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Investment Research

Thematic Report

Gold I Gold Primer

Date: 9 August 2012

Executive Summary
Gold price began its ascent in April 2001, moving from USD273 to USD1,700 in 10 years translates to a huge growth rate of 20% per annum. Furthermore, gold never had a down year between 2001 and 2011. Gold consistently put in a positive return every year in that decade. The demand for gold can be subdivided into three major components; jewellery, industry and investment. In 2011, jewellery constituted 48% of gold demand while investment and industrial constituted 40% and 12% respectively. In recent years, the demand for gold has been driven by investment demand in particular the growth in demand from gold ETFs. On the supply side, the supply of gold can be divided into three major components; mine supply, official sector sales and recycled gold. The supply of gold is very inelastic. Despite the rise in the price of gold, there has been no persistent increase in supply.

John LEE
john@nonameresearch.com

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Table of Contents
More Than Just a Commodity .................................................................................... 3 Scarce, attractive and indestructible ...................................................................... 3 Gold role as money ................................................................................................. 3 Demand for Gold ........................................................................................................ 6 Jewellery demand................................................................................................... 7 Industrial demand .................................................................................................. 8 Investment demand ............................................................................................... 9 Supply of Gold .......................................................................................................... 11 Mine supply .......................................................................................................... 12 Official sector sales ............................................................................................... 13 Recycled gold ........................................................................................................ 15 Gold Price Trends ..................................................................................................... 16 A decade of strong growth ................................................................................... 16 Dont forget the denominating currency ............................................................. 17 Comparative return of gold .................................................................................. 18 Investing in Gold ....................................................................................................... 20 How the price of gold is decided .......................................................................... 20 How to gain exposure to gold .............................................................................. 20

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More Than Just a Commodity

Scarce, attractive and indestructible
Gold is a metal with unique characteristics that make it highly prized.
Table 1: Gold unique characteristics

Attribute Attractive Indestructible

Description Gold has a bright yellow color that is considered highly attractive Gold is nearly indestructible. Due to golds atomic structure, it is the least reactive element known (except for the noble gases). Consequently, gold has strong resistance to corrosion and oxidation. In fact, all the gold ever mined in history, estimated at 160,000 tonnes, still exists today and can be fitted into a cube no bigger than 20m by the sides Gold is very scarce. While gold is found in every continent, it is very costly to mine. For comparison, weight for weight, gold is valued at 50x times silver and 70,000x times steel Gold is the most malleable and ductile metal. Golds extreme malleability allows a single ounce of gold to be flattened into sheet of 300 sq ft that is so thin as to appear translucent. At the same, golds ductibility allows it to be pulled into very thin wires and shaped into various jewellery designs Gold is highly conductive to electricity. However, gold is only used in relatively expensive and critical electronics due to high gold price

Scarce and valuable Extremely malleable and ductile

High electrical conductivity

Gold is measured in troy ounces with the following conversion:

Table 2: Gold conversion guide

1 troy ounce 1 kg 1,000 tonnes = 1 million kg

31.1g 32.151 troy ounce 32.151 m troy ounce

Gold role as money

The key differentiating factor about gold is that even though gold is a commodity, it has also emerged through history as the ultimate form of money. Consequently, gold price is affected not just by industrial demand but also and by far, more importantly, monetary demand.

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Gold role as money can be broadly classified into three periods1 Gold used as specie money from ancient times to 1900 The classical gold standard era from 1900 to 1971 The current fiat money regime from 1972 onwards

