Denver Gold Group Toronto, 21 October 2013 Denver, 31 October 2013 - - PowerPoint PPT Presentation

The State of the Gold Market Fourth Quarter 2013 through 2014

Denver Gold Group Toronto, 21 October 2013 Denver, 31 October 2013

30 Broad Street, 37th Floor New York, NY 10004 www.cpmgroup.com Jeffrey M. Christian Managing Partner jchristian@cpmgroup.com

The Economic Outlook The Outlook For Gold The Relationships Among Monetary Supply, Inflation, And Gold Gold Standards Do Not Work Gold Has No Role In Future Monetary Systems The Optimal Future International Currency Regime Gold Investment Demand And Price Gold Supply Hedging Gold Fabrication Demand Official Transactions The Gold Market Does Not Know Itself A Note About Comex Inventory Levels Relative To Open Interest Forwards Are Not Spot Physical Transactions The Next Big Thing For Gold Investors

Topics For Today’s Presentation

Spread Between Shanghai and London Gold Prices

4

• 10
• 5

5 10 15 20 25 30 35 40

• 10
• 5

5 10 15 20 25 30 35 40 03 04 05 06 07 08 09 10 11 12 13 Premium Discount

$/oz $/oz

Monthly Average, Through October 30, 2013

$8.86 $2.27 $5.24 $6.10 $18.90 Annual Average Premiums

Spread Between Shanghai and London Gold Prices

Large Comex Gold Trading Volumes In October

5

Recent Major Intraday Price and Volume Changes Volume During Time Interval Date Time Interval Stop Logic Troy Ounces as % of Total Daily December Contract Volume as % of Total Daily Aggregate Futures Volume Price Action during Time Interval Daily Change in Settlement Prices 17-Oct 4:00 - 4:10 No 1,780,000 8.2% 8.1% $33 $41 15-Oct 9:50 - 10:00 No 1,320,000 6.5% 6.1% $11 ($3) 11-Oct 8:50 - 9:00 20 Seconds 2,810,000 15.1% 14.3% ($27) ($29) 9-Oct 10:10 - 10:20 No 1,280,000 8.1% 7.8% ($10) ($17) 7-Oct 9:50 - 10:00 No 1,140,000 11.9% 11.4% $11 $15 1-Oct 8:40 - 8:50 10 Seconds 2,410,000 11.3% 10.9% ($24) ($40) Note: Time is military time, EDT. Sources: Reuters data, CPM Group

Contrary to market commentary: 1. Half of the trades have been heavy buying pushing prices higher; obviously not ‘smack-downs.’ 2. No single entity but hundreds of algorithmic traders using similar systems generating the same sell points.

The Economic Outlook

6

Slower Real Economic Growth Globally Long Term

Source: IMF, CPM Group Note: Historical data are IMF statistics. Projections are made by CPM Group. Projections for "Emerging and Developing Economies are only for BRIC countries, which account for approximately 52.8% of this category. Projections for "Advanced Economies" are only for the U.S., U.K., Eurozone, and Japan. These countries accounted for 82.2% of this category.

7

• 6
• 4
• 2

2 4 6 8 10

• 6
• 4
• 2

2 4 6 8 10 1980 1985 1990 1995 2000 2005 2010 2015p 2020p World Emerging and Developing Economies Advanced Economies Real Gross Domestic Product Annual, Projected Through 2022 Percent Change Percent Change Actual Projected

Slowing Chinese Economic Growth: On Target For Government

4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

Chinese GDP Quarterly Data, Through Q2 2013 Percent Percent

9

Sub-par Growth in U.S. Real Gross Domestic Product

• 4.0
• 2.0

0.0 2.0 4.0 6.0 8.0

• 4.0
• 2.0

0.0 2.0 4.0 6.0 8.0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013p 2016p 2019p 2022p

