Gold investor june 2017

Gold Investor June 2017

The voice of authority Dr Reddy on gold’s global role

In the vanguard

Backed by bullion

The immutable force

ICBC moves gold online

A new way of banking

Unravelling the blockchain

Gold Investor | June 2017

Contents Foreword The global role of gold

In the news Gold market news from around the world

Gold in the FinTech era

3 4 5 7

The Royal Mint is the world’s oldest mint, with a history stretching back 1,100 years. Now it is launching RMG, a gold investment product that combines tradition and modern day technology.

Goldmoney: banking on gold Goldmoney operates a leading gold-based savings and payments network.

Chief Executive Officer Roy Sebag explains how it works and why it matters.

10 14

To some observers, gold and BitCoin are natural rivals on the global stage. Charlie Morris takes a different view however, arguing that gold can benefit from the technology that brought BitCoin into being.

Gold Investor | June 2017

Dr YV Reddy was Governor of the Reserve Bank of India during one of the most influential periods for the subcontinent and the global economy. He discusses the role of gold, against a backdrop of persistent geopolitical uncertainty.

20

24

A brighter outlook for gold in India

The Indian gold market has been swept up by wide-ranging political, fiscal and economic reforms. Alistair Hewitt, Head of Market Intelligence at the World Gold Council explains why gold should prosper in India.

Lifting the lid on gold strategy

Gold, BitCoin and blockchain technology

18

Leading Chinese bank ICBC is a digital pioneer for gold, creating an online platform to buy, trade and invest the precious metal. Here the bank explains the benefits of moving gold online at both the retail and institutional level.

Gold policies: a new era

Financial technology has already transformed swathes of the financial services industry. Robin Martin, Managing Director, Market Infrastructure at the World Gold Council, assesses the impact of FinTech on gold.

Leveraging FinTech to drive gold investment

Building a popular ecosphere for gold

27

John Reade, Chief Market Strategist and Head of Research at the World Gold Council, on the importance of strategy and the outlook for gold.

Key gold market statistics

30 2

Foreword

The global role of gold Aram Shishmanian Chief Executive Officer World Gold Council

Against this backdrop, the views of one of India’s most widely respected policymakers, Dr YV Reddy, are particularly germane. Governor of the Reserve Bank of India from 2003 to 2008, Dr Reddy has been a keen follower of the gold market for almost three decades.

Writing in this summer’s Gold Investor, Dr Reddy says: ‘As someone with a strong belief in gold’s economic contribution, I am optimistic about its future, not just in India, but worldwide.’

This time last year, the UK had yet to vote on membership of the EU, Donald Trump had yet to be elected as US president and Prime Minister Modi of India had yet to unveil his dramatic plan to withdraw 86% of the currency from circulation.

The consequences of those decisions continue to reverberate across global markets, in many cases highlighting the attractions of gold.

Gold has always been viewed as a safe haven and recent geopolitical uncertainty has underscored the importance of that role. At the same time, bond yields remain at low levels, particularly at the long end of the curve, even as inflationary threats increase. Again, this draws attention to gold, an asset traditionally associated with long-term wealth preservation.

Gold’s capacity for wealth preservation has long been one of its key attractions in India, the second largest gold market in the world. Since last November’s demonetisation policy, events have continued to unfold at a rapid pace, as Prime Minister Modi pursues a determined agenda to reduce the black economy, strengthen processes and systems and create an environment where the country can genuinely prosper.

Dr Reddy assesses the effect of measures taken so far to formalise India’s gold market, suggests recommendations for the future and takes a broader look at prospects for gold over the coming years (See page 20).

We also analyse gold’s position in a world characterised by rapid changes in technology, the rise of BitCoin and growing interest in the blockchain.

The Royal Mint explains why it is using blockchain to deliver RMG, a gold investment product traded on a digital platform (See page 7).

Leading Chinese bank ICBC reveals how it has broadened market access to gold, most recently through mobile apps and social media integration (See page 18).

Roy Sebag, Chief Executive Officer of Goldmoney explains why he believes gold has a key role to play in today’s financial system and how technology can unlock gold’s potential to the benefit of savers and consumers the world over (See page 10).

And Charlie Morris, Chief Investment Officer at financial services boutique Newscape Group, echoes this view, suggesting that BitCoin, the blockchain and gold are well able to co-exist and that gold has little to fear from technology (See page 14).

Finally, we introduce John Reade, who joined the World Gold Council this year as Chief Market Strategist and Head of Research. He explains what he does and how he expects gold to perform (See page 27).

We are keen to hear your views about our publication so please email goldinvestor@gold.org. We hope you enjoy the read.

Aram Shishmanian

The World Gold Council is the market development organisation for the gold industry. Working with world-class organisations across the supply chain, we stimulate demand, develop innovative uses of gold and take new products to market. As the global authority on gold, we offer comprehensive analysis of the industry, giving decision makers unparalleled information and insight into the drivers of gold demand.

Gold Investor | June 2017

3

In the news LMEprecious launches with new participants LMEprecious, a suite of exchange-traded and centrally cleared precious metals products, will launch on 10 July. A major initiative from the World Gold Council and the London Metal Exchange (LME), LMEprecious was devised in conjunction with some of the foremost participants in the gold market, including Goldman Sachs, ICBC Standard Bank, Morgan Stanley, Natixis, OSTC and Societe Generale.

India levies 3% GST on gold As part of the introduction of a national Goods and Services Tax (GST) in India, the government is levying a 3% tax on gold. The new rate is lower than expected but, with customs duty at 10%, purchasing gold still incurs a considerable tax burden.

Somasundaram PR, Managing Director of the World Gold Council, India, says: “We welcome the decision to impose a 3% GST on gold, but we believe this may be an opportune time for the government to cut import duties and reduce the total tax on gold significantly.”

Now four more firms have agreed to participate, Bank of China International, Commerzbank, Marex Financial and Macquarie Bank.

“The addition of these four leading players and the support from major Chinese financial institutions is a ringing endorsement of the LMEprecious model,” says World Gold Council Managing Director, Market Infrastructure, Robin Martin.

ETF deemed Shari’ah compliant The world’s largest physically-backed gold fund has been certified as Shar’iah compliant by Islamic finance group Amanie Advisors.

The SPDR Gold Trust, pioneered by the World Gold Council, now conforms with rules from the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).

Gold Investor | June 2017

LBMA launches Global Precious Metals Code The LBMA, the international trade association for gold and silver bullion, has launched a Global Precious Metals Code, intended to promote integrity and the effective functioning of the global market. The Code was established following extensive consultation with members and market participants and is designed to define a robust, fair and transparent market.

4

Gold in the FinTech era The rapid pace of technological innovation has put many industries at risk of disruption. Financial technology has received particular attention, as it has the potential to eliminate certain types of financial intermediary, simplify services and reduce costs. Indeed, consumers armed with smartphones increasingly demand financial services that are innovative, offer a slick user experience and are priced transparently.

Robin Martin Managing Director Market Infrastructure World Gold Council

In this fast-changing environment, it is worth questioning whether such trends will affect gold demand and the way gold is accessed and traded by investors.

The World Gold Council believes that technology is an important enabler in the democratisation of gold ownership, making gold accessible to new segments of investors and consumers. Historically, investing in gold could be difficult and complex, particularly with respect to safe storage.

Innovation has led to the emergence of new gold product categories, such as ETFs and a new breed of online-only vaulted gold providers. These product innovations, now readily accessible by mobile phone, have made investing in gold a simpler and more cost-effective experience.

Gold’s

enduring history and unique properties are arguably more, not less, important in an environment where the pace of change is accelerating and we consume ever more ‘virtual’ products and services.

Gold Investor | June 2017

5

Gold in the FinTech era

Blockchain

could be one of several technologies that could transform the gold supply chain, helping to track gold across every stage of production from ‘mine to vault.’

A specific technology that gold market participants are likely to hear more about is blockchain or distributed ledger technology. For gold investors, blockchain could enable product providers to offer a more transparent and secure record of pseudo-anonymised transactions to their customers and help enable services such as goldbacked payments.

