FWP
Filed Pursuant To Rule 433
Registration No. 333-153150
March 18, 2009
WGC Vodcast The Changing Economic & Financial Landscape and Gold
Transcript and Power Point Presentation posted on www.gold.org
WGC Vodcast Transcript
The Changing Economic & Financial Landscape and Gold
Voiceover: Welcome to the World Gold Councils latest vodcast, part of a series of educational
presentations on the gold market. In our latest vodcast, we look at golds price performance
throughout the credit crisis and consider what impact the US recession might have on the gold
market. We also highlight some of the aftershocks that are likely to follow the financial crisis,
and again ask what they might mean for gold.
Lets begin by reviewing golds price performance since the credit crisis began in the summer of
2007. The progressive deterioration in financial sector balance sheets from mid 2007 onwards,
prompted a steady increase in investor demand for gold and a corresponding sharp increase in the
gold price. Golds appeal during such times arises amongst other things, from its inherit lack of
count-party risk. By March 17th, 2008 when the financial crisis claimed its first major
victim, in the shape of Bear Sterns Investment Bank, the gold price had reached a new all-time
record of $1,011 dollars an ounce, a rise of over 50% in just nine months. This took the gold price
through its previous long-standing record of $850 an ounce set back in January 1980.
In the two months that followed, the gold price gave back some of those gains. By May of 2008, gold
was trading back around the $850 an ounce level. However, when the next major financial shock came,
which was arguably news that mortgage giants Fannie Mae and Freddy Mac would require a federal
bailout, the gold price rallied again, although this time it stopped just short of the $1,000 an
ounce mark. However, in Q3 and Q4, when the financial crisis really started to become systemic,
gold traded in a lower range, mainly between $700 and $900 an ounce. The fact that gold traded in
the lower range in the second half of the year compared with the first confused some investors -
after all, the second half of the year was characterized by record inflows into gold exchange
traded funds and a remarkable increase in retail investment in gold.
Net inflows into all of the gold ETFs that we monitor rose by 240 tons in H2 to 1,190 tons worth 33
billion U.S. dollars. While retail investment in bars and coins rose by a staggering 400% in Q4,
following a 120% increase in Q3. The strength of retail demand was such that widespread shortages
of coins and small bars emerged around the world. The US mint, unable to purchase enough blanks,
was temporarily forced to suspend styles of American Eagle coins. The apparent dichotomy between
record ETF and retail demand and the lower gold price during H2, is explained by the behavior of
investors elsewhere in the gold market. GFMS, an independent economic consultancy, who compile gold
demand and supply statistics, tried to capture this element of investment in their statistics under
a category called inferred investment. A word of warning however, as this is the residual of all
the other elements of demand and supply, it can also include any errors and any changes in stocks.
GFMS estimate that during Q3 inferred investment declined by 350 tons, and in Q4 recorded only a
five ton increase. The significant outflow during Q3 reflected several key factors: the rise in the
US dollar and the unwinding of long-gold short-dollar positions, the decline in commodity indices
and the liquidation of commodity index-tracking vehicles and the effect of hedge fund selling, as
they were forced to raise cash in the face of margin calls and massive redemptions. Gold provided
access to much needed funds during that period.
1 | Cubitt Jacobs & Prosek Communications
While these liquidations continued into the early part of Q4, they abated during November. In fact,
the second half of Q4 was characterized by the return of net-buying from this side of the market.
The distress selling of gold that took place in Q3 and early Q4 capped last years rise in the gold
price to 6% lower than the returns taxical investors in gold have become accustomed to over the
past few years. Indeed between 2002 and 2007, the average annual return on gold has been an
impressive 20%. But golds performance last year must be viewed in the context of what was
happening elsewhere in financial markets. This slide shows the performance of gold, vis-à-vis US
and German Government Bonds, the S&P 500, international equities, a general commodity basket and
oil prices. Government bonds in gold were the only assets to rise in price last year. While the
gold price increased by 6%, domestic and international equities both fell by 40%, as did the
Goldman Sachs Commodity Basket. Oil prices fell by almost 60%.
It is worth dwelling on this point for a moment. Although many investors think of gold in terms of
a commodity, it is important to highlight that gold moves independently from most other
commodities. Indeed, of the sixteen commodities that we regularly monitor, gold was the only one to
increase in price last year.
