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GOLD REPORT
HEDGE EQUITIES
GOLD REPORT
Contents
Introduction:...................................................................................................................................... 2 Uses & Applications of gold .................................................................................................................. 2 Global Gold outlook............................................................................................................................. 3 Gold database .................................................................................................................................... 4 Global Gold Supply ............................................................................................................................. 5 World Gold Demand ............................................................................................................................ 7 Factors affecting gold prices................................................................................................................. 8 Key global markets ............................................................................................................................. 9
China .................................................................................................................................................................................................... ............................ 9 India ..................................................................................................................................................................................................... .......................... 10
Gold as an investment........................................................................................................................11 Country's official gold holdings in tons as reserves on May 2011..............................................................12 Consumer demand in selected countries ...............................................................................................14 Gold Outlook .....................................................................................................................................15 1 1
HEDGE EQUITIES
GOLD REPORT
Introduction:
Gold is one of the many metals found in the earths crust. It has been considered as symbol of wealth in the olden days and has strong cultural linkage to many Asian countries. The color of Gold is one of its most important properties, which attracts and reflects beauty and is used in making of jewelry. Although widespread, many number of refining and extraction processes are required to extract the gold from its ore, as only a minute amount of Gold (.005 units from 1 ton) is extractable from its ore. Gold has been found in huge quantities in the Witwatersrand in South Africa. But recently the resources have declined in South Africa and other countries have started mining of gold. Gold has been a part of the monetary system for most of human history, even as recently as a few decades ago under the Gold Standard. Only relatively recently has it been replaced with a Fiat Currency. The demand for a metal with such historical significance has been ever increasing and is only expected to rise in coming years.
HEDGE EQUITIES
GOLD REPORT
windows, which reduce the heat getting inside the building. By adding a gold nano rod to the memory sticks or optical drives can significantly increase the storage capacity, according to research. Space & engineering: Gold has many important qualities such as good reflector of heat & infrared radiation. Gold coating is applied on various items used in space to protect against various radiations that occur which is uncertain. Golds resistance to extreme temperatures and corrosion resistance are attracting more engineering uses and the demand is increasing. A gold coati ng on windows provides protection against extreme temperatures. Dental Industry: Gold in recent years has been used extensively in dental applications, due to its resistance to corrosion and is not harmful when it comes to contact with body. Setting up of golden tooth is one of the major uses in the dental industry & seen as status symbol.
HEDGE EQUITIES
GOLD REPORT
Gold database
GOLD
GLOBAL PRODUCTION IN TONS(2010) MINE PRODUCTION -2586 RECYCLED GOLD 1645 TOTAL GOLD SUPPLY - 4231
TOP PRODUCERS 1.CHINA14% 2.AUSTRALIA 10% 3.UNITED STATES- 9% 4. SOUTH AFRICA- 7% 5.RUSSIA 7%
5. GERMANY - 5%
GLOBAL CONSUMPTION IN TONS( 2010) JEWELLERY DEMAND - 2017 TECHNOLOGY DEMAND- 466 INVESTMNET DEMAND -1487 TOTAL DEMAND 3971
TOP CONSUMERS 1. INDIA 25% 2.CHINA 18% 3.UNITED STATES-9% 4.MIDDLE EAST - 9%
GOLD REPORT DIA - 25% 2.CHINA -15% 3.MIDDLE EAST - 10% 4.GERMANY - 7% 5. TURKEY 4.5%
HEDGE EQUITIES
GOLD REPORT T
Countrys share of Mine production in 2010
The major source of Gold supply is the mine production which contributes around 60% of the world supply and the remaining supply is met through recycled gold. In the last year recycled gold supply has decreased 3% to 1645 tons.