While technological progress will undoubtedly improve access to gold, it is perhaps less clear whether these developments also introduce risks for gold. Will gold lose its relevance, for example, in an increasingly digital world?

We don’t believe that it will. Gold’s enduring history and unique properties are arguably more, not less, important in an environment where the pace of change is accelerating and we consume ever more ‘virtual’ products and services.

We don’t discount the potential of cryptocurrencies, such as BitCoin and ethereum, for certain applications, but they are a long way from establishing themselves as alternatives to gold. The vast size of the gold market and gold’s diverse sources of demand provide it with unique characteristics as an alternative asset class. Moreover, the technical innovations that underpin cryptocurrencies are already helping to reduce costs and friction in the gold market.

Gold Investor | June 2017

Blockchain may also be able to augment or replace the post-trade settlement infrastructure that underpins the wholesale markets for gold. Several companies are exploring opportunities in this space, hoping to eliminate settlement risks as well as introducing greater operational efficiency to the trade lifecycle. Even more boldly, blockchain could be one of several technologies that could transform the gold supply chain, helping to track gold across every stage of production from ‘mine to vault’.

Establishing tamper-proof gold provenance would make the gold market more transparent and efficient and help stamp out illegal practices such as the smuggling of gold from conflict areas.

Overall, the World Gold Council believes that modern technology holds great promise for gold. In this edition of Gold Investor, we include views from several market participants about the impact of FinTech on gold, ranging from gold-linked financial services to Chinese mobile apps to gold and blockchain. Many new products and services are emerging – and we include just a few of the more prominent examples – but, across the industry, it would seem that gold market participants view technology as an opportunity for gold, rather than a threat.

6

Leveraging FinTech to drive gold investment The Royal Mint is the world’s leading export mint, founded more than 1,000 years ago. Now it has partnered with renowned derivatives exchange CME Group to create RMG, a gold investment product combining the attributes of physical gold with a state-of-the-art blockchain-based digital trading mechanism.

David Janczewski Director of New Business Ventures The Royal Mint

The former home of The Royal Mint in the City of London.

Gold Investor | June 2017

7

Leveraging Fin Tech to drive gold investment

As far back as 550BC, gold has been recognised as a trusted means of trading and storing wealth. A finite commodity, relied on through centuries of change, gold plays a significant role in the international monetary system to this day. Even when gold found itself superseded by the practicality of trading with coins and paper money, many currencies were still anchored to gold prices under the Gold Standard, guaranteeing a level of confidence, trust and security with each transaction. In the fast-moving world of currency trading on the foreign exchange markets, and fiatmoney not backed by commodities, many feel that gold still offers substantial opportunities for investment.

Gold can be easily traded, valued and stored. Importantly too, it is fully fungible so an ounce of a specific quality is interchangeable with another ounce of the same quality.

But there are some limitations to owning and investing in physical gold. Gold is heavy, difficult to transport and hard to store in big quantities. Much of the world’s gold trading is confined to certain localities. And, in practical terms, it is not as easily divisible into fractional amounts as other currencies or commodities: gold bars, for example, are normally traded in a single investment unit size.

Now however, developments in financial technology have created a significant opportunity to facilitate investment in gold – using blockchain.

Much discussed, blockchain is essentially a distributed ledger, maintained by a group of authorised participants within the blockchain network.

Developments in financial technology have created a significant opportunity to facilitate investment in gold – using blockchain.

Gold Investor | June 2017

Under the traditional ledger model, data is recorded on a database, and verified and secured by one central authority.

This single entity is responsible for maintaining the data’s security and integrity, limiting the speed with which transactions settle and often adding an additional layer of fees.

8

Leveraging Fin Tech to drive gold investment

A distributed ledger, by contrast, is intrinsically immutable and tamper-proof, both in terms of the order that data is stored on the blockchain, and the integrity of that data – guaranteed using cryptography (mathematical formulae, which provide irrefutable proof that all recorded transactions have followed the rules of the system). The ledger is also dynamically updated on a continuous basis, so it is never “down for maintenance” and can be accessed day and night, 365 days of the year.

To date, blockchain has been synonymous with BitCoin. which was the first cryptocurrency to use it. Initially intended to become a type of electronic cash for online payments, BitCoin has largely been used more for speculative purposes, creating extensive price volatility, with several pronounced boom-bust cycles during its eight or so years of existence.

Devised by The Royal Mint in partnership with leading derivatives exchange, CME Group, RMG is a secure, cost-effective and convenient gold investment product with the price transparency, real-time price discovery and trade execution of an exchange-traded security.

Gold, however, has been comparatively stable during this time. And, although gold has also seen its fair share of highs and lows throughout history, its price swings are minor compared with BitCoin.

Enter RMG RMG is designed to combine the benefits of blockchain with gold’s innate investment appeal. Devised by The Royal Mint in partnership with leading derivatives exchange, CME Group, RMG is a secure, cost-effective and convenient gold investment product with the price transparency, real-time price discovery and trade execution of an exchange-traded security.

As such, RMG addresses many of the issues traditionally associated with gold trading and the blockchain.

One RMG represents ownership and full title to 1g of physical gold bullion held in the form of fully-allocated, LBMA Good Delivery Bars, stored within The Royal Mint vault, a highly secure, on-site bullion storage facility.

The use of LBMA good delivery bars ensures that the underlying fungibility of the gold is maintained so RMG holders can redeem each RMG for 1g of 999.9 fine gold (0.0321507 troy ounce).

Delivering RMG on a trading platform with CME Group creates a frictionless and highly secure way to transact, buy and sell digital physical gold, accompanied by a permanent, immutable record, impervious to accounting fraud or error and the associated costs.

There are no ongoing annual management fees and free storage too, thereby satisfying customer demands for faster, cost effective and more secure ways to buy, hold and sell gold.

Looking ahead, we at The Royal Mint are confident that RMG presents investors with a unique, trusted and innovative way to invest and trade gold backed by a landmark partnership between a leading mint, a leading commodities futures trading platform and best in class technology. In time, we hope RMG will become a Digital Gold Standard.

Fully fractional to six decimal places, RMG will also be traded on a digital trading platform and can be transferred from one holder’s account to another’s through digital wallets. As such, RMG can be transferred globally without the concerns associated with physical gold delivery.

Gold Investor | June 2017

9

Goldmoney: banking on gold Roy Sebag Chief Executive Officer Goldmoney

1

What is Goldmoney and why was it founded?

Goldmoney was founded to broaden access to physical gold bullion and it is the easiest way to start investing in gold bullion online. Goldmoney accounts are similar to bank accounts except that, rather than being backed by currencies, they are backed by precious metals allocated under individual account holders’ names in physical gold around the world. Our view is that gold’s attributes are best suited to both long-term savings and transactions so people should have a gold account in the same way that they have dollar, euro or sterling accounts.

Goldmoney operates the largest gold-based savings and payments network in the world, with 1.4 million users and US$1.9 billion of custodial assets. Chief Executive Officer Roy Sebag explains what Goldmoney What steps are you taking to does and why he believes it has such broaden access to gold? an important role to play in today’s We are reducing friction, innovating wherever we can and financial system. educating people about gold.

2

When we first set out, we realised that it was quite difficult for people to own physical gold. We wanted to simplify the process and we decided to do it via technology.

We have a choice in everything else, why can’t we have choice about money?

Gold Investor | June 2017

We used software to create a digitised version of the existing gold bullion infrastructure. So bullion dealers quote prices on our platform, but we’ve also linked vault custodians into the system, which means customers can instantly buy and sell gold and follow the settlement process straight through to a specific custodian.

We’ve also spent a lot of time explaining the merits and attributes of gold; how it gives you choice in money, whereas fiat currencies leave you beholden to a centralised control. That really resonates with the millennial generation.

10

Goldmoney: banking on gold

3

What segments of the market are you targeting?

