September 16, 2013

Precious Metals

Neutral gold prices near-term but still expecting new lows in 2014
Commodities Research

Gold prices remain in wide trading range on transient catalysts

After reaching $1,200/toz following the hawkish June FOMC, gold prices rallied sharply to peak at $1,420/toz in late August, only to sharply recede to $1,300/toz since. We view these wide price gyrations around our $1,300/toz 2H13 forecast as driven by transient catalysts such as Syria and the identity of the next Fed chair with potential for further price volatility ahead driven by the September FOMC and the US debt ceiling debate.

Damien Courvalin
(212) 902-3307 damien.courvalin@gs.com Goldman, Sachs & Co.

Jeffrey Currie
(212) 357-6801 jeffrey.currie@gs.com Goldman, Sachs & Co.

Acceleration in US growth to push gold prices to fresh lows

As a result, and given the recent string of slightly disappointing US economic data, we remain neutral relative to gold prices until the end of this year. In particular, our US economists expectations for a dovish taper and golds recent decline will likely limit the downside to gold prices heading into the September FOMC. Importantly, we continue to expect that gold prices will resume their decline heading into 2014 when we expect economic data to solidly confirm a reacceleration in US growth and warrant a less accommodative monetary policy stance. Our end of 2014 price forecast therefore is unchanged at $1,050/toz, implying 20% downside potential from current prices.

A more hawkish taper or recent stress on EM economies could accelerate gold price decline
A more hawkish taper then we currently expect would likely precipitate a decline in gold prices given the rebound in speculative positioning since June. Beyond this near-term risk, the recent pressure on EM economies and current accounts could accelerate the decline in gold prices as it forces such countries to slow their domestic gold demand, imports and reserve accumulation.

Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.

The Goldman Sachs Group, Inc.

Goldman Sachs Global Economics, Commodities and Strategy Research

September 16, 2013

Global

Gold update
After reaching $1,200/toz following the hawkish June FOMC, gold prices rallied sharply to peak at $1,420/toz in late August, only to sharply recede to $1,300/toz since. We view these wide price gyrations around our $1,300/toz 2H13 forecast as driven by transient catalysts such as Syria and the identity of the next Fed chair with potential for further price volatility ahead driven by the September FOMC and the US debt ceiling debate. As a result, and given the recent string of slightly disappointing US economic data, we remain neutral relative to gold prices until the end of this year. In particular, our US economists expectations for a dovish taper and golds recent decline will likely limit the downside to gold prices heading into the September FOMC. Importantly, we continue to expect that gold prices will resume their decline heading into 2014 when we expect economic data to solidly confirm a reacceleration in US growth and warrant a less accommodative monetary policy stance. Our end of 2014 price forecast therefore is unchanged at $1,050/toz, implying 20% downside potential from current prices. A more hawkish taper then we currently expect would likely precipitate a decline in gold prices given the rebound in speculative positioning since June. Beyond this near-term risk, the recent pressure on EM economies and current accounts could accelerate the decline in gold prices as it forces such countries to slow their domestic gold demand, imports and reserve accumulation.

Gold trading in a wide range on transient catalysts

We view the recent large gold price gyrations around our $1,300/toz 2H13 forecast as driven by transient catalysts with potential for further price volatility in coming months:

Syria. Gold prices rallied and sold-off with oil prices as the potential for a military intervention in Syria escalated and dissipated, as was the case during the 2011 Arab Spring. The similar magnitude ($30/toz) of the rally and sell-off suggest the Syria premium has disappeared (Exhibit 1). US debt ceiling. Our economists view the debt ceiling as the more significant policy
challenge in coming months with this debt limit increase likely to be more difficult to enact than in February. In the six instances between 1996 and 2007 when the debt limit was reached and the Treasury resorted to using extraordinary measures, gold prices rallied by c.10% in half of these in the month prior, a similar magnitude to the 2011 rally. As a result, we see potential for the debt ceiling to support gold prices near term, although we believe an agreement will ultimately be reached as in the five last fiscal policy "showdowns". See Tax hikes, debt ceiling and sequester to support gold prices, January 18, 2013 for more details.