Ancient times to 1900. Gold is the world's oldest international currency, having played a role in most countries' currency systems for well over two thousand years. Gold's scarcity, the fact that it does not corrode or tarnish, its malleability and status across civilisations have made it eminently suitable as a form of money. Before 2000 BC agreed weights of gold (and silver), in various forms, were used to trade in Egypt, Mesopotamia, Anatolia and China. Their use then increased around the Mediterranean. King Croesus minted the worlds first gold coins in 564 BC in Lydia (modern day Turkey) and other Mediterranean civilisations subsequently adopted the practice. Gold coins often circulated far beyond their countries of origin; Roman gold coins were exchanged long after the fall of Rome itself. During the Middle Ages gold and silver continued to form the basis of currency systems in Europe, around the Mediterranean and in the Middle East. Gold was too valuable for most day-to-day transactions, but coins such as the Byzantine nomisma or bezant, the Islamic dinar and later the Venetian ducat, became widely used by merchants. Over the centuries, specie money (made from metals where the value of the coin was essentially based on the value of the metal itself) was gradually superseded by specie-backed money. The transition began with bankers' bills of exchange in the Middle Ages and moved on to state-issued token coinage or paper money in the 17th and 18th centuries. These bills of exchange and tokens were guarantees that the bearer could (at least notionally) exchange on demand for gold or silver. Gold, silver, or both, remained the basis of the monetary system. Britain moved onto a de facto pure gold standard in 1717 - when the government linked the currency to gold at a fixed rate. While Britain moved onto a de jure gold standard in 1816, most countries remained on a silver or bimetallic system until around 1870, when the newly emerging Germany moved onto a gold system. By 1900 almost all major countries, China being a notable exception, were on a gold standard. 1900 to 1971. The classic gold standard existed for a comparatively short period from the 1870s to the outbreak of World War I in 1914. It had its disadvantages, such as periods of short-term economic instability and susceptibility to variations in gold supply. Despite these factors, gold provided the backdrop to a period of rising economic prosperity and medium-term price stability. Gold also facilitated large and stable flows of international direct investment capital that helped to open up and develop much of the US, Canada, Australia and other "emerging markets" of the day. With the important exception of the US, most countries left the gold standard, either legally or in practice, during or immediately after World War I.

The narrative below is taken from World Gold Council

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Later attempts to return to the standard were uncoordinated and mismanaged and none survived the impact of the 1930s great depression. The US suspended its dollar/gold parity of US$20.67/troy ounce in 1933 but re-fixed it at US$35 = one troy ounce in 1934. The Bretton Woods international monetary system, established after World War II, maintained the $35/troy ounce parity. It defined other currencies in terms of the dollar, with fixed but adjustable pegs. This system helped to form what was, at least for western countries, probably the most successful period of economic history. Growth was high and inflation, while higher than in the classical gold standard period, was relatively low and stable. Many developing countries also made rapid progress during this era. Over time, however, the $35/troy ounce fixed price became unrealistic. This was partly as a result of existing inflation and in part due to rising demand for gold as jewellery and as investment. In 1968 a two-tier system with a free private market replaced the $35/troy ounce peg, with gold still officially changing hands at a fixed rate. This system was untenable, and ended in August 1971 when the United States suspended the fixed convertibility between gold and the dollar. 1971 onwards. After attempts to revive a Bretton Woods based system failed, governments formally abandoned the two-tier gold market in 1973. Golds official role in the international monetary system finally ended in 1978, when the 2nd amendment to the articles of the IMF came into effect. This amendment prohibited member countries from linking their exchange rates to gold. Nevertheless, gold still retained certain monetary functions and is still considered by some as "the ultimate form of payment" today. Its main formal use is as a reserve asset for central banks - for whom it ranks third place after the dollar and euro. Gold is popular as a means of saving in Asia and the Middle East and at times forms the basis of transactions (for example property sales in Vietnam often use gold).

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Demand for Gold

Three main categories of gold demand. The total global demand for gold was approximately 4,067 tonnes, or 130m ounces in 2011. At the average price of gold of circa USD1,571/ozt , the gold sector was worth USD205bn. The demand for gold can be subdivided into three major components: Jewellery Industry Investment

In 2011, jewellery constituted 48% of gold demand while investment and industrial constituted 40% and 12% respectively.
Figure 1: Demand for gold by category 2011

Source: World Gold Council

Table 3: Gold demand 2011 tonnes 1,963 330 89 44 464 1,487 154 1,641 4,067 1,225 USD m 99,175 16,696 4,513 2,211 23,420 75,115 7,783 82,898 205,493 1,572

Jewellery (a) Electronics Other industrial Dentistry Industrial (b) Total bar and coin ETFs and similar Investment (c) Total gold demand (a+b+c) London gold price (USD/oz)
Source: World Gold Council

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Investment demand up, jewellery demand down. Demand from all three segments generally fluctuates annually depending on the price of gold. As can be seen from Figure 2, as the price of gold took off in 2006 (from USD444 to USD604), the demand from jewellery declined while the demand from industrial was more or less the same. The decline in demand from jewellery however was offset by an increase in demand from investment (which has experienced rapid growth in the past decade).
Figure 2: Demand for gold by major categories 2001-2011 (in tonnes)