Historically, Goldmoney targeted high-net worth and middle-class consumers. Now, we see it as our duty to cast a wide net and to make gold accessible to all segments of the market so whether you are trying to buy US$10 of gold via a drip savings programme or US$500,000 of gold in one go, we want to be that destination. Our customers include high net worth individuals, trust companies, hedge funds and financial institutions, but the crux of our business is the retail investor, with US$10,000-US$20,000 in their account.

4

What makes customers open a Goldmoney account? Are they driven by fear?

Fear plays a part for sure, but when we talk about gold, our narrative is built around cooperation and choice. We have a choice in everything else, why can’t we have choice about money? We also try to educate people about gold’s natural attributes and, because it’s easy, people end up giving it a shot, like trying new food or a new investment product.

Once they own it, they begin to see that it has an inverted asymmetry to everything else they own. And then they begin to develop a trust in the metal and realise that it is the most important sliver of assets that they own.

Gold Investor | June 2017

5

Crypto-currencies are abstract monies, not commodity monies. As such, they are inferior to gold and even inferior to fiat currencies.

You offer gold-based payments and remittances. Can you describe the size of this opportunity and the value to users?

We believe that gold is the premier commodity money, but people have lacked the ability to use it as such. We aim to change that by making it easy for people to transact in gold.

Under our system, people can send as little as 0.01g of gold to anyone with an email address or a mobile phone. And customers really respond to that.

There is also a deep interest in remittances, particularly international payments. With banks, each time you convert a currency, there is an associated cost, which often becomes expensive and inefficient. But gold is so desired as an intermediate commodity that counterparties convert the currencies without even thinking about it, so you can convert between fiat currencies at less than half a per cent. That makes gold really effective in international transactions.

We want to help people spend gold too. It’s really like selling, but instead of turning the precious metal into a currency, you can use a Mastercard and trigger a sale, converting that weight of gold into a good or service that you want to consume.

11

Goldmoney: banking on gold

People attack gold for not paying a dividend or not having earnings, but that betrays a misunderstanding of gold’s fundamental properties.

6

8

What role does technology and innovation play in the gold market?

Technology has not played a big role in the gold market historically because there’s been no need for it. Owners of gold can always crystallise value down the supply chain, because the demand is always there. Also, gold was historically a reserve asset so even as financial technology developed around fiat money, there was always an inextricable link to gold. Now, we’ve applied technology while still using physical gold so we are recognising gold’s unique attributes but overlaying them with technology to facilitate ownership and make it possible for people to transact using gold as well.

9

What are the key considerations retail investors should take into account when evaluating providers How did you personally come to be interested in gold? of gold investment products?

Regulation, transparency, governance, capital position, integrity and technology. Those are the six pillars. I have found that fees are less important to someone looking to acquire and store gold for long-term savings. It’s more about those key pillars which convey trust and security.

In 2004, I founded a small hedge fund, focused on distressed securities. Once I started doing well, I began to question the very concept of money and the more I questioned it, the more I found that historically, money was always linked to precious metals. I developed an insatiable curiosity about gold and I realised that gold is money.

7

People attack gold for not paying a dividend or not having earnings, but that betrays a misunderstanding of gold’s fundamental properties. Money doesn’t pay dividends and doesn’t have earnings; it’s a store of value. And gold is a stable store of value in a world where, for the first time in thousands of years, economic systems are entirely reliant on freely floating currencies.

What is your perspective on crypto-currencies like BitCoin, both as a currency and a store of value? Do they compete with gold?

People have become accustomed to the idea that governments can regulate the measure, weight and value of money so they don’t question the intrinsic value of fiat currencies. BitCoin and crypto-currencies remind citizens that money is a commodity and their success highlights the demand for non-fiat currencies. Ultimately though, cryptocurrencies are abstract monies, not commodity monies.

As such, they are inferior to gold and even inferior to fiat currencies because they are governed by programmers who are incentivised by fees. Logically, that is going to lead to a scenario where the programmers will need to extract oligopolistic rents from the network.

Gold Investor | June 2017

Gold is the only asset that is no one else’s liability. It’s exceedingly rare through time, but once you mine it, it lasts forever. And, with policymakers constantly printing more money as a matter of policy, the price of gold in nominal terms will rise – as it has done against the US dollar over the past 40 years at around 8.1% per annum.

Against that backdrop, I began to wonder why there wasn’t a single gold bank. It would be the safest bank in the world because there would be no counterparty risk. And so eventually, I set out to build that bank.

12

Goldmoney: banking on gold

10

Your early career was quite unusual. Can you explain why you made the choices that you made?

I began following markets and developing an interest in investing when I was 12. It didn’t take long for that interest to evolve into a passion for finance in general and I wanted to set up an investment partnership in the mould of Warren Buffet’s BPL. While I was still in high school I developed a track record of outperformance. I also won an investment competition at school. These activities began to attract the attention of mentors and other high net worth individuals in my community. As I was preparing to graduate, it was clear (to me at least) that I would continue investing when I left school and I didn’t see the point of going to college.

But my parents did not believe in the market and wanted me to continue my education. In the end I signed a written contract with my father. I had to achieve certain economic and non-economic milestones he had set within the first year and if I didn’t, I would have to return to the higher education route. Fast forward one year and I easily met the economic milestones and the rest is history and I must say it has exceeded any expectation I had originally set. I was always confident that I could earn a living from markets, but I had never imagined I could be where I am today.

That is why I wake up every morning and reflect on my position with great pride and responsibility. My colleagues at Goldmoney and I are in a unique position of privilege as stewards of nearly 35 tonnes of precious metal and we see our jobs as guarding that capital for the benefit of our clients.

Gold Investor | June 2017

11

What is your vision for the future?

In ten years’ time, I would like gold to be viewed as a banking currency, accessible with ease, just as banks now offer multiple currency accounts. There’s US$7 trillion of gold above ground and US$3 trillion held in bullion form so it is an under-exploited asset, gathering dust in vaults when it could actually power a lot of exchanges in the economy.

As for Goldmoney, we believe there is the potential for our technology to really take off and become ubiquitous.

We only set up Bitgold two years ago, giving people the chance, for the first time, to spend gold, access gold and transfer gold. If you look at start-ups like Uber, Airbnb, Facebook, Paypal, they all took five, six, seven years to get off the ground. So we think that Goldmoney can become very big indeed

over the next few years and impact the way people view gold.

With policymakers constantly printing more money as a matter of policy, the price of gold in nominal terms will rise – as it has done against the US dollar over the past 40 years.

13

Gold, BitCoin and blockchain technology Charles Morris Chief Investment Officer Newscape Group

Ever since BitCoin was invented, comparisons have been drawn with gold, often to gold’s detriment.

Charles Morris, chief investment officer at Newscape Group and editor of AtlasPulse.com argues that BitCoin and gold can happily co-exist, while technological advances will ultimately work to gold’s benefit.

On 2nd March 2017, the price of BitCoin surpassed the price of an ounce of gold for the first time. For those who worry that gold has found a digital rival, it hasn’t – this is merely a nominal coincidence. BitCoin does have something over gold – the market is small (US$40 billion network value) and growing. But gold also has an advantage – the market is deep (US$8 trillion) and it enjoys an unrivalled sense of stability.

Most thinking folk acknowledge the blockchain behind BitCoin is a technological masterpiece.

BitCoin deserves to appreciate rapidly as it is a growth asset. In that sense, it is more comparable to a social media stock than to gold. Around US$1.5 billion changes hands each day over the BitCoin network. That has risen ten-fold over the past three years – all while bypassing the banking system. Whatever that money is up to, most thinking folk acknowledge the blockchain behind it is a technological masterpiece.

Gold Investor | June 2017

14

Gold and the blockchain

Even as gold lost much of its formal role, it maintained its status with central banks and other long-term investors.

If we cast our minds back to the era before modern technology, gold stood out as a technology of its time.

A universally accepted form of payment, it could be authenticated, measured and exchanged. That simple idea enabled different economies to be calibrated and trade to flourish. Gold’s monetary dominance lasted until relatively recently. In fact, gold’s formal role was only eroded with the rise of modern communications.