Nowhere was the difference more pronounced than with oil. Oil prices fell from $94 a barrel last
year to forty-one, while the gold price rose from $834 to $882. Last year serves as a poignant
reminder that there is no stable relationship between changes in the price of gold and changes in
the price of oil, contrary to popular belief. Indeed over the past twenty years, gold and oil have
moved in the same direction in eleven years, but in a different direction in nine. But gold doesnt
just have a role to play during times of financial duress. It makes sense to have an allocation to
gold regardless of the health of the financial sector or the broader economy. This is because
changes in the price of gold do not correlate either positively or negatively with changes in the
price of other financial assets, thus making gold an effective portfolio diversifier.
This is clear from the matrix in slide eleven, which shows the correlation of gold and a range of
assets over the past five years. The numbers in red indicate that the correlation coefficient
between the two assets is not statistically significant. As you can see, this is in case the fact
for gold and most of the bond and equity series shown. Hence, if you hold any of these assets in
your portfolio, adding an allocation to gold will help to diversify you.
The yellow metals lack of correlation with other financial assets is underpinned by the unique
drivers of gold demand and supply. These pie charts show average demand and supply in the gold
market over the past five years. On the demand side, the single largest element by a wide margin is
jewelry, having accounted for 68% of total demand between 2002 and 2007. Investment has accounted
for a further 19%, and the balances come from the industrial sector. On the supply side, it wont
come as a surprise to hear that the largest source of supply is mining. This has accounted for 60%
of the total supply of gold over the past five years net of producer de-hedging. A further 25% of
supply has come from recycled gold and the balances come from the official sector.
2 | Cubitt Jacobs & Prosek Communications
These three sources of demand and three sources of supply are in turn affected by a whole host of
factors. Some, though by no means all, are listed on Slide 13. For instance, jewelry demand is
affected by everything from fashion trends, to marketing, to changing income levels in our key
jewelry buying markets, to religious festivals and the wedding season in India, a major gold-buying
country. Its worth pausing and considering just how important the emerging market and Middle East
countries are to jewelry demands. Together, India, China, Saudi Arabia, Turkey and Russia make up
55% of total jewelry demand. These countries have enjoyed strong economic growth for several years,
which has boosted households disposable incomes and discretionary spending. This has helped to put
a higher floor underneath the gold price from the jewelry sector. Because some emerging market
countries have not suffered as much from the financial crisis as the likes of the United States and
Europe, theyre helping to offset the sharp decline in gold jewelry demands seen in the Western
Worlds. In 2008, US and UK demand for gold jewelry fell by 31% and 28% respectively for example,
whereas demand from China and Russia rose by 8% and 12%, helping to limit the overall decline in
worldwide demand for jewelry to 11%. Similarly, supply is affected by a whole host of factors
including exploration spending, the success or otherwise in discovering new gold deposits, the cost
of extracting gold, industry lead times and the location of the deposit. The investment element of
demand is of course impacted by some of the same factors that drive other asset prices such as
inflation and currency movements. But these are nowhere near the whole story. Moreover, different
factors will become more or less important at different times. Back in the late 1990s for example,
two big drivers of the gold price were producer hedging, and fears about central bank sales. Over
the past five years, rising income levels in key jewelry-buying markets and the sharp increase in
mining costs have been the key influences driving up the price. At the moment, it is the financial
crisis. The bottom line is that the gold price is driven by a very diverse range of factors, many
of which are unrelated to financial market developments and something which firmly underpins golds
role as a diversifying asset. A further consequence of this is that, as well as not correlating
with other financial assets, changes in the gold price do not correlate with changes in the
economic cycle.
Slide fourteen shows quarterly US GDP growth versus the average quarterly gold price. There is no
clear pattern between the two. This is also supported by rigorous statistical analysis. If you look
at the correlation coefficient between changes in the gold price and changes in US GDP or if you
regress the two against each other, neither technique will show you a statistically significant
relationship. At times the gold price has fallen as the economy has slowed, but at other times the
reverse has been true.
All of this has important implications for todays economic environment. Recessions have clear
negative implications for some commodities like oil, but they do not have negative implications for
gold. This assertion is backed up by historical experience. There have been five official US
recessions once the gold price was fully freed in 1971 and as you can see from this slide, there
has been no uniform response in the gold price. It rallied strongly in one, fell slightly in two,
and increased moderately in two.