As a result, while we remain bearish on gold prices in the medium term, we expect gold prices to continue to be range bound into year-end around our $1,300/toz forecast.

Goldman Sachs Global Economics, Commodities and Strategy Research

September 16, 2013

Global

Exhibit 1: Gold prices rallied and sold-off with oil prices on the potential for intervention in Syria
$/bbl (left); $/toz (right)
119 1,430 1,420 117 1,410

Exhibit 2: Since 1995 the debt limit was reached six times and gold rallied by 10% in half of these instances
Gold price indexed to 100 as of date of debt ceiling increase
115

110

105

115

1,400 1,390
100

113

1,380 1,370

95

111 27-Aug 109

Syria headlines impacted oil and gold prices simultaneously 10-Sep

90

1,360 1,350
85 -90 -80 Mar-96 -70 -60 Jun-02 -50 -40 May-03 -30 -20 -10 Nov-04 Mar-06 0 10 Sep-07 20 30 Aug-11

Brent oil prices

COMEX gold prices (right axis)

Source: ICE, COMEX.

Source: COMEX, Goldman Sachs Global Investment Research.

We maintain a neutral stance on gold prices heading into the September FOMC as well given the recent gold sell-off and our own economists expectations for a dovish taper. Specifically, with US economic releases since early August steadily coming in slightly below expectations including the disappointing August employment report, our economists expect a $10 bn taper, all in Treasuries, as well as a strengthening of the forward guidance. Nonetheless, we see two potential catalysts for gold prices to decline following the FOMC, although our conviction is not high enough to position for such a move: The rebound in speculative positioning since June suggests that a more hawkish FOMC then we expect would likely precipitate a decline in gold prices. Specifically, COMEX net long speculative gold positioning as measured by the CFTC is back to its April level, when gold traded at $1,550/toz (Exhibit 3) Further, gold prices remain elevated relative to the level of US real rates, with the disconnect culminating last week with COMEX gold prices back to their pre-hawkish June FOMC levels and US 10-year TIPS yield at their highest level since 2011 (Exhibit 4). And while the recent sell-off in gold prices and rally in Treasuries have started closing this wide disconnect, our gold pricing framework suggests further convergence.

Goldman Sachs Global Economics, Commodities and Strategy Research

September 16, 2013

Global

Exhibit 3: COMEX net long speculative gold positioning is back to its April level, when gold prices were $1,550/toz
million toz (left); $/toz (right)
35 30 25 20 15 10 5 0 -5 -10 -15 -20 Jan-12 1,275 1,200 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 CFTC net speculative positioning COMEX gold price (right axis) 1,500 1,725 1,650 1,575 1,800

Exhibit 4: Gold prices and US real rates have diverged, a break for their historically strong inverse correlation
$/toz (left); % (right)
1,800 -0.90 -0.70 -0.50 1,600 -0.30 -0.10 0.10 1,400 0.30 1,300 0.50 0.70 0.90 1,100 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Gold price US 10 year TIPS yield (right axis, inverted)

1,700

1,500

1,425 1,350

1,200

Source: CFTC, COMEX.

Source: Federal Reserve Board (FRB), COMEX.

Beyond the upcoming FOMC meeting and debt ceiling debate, our economists outlook for accelerating US growth late in the year, clearly above-trend growth and a less accommodative monetary policy stance in 2014 remain the key driver to our bearish outlook for gold prices into 2014. With this economic outlook unchanged since we last updated our forecast in June, our gold price forecast is unchanged, leaving us structurally bearish on gold prices into 2014 with a steady decline in prices in 2014 to $1,050/toz by year-end (see Fast Forward, June 23, 2013). Over this horizon, we also view the recovery in net long speculative positioning as well as the still elevated level of gold ETF holdings at 62 mtoz as supportive to our bearish gold outlook as it provides fresh ammunition for another leg lower in prices once US activity accelerates (Exhibit 5). Exhibit 5: Despite their year-to-date decline, ETF gold holdings remain elevated
million toz (left)
90 80 70 60 50 40 30 20 10 0 2005

2006

2007

2008

2009

2010

2011

2012

2013

Gold ETFs holdings

Source: Bloomberg.