The first big shift occurred in the mid-19th century, when the telegraph was set up, facilitating access to real-time information and paving the way for the current financial system. Communication has become increasingly rapid since then, thanks to the telephone, computers, satellites and the internet, but, with each fresh development, reference to gold became less important.

Gold Investor | June 2017

15

Gold and the blockchain

Gold should continue to thrive in the digital age as it remains the ultimate store of value.

Even as gold lost much of its formal role, it maintained its credibility and status with central banks and other longterm investors. That informal role is significant as roughly US$250 billion changes hands each day through the gold market. Consider that gold offers no annual income, yet the market remains vibrant – a sign that this is a true and lasting safe-haven. As a result, gold should continue to thrive in the digital age as it remains the ultimate store of value.

Digital gold The blockchain technology that drives the BitCoin network has one great advantage – it is immutable, which means that past data can never be changed.

As such, it is a point of reference that can be trusted by all. And it has big ramifications for gold. Using blockchain, modern communications enable gold to be redistributed round the world at the touch of a button, without ever leaving the vaults.

Hedge fund manager, Adam Cleary of Cavenham Capital, was a pioneer in this field, founding Bullion BitCoin in 2013, just as BitCoin was capturing the public’s imagination.

Cleary wanted to make gold freely transferable by piggybacking on the BitCoin blockchain so he created an electronic token backed by gold. Back then, he was ahead of his time but today, his ideas are beginning to take root, as he reveals: “Following my initial experimental attempts at creating a gold token on the BitCoin blockchain in 2014/15, it is great to see the huge multiplicity of innovation and startups in the space. This shows that the idea of a redeemable digital gold token is sound, but to succeed, above all, this idea requires a highly capitalised, immediately recognisable sponsor with strong market credibility who is highly trusted by gold market participants. The technology is readily available and easy to implement so there is a huge opportunity here for a major gold market player to swoop in and dominate the digital gold market.”

Cleary’s dream was to make gold digital so that it could be transacted around the world in a decentralised manner, enjoying the same anonymity as a cash transaction.

However, as he suggests, such a system would require trust and therefore a “recognisable sponsor.” That sponsor would struggle to operate without providing an audit trail to the authorities, which directly contradicts the notion of decentralised and anonymous payments in gold: at least on a grand scale.

Gold Investor | June 2017

16

Gold and the blockchain

Today, many well-known brands such as The Royal Mint are building new gold platforms, using either blockchain or other technologies.

One company, expected to launch in the next few months, will be able to store gold securely in a vaulting service, yet allow you to spend your gold using Master Card. You can also text it, email it or transfer it at the touch of a button, and at no cost. It’s impressive, usable and slick and may well have broad appeal.

This fledgling operation has chosen to abstain from the blockchain, primarily because, in order to achieve the functionality they desired, the system had to settle a transaction in one hundredth of a second. However, this new firm does recognise the appeal of BitCoin’s public record keeping.

And this is the crux. A traditional database must be private, yet a blockchain system can be private or public.

If private, the owner maintains control of the system so it is centralised. A public blockchain is the breakthrough design that enables the network to be decentralised.

A growing role for gold Many gold market participants have dreamt of a decentralised system for gold, yet it needs a brand to provide trust and grow the network. And a brand will be under the control of authorities. This is a fundamental obstacle standing in the way of decentralising gold: someone or some entity must be responsible for the gold in the vaults and reconcile what is shown on the blockchain.

It therefore seems that centralised systems for gold offer the best practical solution. Yet developments in FinTech mean that we can still maintain a balance in gold rather than cash and spend it, as if it were cash, using widely adopted systems such as Master Card or Visa.

In so doing, gold’s liquidity will improve further and its central role will be restored.

In an indebted world, there are plenty of reasons why people should want to carry electronic gold in their pockets – and technology is allowing them to do so in a seamless way.

In an indebted world, there are plenty of reasons why people should want to carry electronic gold in their pockets – and technology is allowing them to do so in a seamless way. Whether or not the systems opt for blockchain over traditional databases isn’t the issue, as they can all succeed in different ways.

In years to come, therefore, historians will probably see the late 20th century as gold’s ‘Dark Age.’ Gold was relevant in the preceding millennia and its relevance has been on the rise again in recent years. At first, technology threatened gold. In the end, technology was its saviour.

Gold Investor | June 2017

17

Building a popular ecosphere for gold China’s gold market is the largest in the world and it is moving increasingly online. The Precious Metals Department of leading Chinese bank ICBC explains how they are leveraging the power of the internet to drive gold investment among a wide range of savers, from the young millennials to sophisticated traders.

SUN Yang Deputy Head of IT Division of Precious Metals Department

The internet has prompted an enormous shift in consumer habits, not least in the financial arena. Traditional ways of payment, settlement, investment, financing and trading are undergoing rapid innovation, which makes financial services apparently more transparent, more efficient, therefore further market-oriented and much more popular.

At the same time, escalating political and economic uncertainty worldwide highlights the need to invest in assets with monetary and financial attributes, such as gold.

China has consistently encouraged the concept of ‘common gold ownership’, building on our traditional affinity with gold to stimulate investment, collection and consumption.

Today’s rapidly emerging online gold market combines both changes in mass-market investment and shifting consumer needs. As a significant participant in the Chinese gold market, we are keen to play a pioneering role in this space.

Our customers include industrial chain enterprises, financial institutions and hundreds of millions of individuals who acquire gold for a range of different reasons: investment, wealth preservation, asset appreciation or simply for gifts and adornment.

We have created a transparent, easy-to-use online platform to facilitate the purchase of even very small amounts of gold. We also aggregate customers’ gold and use it to finance funding, leasing and hedging activities.

Gold Investor | June 2017

18

Building a popular ecosphere for gold

To better serve those customers, we have created a transparent, easy-to-use online platform to facilitate the purchase of even very small amounts of gold. We also aggregate customers’ gold and use it to finance funding, leasing and hedging activities across our industry. In effect, this allows us to monetise retail investors’ gold, namely producing returns, preserving and even enhancing the value of gold assets, thereby building a more effective gold market.

In recent years, we have established three internet-based platforms to drive innovation, encourage investment and allow us to remain at the forefront of the online gold market: ‘ICBC Mall’, an e-commerce platform; ‘ICBC Link’, an instant messaging platform and ‘ICBC Mobile’, a direct banking platform, which has amassed 56 million, 66 million and 250 million users respectively.

For consumers keen to purchase physical gold, we also set up virtual precious metal stores on our ICBC Mall.

These stores, known as ‘ICBC Gold Elite’, offer a number of physical gold products, including coins and bars for investment and collection and decorative items too. Since the launch of our flagship store on ICBC Mall in 2014, we have accumulated over 80,000 users, while total transaction volumes have reached 220,000 pieces or CNY 680 million (US$99 million). In March 2017, we set up ‘ICBC Gold Elite’ flagship store on ‘JOYBUY’ (an online shopping mall run by JD.com Inc.) to bring our services and products to more consumers through a larger platform.

Over time, we are determined to leverage the internet and help everyday savers to invest in gold as one of the principal ways to conserve and increase wealth.

To make the purchasing process as simple as possible, we use QR code technology, so customers can buy goods by scanning codes via our instant messaging tool, ICBC Link.

Once items have been acquired, they are dispatched via a state-of-the-art logistics and warehousing system, which supports a variety of e-commerce service models such as direct delivery and click and collect (online ordering, followed by physical collection).

We have also launched an innovative product: Gold Accumulation Plan (GAP), which provides small-sized gold accumulation services for our users, as well as the collective functions of gold purchase, deposit, selling, redemption, financing and leasing. Through continuous Gold Investor | June 2017

optimisation of related functions and reduction of transaction costs, the GAP plays well to the purchasing habits and gold allocation needs of long-tail customers, particularly young, millennial investors and consumers.