Annual, Projected Through 2022

Percent Change Percent Change Actual Projected

10

Inflation Remains Under Control For Now; Deflation is the Major Risk

• 4
• 2

2 4 6 8 10 12 14 16

• 4
• 2

2 4 6 8 10 12 14 16 Apr-68 Nov-71 Jun-75 Jan-79 Aug-82 Mar-86 Oct-89 May-93 Dec-96 Jul-00 Feb-04 Sep-07 Apr-11 Percent Percent

Monthly Data, Through August 2013

U.S. Consumer Expenditures, Weighted To Percentage of Spending

• 3
• 2
• 1

1 2 3 4

• 3
• 2
• 1

1 2 3 4 10 20 30 40 50 60 70 80 90 100 % CHANGE FROM FEBRUARY 2012 WEIGHT IN CPI (percentage of The cost of home ownership*, which represents 24.0% *Measure as the cost of renting the home you own

Weightings of the components of the consumer price basket

Bar heights measure change from a year earlier in some major areas of spending.

Source: Labor Departme % % % % % % % % % %

Inflation Data Should Be Understood Before It Is Criticized

12

Table A. Percent changes in CPI for All Urban Consumers (CPI-U): U.S. city average Seasonally adjusted changes from preceding month Unadjusted 12-mos.

• Mar. Apr. May June July Aug. Sep. ended

2013 2013 2013 2013 2013 2013 2013 Sep. 2013 All items.................. -.2 -.4 .1 .5 .2 .1 .2 1.2 Food...................... .0 .2 -.1 .2 .1 .1 .0 1.4 Food at home............. -.1 .1 -.3 .2 .1 .1 .0 1.0 Food away from home (1).. .2 .3 .2 .2 .2 .2 .1 1.9 Energy.................... -2.6 -4.3 .4 3.4 .2 -.3 .8 -3.1 Energy commodities....... -4.1 -7.9 -.1 5.7 1.0 .0 .9 -7.0 Gasoline (all types).... -4.4 -8.1 .0 6.3 1.0 -.1 .8 -7.5 Fuel oil (1)............ -2.1 -4.4 -2.9 -.5 1.1 1.2 .9 -3.1 Energy services.......... -.2 1.4 1.2 .1 -1.0 -.7 .8 3.7 Electricity............. -.6 .5 .8 .2 -.3 -.1 .5 3.2 Utility (piped) gas service.............. 1.0 4.4 2.4 -.4 -2.8 -2.3 1.8 5.3 All items less food and energy................. .1 .1 .2 .2 .2 .1 .1 1.7 Commodities less food and energy commodities.... -.1 .0 .0 .2 .0 .0 -.1 -.1 New vehicles............ .1 .3 .0 .3 .1 .0 .2 1.2 Used cars and trucks.... 1.2 .6 -.1 -.4 -.4 -.1 .0 .4 Apparel................. -1.0 -.3 .2 .9 .6 .1 -.5 .8 Medical care commodities .1 .1 -.5 .5 .4 .4 .1 .2 Services less energy services.............. .2 .1 .2 .2 .2 .2 .2 2.4 Shelter................. .2 .2 .3 .2 .2 .2 .2 2.4 Transportation services .2 -.2 .4 -.1 .4 -.5 .3 2.4 Medical care services... .3 -.1 .0 .4 .1 .7 .3 3.1 1 Not seasonally adjusted.

13

Global Surplus of Labor Is A Major Impediment to Growth

2 4 6 8 10 12 2 4 6 8 10 12 Jan-48 Oct-52 Jul-57 Apr-62 Jan-67 Oct-71 Jul-76 Apr-81 Jan-86 Oct-90 Jul-95 Apr-00 Jan-05 Oct-09 Percent Percent

U.S. Unemployment; Monthly Data, Through August 2013

Surplus Labor Will Be A Major Global Problem Now and Going Forward

14

The U.S manufactures 51% more today than it did in the late 1980s, but uses 34% fewer workers. More jobs have been lost to computers than to off-shoring. The next wave of technological innovation will be even more devastating to jobs, replacing computer-assisted manufacturing with computerized manufacturing. It already has begun.