Source: World Gold Council

Jewellery demand
Jewellery demand inversely related to gold price. Jewellery demand consists of demand for decorative purposes. It is the major component of demand for gold and constituted 48% of total global demand in 2011 amounting to 1,963 tonnes or USD99bn. Jewellery demand fluctuates inversely to the price of gold. When the price of gold was at a low of USD271 in 2001, jewellery demand was at a high of 3,064 tonnes. As the price of gold increased, jewellery demand gradually declined. In 2011, when the price of gold was at USD1,700, jewellery demand declined to a low of 1,963 tonnes or a 36% decline from 2001 high. Jewellery demand depends on market perception of gold as ornament (say versus diamond), cultural influences, income levels and of course price. About 60% of jewellery demand comes from only four countries China, India, Turkey and Middle East. In particular, India buys a quarter of world jewellery. India demand for gold is due to cultural and religious traditions. Hinduism is practised by 80% of population and Hindus consider gold auspicious metal. Gold is also used in the marriage ceremony to adorn the bride.

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Figure 3: Jewellery demand 2001-2011 (in tonnes)

Source: World Gold Council

Emergence of China as a major consumer. The source of jewellery demand has also changed over time. As the price of gold increased, demand has declined in all countries except in China and Hong Kong. In particular, demand for gold from China continued to grow each year. Both China and India are the largest consumer of gold jewellery with a combined 56% of total global demand for gold jewellery. China stands out as a key source of demand. Not only has Chinese demand doubled in six years, size-wise, it is also within striking distance of the largest jewellery consumer India. At this rate, China will be the largest consumer of gold jewellery in 2012.
Table 4: Top five countries for gold jewellery demand (in tonnes) tonnes India China USA Turkey Saudi Arabia Others Total 2005 587 241 349 195 146 1,186 2,704 2006 506 245 309 165 113 929 2,267 2007 552 302 258 188 118 983 2,401 2008 470 327 179 153 109 900 2,138 2009 442 352 150 75 78 662 1,760 2010 657 451 129 71 68 641 2,017 2011 567 511 115 64 56 650 1,963 Cum growth -3% 112% -67% -67% -62% -45% -27%

Source: World Gold Council

Industrial demand
Steady by nature. Industrial demand for gold consists of gold used in the manufacturing of goods. Total industrial demand was 464 tonnes or USD23bn in 2011 (12% of total global gold demand). Key user of gold includes the electronics industry and dentistry. Almost 68% of gold used in industry is absorbed by the electronics industry while dentistry constitutes a further 12%.

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Industrial demand is relatively stable as demand continued to grow despite higher price of gold. The decline in demand in 2009 (evident from Figure 4) was probably due more to the global recession rather than high gold price.
Figure 4: Industrial demand by category 2003-2011 (in tonnes)

Source: World Gold Council

Investment demand
Investment key driver of gold demand. Investment demand consists of gold held in the form of physical bar, official coins, imitation coins and ETFs. It is the second largest and fastest growing of global demand for gold. In 2011, investment demand for gold was 1,641 tonnes or USD83bn. In contrast to jewellery demand, investment demand for gold has increased in line with the rise in the price of gold. It is debatable whether the rise in gold price has caused an increase in investment demand or an increase in investment demand has caused a rise in the price of gold. The truth is probably a bit of both. The largest component of investment demand is physical bar demand which constituted 70% of total investment demand in 2011. A marked increase in demand can also be seen in official coins. In fact, demand for both physical bar and official coins jumped in 2008. Again, similar to jewellery demand, the increase in demand was driven by China and India. Hence not only are China and India demanding more gold jewellery, they are also demanding more gold bars and coins. The rapid rise of gold ETF. The most rapid growth in demand can be seen from gold ETF. The first gold ETF was launched in March 2003 and since then gold ETF demand (per annum) has increased from only 39 tonnes in 2003 to a high of 617 tonnes in 2009, a huge increase of 16x times. This can also be seen visually from Figure 5 where it is clear that investment demand has grown markedly from 2008 onwards. Furthermore, it is apparent that demand in the form of physical gold bar has been very strong and persistent while ETF demand is a bit more volatile. The demand for gold ETF has also increased during recent financial turmoils. For example, during Lehman collapse in September 2008, investors bought 111 tonnes of gold ETF in just five days. At an average gold price of USD800 then, this was equivalent to an inflow of USD2.8bn into gold ETF