Goldman Sachs Global Economics, Commodities and Strategy Research

September 16, 2013

Global

EM crisis could exacerbate slowdown in CB purchases

As detailed in our 2013 outlook (Gold cycle set to turn on improving US recovery, December 5, 2013), our gold price forecast accounts for the impact of central bank purchases which we expect to continue at a 1 mtoz per month pace. Interestingly, IMF data and the recent pressures on EM economies present downside risk to this pace of purchase and in turn downside risk to our gold price forecast. Specifically, according to the IMF, central bank gold holdings have risen at an average 1.1 mtoz monthly pace since late 2011. However, nearly half of this increase has occurred in Turkey, where the growth in the central banks gold reserves has in part been driven by higher reserve requirements against local commercial banks gold holdings, implying outright gold purchases by central banks below our expected pace of purchase. Further, IMF June preliminary central bank gold reserves point to a sharp slowdown in reserve accumulation (Exhibit 6). While such a decline is not unprecedented over the past couple years, the recent stress on EM economies from rising US interest rates may extend this slowdown as EM economies with current account deficits focus on using USD reserves rather than accumulating gold reserves. The main caveat is that other EM economies including those with current account surpluses - could continue to accumulate gold reserves, which is the case for Russia and China. As a result, we maintain our central bank gold purchase pace unchanged for now, although we see risks as skewed to smaller purchases. Exhibit 6: EM central bank gold purchases declined sharply in June
Month-on-month change in central bank gold holdings (mtoz)
3.00 2.50 2.00 1.50 1.00 0.50 0.00 -0.50

Subset of countries having reported in June 2013

All countries reporting

Source: IMF.

Retail gold demand running out of steam too?

Importantly, this stress on gold demand is likely to also slow EM retail and jewelry gold demand, especially in India which remains the largest gold consumer. First and foremost, gold prices in rupee increased to near record high levels following the recent currency depreciation, although they have receded since (Exhibit 7). Further, domestic retail gold demand has exacerbated the current account deficit, with gold imports representing more than half of its current account deficit. As a result, the Reserve Bank of India (RBI) has introduced measures to slow gold imports, including raising the import duty on gold to 10%, leading to a 95% sequential collapse in Indian gold imports in August. Admittedly, the decline in gold demand is likely smaller as imports by neighboring countries increased
Goldman Sachs Global Economics, Commodities and Strategy Research 5

September 16, 2013

Global

concurrently but this may not last as Pakistan, Sri Lanka, Nepal and Bangladesh have now also enacted restrictive gold import policies. Interestingly, these developments are reminiscent of the shifts in gold demand that occurred during the Asian Debt Crisis, although our EM economists do no view the current EM stress as dire as in 1997-1999. At the time, EM gold demand weakened: (1) some Asian central banks sold gold such as Malaysia (1.2 mtoz in August 1999, half of its reserves) and India (1.3 mtoz in April 1998, 10% of reserve), (2) domestic consumer demand collapsed by roughly 20% in 1998 according to the GFMS consultancy, although Thai demand dropped 70%. Finally, it led to a surge in scrap supply with for example the Korean government setting up a domestic gold collection program. Interestingly, Reuters reported potential inquiries by RBI on the stock of gold held by temples in an attempt to recycle domestic gold and lower imports. Finally, coin and bullion data from the US and Perth Australia mints also point to a sharp slowdown in sales in August, beyond any typical seasonal weakness. This follows the surprisingly weak coin sales following the June gold sell-off to three-year lows, in sharp contrast to the April surge in coin sales. While admittedly this is only a small subset of global retail demand, the recent decline in the gold lease rate points to an increase in global physical gold availability as well. Exhibit 7: The depreciation in the rupee pushed local gold prices to near record high levels
Gold prices in Rupee
100000 95000 90000 85000 80000 75000
100 150 200

Exhibit 8: DM coin sales did not rise after the June gold sell-off and declined sharply in August
Thousand toz
250

70000 65000 60000 55000 50000

US Mint Coin Sales Perth Mint Bullion Sales 0

50

Source: COMEX.