60 70 80 90 100 110 120 130 60 70 80 90 100 110 120 130 87 89 91 93 95 97 99 01 03 05 07 09 11 13 Index (2009 = 100) Index 5 7 9 11 13 15 17 19 21 23 5 7 9 11 13 15 17 19 21 23 39 45 52 59 66 72 79 86 93 99 06 13 Million Persons Million Persons

U.S. Manufacturing Output U.S. Manufacturing Employment

The Outlook For Gold

15

Gold Prices

16 1,000 1,100 1,200 1,300 1,400 1,500 1,600 1,700 1,800 1,900 2,000 1,000 1,100 1,200 1,300 1,400 1,500 1,600 1,700 1,800 1,900 2,000 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 $/Ounce $/Ounce Nearby Active Comex Gold Futures High, Low, and Settlement Prices Daily, Through 10 October 2013

The Outlook for Gold

17

Gold prices have fallen to what CPM Group sees as a base. Prices may consolidate for a couple of years around $1,300 - $1,400 on an annual average basis, and may not fall much further. For prices to fall further economic conditions would have to improve dramatically more, which we do not see happening. For prices to rise more forcefully than we envision, economic conditions would have to deteriorate very sharply. This seems more possible than stronger than expected growth. Mine production continues to rise, but the growth expecations have been cut in half by lower gold prices and investor disenchantment with gold mining companies. Secondary supply has fallen sharply as prices declined – 17% in 2013 alone. Investors have sharply reduced their gold buying. Still high, net purchases are off 25% in 2013. Those few central banks that were buying gold have pulled back on purchases, waiting to see how low prices will fall. Fabrication demand is rising modestly in line with lower gold prices and slow economic recovery.

Medium-Term Gold Price Projections

18

$700 $800 $900 $1,000 $1,100 $1,200 $1,300 $1,400 $1,500 $1,600 $1,700 $1,800 $1,900 $700 $800 $900 $1,000 $1,100 $1,200 $1,300 $1,400 $1,500 $1,600 $1,700 $1,800 $1,900 2009 2010 2011 2012 2013 2014 2015 Projections Actual $/Ounce $/Ounce

Quarterly Data, Through Q3 2015

CPM Group’s Long-Term Real Gold Price Projections

19

286 571 857 1,143 1,429 1,714 2,000

• 0.4
• 0.2

0.2 0.4 0.6 0.8 1 51 56 61 66 71 76 81 86 91 96 01 06 11 16p 21p Y-o-Y Change Real Gold Price (RHS)

Real Gold Prices and Year-on-Year Change in Prices Percent Change $/Oz Historical Long-Term Average Real Price of Gold: $691.30 Forecast Long-Term Average Real Price of Gold: $1,346.60 Base Price = 2012 Historical (2002-2012) Average Real Price of Gold: $888.40

Monetary Supply, Inflation and Gold

20

Monetary Ease Does Not Necessarily Lead to Inflation and High Gold Prices

• Monetary accommodation does not necessarily leads to inflation.
• Gold prices do not inevitably have to rise due to monetary accommodation.
• Gold prices do not necessarily rise and fall in response to inflation.
• There are no fixed quantifiable relationships between gold prices and money supply

(e.g. ‘gold prices should be $10,000 per ounce because of the level of M1 money supply in the United States). Which money supply do you want to use? M1, M2, MZM? US, OECD, World? The 40% cover of classic gold standards. Historical statistics do not support such beliefs. They are not theories, but beliefs.

• Gold does not have a constant purchasing power over time. In fact, it is worth a

fraction of what it used to be worth.

What About Tapering?

22

The Fed may institute a very small movement toward limited reductions in the size of its monthly bond purchases in early 2014. It will not do this as long as the political impasse between the Republican controlled House of Representatives and the White House no longer threatens the U.S. and global economies with a recession worse than the one in 2007 – 2009. It also will not do it unless and until it sees somewhat stronger economic growth backed by sustainable trends.