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Figure 5: Investment demand by category 2001-2011 (in tonnes)

Source: World Gold Council

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Supply of Gold
Gold demand can easily turn into supply. Gold has important characteristics that set it apart from other commodities. Gold, prized for its beauty and indestructibility, has been selected as the de-facto currency of the world. Both these characteristics, indestructibility and monetary function, imply that gold is never really consumed unlike other commodities. For example, once produced, both oil and steel are consumed and are irrecoverable. Both the oil used to power vehicles and steel used in constructing buildings do not return to the supply stream. Gold, on the other hand, is fully and easily recoverable. Gold that has been cast into jewellery could easily be melted and recast into other forms. Gold used for industrial purposes could also be recovered because of its high value. More importantly, due to gold monetary function, all gold that has ever been cast into gold bars and coins could easily come forth as supply at a moments notice as they remain unadulterated. Hence, what was once demand could easily turn into supply when the price of gold is sufficiently high. For example, when the price of gold is high enough, jewellery will be sold and melted back into gold bars. This shows up as a decline in jewellery demand and a corresponding increase in recycled gold supply. Even more directly, official sector sales, though classified as supply, can be both a positive or negative number. A positive number implies that gold is added into the supply stream while a negative number implies that gold is removed from the supply stream. Hence, official sector sales can represent demand in one year and supply in the next. Furthermore, because of the high value per weight of gold, shipping cost is a small component and gold can be readily shipped anywhere quickly eliminating price discrepancies.
Figure 6: Total supply of gold 2003-2011 (in tonnes)

Source: World Gold Council

With this in mind, the total supply of gold in 2011 was 3,994 tonnes (128m ounces) or about 2.5% of total global gold stock of 160,000 tonnes. Despite the rise in the price of gold, there has been no persistent increase in supply.

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The supply of gold can be divided into: Mine supply Official sector sales Recycled gold

Mine supply
Very hard to increase mine supply. As has been highlighted before, one of the reasons why gold was chosen as money was because it is very scarce. The supply of gold cannot be easily increased. Mine supply statistics is a stark reminder of this fact. Between 2003 and 2011, gold supply only increased by 22% from 2,313 tonnes to 2,822 tonnes per annum. This is despite the price of gold rising almost 5x times during this period. Furthermore, the increase in mine supply has been overstated. During the early 2000s, when the price of gold was at its lowest in decades, most of the gold producers entered into hedging contract whereby they are contracted to divert part of their production to forward buyers. This caused net supply to be artificially low in the earlier years and overstated growth in later years. Mine supply only normalises in recent years when these contract unwind. Normalising for producer hedging, actual mine supply only increased by a negligible 8% (compared to headline 22%) between 2003 and 2011. Hence, mine supply is very sticky. It does not respond to gold price and cannot be easily increased at all.
Figure 7: Total mine supply of gold 2003-2011 (in tonnes)

Source: World Gold Council

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Gold producers fragmented. Industry-wise, gold production is fragmented and thus gold producers have little market power. Globally, the top 10 gold producers control only 25% of the worlds total supply. The largest gold producer, Barrick Gold of Canada has a market share of only 5%.
Table 5: Top 10 producer of gold 2010/2011 Producer Barrick gold Newmont mining Anglogold Ashanti Gold Fields Kinross gold Newcrest Mining Goldcorp Polyus Gold Agnico-Eagle Mines Yamana Gold Total top 10
Source: Various

Base Canada US South Africa South Africa Canada Australia Canada Russia canada Canada

