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Conference Summary John Reade Public Affairs Committee Member The London Bullion Market Association LBMA Precious Metals Conference Edinburgh, November 2009
Conference Summary
John Reade
Public Affairs Committee Member
The London Bullion Market Association
LBMA Precious Metals Conference
Edinburgh, November 2009
Disclaimer
• Please note that this is meant to be a light hearted summary
of the proceedings of the conference and that no offence
should be taken of anything that is said here...
• (you have been warned)
• Thank you
Opening Session
Orientation
• Stewart Murray
Chief Executive
• The London Bullion Market Association
Orientation
• Tenth LBMA Precious Metals Conference
• First in the UK, first in Scotland
• Not in Peru
• Oversubscribed
Using the keypad
• Polling
• Texting
• Microphone
• What is the fastest land animal?
Introductory Remarks
• Kevin Crisp, Chairman
• The London Bullion Market Association
Introductory Remarks
• (New) Chairman during times of change
• First non market-making Chairman
• Adding, Added to Staff• No sign of Empire Building ,then
• Data Committee; Benchmark forward curve
• Stronger collective voice
• By the industry, for the industry
Keynote Speech
• Paul Mercier, Principal Adviser in Market Operations
• European Central Bank
Keynote Speech
Eternal role of gold
The Past• Predates central banks
• Not the original or most unusual form of money
• Silver had a much more important monetary role
• CB holdings peaked at about 38,000t in 1960s
• Was the anchor of currencies
• The gold exchange standard contained no link between
money supply and gold;
broke down under President Nixon
Keynote Speech
The Present
• Central Banks now hold 30,000t
• 10,800t in the Eurosystem banks
• Gold value has increased; share declined
• Central bank balance sheet increased sharply
• Eurosystem still „optimising‟ its holdings
• Historically gold was important, now less so
Keynote Speech
The Future
• CBGA signatories hold 50-55% in gold
• Non signatories much smaller holdings
• “I would not conclude that gold holdings will
continue to decline”
• Now: “The value of money is only faith”
• Gold investors have less faith in money
The Role of the Bank of England
• Michael Cross, Head of Foreign Exchange
• Bank of England
The Role of the Bank of England
Gold is a small part of a much broader remit
• Promote & maintain financial and monetary stability
• Intelligence function
• Gold falls under the FX division
• Management of UK gold reserves
• Custodial services – 400,000 gold bars
• Contribution to the self regulation of the gold market
• Sold gold for HM Treasury under CBGA1
• Not a signatory to CBGA 2 or 3
• No longer a lender or a seller
Session 2:
Impact of Financial Crisis
• Chairman: Steven Lowe
ScotiaMocatta London
Issues Facing Producers
• Mark Lynam
• Executive Officer
• AngloGold Ashanti
3
Global Footprint
...with significant positions across key gold producing regions.
We are a global company...
China
DRC
Russia
2008
Production 4.98Moz
Total cash costs $444/oz
Current Market Cap $16bn
Issues Facing Producers
• 3rd Largest Miner; Best performing major gold stock this year
Issues Facing Producers
Financing
• Seizure of the credit market
• $1bn convertible bond due in February
• Stressed bank counterparties
• Successfully refinanced in November
• Lots of lessons learnt
• Counterparties
• Focus on the balance sheet
Issues Facing Producers
10
Refinancing Premium
Successful negotiation of bridge facility with Standard Chartered…
…was the catalyst for significant rerating of equity.