• Housing market strength is not sustainable at present.
• Equity market strength is meaningless to economic conditions, and actually

is indicative of future weak economic conditions.

• The labor market is not in good shape by any standard.

The Fed most likely will not begin any significant tapering until the economy is much stronger. Significant tapering only will occur at some point in the future when the economy is in such a strong shape that it begins to show signs of nascent inflation. Only when the economy is strong enough to support itself and is consequently showing signs of future inflation will the Fed significantly tighten monetary policy.

U.S. Narrow Money Supply Does Not Necessarily Cause Inflation

Correlation Time Lag Correlation No lag

• 0.04

One Year Lag 0.10 Two Year Lag 0.24

23

• 10
• 5

5 10 15 20 25

• 10
• 5

5 10 15 20 25 Jan-77 Sep-81 May-86 Jan-91 Sep-95 May-00 Jan-05 Sep-09 U.S. CPI U.S. M1 Money Supply Monthly Data, through August 2013 M1 Money Supply and U.S. Inflation Percent Percent

Excessive Money Supply Does Not Necessarily Lead to Higher Inflation

24

Correlation Time Lag Correlation No lag

• 0.14

One Year Lag

• 0.12

Two Year Lag 0.02

• 3
• 1

1 3 4 6 7

• 10
• 5

5 10 15 20 25 30 35 40 Nov-82 Apr-86 Sep-89 Feb-93 Jul-96 Dec-99 May-03 Oct-06 Mar-10 MZM Money Supply (LHS) U.S. Inflation (CPI) MZM Money Supply and U.S. Inflation Percent Percent Correlation: negative 0.14 Monthly Data, through August 2013

Gold Prices and U.S. Inflation

• 2

2 3 5 7 9 11 12 14 16 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 Jan-69 Jan-75 Jan-81 Jan-87 Jan-93 Jan-99 Jan-05 Jan-11 Real Gold Prices Nominal Gold Prices CPI $/Ounce Percent 25

Correlation: Gold with Inflation

Year Real Gold Prices Nominal Gold Prices

68-12 0.33 0.43

72-74 0.49 0.70 76-80 0.95 0.96 86-90

• 0.73
• 0.69

98-00

• 0.93
• 0.77

02-12 0.24 0.36 68-82 0.40 0.46 84-00

• 0.25
• 0.15

Gold’s Purchasing Power Is Neither Constant Nor Stable

200 400 600 800 1,000 1,200 1,400 1,600 1,800 200 400 600 800 1,000 1,200 1,400 1,600 1,800 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

Nominal Real

$/Ounce $/Ounce Real and Nominal Gold Prices Quarterly, Through Third Quarter 2013

Note: Base years are 1982-84, which are the same base years as reported U.S.CPI.

London Gold Prices since 1700, Base Year = 2012

Gold’s Purchasing Power Has Deteriorated Over Time

1,000 2,000 3,000 4,000 5,000 6,000 7,000 1,000 2,000 3,000 4,000 5,000 6,000 7,000 1700 1750 1800 1850 1900 1950 2000 Real Nominal $/Ounce $/Ounce

Source: The Gold Constant, CPM Group

Gold Standards Do Not Work

28

Gold Standards Do Not Work

29

Most of the monetary systems throughout history have been backed either by gold or silver, or both metals. All of them have failed, despite their gold or silver backing. None of them protected against deterioration of currency values. None of them protected against inflation and economic volatilities. The only international currency regime that has not failed is the current one. It too shall pass away at some point. There is no alternative to the de facto dollar reserve currency system on the immediate horizon. Some Chinese theorists are speaking of a dirty floating exchange rate system based on a new global reserve currency, like the IMF’s Special Drawing Rights created in the 1970s. They are calling this new global reserve currency ‘paper gold,’ but it has no gold backing or relationship to gold in their views.