Production (tonnes) 220 150 130 99 77 74 71 43 37 30 931

Reserves (tonnes) 4,307 2,644 2,329 2,454 1,840 2,395 1,869 2,305 722 603 21,467

Official sector sales

Central banks now a net buyer of gold. For a period of time, as the USD gradually took its place as the world reserve currency under Bretton Woods, many central banks began subscribing to the belief that gold no longer play a central role as reserve. Hence, for many years, central banks were net seller of gold. In 2010, net selling by central banks under the Central Bank Gold Agreement (which ran from 1999-2010) ended. The CBGA was a coordinated attempt by central banks (mostly those from Western Europe) and other holders such as IMF to decrease their gold reserves in a gradual and orderly manner. At the start of the CBGA, these central banks collectively held about 45% of the world gold reserves. Without the selling pressure from the CBGA, official sector sales changed direction. From a slight net sales of 30 tonnes in 2009, central banks became net buyer of 77 tonnes in 2010 and a large 440 tonnes in 2011 (highest since 1964). Net buying began in 2Q 2009 and was driven by demand from central banks in emerging countries such as China and Russia who has began buying gold in order to diversify away their dollar reserve. Europe sovereign debt crisis and S&P downgrade of US debt further fuelled the net buying in 2011. It appears then that in the past decade, while the central banks in developed countries were selling their gold under the CBGA, the central banks in emerging countries have taken the opportunity to increase their gold reserve instead.

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Figure 8: Official sector sales(purchase) in gold 2003-2011 (in tonnes)

Source: World Gold Council

US still largest holder of gold. Due to Bretton Woods, the United States is still the largest holder of gold in the world with 8,134 tonnes or a quarter of total world official sector holding of 30,523 tonnes. Excluding IMF, the next largest holders are Germany, Italy, France, China and Switzerland.
Table 6: World official gold holding (April 2011) Country/entity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 United States Germany IMF Italy France China Switzerland Russia Japan Netherlands India ECB Taiwan Portugal Venezuala Saudi Arabia United Kingdom Lebanon Spain Austria Others Total world tonnes 8,134 3,401 2,814 2,452 2,435 1,054 1,040 792 765 613 558 502 424 382 366 323 310 287 282 280 3,310 30,523 % of reserves 74.8% 70.8% N/A 69.0% 65.9% 1.6% 16.3% 7.3% 3.1% 58.5% 8.3% 28.7% 4.7% 82.0% 54.0% 3.0% 16.0% 29.0% 39.2% 55.4%

Source: World Gold Council

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Despite being the 6th largest holder of gold in absolute term, China still has only a miniscule 1.6% of its reserve backed by gold. In fact, compared to US, Germany, Italy and France, where about 2/3 of their reserves is backed by gold, China low gold reserve sticks out clearly. Hence, it appears that China (in line with its status as the worlds second largest and fastest growing economy) will continue to be a major source of gold demand moving forward.
Figure 9: Gold as % of reserves for top 10 gold holders (as at April 2011)

Source: World Gold Council

Recycled gold
Supply tapering off despite higher price. In 2011, recycled gold contributed 1,612 tonnes out of total gold supply of 3,993 tonnes. This represents a doubling of the amount of recycled gold in 2003. Generally, one would expect that the amount of recycled gold would increase in correlation to the price of gold. Surprisingly, this is not the case. On the contrary, the amount of recycled gold has been fairly restrained in recent years. The amount of recycled gold increased materially from 1,146 tonnes in 2008 to 1,672 tonnes in 2009. However, since then, the amount of recycled gold has not increased but instead declined slightly to 1,612 tonnes in 2011. It is a puzzle why this is so. Perhaps, the source of easily recyclable gold is being exhausted and as such supply remains mild despite much higher prices of gold.
Figure 10: Total recycled gold 2003-2011 (in tonnes)

Source: World Gold Council

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Gold Price Trends

A decade of strong growth
Gold mine indeed. After 20 years of secular decline, gold awoke from its slumber and began its ascent in April 2001. Gold price has marched upwards unabated from an average price of USD273 in 2001 to USD1,700 in 2011 (note that this is an average price. Actual daily price is higher/lower over this period).
Figure 11: Price of gold in USD/ozt 2000-2011

Source: World Gold Council

Spectacular returns and no down years. Gold price movement from USD273 to USD1,700 in 10 years translate to a huge growth rate of 20% per annum. Two facts are worth mentioning about gold price strong movement. Firstly, gold never had a down year between 2001 and 2011. Gold put in a positive return every year in that decade. The lowest return was 8.6% in 2005 and the highest return was 38.8% in 2011. Secondly, gold price managed to perform spectacularly over a very turbulent decade. The decade between 2001 and 2011 witnessed many disruptive global events such as the tech crash of 2001, the September 11 terrorist attack on America, global bird flu outbreak in 2004, the real estate crash in 2008, US credit downgrade by S&P in 2011 and the ongoing sovereign debt crisis2.