China: China is the largest gold producer in the world, with a production 340 tons in 2010. In the year 2007, Chinese output rose to 276 tones increase of nearly 12% compared to previous year; to become the worlds largest producer overtaking South Africa which produced 272 tones. China gold production has increased by 70% for the past decade and the reason behind is the mining industry has received foreign and domestic investment and project numbers have increased as more discoveries have been found. China is the leader in gold mine production and with its existing resources; it may exhaust its gold reserves in other 6 years approximately. The Chinas current demand is close to 700 tons and it plays a major part in determining the gold prices in the future. United States: Major mines in United States are present in Alaska and other smaller mines are present in western states. Nearly thirty operations yielded more than 99% of the gold produced in United States. In 2010, the value of mine production was about $8.9 billion. After continuous
South Africa 7%
Unite d State s 9%
Source: US Geological Survey, Hedge Research decrease in mine production in United States, there was an
HEDGE EQUITIES
Y ear U S Pr im a r yp ro d u ction U S Seco n d a y p ro d u r ction U S Im p s U S ort Exp orts U S Co nsum p tio n 20 00 20 01 20 02 353 335 298 40 41 38 223 193 217 547 489 257 337 257 267
44 45 40 44 66 87 92
352 REPORT 224 T 257 295 324 277 389 130 519 214 567 183 381 254
GOLD
Australia: In the year 2009, Australia produced 227 which helped the country to be the second largest procuring country. This surpassed United States to place which produced 223 tons in 2009.At Australian
price of around A$1250 per ounce, the 227 tons produced in 2009 is worth A$9 billion, making a significant contributor to Australian export earnings. Super pit is a world class deposit situated in Western Australia producing 850,000 ounces of gold every year and the largest open mine pit in Australia Australia has gold reserves of 7300 tons, which is the highest according to the current statistics and is one of the leading exporters of gold. Australia & China are few countries were mine production
243 0
2001 2010
2002
2003
2004
2005
2006
2007
2008
2009
HEDGE EQUITIES
GOLD REPORT
375 3 351 5
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: World gold council, Hedge research Ind y App tions: Golds quality of corrosions resistance, medicinal importance resistance extreme
& to
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GOLD REPORT
Gold demand segmentation 8% 4% 28 % 49% Jewellery Technology total bar & coin demand ETF's & similar OTC investment
11 %
8 8
HEDGE EQUITIES
GOLD REPORT T
1. Decline of Mine production: Mine production has been in the decline trend in the recent past. Major factors that cause the production to decline are increase in cost of mining, strikes by gold miners, legal formalities, geographical problems and worsening political situations. 2. Inflation and interest rates: Gold has always been one of the best asset classes for hedging against inflation. Rising inflation rates appreciates gold prices as more investors start investing in the yellow metal. Gold has an inverse relationship with interest rates and as gold is pegged to the US dollar, the US interest rates affect gold prices to a certain extent. 3. Currency Fluctuation: As gold is denominated in US dollar, it has an inverse relationship with the dollar. When the dollar is weaker, the gold demand increases as it becomes cheaper for other currency holders. 4. Geo political concerns: Whenever there is uncertainty prevailing in the globe, the prices of gold will shoot up. In the recent financial crisis the prices were in uptrend followed by Middle East North African issue (MENA) issue which supported the gold prices. 5. Central bank Demand: US dollar which is considered to be one of the safe asset classes is losing its value in the past few months and central banks have started to increase their proportion of gold in the reserve holdings of their respective countries. 6. Demand for jewellery from the Asian markets especially India & China: India and China has been the major demand drivers of gold. India continued to be one of the strongest gold markets in 2010. Total annual consumer demand for jewellery registered growth of 66% relative to 2009. China was the strongest market for investment demand growth. Annual demand for bars and coins in China totaled 179.9 tons, an increase of 70% year-on-year. 7. Economic data is other major factor which influences the gold prices to certain extent. If macro economic data such as unemployment data, GDP numbers & Home sales are positive, then the gold prices will be sluggish as the economy is growing at good pace. Generally when the economy is growing then the investors will move the funds from the safe assets to the riskier assets, which give higher returns. Is Gold going to become extinct? With the current estimated gold reserves of 51000 tons as per United States geological survey (USGS) and if the current demand of 3971 tons (WGC) remains, the gold reserves will become extinct in other 13 years approximately.