Source: US Mint, Perth Mint of Australia.

As we have highlighted previously, we expect further declines in gold price to coincide with rising jewelry demand, which we view as price responsive and not price setting, a pattern that has held well on a global level over recent years (Exhibit 9). However these recent developments, both in EM and DM consumer gold demand, point to downside risk to what we had expected be growing jewelry demand net of scrap going forward.

Goldman Sachs Global Economics, Commodities and Strategy Research

September 16, 2013

Global

Exhibit 9: Global retail demand for gold responds to prices and should continue to increase as prices decline
Annual average gold prices ($/toz, vertical axis); Annual global jewelry demand net of scrap (million toz)
1,800 1,600 1,400 2012 2011

COMEX Gold price ($/toz)

1,200 1,000 800 600 400 200 0 0 2009

2010

20

40 60 Jewelry demand net of scrap (mtoz)

80

100

Source: GFMS, COMEX.

Subdued inflation to keep next gold cycle several years away

Net, our forecast of continued unwind of speculative positions - including physically backed - leads us to forecast that this additional supply will push gold prices below the current marginal cost of production, likely near $1,300/toz. Over time, we expect that the ensuing decline in mined output will maintain prices near $1,200/toz, which remains our forecast for the 2015 and beyond horizon. Over that horizon forecast, we expect US real rates to stabilize and see risks to US inflation as more symmetrical. And while higher inflation may be the catalyst for the next cycle in gold prices, this is likely several years away: inflation expectations remain well anchored and our economists expect subdued inflationary pressures in coming years. Exhibit 10: We expect gold prices to stabilize at $1,200/toz
Gold prices in 2013 $ (LHS), 10-year US real rates (RHS, inverted, prior to 1997, calculated as 10year US treasury yield less inflation expectations from University of Michigan Survey)
1,800 1,650 0% 1,500 1,350 1,200 2% 1,050 900 750 4% 600 450 300 6% 150 0 7% 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 Real gold price (2013 $) GS gold forecast 10-yr ex-ante real rates 10-yr TIPS Real rate forecast 5% 3% 1% -1%

Source: COMEX, FRB, Goldman Sachs Global Investment Research.

Goldman Sachs Global Economics, Commodities and Strategy Research

September 16, 2013

Global

Hedging and trading recommendations

Hedging recommendations
Consumers: We expect that gold prices will continue to decline in 2014 although the nearterm outlook is more neutral with potential for further price volatility. This outlook suggests that gold consumers looking to hedge could purchase call spreads, a low cost hedge.

Producers: Given our forecast for lower gold prices over our forecast horizon, we recommend producers lock in current gold prices for 2013 and beyond. With our mediumterm gold price forecast at $1,050/toz, we believe that put-spread hedges are compelling, a hedge that takes advantage of the positive put skew.

Current trading recommendations

Current trades First recommended Initial value Current Value Current profit/(loss)
1

June 13, 2013 - Agriculture Update Short new-crop soybean and corn basket Basket short two Dec-13 CBOT corn, one Nov-13 CBOT soybeans Long NYMEX natural gas call options Buy $4.20 Nov-13 NYMEX natural gas call option

100.00

96.24

3.76%

April 4, 2013 - Natural Gas Watch

$0.31/mmBtu

$0.03/mmBtu

($0.28/mmBtu)

As of close on September 13, 2013. Inclusive of all previous rolling profits/losses.

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Economics, Commodities and Strategy Research

September 16, 2013

Global

Price actions, volatilities and forecasts

Prices and monthly changes1 units Energy WTI Crude Oil Brent Crude Oil RBOB Gasoline NYMEX Heating Oil NYMEX Nat. Gas UK NBP Nat. Gas Industrial Metals LME Aluminum LME Copper LME Nickel LME Zinc LME Lead Precious Metals COMEX Gold COMEX Silver Agriculture CBOT Wheat CBOT Soybean CBOT Corn ICE Cotton ICE Coffee ICE Cocoa ICE Sugar CME Live Cattle CME Lean Hog
1 2 3 4
4