Though a case can also be made that perhaps gold did well because of all the aforementioned crises

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Figure 12: Annual change in gold price (US, weighted average)

Source: World Gold Council

Dont forget the denominating currency

Gold return dependent on denominating currency. Bear in mind also that gold return is dependent on the denominating currency. Different investors with different functional currencies will experience different rate of return. As the price of gold reacts to monetary developments, countries with depreciating currencies will show a higher return in terms of gold. Depreciating currency and appreciating gold price is really the same thing. The figure below emphasises this point. The price of gold in terms of USD (which has depreciated due to money printing by Federal Reserve) has been appreciating at a much higher rate than the price of gold in the strong Swiss Franc currency. Between 2000 to 2011, the price of gold has increased 6x times when quoted in USD compared to only 3x times when quoted in CHF.

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Figure 13: Price of gold index in selected currencies 2000-2011.

Source: World Gold Council

Comparative return of gold

No comparative outperformance. Surprisingly, over the last twenty years, gold did not outperform Industrial Metal Index. In the period 1991-2010, gold returned 6.6% per annum in line with overall Industrial Metal Index returns of 6.4% per annum. In fact, gold has underperformed platinum (12.3% p.a.), copper (12.3% p.a.), silver (10% p.a.) and crude oil (7.4% p.a.).

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Figure 14: Gold return vs other commodities 1991-2010 (annualised)

Source: Various

Sole asset class with positive return during 2008 crisis. Despite showing no outperformace over the long term, gold did have the distinction of being the only asset to register a positive return during the Lehman crisis of 2008. Gold returned 4% in 2008 compared to other asset classes which showed significant decline. All other commodity asset classes showed a decline of greater than 30% ranging from Livestock Index which declined by 28% to crude oil which declined by 62%.
Figure 15: Gold return vs other commodities 2008

Source: Various

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Investing in Gold
How the price of gold is decided
Gold price fixing on LBMA. Gold price is fixed OTC by the London Bullion Market Association3 (LBMA). LBMA has been fixing the price of gold for almost 100 years. LBMA price is used as the benchmark price by gold producers, investors, central banks and other gold market participants. Price fixing is carried out twice a day (10.30am and 3pm) by the five members via a dedicated conference call. At the start of each fixing, the Chairman announces an opening price to the other four members who relay this price to their customers, and based on orders received from them, instruct their representatives to declare themselves as buyers or sellers at that price. Provided there are both buyers and sellers at that price, members are then asked to state the number of bars they wish to trade. If at the opening price there are only buyers or only sellers, or if the numbers of bars to be bought or sold does not balance, the price is moved and the same procedure is followed until a balance is achieved. The Chairman then announces that the price is fixed. The fixing will last as long as it is necessary to establish a price that satisfies both buyers and sellers. Customers may leave orders in advance of the fixings. Alternatively, they may choose to be kept advised of price changes throughout the fixing and may alter their orders accordingly at any time until the price is fixed. To ensure that the price is not fixed before the member has had an opportunity to communicate any changes each member has a verbal flag. As long as any flag is raised, the Chairman may not declare the price fixed.

How to gain exposure to gold

There are now many ways to gain exposure to gold. The common methods are: Gold coins Gold bars Gold ETF Gold mining stocks Gold derivatives

Gold coins. Gold coins are typically issued by governments to serve as legal tender at face value rather than their gold content. However, the market value of these coins is determined by the market price of gold and thus is always significantly higher than their face value.
3

The current five members involved in the fixing are HSCB, Barclays Capital, Deutsche Bank, Societe Generale, Scotia Mocatta

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Gold coins are measured by weight and karat. Pure gold is defined as 24 karat. In this manner, a 22 karat coin contains 22/24*100% = 92% gold. These coins are sold various channels such as wholesalers, brokerage companies, coins dealers and banks. An example of gold coin is the Krugerrand which was first minted by South African Mint in 1967. The coin features Paul Kruger on one side and a springbok antelope on the reverse. The Krugerrand contains exactly 1 ozt of gold (which means at current price, one Krugerrand is worth between USD1,700-USD1,800 each)
Figure 16: A Krugerrand coin