Since the GAP was launched in 2010, we have amassed 14 million investors. In early 2017, we leveraged the popular social media app, ‘WeChat’, embedding a new service within it, ‘WeGold’, which provides online GAP service for users, even down to a single milligram.

We are keen to remain at the forefront of gold trading too.

Recognising that online trading via mobile is increasingly popular, we have optimised this service, while ensuring that customers can easily transact across all internetbased trading channels. We have also launched the ‘ICBC e-Investment’ app – an advanced trading tool for professional precious metal trading customers. In 2016 alone, total transaction volumes for our RMB-denominated and US$-denominated Account Gold reached 728 tonnes (or CNY195 billion) and 72 tonnes (or US$2.9 billion) respectively.

We will continue to research and develop a wide range of gold wealth management products to help our customers manage risk, preserve and enhance value of their wealth via gold. We also intend to remain in the vanguard of internetbased financial services, combining customer demand for precious metals products with online ease of use.

Ultimately, we hope to create a broad suite of efficient and effective online financial services, in terms of information flow, fund flow and product flow.

Over time, we are determined to leverage the internet and help everyday savers to invest in gold as one of the principal ways to conserve and increase wealth. We also hope to develop China’s gold industry still further, driving integration with the international gold market, generating competition and increasing our influence as a global voice for gold.

19

Gold policies: a new era A study by PricewaterhouseCoopers, the global consultancy firm published in October 2013, suggests that the gold industry adds some US$30 billion to Indian national output, and employs around 2.5 million people. Former governor of the Reserve Bank of India, Dr YV Reddy argues that gold’s role in the Indian economy should be formally recognised so it can make an even greater contribution to economic growth.

Dr YV Reddy Former Governor of the Reserve Bank of India

Gold has been an important part of the Indian economy since time immemorial. Even Roman senators discussed exporting enormous amounts of gold to finance imports from India.

Nearly 2,000 years later, in the early 20th century, an active gold and silver market developed in Mumbai. Gold and silver options and futures were actively traded and the Bombay Bullion Association, formed in 1948, included representatives from Government and the Reserve Bank of India (RBI).

This ‘golden era’ ended with the imposition of controls in 1963. Since then, gold has been the single largest contributor to non-official imports and the spread of black money, both in domestic and international trade. Curbs were lifted with the repeal of the Gold Control Order in 1990 and gold imports were liberalised in 1997, but there was little sign of a good or positive gold policy until 2015.

Customers at Mumbai gold market.

Gold Investor | June 2017

20

Gold policies: a new era

Merely because demand for gold is traditional, it does not mean that it is irrational or undesirable.

Gold is the only form of matrilinial wealth in large parts of India.

My interest and association with gold in the policy arena spans several decades, not least as joint secretary at the Ministry of Finance in 1991. We had to promulgate an ordinance to enable us to value the RBI’s gold reserves as per market value. We also had to lease gold held by the government with the State Bank of India to obtain foreign exchange. Ultimately, we had to pledge part of the RBI’s gold reserves in exchange for foreign currency to manage a serious balance of payments crisis.

This is particularly important given the absence of property rights for women in most of India. Even where property rights are equal on paper, women cannot in reality exercise them.

These events reinforced my belief in the importance of gold to the Indian economy. I believe that, merely because demand for gold is traditional, it does not mean that it is irrational or undesirable. Women are responsible for most of the traditional demand for gold in India. Gold is inherited by women and they are deprived of it only under desperate circumstances. As gold is significantly nondepreciating in its physical form or in terms of value, it provides safety and security for women and, under difficult circumstances, liquidity.

I became a public advocate of gold in the mid-1990s.

In November 1996, after I joined the RBI as deputy governor, I gave a speech in which I departed from the official stance on gold and argued for an overall review of the policy stance to liberalise gold imports. The Tarapore Committee on capital account convertibility – headed by my predecessor in the RBI, SS Tarapore – subsequently recommended liberalising the import of gold.

Gold Investor | June 2017

It seems highly inappropriate to discourage gold imports, which meet women’s needs, while allowing imports such as luxury cars and men’s shaving lotion. I believe that public policy with regard to gold should be fair to all, and not imply a bias against tradition or gender.

The following year, I called for a new gold policy that would recognise the importance of gold in the Indian economic system, allowing it to play a transparent and positive role in industrial development, exports and employment, while encouraging an orderly development of the domestic gold market. Following this speech, the Standing Committee on Gold and Precious Metals was revived by the RBI and addressed the need for hallmarking and assaying gold with the Ministry of Consumer Affairs.

21

Gold policies: a new era

These reform measures – initiated in the late 1990s – began the process of formally organising an industry that was almost completely unorganised back then. Today, at least 10 per cent of retailers are organised, and amendments to laws, such as the Bureau of Indian Standards Act, are taking us further in that direction.

In fact, government policy now recognises several factors that contribute to gold’s unique status across India. First and foremost, gold is an integral part of our economy and economic activity, so we need to ensure that markets develop in an orderly fashion and that consumers are adequately protected. It is also worth noting that gold has the characteristics of a currency, competing with the official currency as a form of savings or a store of value. It is a commodity by definition – but its links with the financial sector provoke central bank concern.

This duality can be regulated however and current government initiatives seem to be moving in the right direction, marking a radical change in public policy.

In 2015-16, for example, three key initiatives were announced: the Gold Monetisation Scheme, the Sovereign Bond Scheme and the Indian Gold Coin Scheme. The Gold

Gold Investor | June 2017

Monetisation Scheme, encouraging consumers to generate more value from their gold, has faced some practical and implementation challenges. The government may have to go back to the drawing board to make it work better and attract greater depositor and bank interest.

The Sovereign Gold Bond is issued by the government, its efficacy is untested and, to my mind, the benefits to both government and bond buyers are not obvious.

Gold is an integral part of our economy and economic activity, so we need to ensure that markets develop in an orderly fashion and that consumers are adequately protected.

22

Gold policies: a new era

To that end, I believe the government’s current initiatives need to be taken further, culminating in a comprehensive gold policy, that addresses both opportunities and challenges and that focuses on what gold savings can do for India rather than whether India can do without gold.

The Indian Gold Coin allows individuals to acquire gold coins of assured 24-carat quality. This is higher than 22-carat gold, which Indians prefer, but it is part of a growing awareness of the need to formalise the Indian gold market.

Across the board, government policy is at an embryonic stage. Importantly however, recent developments demonstrate a positive attitude towards gold – a radical departure from the past.

In effect, current public policy recognises that the Indian affinity with gold stems from a range of factors. Some of the demand for gold today stems from black market transactions, which have a nefarious influence on the economic system and social fabric and deserve immediate and serious attention. As part of that journey, a number of measures need to be taken. Over the long term, if the financial sector expands and develops, the economy grows and society evolves, demand for gold arising from cultural factors, property rights and general preferences will be resolved.

The formation of an inter-regulatory working group on gold issues under the Ministry of Finance is a welcome step in this context. Elsewhere, institutions such as the Centre for Advanced Financial Research and Learning and the India Gold Policy Centre of the Indian Institute of Management, Ahmedabad, should also be engaged to build a genuine, independent knowledge base around India’s substantial gold savings.

Overall, as someone with a strong belief in gold’s economic contribution, I am optimistic about its future, not just in India but worldwide. There have been interesting developments across the globe that signal a heightened significance for gold in the global economy, particularly as a store of value.

For many years, central banks were net sellers of gold, so much so that, by the end of 2000, official central bank reserves of gold were 3,600 tonnes lower than in 1975. To stem further sales, 17 central banks signed the Washington Gold Agreement (WGA) in 1999 to put a ceiling on the total amount of gold they would sell. The second, third and fourth versions of the Agreement were put in place in 2004, 2009, and 2014.

However, attitudes changed radically in 2009, when central bank confidence in the international monetary system was rocked by the global financial crisis. Since that time, central banks have been net purchasers of gold, recognising its role as a long-term store of wealth.

