1. Gold Outlook : The May Bulletin
Shamik Bhose http://in.linkedin.com/pub/shamik-bhose/4/159/700
MAY 2012 Gold Outlook
Re-birth of Uncertainty and Consumer Demand Fuel Gold -- Understanding
Gold's Crosscurrents -- Central Bank Gold Allocations Could Rise
Europe Teeters On A Knife Edge - Physical Gold Demand Rising -- Gold on
Track to Fulfill its Multiple Roles –
There are more complex factors in play for gold price than just liquidity. In their Q1 2012 gold
investment statistics commentary, the World Gold Council (WGC) explained that gold has had a
challenging first quarter. While investors speculated that a U.S. recovery and rising U.S. real
rate would cause gold price to fall, the fact that gold demand is no longer just coming from the
U.S. and Europe, but from emerging countries such as China and India means that gold price
may respond differently to changes in U.S. real rate.
Rising foreign demand for gold signals that gold is not just a dollar hedge but also a global
currency hedge. Also gold has acted as hedges against asset deflation and inflation, both likely
outcomes of the still-evolving European debt crisis. While gold price seems to go up and down
with equities in the short-term, WGC clarified that gold's long-term relationship with risky
assets, such as U.S. equities, has been hovering around zero historically, which means gold acts
as a good portfolio diversifier.
Emerging Market Central Bank Gold Allocations Could Rise If Dollar-Based
Valuations Removed – WGC
Central banks became net purchasers of gold in 2010, with emerging-market central banks
leading the accumulation trend as they seek to diversify their growing foreign-exchange
holdings.On average, emerging-market central banks hold less than 4% of their foreign-
exchange reserves in gold, which is slightly under the 4.6% to 7% mid-range optimal level
suggested by previous research done by academics, institutions and the World Gold Council for
diversification of reserves.
Analysis of optimal gold holdings has normally been conducted in U.S. dollar terms since
gold is traditionally denominated in the U.S. dollar. A new research report by the World
Gold Council looks at the role gold holdings denominated in local currency plays in

2. diversification and the report suggests that stripping out the dollar impact could allow
optimal gold holdings to rise without adding to risk. The new mid-range optimal allocations
could be as high as 8.4% to 10%, the report said.
Bearing in mind of course that gold has gone up by 17% compound year-on-year over 12
years - that's about a 650% rise over the course of the bull run. So I guess it naturally begs
the question whether this is a speculative bubble. The short answer is, no it's not, and the
reason for that is, yes, there is a bubble out there but it's not in gold, it's in the other broader
financial markets - the US balance sheet more than doubling and indeed the real bubble is in
US debt. Gold is merely reflecting those changes and indeed not just gold but actually the
broad commodity complex, including oil and foods, so I think there's an illusion going on that
these commodities appear expensive. The simple truth of the matter is that it's your cash
which is cheap.
Perhaps it's not the commodities that are expensive, it's the cash that's
cheap. What happens when this bubble bursts? There is still no imminent
QE3. However gold did not plunge yet but actually held its line . What has
seemingly supported and cheered the gold market?
Gold traders are getting more bullish and expect price to rally next,
according to Bloomberg, as the IMF data showed at least twelve central
banks bought an estimate of 58 tonnes of gold in March. Central bankers see
gold as a safer alternative to fiat currency ?? That is a Paradigm shift !!!

