LBMA/LPPM Precious Metals Conference 2011 - Montreal

Good Morning Ladies and Gentlemen and welcome to this the 12th annual LBMA Precious Metals Conference. We have once again had the support of the London Platinum and Palladium Market in the organisation of this year’s conference. Among other benefits, this has helped us to ensure excellent coverage of these metals in the programme.

This is my first official engagement since taking over the Chairmanship of the LBMA from Kevin Crisp who stepped down after two years in the hot seat at our AGM in June. I would remind Kevin that this wasn’t a thankless task and so would like to take this opportunity to record the thanks of the LBMA to Kevin for his inspired leadership during these tumultuous years.

This is the first year that we have held an event in Canada.

Gold mining production here may have slipped back since peaking in the early 1990s but the Gold producers based here have gone from strength to strength. 5 of the world’s 15 largest mining companies are headquartered here in Canada.

It cannot go unmentioned that Canada is the home to the largest Gold producer, Barrick, who are represented here today, also present with us is Pierre Lassonde of Franco Nevada, whose company also holds a first, in that they are the leading gold royalty and streaming company in terms of revenues and number of assets.

For the third year in a row we have a record attendance at this year’s conference.

To those of you who have been attending our conferences in recent years, you will have noticed that we have chosen a larger venue for this event. This is due to the fact that in Berlin and Edinburgh, we unfortunately had to turn away would be delegates in the final weeks before the event. I am very pleased that we have not had to do this year and I would like to thank you all for coming to Montreal.

This conference has already got off to a good start with last night’s Welcome Cocktail Reception. We were delighted that two of the LBMA’s Canadian Good Delivery Refiners, Johnson Matthey and Xstrata combined forces to sponsor last night’s reception. The LBMA would like to extend its thanks for this gesture to both of them.

Another refiner on our list, the Royal Canadian Mint has very generously agreed to sponsor the entertainment at tonight’s conference dinner, and I would like to thank RCM in advance for that.

Unfortunately, I am sworn to secrecy on the content of the entertainment. I don’t know whether “sworn” is the best word as I don’t remember anyone actually telling me what has been planned.

Collectively, these events, the coffee breaks and lunches during this conference represent one of the main reasons for holding a conference. That is to allow you to meet with your peers and counterparties both present and future.

Of course this isn’t the only reason to attend the LBMA conference. Unlike some other conferences, our sessions are always well attended, this being a reflection of your desire to be informed about what is happening in the markets including the future direction of prices.

This leads to me to my next note of thanks- to our Public Affairs Committee under the Chairmanship of Edel Tully-for the large amount of high quality work that goes into organising the conference and in particular, for developing the programme of speakers>

It is the PACs task to come up with a series of topics which are relevant and a series of speakers which can address them with authority and most importantly, in such a way that will engage your interest. The LBMA would therefore like to thank all of our speakers and session Chairmen who have responded so well to the invitations in terms of their preparation and what I am sure will be some highly thought provoking presentations.

It will be interesting to see whether what you hear today and tomorrow, will inspire you to forecast, another substantial increase in the gold price as you have done for the last two years.

In speaking about the price, at some stage I have to mention it, In January this year, the LBMA published its usual forecast of analysts and strategists in the precious metals market. For Gold the consensus was very bullish, with a forecast of an average 2011 price some 80 USD above the January price.

So far the average price basis the PM fix this year is running at 1516, a rise of 141 usd since January.

One factor that may have lead to the undershoot could be that the full implications of sovereign state risk had not been completely manifested in January.

As we are all aware, the result of this instability has been a flood of money directed towards all precious metals with Gold the chief beneficiary. The resurgence of demand for unallocated, allocated and exchange traded Gold has seen a tremendous influx of physical metal entering the London vaults. That London has been able to cope with this increase in investment, is a tribute to both the professionalism and capacity of the clearing and vaulting companies. This is the everyday reality of the London precious metals markets; trading, moving and storing huge quantities of Gold Silver Platinum and Palladium. These demand surges can be accommodated because of the experience and trading capacity that has been built up over many years.

For the LBMA itself, however, the turbulence of the market is of secondary importance. Most of the Executive’s core activities such as the maintenance of the Good Delivery List as well as the work in the public affairs area such as the Alchemist, the Website and the organisation of events, are not related to the vagaries of the market. The LBMA also has a responsibility to its members to be involved in decisions taken by various law makers.