India also changed its passive stance and bought some gold from the IMF, which had decided to sell a small proportion of its gold in order to help put the financing of the organisation on a sound long-term footing. To this day, the financial crisis continues to affect the global economy.

There have been interesting developments across the globe, which signal a heightened significance for gold in the global economy, particularly as a store of value.

Gold Investor | June 2017

Looking ahead, we should expect a new era for gold, beyond its emerging significance after the crisis. The global leadership of the USA is under stress, but the US dollar remains the dominant global currency. An inwardlooking economy with a globally used currency has built-in tensions. All major reserve currencies – the US dollar, the euro and the yen carry high public debt, giving gold an edge as a safe haven. In brief, global uncertainties – in particular, the monetary ‘non-system’, and the out-dated global financial architecture (IMF and the World Bank) – coupled with policies that are less than confidence-inspiring may bring about a new era that gives gold fresh lustre in the years ahead.

23

A brighter outlook for gold in India Alistair Hewitt Director, Market Intelligence World Gold Council

Gold is an integral part of the Indian culture and has played a central role in household wealth for centuries. In 2016, demand was hit by a series of economic and political factors. Looking ahead however, we believe there are strong grounds for optimism.

Last year Indian gold demand shrank to its lowest level since 2009, crushed by a soaring gold price and a barrage of policy initiatives designed to purge India of black money and make the economy more transparent. But, in our view, gold demand in 2017 should be stronger. The economy has already bounced back and gold demand was up 15% yearon-year in the first quarter.

The biggest single event took place on 8 November 2016, when the government announced plans to immediately scrap all Rs500 and Rs1,000 notes, ordering them to be returned into local banks or the Reserve Bank of India by 30 December, a total of Rs15.44 trillion – or 86% of the currency in circulation – was ditched.

This rocked the economy. In December, India’s composite PMI dropped to its lowest level on record, while sales of motorcycles – a good measure of the health of India’s cashreliant rural economy – halved in a month, falling to their lowest level in over six years.

But the economy has recovered. In February, Urjit Patel, Governor of the Reserve Bank of India, claimed that the economic recovery would be ‘V’ shaped. Some commentators were sceptical, but he was proved right.

Both the composite PMI and sale of motorcycles have rebounded in recent months.

Chart 1: Motorcycle sales plummeted in December, but bounced back in January Sales volume 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 March 2000

March 2004

March 2008

March 2012

March 2016

Source: Society of Indian Automobiles

Chart 2: ...and so did the Composite PMI Index 56 55 54 53 52 51 50 49 48 47 46 July 2014

March 2015

November 2015

July 2016

March 2017

Source: Bloomberg Gold Investor | June 2017

24

A brighter outlook for gold in India

A brighter economic outlook Looking ahead, we see three key reasons to be optimistic for India’s economic growth in 2017: First, new cash is being printed and put into circulation.

This remonetisation is lubricating India’s economy so last year’s liquidity squeeze has passed. As per recent data, cash in circulation increased by 58% in the first five months of 2017.

Second, an inflation-busting wage hike for central government employees and pensioners will support consumption.

And third, there was a bumper agricultural crop in 2016, following the best monsoon in three years. This should raise rural incomes and drive consumption in the months ahead.

Chart 3: The economy is slowly recovering from 2016’s shock demonetisation Trillion rupees 20

Units 1,200,000

18

1,100,000 1,000,000

16

900,000

14

800,000

12

700,000

10

600,000

8 6 Oct 2016

500,000 Nov 2016

Dec 2016

Currency in circulation

Jan 2017

Feb 2017

Mar 2017

Apr 2017

400,000 May 2017

Motorcycle sales (rhs)

Source: Reserve Bank of India; Society of Indian Automobiles; World Gold Council

High and sustained economic growth is likely to underpin longterm demand in the world’s second largest gold market.

Gold Investor | June 2017

In its flagship report, Global Economic Prospects 2017, the World Bank notes that all these factors will help India ‘regain its momentum’, with economic growth reaching 7.8% by 2019, making it one of the fastest growing economies in the world. Looking further ahead, India should benefit from a demographic dividend as 350 million people under the age of 14 enter the workforce over the next 20 years.

We believe high and sustained economic growth is likely to underpin long-term demand in the world’s second largest gold market.

Potential headwinds?

In the short term, there are two India-specific issues that gold market analysts should pay attention to this year. The first is that cash transactions over RS200,000 (US$3,000 as at 1 April 2017) are banned. This will have the greatest impact in rural India, where people do not necessarily have access to cheques and electronic payments. Its potential impact isn’t entirely clear: it could curb gold purchases; it could encourage gold shoppers to buy smaller amounts of gold spread over more transactions; or it could push a large part of demand underground and encourage a black market in gold.

The second issue relates to the bold plans to scythe through India’s complex and confusing web of inter-state taxes and replace them with a simple, nationwide Goods and Services Tax (GST). An efficient tax structure should boost India’s economy – the National Council of Applied Economic Research, one of India’s leading economic think tanks, expects GST to lift GDP by between 0.9% and 1.7% from its already lofty levels.

On 3 June, the GST Council announced a 3% rate for gold bullion and jewellery. The gold industry reacted positively.

There had been fears it could have been higher – perhaps 5% or more. But, in the short term at least, we believe GST may pose challenges for the industry. Small-scale artisans and retailers with varying degrees of tax compliance may struggle to adapt. And our econometric research into data spanning 26 years indicates the tax may pose a headwind to gold demand, because it pushes up the overall tax rate consumers face.

25

A brighter outlook for gold in India

Gold demand in 2017 and beyond Despite these possible obstacles, we believe demand is unlikely to lurch down further, after falling so sharply last year. And the potential headwinds could be offset by strong tailwinds. The gradual remonetisation of the economy, the bumper crop after a good monsoon, and central government employees’ and pensioners’ inflationbusting wage hike can all support economic growth in 2017. Further ahead, the economy can benefit from the groundswell of young Indians entering the workforce – a demographic dividend similar to that which underpinned the stellar growth of Asian Tiger economies during the 1980s and 1990s. All these factors should boost India’s economic growth and support gold demand.

Demonetisation has tested some peoples’ confidence in fiat currencies and reinforced their faith in gold.

We believe the impact of demonetisation will have a behavioural impact too. The shock initiative has tested some peoples’ confidence in fiat currencies and reinforced their faith in gold. The World Gold Council conducted a large-scale piece of consumer research in Q1 2016 in which 63% of respondents in India agreed with the statement: “I trust gold more than the currencies of countries.” And 73% of respondents in India agreed with the statement: “Gold makes me feel secure for the long-term.” We expect that the demonetisation programme has underpinned these beliefs.

Gold Investor | June 2017

We anticipate that economic growth should push demand higher.

By 2020 we see Indian consumers buying between 850 tonnes and 950 tonnes of gold.

In the long-term, we expect GST will have a positive effect on India’s economy and its gold industry. GST should eliminate double taxation and improve supply chain efficiencies. It can make the gold industry more transparent which, coupled with recent hallmarking legislation, should ensure gold buyers have confidence in the gold products they buy, rather than continuing to suffer from the gross level of under-carating they have previously endured.

On balance, we remain relatively cautious for 2017, expecting consumers to buy between 650 tonnes and 750 tonnes of gold, an increase from the 666 tonnes purchased in 2016, but well down from an average annual demand of 846 tonnes between 2012 and last year. Over time however, we anticipate that economic growth should push demand higher. By 2020 we see Indian consumers buying between 850 tonnes and 950 tonnes of gold.

26

Lifting the lid on gold strategy John Reade has spent his entire career in the gold industry. After graduating from the Royal School of Mines, he spent eight years in South Africa, working on both production and project evaluation, before becoming an equity analyst covering South African gold companies. He went on to become UBS’s precious metals strategist before moving to Paulson & Co as gold strategist. In February of this year, he joined the World Gold Council as Chief Market Strategist and Head of Research.

Here he explains what this means and why it matters.

John Reade Chief Market Strategist and Head of Research World Gold Council

Q: So what is a strategist and how do they look at the gold market?

