
-485
-235
-34
77
456
534
0
200
400
600
800
1000
1200
1400
1600
1800
-800
-600
-400
-200
0
200
400
600
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012P
rice o
f G
old
TO
NS
Gold Reserves of the Deutsche Bundesbank – Current Role
Clemens Werner, Deputy Head of the Market Operations Division,
Deutsche Bundesbank
• Gold functions
• Motivations for relocating gold
• End of cold war
• Launch of euro – no need to store gold in Euro area countries
• Euro banknotes and coins tied up vault storage capacity – new storage
possibilities
• Gold relocations
• 2000-2001 – 930 tonnes moved from London to Frankfurt to reduce storage costs
Gold Reserves of the Deutsche Bundesbank – Current Role
Clemens Werner, Deputy Head of the Market Operations Division,
Deutsche Bundesbank
• No active management of gold
• Annual sales of 5-7 tonnes within commemorative coin programme
• Comments from q&A
Managing Gold as a Central Bank
Alexandre Gautier, Director of Market Operations Department,
Banque de France
• BdF sold 516 tonnes between Sept 2004 – Sept 2009 (additional return, less
volatile return for balance sheet)
• 4 drivers to define asset allocation
• Risk, return, resources and governance
• Considers gold a strategic asset, 40% of overall reserves
• Holds 91% in Paris and 9% abroad
• Bars not all LGD but improvement still ongoing
• No plan to sell gold, BdF active in market for its own a/c
• Market participation
• For own account: Trading desk in gold/loan restart still pending
• For CBs and official institutions: Custody, Buy/Sell, Deposits, Swaps
Central Banks and Gold – A New Challenge
Juan Ignacio Basco, Deputy General Manager, Central Bank of
Argentina
EM CBs have been increasing gold
holdings – optimal allocation 8.4% -
10%
Change in LATAM countries attitudes
towards gold after the financial crisis
Central Banks and Gold – A New Challenge
Juan Ignacio Basco, Deputy General Manager, Central Bank of
Argentina
Change in CB attitude towards gold
over time – remain net buyers this
year
Uncomfortable with tail-risk scenarios
– some hedging strategies: long put,
risk reversal
The Bank of England’s Gold Vault Operations
Matthew Hunt, Head of Customer Banking Division, Bank of
England • Long historical association with gold
• Allocated accounts and Book Entry
Transfers
• Holds more than 400,000 bars
• Currently using around 3,000
sqm floor-space for gold
Official Sector Q&A
• Concerned about volatility in the gold market recent
• Recent volatility has changed some attitudes towards gold and the use of
hedging tools “I have to do something, volatility is not good for us”.
• Majors no plan to sell gold
• Non-commital stance on the renewal of the CBGA
Session 5A: Precious Metals Regulation
Chair: Ruth Crowell
Is Bullion Covered? Don Groves, Financial Conduct Authority
Treasury order must define benchmarks
Strategically important markets likely to be covered
LBMA GOFO Rate?
Daily Fixing?
“nothing is decided”….
30
EU Legislative and Regulatory Structure
31
PARLIAMENT
Directly elected 766 member
legislature.
Approves and revises laws but
no legislative initiative.)
COUNCIL
EU heads of state plus
Commission/Council Pres.
Approves and revises laws.
Strategic and political
leadership.
EUROPEAN
COMMISSION
Executive body. Proposes
and implements legislation.
Germany BaFIN
Bundesbank
France AMF
Banque de France
UK FCA
Bank of England
Level1
Legislative
Institutions
(Brussels)
Level 2
European
Supervisory Authorities (ESAs)
National
Competent Authorities
(NCAs)
ESMA (Paris)
Securities and markets regulator with
rulebook for the single market
EBA (London)
Prudential banking authority –
contributes to convergence and
single rulebook
28
Member
State
NCAs
Italy Consob
Banca d’Italia
US and EU Derivatives Regulatory Reform Update
Jonathan Jachym, CME
Q2/Q3
Scope Proposed
15 March
EU Rules Enter in Force
2013 2014
11 March
Mandatory Clearing
Category 1 Entities
10 June
Mandatory Clearing
Category 2 Entities
Q2 Work on
legislation determining
clearing obligation cont’d
US
EU Q4 2014 / Q1 2015
Mandatory clearing begins
9 Sept
Mandatory Clearing
Category 3 Entities
Q4 / Q1
CCPs Authorised
Q1
Start of official ESMA
assessment of classes of
derivatives
US and EU Derivatives Regulatory Reform Update
Jonathan Jachym, CME
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2015 Mandatory Clearing – Projected Implementation in US and EU
• Three Dodd-Frank Sections relate to PM
• 737. Position Limits
• 1502. Conflict Minerals
• 1504. Disclosure of Payments for Resource Extraction)
• All Challenged:
• Two Industry Wins in District Court
• One Industry Appeal Still Pending
• One SEC Appeal Still Pending
• But: All Dodd-Frank Sections Will Still Exist
• Decisions in Early 2014, but even if all industry challenges prevail,
there will be three new rules created by CFTC, SEC.
Dodd-Frank Act – Update
John Bullock, IPMI
Session 6: Silver
Chair: Michael DiRenzo
Future of Silver Mining
Mitchell J Krebs, President, CEO and Director, Coeur Mining Inc.