3. There is still no imminent QE3. What has seemingly cheered the gold market? In sum, Bernanke
is still cautious as the statement says interest rate will be kept low at least until late 2014.
With the economy moderately improving, the Fed is not willing to do more policy easing now
but is prepared to do more to meet growth and inflation target and leave bond purchasing
option on the table. Why, this is because U.S. fiscal tightening towards year-end and the
sovereign crisis in Europe will dampen the US economic growth outlook. In Japan, the BOJ
Governor increased monetary stimulus on Friday by stepping up bond purchases and extending
maturities as economy is not doing so well. Dovish central bankers are good for gold.
Gold Investors Getting Cues from the IMF and Flow Data
The IMF upgraded the world economic growth in 2012 from 3.3% to 3.5% and the U.S. economic
growth from 1.8% to 2.1% while maintained China's growth at above 8%, suggesting that the
U.S. and the Asian countries can grow fast enough to offset the European recession. India also
surprised the market by cutting interest rate by 50bp on Tuesday which will help growth and
investment demand including gold.For the week ending April 10, CFTC reported that fund
managers reduced by 9.3% their net positions across the 18 commodities futures and options,
the largest decline since 20 December. EPFR Global also reported that commodities mutual
funds, especially in gold and other precious metals, saw the largest weekly outflow since early
January. However, physically-backed ETPs remain resilient at 2,442 tonnes, just 3 tonnes lower
than the peak in mid-March.
Barclays pointed out that while a base for gold may be forming around $1,600, helped by the
resilient ETP demand and gradually-rebounding physical demand, for gold to go decisively
higher, it needs to reestablish its safe haven appeal in the short-term. Speeches by the IMF
Managing Director and the World Bank President on the world economy end of this week will
likely be closely watched by investors
"Speak of the devil" is a common idiom. In the same way one feels wary of commenting upon a
possible economic collapse in Europe and the destruction of the Euro, for fear that it just
might precipitate the event... despite the fact that we are all acutely conscious of the
possibility. However, if gold is a barometer of just such an event then the temperature is
nudging higher.
Will the Re-birth of Uncertainty and Consumer Demand Fuel Gold
Many market participants have attributed the drop in gold price since end-February to a
diminishing chance that the U.S. Fed will adopt QE3. The rally in risky assets such as global
equities due to better economic growth number, albeit lopsided from the U.S., led some to
reduce safe haven bets such as gold.The rebirth of uncertainty takes place when the Spanish
10-year bond yield surged 40 basis points last week as investors were expecting Spain, like
Greece, Ireland and Portugal, would need to request for international aid. Spain is the most
closely-watched country as the bellwether for Europe's sovereign debt crisis. The higher than
expected China's March CPI number of 3.6%, compared to median economists' forecast of 3.4%,
may bring more uncertainty to China's monetary easing.
CFTC data confirms that the net speculators' positions on gold declined from this year's peak of
221,542 at end-February to 149,599 as of the week ending 3 April. The technical position for
gold appears better as some of the "weak longs" have been removed from the market.

4. Gold saw tsunami's of physical gold demand in Europe in 2008 and 2010 when the
availability of anything below a 400 oz gold bar (worth $660,000) was simply not to be
found for a several months. After a quiet first quarter, there are grounds for supposing that
another wave of retail investment demand for gold might be just on the horizon. Gold is a
particularly small market and were you to liquidate an entire years gold mine production at
current market prices, it would have a market cap of less than Vodafone - yet it is compared
along with such investment mammoths as the the US dollar, the FTSE 100 and the DJIA. Gold
still represents less than one per cent of total assets under management (AUM) and to rise to
the levels of the 1980's (or by 2% of global financial AUM) would require the creation of 85,000
tonnes of new investment demand or 30 years of mine production. It is still significantly under-
owned.
Gold is currently in a protracted period of consolidation and expecting a break-out.
Technically it is unclear which way the market could go - but fundamentally it looks likely
that a sharp move to the upside is a distinctly possibility based upon rising economic
tensions in Europe. From a technical perspective, the long term gold charts seem to be
saying something big is going to happen, but unable to say clearly which way. The short
term patterns have been quite negative, prompting some long liquidations (what you might
call a "fake-out") but there is a larger and more important chart shape emerging.

5. The strongly bearish scenario is formed by a remarkably steady trend line back to 2008 which,
if $1613 and $1600 were to be breached, would suggest an important shift in market behavior.
Furthermore, gold has a descending triangle which technical analyst’s suggests would be
'resolved' by a move downwards to $1525... a game changer. The bullish argument is that gold
could be forming a massive "reverse head & shoulders pattern". The symmetry of this pattern,
coupled with falling open interest, suggests a likely continuation considerably higher. A breach
of $1700 would then be confirmed by a close above $1800 with a target to breach $1920 (the
previous all time high) topping out at $2080.
The gold market has been characterized by flat prices and declining open interest, as
speculative interest fades. Usually the gold market finds equilibrium or a "bottom" before the
primary trend reasserts itself - this seems to be what is happening now
After rising almost 11% in January, gold Comex futures declined 3 months in a row, at the
end of April. Year-to-date gold futures gained 6.3% compared to MSCI World (Developed
Market) Index, 10.8%, CRB Index, 2.2% and Dollar Index, -1.7%. From this year's peak reached
on 28th February at $1,792.7, gold futures declined 7%.
While spot gold in US dollars has not recovered from its early September peak of $1,921.1,
gold bar per 10 gram in India has reached an all-time high at 29,600 INR per 10 gram on
30th of April. In India, festival and marriage season demand for gold has helped push the gold
price higher. The weak Rupee which declined 19% in the past year caused gold to reach an all-
time high despite the fact that gold in US dollars is still 15% lower than the recent peak.
Uncertainty in both the Indian economic performance and its investment-grade rating would
cause people to seek gold for a safety hedge while a weaker Rupee would bump up local price.
What might have caused the different performance of gold? In the developed market, gold
price has been see-sawing recently as investors weigh on the economic data in the U.S., policy
statement from the Fed, re-ignition of European sovereign debt crisis as well as Central Banks'
gold purchasing actions.