A: I think there is an important difference between research and strategy, at least as far as I think about the descriptions and how we use them at the World Gold Council. When we think about research, we are referring to rigorous analysis, understanding and description of gold, whether that is in the production of supply and demand analysis as seen in our quarterly Gold Demand Trends publication; an issue facing gold demand or supply, or a comprehensive examination of a single country’s gold market, such as India’s Gold Market: Evolution and Innovation. This work focuses on what has happened in the past or what is happening now and is as rigorous as it is possible to be.

Strategy is rather different. It takes research findings as the foundation behind an understanding of the market and then attempts to project forward. Predictions about the future are by their very nature less certain and more speculative and, when discussing how gold demand will evolve, nonfundamental gold market factors play more of a role.

Gold Investor | June 2017

27

Lifting the lid on gold strategy

Q: What does that mean in practice?

Q: How do you try and get it right?

A: The research team’s supply and demand statistics play a vital role in providing an accounting framework for the gold market. How much gold was mined: how much recycled?

Where was jewellery demand strong and where was it weak? How much gold do central banks own, and how much did they buy last year? What is the total stock of gold outstanding, who owns it and in what form?

A: Monitoring the markets is an absolutely crucial part of the process so I spend the first couple of hours of each day working on spreadsheets: building new models, enhancing old ones or adapting data from the World Gold Council’s research team.

A strategist tries to think about how these moving parts fit together and which elements will change going forward: what will trigger a rise or fall in gold demand in China, for example; what will drive recycling flows or affect investors’ holdings in gold via futures, exchange traded funds or other gold products.

The crucial part of a strategist’s job is to try and identify what’s important at the moment, because it does change.

Q: How do you do this?

A: The crucial part of a strategist’s job is to try and identify what’s important at the moment, because it does change.

There have been several big regime shifts during my career as a gold strategist, for example, so what I look at now is quite different from what I looked at 20 years ago, and different again from 10 and five years ago.

Having identified the major factors, the next step is to try and track them, as close to real time as possible. This is another way in which strategy is different from research: the frequency of observations is higher, ideally in real time.

Finally, after working out what’s important and how to track it, the final ingredient is to try and put a predictive framework around the presently important elements of the market. Often it’s impossible to make definitive predictions about these important factors and this is where strategy is less precise and quantifiable than research – dealing with the future is always going to be more uncertain than examining the present or the past.

Gold Investor | June 2017

I’ve divided the spreadsheets into the following categories: • Positioning, flows and premiums I have spreadsheets that I update regularly which allow me to measure and estimate short-term gold positioning and flows by looking at speculative positions and open interest in futures markets, together with the amount of gold held in exchange traded funds. I track volumes and participation in the LBMA Gold Benchmark, and turnover and premiums on various exchanges including, most importantly, the Shanghai Gold Exchange. Where I can, I track gold premiums in all the major markets, both for bars and, where available, coins.

• FX and Fixed Income data Supply and demand fundamentals are not the only factors moving the gold price; the dollar-denominated gold price is usually highly correlated to moves in the US dollar, and interest rates – especially US interest rates - are very important drivers of gold too. I look at gold in lots of currencies – not just in US dollars – as this can explain buying and selling in certain markets.

• Macro-economic data Economic data drives currency and fixed income markets, thus, indirectly, gold flows; sometimes the data can directly influence gold flows, especially inflation data or balance of payment data that suggest potential local currency weakness. I focus first on US economic data, but I also look at China and India due to their relevance to gold demand; then Europe and Japan due to the size of these economies.

• Commodity data I think of gold as a hybrid instrument – part currency, part commodity. Certainly, its inclusion in commodity indices attracted investors into gold via structured commodity investments, so it’s worth watching the performance of other commodities, especially crude oil and copper.

Aside from the gold-market specific positioning and flow data, the most important data at the moment is fixed-income, market-derived probability of interest rate hikes from the Federal Reserve.

28

Lifting the lid on gold strategy

Q: So, what factors are you following most closely at the moment?

A: Aside from the gold-market specific positioning and flow data that I always follow closely, the most important data at the moment is fixed-income, market-derived probability of interest rate hikes from the Federal Reserve.

This probability, and specifically changes to this probability, appear to be having the greatest impact on gold at the moment, even more than moves in the US dollar. I suppose this is logical, as the US is in the midst of a hiking cycle after years of essentially zero interest rates. Typically, the probability of an interest rate hike increases to virtually 100% some time before it is announced and that rapid increase in probability sees gold under pressure.

I don’t try and forecast the US economy myself – it’s beyond my remit and experience – but I do look at consensus forecasts and how the economy is performing when measured against consensus. One simple way of doing this is to look at surprise indices; most large banks have them and I use one from CitiMarkets. The sharp decline in this measure in April’s chart contrasts with the increase in the Fed rate hike probability seen at the same time.

Chart 6: Market-derived probability that the Fed will hike in June % Probability 100 80

Chart 4: Gold and Real 10-year US Tsy Rates XAUUSD XAUEUR

Real interest rates -0.25

1,300 1,250

0

1,200

0.25

1,250 -0.50

1,100

60 40 20 0 Oct 2016

Nov 2016

Dec 2016

Jan 2017

Feb 2016

Mar 2016

Apr 2016

May 2016

Jun 2016

Source: Bloomberg

1,050

-0.75

1,000 January 2015

July 2015 Blended gold price

January 2016

July 2016

January 2017

Real 10 year

Source: Bloomberg

Beyond short-term moves associated with interest rate hikes, the best medium-term relationship appears to be with real interest rates, I use the 10-year real US treasury market yield and compare that to the gold price. The Fed can hike short-term interest rates as much as it likes, but the longer part of the curve – less inflation – is outside of the Fed’s control and seems more important for gold.

Chart 5: Index of US Economic Surprises Index level 60 40 20 0 -20 -40 -60 -80 January April 2015 2015

July October January April 2015 2015 2016 2016

Q: Against that backdrop, what do you think will happen to gold this year?

A: I’ll be launching my strategy commentary later this summer and the intention is that I’ll talk about gold and the many factors that are – and will – influence demand and supply over the short, medium and long term. For now, I’d summarise my current thinking in the following way.

India and China have been the most important countries for gold demand since the steep sell-off in 2013. But both faltered last year and if it hadn´t been for the surge in investment demand, evident from the inflows seen into gold exchange traded funds, gold would have likely struggled rather than rally as it did. India is showing some signs of improvement in 2017, as the economy recovers from the shock removal of more than half the cash in circulation last year. China is more mixed, however, with strong investment demand and softer jewellery demand.

So I believe Western investment will probably be needed again this year if gold is to prosper in 2017. With the Fed in the midst of its hiking cycle, this might seem unlikely at first glance, but long-term real interest rates are much more important than US policy rates and these are currently low.

Finally, it’s fair to say that there is a lot of geopolitical risk around at the moment, and this, combined with concerns about the global economy will, in my view, likely see investors interested in gold.

July October January April 2016 2016 2017 2017

Source: CitiGroup Global Markets; Bloomberg

Gold Investor | June 2017

29

Key gold market statistics Gold returns surpass those of many major financial assets Performance metrics for major global financial assets in US$*

Gold has been inversely correlated versus stocks so far this year Weekly return correlation on key assets and gold in US$*

10-year average return % 20

BarCap 1-3m T-bills

15

10% per year

10 5

BarCap US Credit**

Key: Bubble area = annual volatility

S&P 500

20% per year

0

BarCap US HY MSCI EAFE

BarCap US HY

-5 -10

S&P GS Crude Oil

-15

BarCap US Credit**

Gold (US$/oz)

S&P GSCI

S&P 500 MSCI EAFE

BarCap1-3m T-bills

Brent (US$/bbl) S&P GSCI

-20 -25 -20

-15

-10

-5

0

5

10 15 20 Year-to-date return %

-1.0

-0.8

-0.6

-0.4

-0.2

Year-to-date 2017

0

0.2

0.4

0.6 0.8 1.0 Correlation to gold

10-year

* Year-to-date and 10-year returns based on data ending 31 May 2017. **BarCap US Credit includes both government and high grade corporate bonds.