Silver Mining Industry – Key Themes
• Competition from ETFs – ETFs and the like eliminate operating risks
• Multiple compression – structural shifts
• Cash cost inflation – labour costs, in-country currency appreciation and
declining grades
• Undisciplined capital management – growth for growth’s sake;
• Focus on return of capital – investor demand for dividends driven by 1)
desire for return of capital and 2) desire to impose financial discipline
• Silver market deficit within 5 years
• Now seeing impact of lack of exploration spending 10+ years ago
• Silver mining industry – runs the risk of becoming irrelevant due to small size
and poor shareholder returns
The Importance of Silver in the Portfolio of a Fully Integrated
Mining Company
Radoslaw Zalozinski, Director of Market and Credit Risk
Management, KGHM Polska Miedz S.A.
Silver Uses in Technology & Industry
Silver in Green Technologies – Solar Energy, Water
Purification, Silver - Coated Windows and Glass,
Silver in Medicine – Anti - Bacterial Biocide, X
- Rays,
Silver in Nanotechnology – Pigments,
Photographics, Conductive/Antistatic Composites,
Silver In Batteries – Silver Oxide Batteries, Silver
- Zinc Battery Replacing Lithium Ion Batteries,
Silver in Bearings – Essential Component in Many
Types of Engines,
Silver in Electronics – Excellent Electrical
Conductivity,
Silver in Catalysts – Production of Foundation for
Plastics Including Polyester,
Silver in Brazing & Soldering – High Tensile
Strength, Ductility and Thermal Conductivity,
Silver in Automotive Industry – Silver Coated
Contacts, Silver - Ceramic Lines in Windows.
The Position of Silver in Today’s Financial System
Shayne McGuire, Gold Fund Manager, Teacher Retirement
System of Texas
Comparing the 80s Metals Bear Market with Today’s
• Bias at the Fed
• 1980: inflation was the enemy
• Today: unemployment is the enemy
• Gold:silver ratio – does 61 make sense?
• Such a high level is extreme historically
Session 7: PGMs
Chair: David Jollie
The Catalyst for Change
Andrew Hinkly, Executive Head of Marketing, Anglo American
Platinum
• Platinum mining structural changes – higher operating costs
• Increased UG2 mining and declining head grades
• Increased mining depths
• Increased capital intensity
• Above-inflation cost increases – labour
• Reduced by-product revenue – rhodium thrifting, low focus on development of
minor metals markets
• Industry response
• Unprofitable operations put on care and maintenance or shut down
• Reduced operational footprints
• Reduced funding of capital projects
• Increased focus on operational costs and reduced stay-in-business capital
expenditure
40
Challenges…
Global automotive PGM demand, then and now
2003 2012
ozs (000's) Price
Total Value
(000's) ozs (000's) Price
Total Value
(000's)
3,190 $ 692 $ 2,207,480 3,085 $ 1,552 $ 4,787,920
3,460 $ 200 $ 692,000 7,262 $ 644 $ 4,676,728
665 $ 530 $ 352,450 636 $ 1,276 $ 811,536
Total 7,315 $ 3,251,930 10,983 $10,276,184
% Change 150% 316%
• Volume has increased 50% over the last 10 years...
• …the dollar value has more than tripled.
Challenges Facing PGM Refiners and Fabricators
Mark Barnard, Director of Marketing, Materials Services, BASF
Corporation, Catalysts Division
Platinum and Palladium Availability
Walter de Wet, Head of Commodity Research, Standard Bank plc
PGM Inventory is high
• Platinum and palladium not
trading as tight markets
• Lease rates remain near zero;
sponge continues to trade at a
discount to ingot
• Estimate above-ground platinum
inventory at 1,046 days of
consumption, palladium at 879
days (higher than consensus)
Days consumption — Pd above-ground
inventory
Days consumption — Pt above-ground
inventory
700
950
1,200
1,450
1,700
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Days
300
550
800
1,050
1,300
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Days
Platinum and Palladium Availability
Walter de Wet, Head of Commodity Research, Standard Bank plc Palladium recycling – substantial upside from
2018
0
1,500
3,000
4,500
6,000
2009
2010
2011
2012
2013F
2014F
2015F
2016F
2017F
2018F
2019F
2020F
2021F
ozs ('000)
Other China US Japan Europe
Palladium recycling – supply is
coming but it may be too late
• Pick up in Chinese Pd recycling
from 2018 as current vehicle
stock ages
• Expect Pd market to stabilise
only in 2021 given deficit
forecasts
China import data raises doubts on
autocatalyst loadinvgs
• Car production up but palladium
imports down
China net palladium imports
0
30
60
90
120
Jan
-09
Ap
r-09
Jul-0
9
Oct-0
9
Jan
-10
Ap
r-10
Jul-1
0
Oct-1
0
Jan
-11
Ap
r-11
Jul-1
1
Oct-1
1
Jan
-12
Ap
r-12
Jul-1
2
Oct-1
2
Jan
-13
Ap
r-13
Jul-1
3
ozs ('000)
Session 8: Is the gold bull market over?
Chair: Prof Brian Lucey