REFINANCING RERATING
-80
-60
-40
-20
0
20
40
60
20
08
/06
/20
20
08
/07
/20
20
08
/08
/20
20
08
/09
/20
20
08
/10
/20
20
08
/11
/20
20
08
/12
/20
20
09
/01
/20
20
09
/02
/20
20
09
/03
/20
20
09
/04
/20
20
09
/05
/20
20
09
/06
/20
20
09
/07
/20
20
09
/08
/20
20
09
/09
/20
AU US Equity - Last Price (R1) XAU Index - Last Price (R1)
AngloGold Ashanti Philadelphia Gold & Silver Index
-80
-60
-40
-20
0
20
40
60
Jun
2008
Jul
2008
Aug
2008
Sep
2008
Oct
2008
Nov
2008
Dec
2008
Jan
2009
Feb
2009
Mar
2009
Apr
2009
May
2009
Jun
2009
Jul
2009
Aug
2009
Sep
2009
STANCHART
FACILITY AGREED
• “We are all credit analysts now”, UBS Equity analyst, 2009
Issues Facing Producers
• AngloGold Ashanti‟s stated policy:
• “Hedge book going to zero over a number of years”
Issues Facing The Jewellery Industry
• Aram Shishmanian
• Chief Executive Officer
• World Gold Council
Issues Facing The Jewellery Industry
“But I am not going to talk about that”
1. Preservation hanging on to what you have
2. Relevance must keep gold relevant in EM
3. Desirability tarnished passion in US and Europe
4. Responsibility conscientious consumption, 60 Minutes
5. Innovation new applications for gold
6. Intervention Central Banks net buyers
7. New Axis India, China, Middle East
Issues Facing Refiners and Fabricators
• Mehdi Barkhordar
• Managing Director
• PAMP
Issues Facing Refiners and Fabricators
• A New Western Mindset: Distrust
• Governments
• Currencies
• Financial Systems
• Monetary stability
Trust only gold!
“A traditional Asian mindset”
Issues Facing Refiners and Fabricators
• Business as usual in the East
• Jewellery demand dried up
• Scrap surged
• Jewellery and manufacturing trade severely hurt
• Investment demand held up well, however
Trust only gold!
Issues Facing Refiners and Fabricators
• New Challenges
• Insurance Capacity
• Storage Capacity
• Shipping and Logistics
• Peak production
• Financing & Counterparty risks
A fundamental shift in the gold market
Session 3:
Precious Metals Investment
• Chairman: James Cross
• Chairman
• Swiss Gold DMCC
Macro Outlook
For the world economy and currencies
• David McWilliams
• Economist
Macro Outlook
For the world economy and currencies
• How to summarise Mr McWilliams?
• Fine UBS tradition
• Pope‟s children
• “Don‟t you want me baby”
• Peak “everything”
• Dollar is toast; Ireland toasted
• Inflation could be a big problem in 3-5 years
The ETF Market
• Stephan Mueller
• Executive Director
• Bank Julius Baer
The ETF Market
8
Gap between knowing and understandingETP is the combination of a compelling underlying and a tradable vehicle
• Throughout history, physical precious metals have
always been a means of payment
• Precious meals are subject to price volatility, but will
never lose its physical (real) value
• ETP (Exchange Traded Products); i.e. ETF, ETN, ETC
etc. are well known
• Product setups that are linked to a balance sheet imply
various counterparty risks
• The benefit of the physical backing can be diluted by
choosing a poor product setup
The ETF Market
14
Currency hedging must not be a privilege Professional currency hedging creates real value
• A professional fund management adjusts the
currency hedge versus the USD for the EUR,
CHF and GBP share classes on a daily basis
• The Purpose of the hedge is maximum
participation in the price movement of the
underlying
• Distortion is avoided by converting the USD value
of the underlying into the investor’s base
currency
Clients who invest in precious metals without currency
hedging take on significant currency risks, which detract
from the function in the portfolio context.
Asset Allocation for Precious Metals
• Larry Hatheway
• Chief Economist and Head of Asset Allocation
• UBS Investment Bank
Asset Allocation for Precious Metals
• Gold‟s role in a portfolio
• Limited strategic role
• Tactical allocations vary a lot
• Gold does well when the US dollar is weak
• High inflation is what really makes gold stand out
Gold does well when you need it!