Source: Bloomberg; World Gold Council

* Year-to-date (YTD) and 10-year correlations based on weekly returns ending 31 May 2017. **BarCap US Credit includes both sovereign and corporate bonds.

Source: Bloomberg; World Gold Council

Gold performance should be measured in more than one currency Annual gold returns in various currencies*

Gold trades more than many other major financial assets Average daily trading volumes in US$*

Return %

German Bunds Dow Jones (all stocks) UK Gilts Euro/yen S&P 500 (all stocks) Gold** US Agencies JGBs US$/sterling US Treasuries US$/yen US$/euro

40 30 20 10 0 -10 -20 -30 -40 2001

2003

Gold (US$)

2005

2007

2009

Long US$ Gold Index

2011

2013

Gold (CNY)

2015

2017**

0

Gold (INR)

* Based on the LBMA Gold Price PM except for the Long US$ Gold Index that is based on the Solactive GLD® Long US$ Gold Index. The Index combines a long position in physical gold with a long position in a basket of currencies that include EUR (57.6%), JPY (13.6%) GBP (11.9%), CAD (9.1%), SEK (4.2%) and CHF (3.6%).

For more details see: https://www.solactive.com/complex-indexing/ ?index=DE000SLA2K90. ** Year-to-date as of 31 May 2017.

Source: Bloomberg; ICE Benchmark Administration; Solactive AG; World Gold Council

Stocks

Jewellery 88,693 tonnes

US$3,485bn

47%

Official sector 31,777 tonnes

US$1,249bn

17%

Bars and coins 37,531 tonnes

US$1,483bn

20% 1%

Other fabrication and unaccounted 29,523 tonnes US$1,161bn 16%

Bonds

600

800

1,000 1,200 US$bn/day

Currencies

* Based on estimated 1-year average trading volumes as of 31 March 2017, except for currencies that correspond to 2016 volumes due to data availability. ** Gold liquidity includes estimates on over-the-counter (OTC) transactions, and published statistics on futures exchanges, and gold-backed exchange-traded products.

Source: BIS; Bloomberg; German Finance Agency; Japan Securities Dealers Association; LBMA; UK Debt Management Office (DMO); World Gold Council

S&P 500 US Treasuries Japan TOPIX Shanghai Composite China Gold** UK Gilts FTSE 100 French OATs Hang Seng German Bunds Canada Australia 0

* Estimated tonnage as 31 March 2017. US-dollar values calculated using Q1 2017 average LBMA Gold price of US$1,219/oz. Financial gold is defined as the sum of official sector holdings, bars and coins, and ETPs** (71,926 tonnes, US$2.82bn, 38%). **ETPs include gold-backed exchange traded funds (ETFs) and similar.

Source: Bloomberg; GFMS, Thomson Reuters; ICE Benchmark Administration; Respective ETP Providers; World Gold Council Gold Investor | June 2017

400

Gold market larger than many major stock and bond markets Market size of major global financial assets in US$*

Financial gold accounts for more than a third of above ground gold stocks Market size (in tonnes and US$ value) for various gold sectors*

ETFs and similar 2,143 tonnes US$88bn

200

5,000 Stocks

10,000

15,000

25,000

25,000 US$bn

Bonds

* As of 31 March 2017 where available, otherwise most recent data published. **Includes bars, coins, gold-backed exchange-traded products and official sector holdings.

Source: BIS; Bloomberg; GFMS, Thomson Reuters; ICE Benchmark Administration; World Gold Council 30

Copyright and other rights © 2017 World Gold Council. All rights reserved. World Gold Council and the Circle device are trademarks of the World Gold Council or its affiliates.

All references to LBMA Gold Price have been provided for informational purposes only. ICE Benchmark Administration Limited accepts no liability or responsibility for the accuracy of the prices or the underlying product to which the prices may be referenced.

Other third party data and content is the intellectual property of the respective third party and all rights are reserved to them.

Any copying, republication or redistribution of content to reproduce, distribute or otherwise use the statistics and information in this report including by framing or similar means, is expressly prohibited without the prior written consent of the World Gold Council or the appropriate copyright owners except as provided below.

The use of the statistics in this report is permitted for the purposes of review and commentary (including media commentary) in line with fair industry practice, subject to the following two pre-conditions: (i) only limited extracts of data or analysis be used; and (ii) any and all use of these statistics is accompanied by a clear acknowledgement of the World Gold Council and, where appropriate, of the identified third party source, as their source. Brief extracts from the analysis, commentary and other World Gold Council material are permitted provided World Gold Council is cited as the source. It is not permitted to reproduce, distribute or otherwise use the whole or a substantial part of this document or the statistics contained within it.

Disclaimer While every effort has been made to ensure the accuracy of the information in this document, the World Gold Council does not warrant or guarantee the accuracy, completeness or reliability of this information. The World Gold Council does not accept responsibility for any losses or damages arising directly or indirectly, from the use of this document.

The material contained in this document is provided solely for general information and educational purposes and is not and should not be construed as, an offer to buy or sell, or as a solicitation of an offer to buy or sell, gold, any gold related products or any other products, securities or investments. Nothing in this document should be taken as making any recommendations or providing any investment or other advice with respect to the purchase, sale or other disposition of gold, any gold related products or any other products, securities or investments, including without

Photography credits Front cover: Dr Reddy Page 5: Zapp2Photo/ Shutterstock.com Page 6: Nick Starichenko/ Shutterstock.com Page 7: David Burrows/ Shutterstock.com Page 8: The Royal Mint Page 10: View Apart / Shutterstock.com Page 11: Sergey Nivens/ Shutterstock.com Page 13: Creativa Images/ Shutterstock.com Page 14: whiteMocca /Shutterstock.com Page 15: Top right, World Gold Council Page 15: Bottom, GaudiLab/Shutterstock.com Page 16: Jim Lambert/Shutterstock.com Page 17: Top right, Dirk Ercken/Shutterstock.com Page 17: Bottom, Vastram/Shutterstock.com Page 18: ICBC Page 19: ICBC Page 20: Pete Burana/Shutterstock.com Page 21: tahirsphotography/Shutterstock.com Page 22: World Gold Council Page 23: World Gold Council Page 24: Andrey Armyagov/Shutterstock.com Page 26: Wittayayut/Shutterstock.com Page 27: Olivier Le Moal/danm12/Shutterstock.com

limitation, any advice to the effect that any gold related transaction is appropriate for any investment objective or financial situation of a prospective investor. A decision to invest in gold, any gold related products or any other products, securities or investments should not be made in reliance on any of the statements in this document. Before making any investment decision, prospective investors should seek advice from their own financial advisers, take into account their individual financial needs and circumstances and carefully consider the risks associated with such investment decision.

Without limiting any of the foregoing, in no event will the World Gold Council or any of its affiliates be liable for any decision made or action taken in reliance on the information in this document and, in any event the World Gold Council and its affiliates shall not be liable for any consequential, special, punitive, incidental, indirect or similar damages arising from, related to or connected with this document, even if notified of the possibility of such damages.

This document contains forward-looking statements. The use of the words “believes,” “expects,” “may,” or “suggests,” or similar terminology, identifies a statement as “forward-looking.” The forward-looking statements included in this document are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on the analysis of World Gold Council of the statistics available to it. Assumptions relating to the forward-looking statement involve judgments with respect to, among other things, future economic, competitive and market conditions all of which are difficult or impossible to predict accurately. In addition, the demand for gold and the international gold markets are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the World Gold Council that the forward-looking statements will be achieved.

The World Gold Council cautions you not to place undue reliance on its forwardlooking statements. Except in the normal course of our publication cycle, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, and we assume no responsibility for updating any forward-looking statements.

Expressions of opinion are those of the authors and are subject to change without notice.

Published by: World Gold Council 10 Old Bailey, London EC4M 7NG United Kingdom

C048201706