Looking beyond the recession, there are likely to be several after-shocks to the crisis. I want to
highlight four that I believe will be important to the gold market. First, renewed vigor in the
search for alterative assets that can provide investors with effective diversification. If the
financial crisis has taught us anything it is that we are not good at
3 | Cubitt Jacobs & Prosek Communications
forecasting. Most of us did not see this financial shock coming, at least not in the scale that it
turned out to be, and most of us probably wont see the next shock coming either. As investors the
best we can do is to structure our portfolios in such a manner, that when negative economic shocks
do occur, the assets that we have in our portfolio dont all move in the same direction. Golds
performance throughout the credit crisis has put it firmly in the spotlight of assets that can
achieve this. And there is certainly ample scope for growth. Our best estimate is that the global
pension fund, private wealth, mutual fund, insurance, hedge fund, and sovereign wealth fund
community held less than 1% of their total assets in gold in 2007. Though that percentage is likely
to have increased today, due to the sharp fallen equity valuations, in general, worldwide
allocations to gold from the broad investment community remain very low, meaning there exists
significant scope for growth.
Second, the crisis will undoubtedly result in a tightening in regulatory and reporting standards.
It may also see investors shift from more opaque assets like fund of funds, where the underlying
assets are not clear, to more transparent assets. Residual concerns about counterparty risk are
likely to linger for some time. Assets like gold stand to benefit gold is a simple asset to
understand, it has intrinsic value beyond that of an investment product and it carries no
counterparty risk.
Third, inflation. The final quarter of last year ushered in a new era in monetary policy; the move
to zero interest rates and the introduction of quantitative easing measures. This comes on the back
of the billions and billions of dollars, sterling, Euro and Yen that have already been pumped into
the financial system and ahead of the massive fiscal expansions that are still to come. There are
two main schools of thoughts on this: One, we are on a liquidity track, fiscal stimulus will not
work either and we are going to move from disinflation into deflation. Or two, all of these
measures are going to come together and create a perfect storm for the reemergence of inflation
later down the line, which may or may not be accompanied by our return to economic growth.
Investors in the latter school might want to consider adding gold to their portfolio. Most
traditional assets such as equities and bonds are a pure hedge against inflation. By contrast, gold
often performs at its best during periods of high inflation.
Since the gold price was fully freed in 1971, there have been nine years when the US CPI has
averaged over 5%. Domestic and international equities each fell in five years, rose in four and
posted an average decline of 0.5 % over the nine years. Longer dated treasuries did not fair much
better, they also fell in five and rose in four, although managed to post an increase averaging
1.5%. Commodities rose by 8.7% on average, but gold was the star performer, rising in seven out of
the nine years and posting an average return of 31%.
The final after shock I want to highlight, is the emergence of a much larger government sector. The
Congressional Budget Office estimates that the US budget deficit will top a trillion dollars next
year. However that estimate did not take account of the new fiscal stimulus plan, so in reality the
US budget deficit is likely to be much much higher. To date, foreign investors have been happy to
finance the US budget deficit, but there is a distinct risk that they will not be prepared to do so
in the future, which could see a sharp depreciation in the dollar. Although not all investors are
of this view, those that are, again, may wish to consider adding gold to their portfolio, as it has
a long history as a dollar
hedge.
4 | Cubitt Jacobs & Prosek Communications
Slide 21 shows the close relationship exhibited between the gold price and the trade-weighted
dollar over the past year.
To summarize, golds performance relative to other assets during the financial crisis, highlights
the role it can play as a safe-haven asset during times of financial distress. But golds role in a
portfolio goes beyond that. Its lack of correlation with other financial assets makes it an
effective portfolio diversifier, regardless of the stage of the economic cycle. It has also proved
to be an effective hedge against dollar depreciation and inflation, two additional burgeoning
concerns among the investment community. For more information on investing in gold, please visit
our website at www.gold.org.
5 | Cubitt Jacobs & Prosek Communications
Vodcast: The Changing Economic and
Financial Landscape and Gold
Natalie Dempster
Head of Investment, Americas
World Gold Council
|
Disclaimer
The information and opinions contained in this presentation have been
obtained from sources believed to be reliable, but no representation or
warranty, express or implied, is made that such information is accurate
or complete and it should not be relied upon as such. This presentation
does not purport to make any recommendation or provide investment
advice to the effect that any gold related transaction is appropriate for
all investment objectives, financial situations or particular needs. Prior
to making any investment decisions investors should seek advice from
their advisers on whether any part of this presentation is appropriate to
their specific circumstances. This presentation is not, and should not
be construed as, an offer or solicitation to buy or sell gold or any gold
related products. Expressions of opinion are those of the World Gold
Council only and are subject to change without notice.
|
Presentation outline
Gold and the 2007/2008 financial crisis
Gold relative to other assets
What does the US recession imply for the gold
price?
