The Dark Side of Gold - Lugano Fund Forum

For all Swiss Investors 

or Qualified Investors outside Switzerland 

COMMITTED TO YOU 

The Dark Side of Gold 

Lugano Fund Forum 

November 2011 

Union Bancaire Privée, UBP SA | 96-98, rue du Rhône | CH-1204 Geneva 

Tel.: +41 58 819 21 11 | Fax: +41 58 819 22 00

Objectives For Today 

• Will miners keep underperforming metals? 

• Is Gold ownership saturated? 

– Western Institutional Investor 

– The China Factor 

• Is Gold expensive? 

UBP ASSET MANAGEMENT 1

Miners Have Underperformed Metals 

Miners 

Relative 

Perf 

-23 p.p. -21 p.p. -22 / -45 p.p. 

Price 

(indexed) 

140 

160 

140 

130 

140 

120 

120 

+16.7% 

110 

120 

100 

100 

90 

-6.5% 

100 

-0.7% 

80 

-13.8% 

80 

-25.9% 

80 

-20.2% 

60 

Platinum 

Anglo Platinum 

-35.8% 

Time 

70 

Gold GDX GDXJ 

60 

01/11 04/11 07/11 10/11 

Silver Silver miners 

60 

01/11 04/11 07/11 

Stillwater 

40 

01/11 04/11 07/11 

-59.2% 

Source: Bloomberg, UBP analysis. 


No Mining Growth in 2011 

Miners 

Gold 

Mining 

Production 

(tons) 

3'000 

2‘049 

+5.4% 

2‘277 -0.5% 

2‘265 

2'000 

1'052 1'045 

Others 

914 

1'000 

185 

221 

233 

215 

201 201 

191 183 

231 233 

260 263 

South Africa 

Russia 

USA 

Australia 

0 

282 341 340 

2008 2010 2011 

China 

Source: Bloomberg, World Metal Bureau of Statistics, UBP analysis. 


Four Headwinds Faced by Miners… 

Miners 

Declining investor awareness 

• Diminishing reserves 

• Labor cost inflation 

• Adverse FX exposure 

• “Resource nationalism is the single most important threat 

faced by miners today [up from rank 4 last year]…” 

− Ernst & Young Mining Survey, 2011 

• “Executives judged that attitudes towards mining had 

become hostile in 41 out of the 51 jurisdiction surveyed” 

− Fraser Institute Annual Survey 2011 

• “About 25 countries plan to increase or (have already done 

so) the realized tax on mining profits” 

− Ernst & Young Mining Survey, 2010 

• Nationalization / additional taxation 

• “Resource nationalism is by definition not a bad idea… but 

South Africa relies on foreign capital and this has shrunk” 

− M. Kingston, CEO Rothschild South Africa 

Source: Mining Weekly, Ernst & Young Mining Surveys, Fraser Institute Annual Survey, UBP analysis. 


…Some of Which Materialized This Year 

Miners 

Venezuela 

• “All Gold mined will be 

handed to gov’t” (Chavez) 

• Targets 13% royalty and 

55% ownership 

Australia 

• Mineral Resource Rent Tax 

taxes 30% of ‘super profits’ 

• Gold miners (thus far) 

excluded from bill 

Peru 

• Targets higher gov’t participation 

in mining profits 

• Targets USD 1bn revenues 

from USD 646 mn currently 

Argentina 

• Miners must repatriate 

30% of revenues… 

• …extending bill that was 

valid for oil / gas Cos only 

South Africa 

• ANC calls for 60% gov’t 

participation in profits 

• Gov’t undertaking study on 

nationalization merits 

Source: Mining Weekly, Reuters, Bloomberg, UBP analysis. 


‘Implicit Leverage’ Is Diminishing 

Miners 

1 

Recall definition of β 

Beta 1 

1.6 

β = 

dP 

dP 

E 

G 

/ 

/ 

P 

P 

E 

G 

= 

dE 

dP 

G 

/ 

/ 

E 

P 

G 

1.4 

1.2 

2 

3 

Substitute earnings equation 

( PG 

−UT 

) SO 

E = V ⋅ / 

Derive relationship β to Gold prices 

1.0 

0.8 

0.6 

0.4 

β = 

P 

G 

PG 

−U 

T 

⇒ 

β →1if 

P 

G 

>> U 

T 

0.2 

0.0 

04/07 04/08 04/09 04/10 04/11 

Note: PE is the price of a gold mining equity, PG are Gold prices. V is the volume of oz sold by a miner, while UT are the total cost per unit of Gold sold and SO are the number of shares outstanding. 

1. Beta refers to the 200D MA of the 20D rolling correlation between the daily returns of the GDX and Gold. Source: Bloomberg, UBP analysis. 