The Economy Was More Volatile in the Good Old Days

U.S. real GDP: 1850 – 1919, 16 recessions, 22 month average length; 1945 – 2009, 11 recessions, 10 months average length

• 15%
• 10%
• 5%

0% 5% 10% 15% 20%

• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Percent Change Percent Change 2009

Gold Investment Demand

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• 10

10 20 30 40 50 60

• 30
• 10

10 30 50 70 90 110 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11

Percent Change Million Ounces

Investment Demand's Effect on Gold Prices Price Change Through 10 October 2013

Net Investment Demand (Right) Price Change

Investors Physical Gold Purchases Are Sharply Lower

13p

Gold Demand Is Up In China and Weak In India

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5 10 15 20 25 30 35 40 5 10 15 20 25 30 35 40 01 02 03 04 05 06 07 08 09 10 11 12 13p Net Investment Demand Fabrication Demand Million Ounces Million Ounces

Total Chinese Demand

5 10 15 20 25 30 35 40 5 10 15 20 25 30 35 40 01 02 03 04 05 06 07 08 09 10 11 12 13p Investment Demand Fabrication Demand Million Ounces Million Ounces

Total Indian Demand

34

Deduced Chinese Gold Imports and Exports

• 3,000
• 1,500

1,500 3,000 4,500 6,000 7,500 9,000

• 3,000
• 1,500

1,500 3,000 4,500 6,000 7,500 9,000 J-00 A-01 J-02 O-03 J-05 A-06 J-07 O-08 J-10 A-11 J-12 O-13 Deduced gold imports Deduced gold exports Thousand Ounces Monthly Data, Through August 2013 Thousand Ounces

Gold ETFs: Easy To Buy, Easy To Sell

ETF Gold Holdings Through 30 September 2013

• 10

20 30 40 50 60 70 80 90

• 10

20 30 40 50 60 70 80 90 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Million Ounces Million Ounces

• 25
• 20
• 15
• 10
• 5

5 10 15 20 25

• 25
• 20
• 15
• 10
• 5

5 10 15 20 25 03 04 05 06 07 08 09 10 11 12 13YTD Million Ounces Million Ounces Annual Net Changes to Gold ETP Holdings Through September 2013

Weak Premia on U.S. Mint Gold Coins

3.2% 3.3% 3.4% 3.5% 3.6% 3.7% 3.8% 3.9% 4.0% 4.1% 3.2% 3.3% 3.4% 3.5% 3.6% 3.7% 3.8% 3.9% 4.0% 4.1% Jan-12 Jul-12 Jan-13 Jul-13 American Eagle 1Oz American Buffalo 1Oz Premia on U.S. Mint Gold Coins Daily data through 8 October 2013

Record Investor Short Positions on Comex Earlier in 2013

• 15
• 10
• 5

5 10 15 20 25 30 35

• 15
• 10
• 5

5 10 15 20 25 30 35 A-95 J-97 S-98 J-00 M-02 D-03 A-05 M-07 F-09 O-10 J-12 Long Short Net Fund Position in Comex Million Ounces Million Ounces Non-Commerical Positions in Comex Gold Futures & Options. Weekly Data, through 24 September 2013

The U.S. Dollar Is Not Imploding

38 60 70 80 90 100 110 120 130 140 150 60 70 80 90 100 110 120 130 140 150 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Euro/$ Index Euro/ U.S. Dollar and J.P. MorganTrade Weighted U.S. Dollar Daily, Through 10 October2013

Euro/$ (Left Scale) Trade Weighted Dollar (Right Scale) 31.9% 20.9% 22.2% 5.9%

Longer Term The Dollar Is Falling… Which Means Little To Gold

39 Correlation Of The Trade Weighted U.S. Dollar To Gold

Q1 1968 – Q3 2013 -0.32

Q4 1976 – Q3 1977 0.96 Both Rising Q3 1982 – Q1 1983 0.98 Both Rising Q1 1986 - Q4 1990

• 0.47

Q1 1998 - Q4 2000

• 0.52

Q1 2002- Q3 2013

• 0.40

Q1 2005 - Q4 2005 0.54 Both Rising 70 80 90 100 110 120 130 140 150 160 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10 13 $/Ounce TWD Index Trade Weighted Dollar Gold (left scale) Gold and the U.S. Dollar Quarterly, Through Third Quarter 2013