Volatilities (%) and monthly changes2

Historical Prices

Price Forecasts3 3m 6m 12m

15 Sep Change Implied2 Change Realized2 Change 1Q 12 2Q 12 3Q 12 4Q 12 1Q 13 2Q 13

$/bbl $/bbl $/gal $/gal $/mmBtu p/th

108.21 112.78 2.77 3.11 3.68 66.41

1.67 -0.21 0.04 0.26 1.98

0.88

23.4 22.4 23.3 21.3 30.0 12.1

2.11 2.53 0.80 1.83 -1.18 0.20

20.4 19.9 28.5 16.3 25.6 11.5

0.9 7.9 11.5 1.6 -6.9 2.7

103.03 93.35

92.20

88.23

94.36

94.17

104.00 100.00

96.00

118.45 108.76 109.42 110.13 112.64 103.35 110.00 108.00 105.00 3.06 3.16 2.50 57.46 2.95 2.89 2.35 55.89 2.95 3.00 2.89 56.92 2.73 3.05 3.54 66.12 2.99 3.04 3.48 67.58 2.83 2.89 4.02 65.08 2.70 3.10 4.00 81.30 2.70 3.10 4.25 71.50 2.70 3.00 4.25 72.00

$/mt $/mt $/mt $/mt $/mt

1,790 7,041 13,875 1,869 2,071

-268 -850 -91 -53

-118

19.0 20.2 23.9 17.8 21.7

-0.15 -1.33 -0.21 -0.37 -0.19

16.7 15.9 18.0 15.2 16.7

0.3 -3.5 -4.8 -0.7 -1.1

2,219 8,329

2,019 7,829

1,950 7,721

2,018 7,924

2,041 7,958

1,871 7,190

1,850 7,000

1,900 6,600

2,000 6,600

19,709 17,211 16,396 17,025 17,375 15,035 13,500 14,500 15,000 2,042 2,117 1,932 1,986 1,905 1,989 1,978 2,200 2,054 2,308 1,876 2,065 1,900 2,050 2,000 2,150 2,100 2,300

$/troy oz $/troy oz

1,309 21.7

-53 -1.3 4 116 -32 -7 -6 140 -0.1 1.6 3.4

20.3 33.2

0.82 3.74

20.1 41.1

0.9 5.6

1,693 32.7

1,612 29.4

1,654 29.9

1,719 32.6

1,631 30.1

1,417 23.2

1,300 21.7

1,230 20.5

1,110 18.5

Cent/bu Cent/bu Cent/bu Cent/lb Cent/lb $/mt Cent/lb Cent/lb Cent/lb

642 1,382 450 84 116 2,576 17.1 125.3 90.7

22.3 19.7 24.3 20.9 25.0 24.5 16.9 8.4 15.2

0.13 -0.02 -0.37 0.03 -0.33 1.36 -0.55 -0.15 -0.40

18.8 29.4 41.0 27.2 23.0 21.1 15.7 12.4 57.4

4.4 6.3 10.7 11.5 -9.4 0.3 0.8 5.3 0.2

643 1,272 641 93 205 2308 25 125 87

641 1,426 618 80 170 2,222 21 117 88

871 1,677 783 73 172 2,438 21 122 83

846 1,484 737 73 152 2,421 20 127 82

739 1,450 716 83 143 2,175 18 128 84

695 1,468 661 86 132 2,278 17 122 92

650 1,250 425 75 130 2,400 16.5 128.0 82.0

650 1,150 425 75 130 2,400 17.5 130.0 81.0

650 1,050 425 75 130 2,500 19.0 128.0 87.0

Monthly change is difference of close on last business day and close a month ago. Monthly volatility change is difference of average volatility over the past month and that of the prior month (3-mo ATM implied, 1-mo realized). Price forecasts refer to prompt contract price forecasts in 3-, 6-, and 12-months time. Based on LME three month prices.

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Economics, Commodities and Strategy Research

September 16, 2013

Global

Disclosure Appendix
Reg AC
We, Damien Courvalin and Jeffrey Currie, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced by considerations of the firm's business or client relationships.

Disclosures
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