UBP ASSET MANAGEMENT 6 

Time

Over-Talked But Under-Owned 

Ownership 

Bberg 

30'000 

Average 

80% 

“Gold” 

Investor 

Story 

Ownership 

Count 

25'000 

CAGR 17% 

60% 

20'000 

15'000 

40% 

68.62% 

10'000 

20% 

5'000 

31.22% 

0 

2004 2005 2006 2007 2008 2009 2010 

0% 

0.16% 

Gold Equities Fixed-Income 

Source: Bloomberg, Financial Times 14 March 2011, UBP analysis. 


The China Factor (I) 

Ownership 

Gold turnover in Shanghai has reached Tokyo / Mumbai volumes… 

…and is dominated by fast-growing individual clientele 

Tons/y 

5’000 

600 

Together, 

comparable to 

Tokyo / Mumbai 

6'751 

Institutional 

400 

1'778'500 

Individuals 

200 

5'434 

93% 

918'500 

0 

2009 Customers 2010 Customers 

NY (COMEX) 

Mumbai 

Tokyo 

Shanghai (SGE) 

Shanghai (SHFE) 

New York (NYSE) 

Bangkok 

Moscow 

Source: Shanghai Gold Exchange Report 2010, Bloomberg, UBP analysis. 


The China Factor (II) 

Ownership 

• China’s Gold imports from Hong Kong during Q3 2011 (tons) 140 

− During FY 2010 120 

⇒ Implied annualized growth 55% 

• Chinese customers bar hoarding in 2010 (tons) 142 

− During 2009 73 

⇒ Implied annualized growth +94% 

• # of Gold paper trading account opened at ICBC each month 100’000 

• # of Gold Accumulation Plans (GAP) opened at ICBC each month 20’000 

• Average % of income routed to GAP by ICBC client 10% 

• % Penetration of GAP among ICBC 300 mio customer base 0.6% 

• % Gold yearly supply absorbed by GAP if penetration rose to 10% 11% 

Source: UBS Research, Bloomberg, ICBC Interviews, UBP analysis. 


The China Factor (III) 

Ownership 

West Central Banks 


holdings 

(tons) 

10'000 

1'000 

China 

100 

India 

10 

1 

0% 20% 40% 60% 80% 100% 

Proportion of total foreign reserves (%) 

Source: Bloomberg, UBP analysis. 


Consultants Started to Recommend Allocations 

Ownership 

Allocation 

to Gold (%) 

30% 

Base case Macro case UBP case 

20% 

10% 

25% 

0% 

5% 5% 

Oxford Economics Mercer Oxford Economics - 

With Inflation or 

Deflation 

10% 10% 10% 

1 2 1 

3 4 

Bruno & Chincarini Scherer UBP View 

• « It’s a must have even in ‘goldi- 

• « Under inflationary or deflationary scenarios the 

• «Gold isthe 

locks’ (growth / inflation of ~2%) » 

recommended allocation rises to 10% » 

best cash » 

Key 

• « It’s an excellent stabilizator when 

• « The 10% under deflationary scenarios is due to the most 

• « Gold is not 

reasoning 

holding bonds / equities » 

• « 5% reduces the Conditional Value 

likely (violent) monetary response to that threat » 

• « A 10% allocation is recommended for investors with global 

expensive… » 

• «It’scash that 

at Risk most significantly » 

portfolio and significant allocation to sovereign bonds » 

lost value » 

1. http://www.goldcore.com/gold-media/Oxford_Economics_Report_on_Gold_GoldCore.pdf 2. “Gold als Anlageklasse für institutionelle Investor”, Mercer, 2011 

3. “A Historical Examination of Optimal Real Return Portfolios for Non-US Investors” http://www.citeulike.org/article/7399262 

5. “A note on portfolio choice for sovereign wealth funds” http://www.gulfissues.net/m_p_folder/main_div/derasat/pdffolder/fulltext.pdf 


Real-Rates Worsened Significantly… 

Ownership 

UK US Hong Kong Singapore Canada 

Real 

Rates (%) 

0% 

-1% 

-1.0% 

-1.0% 

-2% 

-1.6% 

-3% 

-2.6% 

-2.6% 

-2.4% 

-3.4% 

-4% 

-5% 

-4.7% 

Q3 2010 Q3 2011 

-5.3% 

-6% 

-5.6% 

Source: Datastream, Bloomberg, UBP analysis. 


…Which Is Bullish Real Assets 

Ownership 

Returns 

8% 

Rates 

1946-1980 

(%) 

6% 

Nominal 

Real 

6.6% 

4% 

4.0% 

2.8% 

2% 

1.7% 

1.1% 

1.8% 

2.0% 

0% 

10 y Treasuries 

-0.5% 

-2% 

-2.6% 

-4% 

-3.3% 

30 y Treasuries Corp Bonds T-Bills Commodities 



Is Gold Expensive? 

Expensive 

If Gold will turn to be a bubble, 

at what stage are we now? 

Is Gold 

‘Expensive’? 

If Gold is a currency, 

what can I buy with it? 