Gold Supply

40

Total Supply Declining, But Mine Production Is Rising

20 40 60 80 100 120 140 20 40 60 80 100 120 140 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13p Secondary Supply Transitional Economies Exports to Market Economies Market Economy Mine Production Total Gold Supply Annual, Projected Through 2013 Mln Oz Mln Oz

Gold Mine Supply In Fact Was Flat Between 2000 and 2012

42 10 20 30 40 50 60 70 80 90 00 01 02 03 04 05 06 07 08 09 10 11 12 13p Transitional Economies Exports to Market Economies Market Economy Mine Production Total Gold Mine Supply Annual, Projected Through 2013 Mln Oz

3.3%

It Has Risen More Than 11 Million Ounces Since 2008

43 60 65 70 75 80 85 90 08 09 10 11 12 13p Transitional Economies Exports to Market Economies Market Economy Mine Production Total Gold Mine Supply Annual, Projected Through 2013 Mln Oz

15.8%

Mine Supply Is Forecast To Be The Second Highest On Record in 2013

44 10 20 30 40 50 60 70 80 90 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13p Transitional Economies Exports to Market Economies Market Economy Mine Production Total Gold Supply Annual, Projected Through 2013 Mln Oz

Lower Gold Prices Have Slashed Estimated Gross Additions to Gold Mine Production Capacity Almost By Half

45

5 10 15 20 25 30 35 40 5 10 15 20 25 30 35 40 2013 2014 2015 2016 Post 2016 Post 2016 2016 2015 2014 2013

September 2013

• Mln. Oz.
• Mln. Oz.

Note: Post 2016 data refers to 2017 through 2022.

5 10 15 20 25 30 35 40 5 10 15 20 25 30 35 40 2013 2014 2015 2016 Post 2016 Post 2016 2016 2015 2014 2013

• Mln. Oz.
• Mln. Oz.

Note: Post 2016 data refers to 2017 through 2022.

January 2013

Cost Reductions Are On The Way

46

• 200

400 600 800 1,000 1,200 1,400

• 200

400 600 800 1,000 1,200 1,400 2012 2013 Costs Related to Sustaining Production Cash Costs

Production-Weighted All-In Sustaining Cost For Select Gold Mining Companies (Accounting for 43% of Production) USD/Oz USD/Oz Increase of 15.3% in Cash Costs Increase of 2.8% in Costs related to Sustaining Production All-In Sustaining Costs Rose by 10.1%

The market will be pleasantly surprised by producers ability to reduce costs relatively quickly, starting with capital costs but later also operating costs.

Effective Hedging Is Needed, But Faces The Same Old Obstacles

47

600 800 1,000 1,200 1,400 1,600 1,800 2,000 600 800 1,000 1,200 1,400 1,600 1,800 2,000

Market Price Spot Sales Gold HedgeFor Dec 2014

Indicatively priced on 10 October 2013

$1,100 Floor US$ / Ounce - Sales Price

Producers this month could lock in a guaranteed floor of $1,110 per ounce and given up only $60 of any upside. Obstacles To Effective Hedging

• Mining companies often lack

financial expertise to evaluate, counter-bid, and effectively manage hedging programs.

• Banks offer less than ideal hedges

to mining companies, which lack the internal capacity to evaluate proposed hedges and counter-bid.

• Conflicts of interest and obstacles

from the 1990s still exist in the market.