6. In terms of the Indian and Chinese demand for gold it's a lot easier there perhaps to buy
physical gold than perhaps it is in other parts of the world. That clearly must have
attributed to the rising demand there.And those markets are very efficient, certainly India.
The bid-offer spread, for want of a better way of putting it - the difference between the
buying and selling price - is very tight. If you're looking to sell gold in India, it's about minus
1% - you get 1% below the spot price. If you're looking to buy fabricated jewellery products
you're paying about 2% above spot and that's for a very intricate product, whereas in Europe
the spread is roughly more than double that, so the European market is less efficient. And the
Chinese market you alluded to is the new market and that's growing in efficiency. It's a
relatively new market, it only liberalised in 2004 for the first time for over 40 years, but it's
showing remarkable growth and the present time while demand in India seems to be stalling,
the Chinese seem to be picking up the baton and running with it, because as we've seen,
imports of gold into Hong Kong have been remarkably strong and the outlook seems to be that
that will be maintained.
SPOT GOLD:
Date Open Low Close High % gain from
previous year high
2005 437.3 410 516.6 540.95
2006 517 516.75 636.3 730 34.95
2007 636.8 601.8 833.5 846.3 15.93
2008 835 681.6 880.3 1032.8 22.04
2009 879.7 801.5 1096.5 1226.65 18.77
2010 1099.2 1043.75 1420.75 1431.3 16.68
2011 1420.75 1307.45 1564.00 1920.00 10.02
Gold on Track to Fulfill its Multiple Roles
While investors and traders are speculating whether the U.S. Fed will engage in QE3 or not and
where gold price may head, the Euro crisis still has a major bearing on gold price. Europe is
simultaneously facing three crises: banking, debt and economic growth crises. According to
Jefferies' Chief European economist, Europe needs to see enough growth to escape from the
worst of its problems. To have growth ECB may end up engaging in a fully transparent
quantitative easing policy, perhaps as soon as the third quarter, if economic conditions remain
distressed.
The latest GFMS gold survey predicted that gold investment demand, especially physical gold
demand, is the current key driver of gold prices and can reach 2,000 tonnes in 2012. Central
banks which became net buyers of 400 metric tonnes in 2011, will remain gold buyers in 2012.
However, the head of Metals Analytics of GFMS also warned that production supply will
continue to grow at 3% this year as producers are motivated by higher prices, producer hedging
will probably go up after 10 years of de-hedging and investment demand will need to rise as
much as $130 billion in order to fill the gap between supply (mining plus scraps) and fabrication
demand.

7. $4,000 gold and $100 silver or lower bullion prices and $20 silver asks..... Ross Norman of
the blue-blooded Sharps Pixley brokers from London the recent leader of the bullish camp.
He forecast $3,500-4,000 gold prices and $100 an ounce for silver by 2017. His recent
presentation entitled 'Silver has the bubble burst?' argued that no it had not, and that merely
projecting forward recent growth rates arrived at $100 an ounce within five years. Negative
real interest rates were the reason for high precious metal prices cited by most experts. In
short inflation is higher than the cost of money so cash on deposit is losing money.
Dr Paul Walker of consultancy GFMS Thomson Reuters. He suggested that investor
enthusiasm for gold and silver is wearing thin and that higher interest rates could be the
real 'black swan' event after the US presidential election is over. Dr Walker noted that it
required $120-150 billion of investment demand per annum just to sustain current bullion
prices. But if the bond market collapses the amount of money in search of a safe haven would
be a multiple of that times ten or even a hundred times. Investor fatigue? Precious metals will
rise until that ceases to be the case, or so contended arch-bears ; one would not doubt this
possibility. But we wonder if the immediate impact would be a lower gold price. For surely this
would mean a bond market crash, and that is precisely the event that will maximize precious
metal prices.

8. Shamik Bhose http://in.linkedin.com/pub/shamik-bhose/4/159/700
best regards,
Shamik Bhose
Executive Director
Commodity & Currency & Interest rate futures Markets
Microsec Commerze Limited
Www.microsec.in ; www.commoditylive.in
Phones 009133-30512100 / 30512139 -40
Fax 009133 -30512020
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