If Gold is money that can’t be 

created, how does it stand vs. M2? 

If Gold is store of value, 

what are inflation-adjusted prices? 

Source: UBP analysis. 


If Gold Is a Bubble, Where Are We Now? 

Expensive 

Indexed 

2'500 

First phase 

Second phase 

price 2 

2'000 

Nasdaq 

• On inflation-adjusted basis, Gold is at ‘par’ 

with peak prices of 1980 

1'500 

• Profits in the ‘second’ phase can be as high 

as throughout the entire first ‘phase’ 

1'000 

Real Estate 

• The ‘second’ phase lasts about 1/3 of the 

‘first’ phase with much higher volatility 

500 


0 

0 2 4 6 8 10 12 

Years from boom start 



If Gold Is a Currency, What Can I buy? 

Expensive 

Gold / 

8 


35 

Copper 

7 

Oil 

30 

6 

25 

5 

4 

3 

20 

15 

2 

10 

1 

5 

0 

0 

1988 1991 1994 1997 2000 2003 2006 2009 

1988 1991 1994 1997 2000 2003 2006 2009 


8 


10 

Equities 

7 

6 

5 

Housing 

9 

8 

7 

6 

4 

5 

3 

4 

2 

1 

3 

2 

1 

0 

0 

1930 1940 1950 1960 1970 1980 1990 2000 2010 

1987 1990 1993 1996 1999 2002 2005 2008 



If Gold Is a Store-of-Value, Where Are ‘Real Prices’? 

Expensive 

USD / 

2'000 

oz 

• On inflation-adjusted basis, Gold is at ‘par’ 

1'600 

Non-inflation adjusted 

with peak prices of 1980 

1'200 

Inflation-adjusted 

800 

400 

0 

1977 1980 1984 1988 1992 1996 2000 2003 2007 2011 

Year 



If Gold is Money, Where Does It Stand vs. M2? 

Expensive 

US 

25'000 

UK 

1'800 

M2 / 


(mio oz) 

20'000 

15'000 

M2 / 


(mio oz) 

1'600 

1'400 

1'200 

1'000 

10'000 

800 

600 

5'000 

400 

200 

0 

0 

1975 19781981 1984 1987 19901993 1996 19992002 2005 2008 2011 

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 

Japan 

400 

EUR 

16'000 

M2 / 

350 

M2 / 

14'000 


(bio oz) 

300 

250 

200 


(mio oz) 

12'000 

10'000 

8'000 

150 

6'000 

100 

4'000 

50 

2'000 

0 

0 

1975 1985 1995 2005 

1999 2002 2005 2008 2011 



Conclusions 

• The macro environment is conducive to further monetary accommodation 

− Will ultimately keep real rates negative, thus favoring higher Gold prices 

• Rising trading volumes and access routes will keep volatility elevated 

− To date, there are 42 Gold ETFs and 97 Precious Metal ETFs 

• Major risks in the short-term 

− Withdrawal / pause of Chinese consumer from Gold markets due to placated inflation fears 

− Reversal in the sentiment of confidence for political class 

− Turnaround in the US Housing Market, which will unlock labor mobility 


Disclaimer 

The content of this document is based on information and data obtained from sources deemed reliable. However Union 

Bancaire Privée, UBP SA does not guarantee its accuracy or completeness and accepts no liability for any direct or 

consequential losses arising from the use of the information contained in this document. The information contained herein is 

subject to change without prior notice. 

Past performance is not a guide to current or future results. The performance data do not take into account fees and 

expenses charged on issuance and redemption of the shares nor any taxes that may be levied. Changes in exchange rates 

may cause the NAV per share in the investor’s base currency to go up or down. 

This is a marketing document. It does not replace the prospectus or any other legal documents that can be obtained free of 

charge from the registered office of the fund or from Union Bancaire Privée, UBP SA. Any subscriptions not based on the 

latest prospectus, and the latest annual or semi-annual reports of the fund, shall not be acceptable. Investors are invited to 

carefully read the risk warnings and the regulations set out in the prospectus and should seek professional counsel from their 

financial, legal and tax advisors. 

This document has not been produced by UBP’s financial analysts and is not to be considered as financial research. 

This document is confidential and is intended only for the use of the person to whom it was delivered; it may not be 

reproduced or distributed. The present document constitutes neither an offer nor a solicitation to subscribe for shares in the 

funds in any jurisdiction where such an offer or solicitation would not be authorized, or to any person to whom it would be 

unlawful to make such an offer or invitation. 

Union Bancaire Privée, UBP SA is authorized and regulated in Switzerland by the Swiss Financial Market Supervisory 

Authority (FINMA) and in the United Kingdom by the Financial Services Authority (FSA). 

Union Bancaire Privée, UBP SA | 96-98, Rue du Rhône | CH - 1204 Geneva

The Dark Side of Gold - Lugano Fund Forum

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