Fabrication Demand

48

Gold Fabrication Demand

20 40 60 80 100 120 20 40 60 80 100 120 77 80 83 86 89 92 95 98 01 04 07 10 13p Other Uses Dental/ Medical Electronics

Gold Fabrication Demand Projected Through 2013

Million Ounces Million Ounces Jewelry - Developing Countries Jewelry - Developed Countries

Official Transactions

50

Official Transactions, Adjusted for Turkish Central Bank Additions

• 35
• 30
• 25
• 20
• 15
• 10
• 5

5 10 15 20

• 35
• 30
• 25
• 20
• 15
• 10
• 5

5 10 15 20 80 83 86 89 92 95 98 01 04 07 10 13p Million Ounces Million Ounces Net Additions Net Reductions Official Transactions Annual Data, Projected through 2013

Note: Turkey introduced a policy in 2011 that allowed commercial banks to use gold to meet a portion of their reserve requirements. The bank included this gold in its monetary

• reserves. Because these additions were not outright central bank purchases and no ownership has been transferred from the actual owner to the central bank, annual official transactions

have been adjusted to exclude Turkish central bank gold additions since 2011.

Adjusted for Turkish Central Bank's ROM Gold

Why are Central Banks Adding Gold to their Monetary Reserves?

Note: 1995 Claims in Euros refers to the sum of claims in Deutschemarks, French francs, Netherland guilders, and the European Currency Unit. 2012 data is end-September. Other years is year-end data. Source: IMF Statistics Department COFER database and International Financial Statistics.

U.S. Dollar 59.0% U.S. Dollar 71.1% U.S. Dollar 61.8% Euro 27.3% Euro 18.3% Euro 24.1% Yen, 6.8% Yen, 6.1% Yen, 4.1% Pound, 2.1% Pound, 2.8% Pound, 4.1% Other, 4.8% Other, 1.8% Other, 5.9% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1995 2000 2012 Currency Composition of Official Foreign Exchange Reserves

A Few Final Points

53

Comex Gold Inventories Always Have Been Low Relative To Open Interest

54

10 20 30 40 50 60 70 10 20 30 40 50 60 70 Jan-85 Mar-89 May-93 Jul-97 Sep-01 Nov-05 Jan-10 Total Comex Stocks

M

Million Ounces Million Ounces

Total Open Interest (Right Scale)

Comex Gold Inventories & Total Open Interest Monthly, Through September 2013

Gold Inventories Actually Are Historically High Compared To Open Interest

55 0% 5% 10% 15% 20% 25% 30% 35% 0% 5% 10% 15% 20% 25% 30% 35% Jan-85 Mar-89 May-93 Jul-97 Sep-01 Nov-05 Jan-10 Percent of Comex Gold Open Interest Backed by Stocks

Percent Percent

Monthly, Through September 2013

Forwards Do Not Involve Spot Physical Metal

56

40 60 80 100 120 140 160 40 60 80 100 120 140 160 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Million Ounces Million Ounces Including forward paper transactions in producer hedging as a form of spot physical supply has led to physical supply being over-counted by 103.3 MM

• unces between 1986 and 1999.

Including forward paper transactions in producer dehedging as a form of spot physical demand then led to physical demand being over-counted by 96.3 MM ounces from 2000 through 2012.

Actual Physical Supply and Demand

Mis-measuring Gold Supply and Demand Statistics Has Over-Stated The Market For Decades

Note: Actual supply and demand are CPM total data; the over-counting is not adjusted for other statistical discrepancies.

The Next Big Thing For Gold Investors

57

In 1998, when CPM Group first suggested to the World Gold Council and gold producers that they should focus on stimulating investment demand instead of jewelry demand if they want higher gold prices, our suggestion was a fund-like gold investment product that would allow investors to buy physical gold as easily as equities. We warned that investors would like a gold ETF only in a bull market, and that redemptions could add to the pain in a down market. We suggested a guaranteed principal gold fund.

• 50%
• 40%
• 30%
• 20%
• 10%

0% 10% 20% 30% 40% 50%

• 50%
• 38%
• 25%
• 12%

0% 13% 26% 38% 51%

Gold Guaranteed Principal Five-Year Note

Yield Price of Gold Yield

100% Guaranteed principal with exposure to gold price increases.

Spot Gold Price Change

CPM Group Precious Metals Yearbooks & Other Reports

58

For general inquiries, email info@cpmgroup.com