Asset Allocation for Precious Metals
17
3. Precious metals and high inflation
Source: Bloomberg, UBS
0
2
4
6
8
10
12
14
16
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Core CPI inflation
Q4 1976
Q2 1980
Q3 1990
Q4 1999
Q1 1975
Q2 1983Q1 1973
Source: Bloomberg, UBS Note: Dates and arrows denote high/low inflation periods used in analyses.
Equities
Gov ernment bonds
Corporate bondsReal Estate
Precious Metals
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Risk (p.a.)
Return (p.a.)
Corporate bonds
0%
Equities
0%
Real Estate
0%Precious metals
100%
Gov ernment bonds
0%
J
Optimal allocation
• Another fine UBS tradition
Asset Allocation for Precious Metals
• US dollar weakness is what has driven gold
• USD has fallen for the past 8 years
• Inflation needed for much higher allocations
• What investors have been asking about all year
• UBS does not see any inflation problem
If inflation fears increase dramatically,
gold will trade much higher
Session 4:
PGMs Looking Forward
• Chair: Edel Tully
• Head of Precious Metals Research
• Mitsui Precious Metals
The Autocatalyst Market – The next decade
• David Jollie
• Manager, Precious Metals Marketing
• Johnson Matthey
Platinum trends
Platinum use
Heavy duty US dieselFilters Emissions leg.
Pd substitutionThrifting Downsizing
Vehicle market
Hybridisation
Metal cost
Fuel cost
Customer preference
The Autocatalyst Market – The next decade
Palladium trends
Palladium use
Use in diesel China, IndiaFilters Emissions leg.
CO2 legislationThrifting Downsizing
Vehicle market
Hybridisation
Metal cost
Fuel cost
Turbocharging
Engine technology
• Complicated outlook:
lots of moving parts but
generally positive for
demand for PGMs
The Autocatalyst Market – The next decade
0
2
4
6
8
10
12
14
1988 1992 1996 2000 2004 2008 2012 2016 2018
Annual historical pgm demand … and future?
Million ounces
The Chinese Platinum Market
• Philip Klapwijk
• Executive Chairman
• GFMS
The Chinese Platinum Market
China’s Forecast Share of Global Precious Metals Demand in 2009
Source: GFMS Ltd.
The Chinese Platinum Market
Chinese Platinum Jewellery Demand
China’s Share of Global
Pt Jewellery Demand
Source: GFMS Ltd. (2009 data are forecast)
The Chinese Platinum Market
Chinese Platinum Autocatalyst Consumption and Passenger Vehicle Sales
Pt Autocatalyst
Consumption
Passenger Vehicle Sales
Mil
lio
ns
of
Ve
hic
les
an
d T
on
ne
s
Source: GFMS Ltd.; CAAM (2009 data are forecasts.)
PGMs: The Investor Arena
• Michael Sheehan
• Portfolio Manager
• Red Kite
…and supply remains tight – many mines are currently operating unprofitably…
15
400
500
600
700
800
900
1,000
1,100
1,200
1,300
1,400
140,0
00
510,5
00
834,6
00
1,5
96,7
00
2,9
85,9
78
3,6
14,0
78
3,8
52,8
78
4,7
17,0
88
5,4
27,6
88
5,6
51,8
88
6,1
06,8
88
8,6
72,8
88
9,0
59,4
88
9,3
03,4
88
9,4
95,4
88
Cumulative PGM production
Cash operating cost - $/PGM oz YTD avg. PGM basket price ($/oz) Current PGM basket price ($/oz)
PGM
US$ / oz
2009
Source: Standard Bank
…and mining costs in South Africa are rising
16
• Labor represents 50% of cost base for Platinum producers
• Domestic wages in South Africa increased 8% indexed since 2006
Labor
Electricity
• Electricity represents 10% of cost base for Platinum producers
• In 2009/10 South Africa’s biggest electricity suppler, Eskom, increased
tariffs by 31.3%
• Interruptions in electricity supplies are also common in South Africa
Source: Bloomberg: Johnson Matthey Patinum Report 2009
PGMs: The Investor Arena
• Investors have not forgotten
South African production challenges: nor should we.
