GOLD Investment Analysis Krassimir Petrov, Ph. D. The American University in Bulgaria, Dept. of Economics

Investment Analysis 1. Cyclical Analysis 2. Fundamental Analysis 3. Portfolio Analysis 4. Behavioral Analysis 5. Technical Analysis

1. Cyclical Analysis Secular Commodity Bull Markets – (16 years) – (21 years) – (15 years) –1999-pres. (15-25 years)

1. Cyclical Analysis CRB = Commodity Research Bureau Index of 15 Equally-Weighted Commodities

1. Cyclical Analysis

2. Fundamental Analysis Undervalued relative to Financial Assets Investment Demand by ”Smart” Money Investment Demand by “Big” Money Inflation Hedge – rising inflationary expectations Currency Hedge – confidence loss in fiat paper Crisis Hedge (= Safe-Haven) Alternative Asset (to stocks, bonds, property) Central Bank Price Suppression – GATA Central Banks end gold sales Central Banks buying gold (Russia, Qatar, reputedly China, etc.)

2. Fundamental Analysis Investment Demand –Safe-Haven (Investor Fears) Falling dollar General currency market volatility Financial market instability Potential bank bankruptcies Political fears War fears Economic/Recessionary fears Overall uncertainty in the world –Sovereign Wealth Funds (SWF) –Institutional Investors –ETFs

2. Fundamental Analysis Overall Investment Demand for = net 300 million oz. = total world supply Investment Demand

2. Fundamental Analysis Consumer Demand –Rising Jewelry Consumer Demand (despite rising gold prices!) Middle East, India, Pakistan – quasi-investment demand Industrial Demand –Rising Fabrication Industrial Demand (despite rising gold prices!) Electronics – price-inelastic demand

2. Fundamental Analysis Gold Investors now own more gold than Central Banks Gold Investors seldom, if ever, sell their gold holding (buy-and-hold strategy) Only 1-2% of all world liquid assets are now invested in gold

3. Portfolio Analysis Uncorrelated to other investment classes Negatively Correlated to Currencies Excellent Portfolio Diversification Improves Portfolio Risk-Return Profile Scholarly Research recommends % Academic Research – gold no riskier than stocks Highly correlated with commodities in boom Negatively correlated with commodities in bust Gold Stocks cannot replace gold bullion

4. Behavioral Analysis Gold is not well understood Gold is not widely recommended Gold is still unloved Gold is underowned Gold is hard to value (no income) by CFAs Gold is undervalued The public doesn’t know how to spell “gold” (Chartered Financial Analysts)

5. Technical Analysis Gold is in a secular uptrend for 7 years Gold is rising against all major currencies Gold is seasonal Technical corrections –15-25% regular pullbacks –Occur every months

5. Technical Analysis

6. Gold - How to Invest Gold Certificates Gold Accounts Gold Storage at Bullion Banks Gold Mining Stocks Gold Spread Betting Gold Derivatives Gold ETFs (lower cost; greater flexibility, no management risk, tight link to NAV) –GLD (streetTracks) –IAU (iShares) –DGL (PowerShares) –GDX (Market Vectors Gold Mining Index) Gold Coins and Bars –No counterparty risk –Used for direct payment –Easy to transport –Acceptable worldwide

Conclusion All investment analyses – cyclical, fundamental, portfolio, behavioral, and technical, - suggest that gold is now an excellent long-term investment: –05-10% for “diversified” portfolios –10-15% for “balanced” portfolios –20-40% for “aggressive” portfolios –50-80% for “crisis” portfolios