The "after shocks" and gold
|
Gold and the 2007/2008 financial crisis
Gold Price (US$) since credit crisis began
600
650
700
750
800
850
900
950
1000
1050
2-Jul-07
2-Sep-07
2-Nov-07
2-Jan-08
2-Mar-08
2-May-08
2-Jul-08
2-Sep-08
2-Nov-08
Source: Global Insight, WGC
Bear Stearns
Fannie and Freddie
Six major central banks make
emergency interest rate cuts
$/oz
Lehman fails
WaMu fails
|
Demand for gold ETFs reaches record levels
|
Retail Investment in Q4
0
5
10
15
20
25
30
35
40
45
50
China
Net retail investment by country, Q4 2008 (tonnes)
Source: GFMS
India
Hong Kong
Taiwan
Japan
Indonesia
Thailand
Vietnam
Saudi Arabia
Egypt
UAE
Other Gulf
Turkey
USA
France
Germany
Switzerland
Other Europe
|
Eighth consecutive annual increase in the gold price
|
Price performance in relative terms in 2008
|
Gold moves independently from other commodities
|
Gold does not just have a role to play during times of crisis
|
Unique price drivers underpin diversification role
The structure of the gold market
|
Factors affecting demand and supply
Religious
festivals
Indian Wedding
Season
Monsoon
Exploration
spending
Mine construction
New gold
discoveries
Strategic
decisions on gold
reserves
Jewelry
marketing
Financial and
economic
crisis
Dollar
Extraction costs,
e.g. Tractors,
Rubber
Volatility
Electronics
demand
Political risks
Mining
lead times
Desirability
Fashion Trends
Tourism in the
Middle East
Chinese NY
Inflation
Producer hedging/de-
hedging
|
There is no correlation between US GDP growth and the gold price
Quarterly GDP growth and Gold Price (US$/oz)
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
900.0
1000.0
1973q1
1978q1
1983q1
1988q1
1993q1
1998q1
2003q1
2008q1
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
Gold (LHS) End-of-period
GDP % yoy (RHS)
(% yoy)
($/oz)
Source: Bloomberg, BEA
|
Gold price performance during recessionary periods
|
After shock (1): Diversification
|
The after shocks: (2) From opaque to transparent
Tighter regulations
Tighter reporting
Investable assets might change
Complex derivative products, exotic structured products no
longer in vogue
Or fund of funds, where the underlying investments are not
clear.
Residual concerns about counterparty risk likely to
linger
Gold is simple to understand, it has intrinsic value beyond that
of an investment product and it has no counterparty risk.
|
The after shocks (3): The re-emergence of inflation
Fed Funds Target Rate of "0 to 1/4 %"
Massive injections of liquidity into the banking system
Quantitative easing measures
A large fiscal stimulus package
= Future Inflation (?)
|
Gold performs well in a high inflation environment
|
The after shocks (4): The trillion dollar deficit
|
Gold as a dollar hedge
Gold (US$) and Trade-weighted Dollar (Index, Inverted Scale)
700
750
800
850
900
950
1000
1050
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
77
79
81
83
85
87
89
91
93
95
Gold (US$) LHS
TWI (RHS)
Source: Bloomberg
US$/oz
Inde
|
Summary
Gold's performance during the financial crisis highlights
the role it can play as a safe-haven asset
But gold does not just have a role to play during times of
financial duress
Gold is an effective portfolio diversifier regardless of the
stage of the economic cycle
Gold can help to protect the value of a portfolio against
dollar depreciation and inflation
|
Investing in Gold
www.gold.org
www.investingold.org
www.pensions.gold.org
|
SPDR® GOLD TRUST has filed a registration statement (including a prospectus)
with the SEC for the offering to which this communication relates. Before you invest,
you should read the prospectus in that registration statement and other documents the
issuer has filed with the SEC for more complete information about the Trust and this offering.
You may get these documents for free by visiting EDGAR on the SEC Web site at www.sec.gov.
Alternatively, the Trust or any Authorized Participant will arrange to send you the prospectus if you
request it by calling toll free at 1-866-320-4053 or contacting State Street Global Markets, LLC, One
Lincoln Street, Attn: SPDR® Gold, 30th Floor, Boston, MA 02111.