PGMs: The Investor Arena
Pt & Au are hedges for the US dollar: USD down = Pt, Au up
13
USD Index
Platinum
Gold
Platinum and Gold
US$ / Oz
2000 – 2009 weekly data
US Dollar
Indexed
2000 - 2009 weekly data
Correlation Platinum and USD = (0.84); Gold and USD = (0.82)
Source: Bloomberg; US Treasury Website
Session 5:
Silver
• Chairman: Michael DiRienzo
• Executive Director
• The Silver Institute
Prospects For Silver Supply and Demand
• Jessica Cross
• CEO
• The VM Group
Prospects For Silver Supply and Demand
• Well-known weaknesses
• By-product supply
• Photography and Imaging
• Recycling
Prospects For Silver Supply and Demand
New Silver Applications
0
50
100
150
200
250
300
350
400
2004 2006 2008 2010 2012 2014 2016 2018 2020
Off
take
(M
oz)
Radio Frequency Identification Tags Solar Panels
Wood preservatives Wound care
Fibre/Textiles Food hygiene and water
ACTUAL FORECAST
Food hygiene and
water purification (95
Moz/y by 2020)
• Able to offset silver‟s well-known weaknesses?
Prospects For Silver Supply and Demand
The future?
much healthier supply/demand balance than in the past
robust industrial offtake emerging that does not generate vast amounts of scrap
re-emerging as an asset class in the minds of investors
expect gold/silver price ratio to narrow
expect price rise to be sustainable
London‟s Role In The Silver Market
• James Steel
• Precious Metals Analyst
• HSBC
London‟s Role In The Silver Market
• Why London?• Decline of the Spanish Empire saw London seize the silver
market – London never let go
• High quality facilities:• Clearing & Vaulting
• Personnel
• Legal and Financial services
• Mining Finance
• Good delivery
• Policing and networking
Mining in Peru
• Roque Benavides
• CEO
• Buenaventura
Mining in Peru
Source: CEPAL, PromPeru, and MINEM
3,220 3,2053,809
4,690
7,124
9,790
14,735
17,328
18,656
0
4,000
8,000
12,000
16,000
20,000
2000 2001 2002 2003 2004 2005 2006 2007 2008
Mining exports(US$ Millions)
Mining in Peru
Excellent competitive position
Source: ProInversión
Production Ranking 2008
Mineral Latin America World
Silver 1 1
Tellurium 1 3
Zinc 1 3
Tin 1 3
Lead 1 4
Gold 1 5
Copper 2 3
Bismuth 2 3
Molybdenum 2 4
Mining in Peru
Summary of Mining climate in Peru
• Bountiful geological setting
• Investment grade sovereign rating
• Solid legal system
• Steady tax regime
• Favourable investment climate
• A cornerstone of the economy
• Environmentally sensitive
• Sustainable focus
Session 6:The future of the London PM Market
• Stephen Branton-Speak
• Head of Metals Trading and Partner
• Goldman Sachs
The future of the London PM Market
• Presidential debate: The Panel
• Phil Clewes-Garner, HSBC, LPPM
• Raymond Key, Deutsche Bank
• Neil Clift, JP Morgan Chase
The future of the London PM Market
Stephen Branton-Speak
• Highly Opinionated Industry that Dislikes Change
The future of the London PM Market
Phil Clewes-Garner, HSBC, LPPM
• The Past, the Present and the Future of the London PM Market
The future of the London PM Market
Neil Clift, JP Morgan Chase
• Physical, Allocated and zero yield for commodities
• Credit, counterparty and concentration
• New exchanges –a threat to London via Fragmentation?
• A return to hedging
• Investors are surrogate producers
• Will take advantage of forward and forward vol curve
The future of the London PM Market
Raymond Key
• A time of change: Threats and Opportunities
• ETFs
• Regulatory
• Why we should be positive about London?
• LBMA and the London clearing market
• Delivery list, vaulting, clearing etc
• Market Makers need to look at themselves
• London has a role
• Needs to maintain this role