HEDGE EQUITIES
GOLD REPORT
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GOLD REPORT
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India
Indias demand rose to 963 tons in 2010 compared to 819.7 tons in 2009. India demand for gold is 25% of the total gold demand in 2010 when compared to 16% in 2009. Jewellery demand in 2010 was at 745.7 tons compared to 442.4 tons 120 0 100 0 80 0 in 2009 & investment demand icnreased from 136.1 tons to 217.4 tons. The four southern states of India accounts for 40% of the Indian demand. More than 90% of the gold demand are met by imports. Indian Households hold more than 18000 tons of gold, the largest amount of bullion holdings in the world. The total worth amounts to $840 billion, according to current prices and it is nearly 50% of Indias GDP, according to WGC. This represents 11% of the global stocks and equivalent to nearly half an ounce per capita, which is slightly lower the western markets and signals scope for future growth. India remains the key market for gold and the demand is set to increase and reach 1200 tons by 2020, according to World gold council. Indias demographic trends, the growing middle class and declining age profile are the major factors which will drive the future gold market. Indias gold Exchange traded funds (ETFs) have seen significant growth and the total holdings were at 13 tons in 2010 when compared to 6 tons in 2009. ETF is not popular in India, but this kind of investment mode is slowly catching up among traditional Indian 60 0 40 0 20 0 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
investors. Gold ETFs in India are allowed to diversify 10% of their assets and remaining is backed by physical gold. Source: World gold council
Gold as an investment
Bars & coins: One of the most preferred and traditional ways of buying gold is through bars & coins. These can be bought in Jewellery shops, banks & through bullion dealers. Bars generally have lower price premiums than the coins. Investors should be careful when purchasing the bars & coins, make sure you purchase through a reputed jewellery shops or banks. Gold Exchange Traded Funds (ETF): Investing in gold by buying Gold ETFs is a good option as they are listed in the stock exchanges and one can buy or sell as per their needs. Gold ETFs trade very close to the actual gold prices and any movements in actual gold prices will be reflected in Gold ETFs.
Gold Mutual Funds: Gold mutual funds hold portfolios of gold mining companies, invest in physical gold. The gold mutual funds are directly linked to gold price, still having an undue advantage as the mutual funds will diversify at least small part for the portfolio. As the mutual funds will be handled by the fund managers with expertise knowledge will be an added advantage. E-Gold: It is similar to Gold ETFs, but in E-gold investors can take delivery of gold and the pricing is transparent which tracks the physical gold. E-gold has been launched by National Spot exchange and it is the first of its kind, especially focused on retail investors and E-gold can be converted into physical gold coin/bar. Derivatives: Derivatives such as gold forwards, futures & options are traded on various exchanges around the world. Gold derivatives are traded in Chicago mercantile Exchange CME in US & in India gold futures are traded in Multi commodity exchange (MCX), National commodity & derivatives Exchange limited, National Multi commodity exchange (NMCE) & National spot exchange.
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2.57% 0.10 %
-0.49%
-1.45%
-5.46%
-7.04%
-12.25%
-14.33%
China
Russia
India
Venenzula
United Kingdom
itze
ECB
IMF
13
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Gold Outlook
Gold is one precious metal with a limited supply which is supported by strong fundamental factors and has given a good run over the past few years. Few of the major factors which is driving up gold prices is increasing demand, especially from India & China, a decreasing resource pile and that supply is not in tandem with the demand. Gold prices have been rising in recent times because of global issues and as most of the governments are reducing their exposure to US Markets and eyeing other asset class such as gold. All these make the gold as an ideal investment candidate to anyones portfolio and one can consider adding 5% gold investment to their portfolio.
Last updated on 02/06/2011 Note: This report will be updated on timely manner.
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Researched and prepared by: Vignesh S.B.K Junior Analyst Email: Vignesh.sbk@hedgeequities.com Under the Guidance of Krishnan Thampi K Head of Research and Strategies Email:
krishnanthampi.k@hedgeequities.com
HEDGE RESEARCH & STRATEGIES GROUP Head of Research: Krishnan Thampi K Sr. Fundamental Analyst: Amar Chandramohan Jr. Fundamental Analyst: Muhammed Aslam E Jr. Fundamental Analyst: Neha Mahajan Sr. Equity Technical Analyst: Anish Chandran C V Sr. Commodity & Equity Technical Analyst: Kesavamoorthy B Futures & Options Analyst: Yunus Ismail Jr. Analyst Vignesh S.B.K Access all our research reports online at www.HedgeEquities.com
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