As an interesting aside, the US Mint issue the American Eagle coin in 1986 in denomination of 1/10 ozt, 1/4 ozt, 1/2 ozt and 1 ozt respectively. When these coins were first issued, they were denominated USD5, USD10, USD25 and USD 50 respectively and serve as legal tender for all public and private debt at face value. However, over time, due to devaluation of the USD, these very same coins are now worth significantly more at USD180, USD460, USD900 and USD1,780 respectively today.
Figure 17: American Gold Eagle coin

Gold bars. Gold bar differs from gold coins in that it is generally traded in the wholesale market rather than the retail market. Otherwise, the concept is similar with the value of the bar being related to its weight and purity. Gold bars range from 1g to 400ozt or 12.44kg (which is the size of the standard London Good Delivery bar). The most widely traded small bars are 1kg bars while the mostly widely traded large bars are the London Good Delivery bar.

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Each bar is distinguished by their weight and purity (ranging between 995 to 999.9 per 1,000). Bars are also marked with the name of the manufacturer, a serial number and bar purity.
Figure 18: Example of a gold bar

Gold ETF. Gold ETF is a recent development and has been the main source of growth in gold demand. It is estimated that collectively gold ETFs holds about 2,400 tonnes of physical gold. As a comparison, the annual supply of gold is 4,000 tonnes. Gold ETFs allow investor to trade gold as they would trade ordinary stocks on the exchange through brokerage accounts. This way investors do not have to concern themselves with logistics and storage costs. Furthermore, since gold ETFs behave like stocks, investors could exercise limit and cut loss orders. Gold ETFs generally charge a trust expense is typically 0.4% of NAV. Like all ETFs, shares in the ETF are created in kind. In this instance, new shares in the ETF are only created when physical gold is presented to the trustee. The gold delivered must be in the form of 400ozt London Good Delivery bar and held in a vault in London. Since gold ETFs are backed by physical gold, the price of each gold ETF share should theoretically track the price of gold. The first gold ETF was listed on March 2003 on the Australian Stock Exchange. However the largest gold ETF is the SPDR Gold Shares which was initially listed on NYSE but now also trades in the Hong Kong, Singapore and Tokyo stock exchanges. It currently has USD70bn in asset backed by 42m ounces of physical gold. Since its listing in November 2004, SPDR Gold Shares has returned 20% per annum over 7 years.

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Figure 19: SPDR Gold Shares price

Source: Bloomberg

Gold mining stocks. Investors could also gain indirect exposure to gold through gold mining stocks. The exposure is indirect because gold mining stocks are influenced by more than just gold price. They are also influenced by other considerations such as operations and financial metrics. In addition to that, most mining companies are not pure gold miners but dabble in other metals as well. Hence, investors may not get a clean exposure to gold. Globally, there are over 300 listed gold mining companies with a total capitalisation of circa USD200bn. Benchmark index for gold mining shares include FTSE Gold Mines Index, S&P/TSX Capped Gold Index, Philadelphia Gold and Silver Index and AMEX Gold Bugs Index. Gold derivatives. Gold derivatives take the form of gold futures and gold options. Typically, in contrast to direct exposure to gold, gold derivatives provide an additional leverage factor as the initial margin is generally only a fraction of the underlying price. Gold futures are traded on commodity exchanges around the world. For example, in US, gold futures is traded in size of 100ozt or 50 ozt on the NYSE Mercantile Exchange COMEX division. Assuming a current price of gold of USD1,700, each 100ozt contract is worth USD170,000.

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nonameresearch.com | 9 August 2012 Rating structure The rating structure consists of two main elements; fair value and conviction rating. The fair value reflects the security intrinsic value and is derived based on fundamental analysis. The conviction rating reflects uncertainty associated with the security fair value and is derived based on broad factors such as underlying business risks, contingent events and other variables. Both the fair value and conviction rating are then used to form a view of the security potential total return. A Buy call implies a potential total return of 10% or more, a Sell call implies a potential total loss of 10% or more while all other circumstances result in a Neutral call.

Disclaimer This report is for information purposes only and is prepared from data and sources believed to be correct and reliable at the time of issue. The data and sources have not been independently verified and as such, no representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in this report. The information and opinions in this report are not and should not be construed as an offer, recommendation or solicitation to buy or sell any securities referred to herein. Investors are advised to make their own independent evaluation of the information contained in this research report, consider their own individual investment objectives, financial situation and particular needs and consult their own professional and financial advisers as to the legal, business, financial, tax and other aspects before participating in any transaction.

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