This year, has seen many changes in the regulatory area. As the Dodd Frank law begins to address mandatory clearing and trade repositories, we can expect changes to the way we all have to do business. The LBMA has gone someway in recognising these changes. In creating daily forward price curves, it is now possible to clear OTC forward Gold and in the future Silver. This can be used as a voluntary credit mitigant or may well be used if regulators determine mandatory OTC clearing for bullion.

In January this year we set up the Regulatory Affairs sub committee. This reflects the need to follow and understand developments in a numbers of areas. The RAC can provide advice to members and in some cases has prepared responses to planned legislation.

The RAC’s main focus has been on two initiatives. The first of these is the addendum to the Dodd Frank Act concerning conflict minerals, the second is the discussion about liquidity buffers as enforced by the Basel Committee for Banking Supervision.

The fact that Gold has been included as one of the four conflict minerals has forced us to act.

Some may argue that the rules that the SEC were mandated to develop on conflict minerals may end up having more negative unintended consequences than positive benefits for gold producers in Central Africa.

But we cannot ignore this development.

Our unique position in relation to the premier division of the world’s gold refiners- I am of course referring to the Good Delivery List- made it incumbent on us to do something to protect them and indeed the global gold market from the potential effects of this legislation.

These refiners are the gold market’s pinch point. After all it is the process of refining of gold that makes it useable for investment or fabrication. Almost all of the gold that is dealt with in London has been refined at one of the Good Delivery Refiners. Our goals have been to ensure that all the gold produced by these refiners, past present and future should be freely tradable as conflict free and that existing stocks of refined gold in whatever form should also be similarly regarded.

Our contribution to this issue has resulted in the LBMA making a direct representation to the SEC; followed by developing guidance on supply chain due diligence which will be followed by all good delivery refiners.

Collectively, the LBMA, our members and good delivery refiners have been involved in the drafting of the OECD guidance which it is hoped will mirror the guidelines which we have developed. This will be discussed at our workshop here tomorrow afternoon.

The aim of the guidance is to be credible to the outside world and practicable for the refiners that have to follow it. Tomorrow’s workshop is intended as a more in depth examination of our proposed guidelines by GD refiners in particular.

Turning to Basel III, this is a good example of where the RAC can work effectively with other organisations. In this case, the World Gold Council had taken the initiative to argue that gold should be regarded as a high quality liquid asset which should be used as part of the liquidity buffers which banks will have to establish to cope with any future market turmoil. To support its representations to all EU authorities, and support the inclusion of Gold in this list of assets when the Basel III is finalised, the WGC asked the LBMA to undertake a survey of trading turnover in the London market.

As a trade association, the LBMA does not routinely require its members to provide such data, but on a voluntary basis, all of the leading members agreed to do so. The survey details are described in the current edition of the Alchemist. These result show that the average daily turnover of gold is some 240 bln usd with 90% of this being spot trades.

If this quest is successful, Gold’s inclusion into Basel III as a tier one asset could be one of the greatest changes in the modern day gold market.

It is the LBMA’s intention, not only to continue to support this proposal but to also ensure that in the future, the LBMA takes a leading role in any regulatory debate that involves bullion. In short we intend to represent ourselves as the competent authority for bullion. This will require us to create an educational push that will span lawmakers, government agencies as well as the broader membership when required.

We will begin by organising a member’s seminar on this topic early in the New Year in order to update them on regulatory changes. At this time, all of the proposed laws should have been implemented in Europe and the US.

Next year we plan to so something similar in the US with a view to explaining how the OTC market in London really works. Our current plans are to hold two seminars one of which will be in New York in March.

Other completed events, included the bullion market forum held in Shanghai in May this year. This revived an idea from some years ago with similar meetings that were held in Delhi and Moscow.

Shanghai was a great success in allowing us to exchange ideas with our colleagues in China regarding the development of that market.

Refiners will be particularly interested in the developing works of the LBMA in relation to technical aspects of refining, casting and assaying of precious metals. I would commend the account of this seminar held in March this year to you, the details of which can be found on our website.

Let me conclude with a word on membership. This has grown steadily and encompasses all parts of the precious metals business. Our membership admission criteria are very strict and only suitably qualified and experienced companies will be able to join. In the past, we have not accepted applications from other associations but a recent change of policy will mean that suitable associations may apply to become LBMA associates.

To sum up the role of the LBMA, it is to ensure that the London Bullion market continues to serve the needs of its members and their customers around the world. If any of you have suggestions about how we can better achieve this goal, please do not speak to me!

Seriously, the executive will be genuinely pleased to hear from you at any time.

But for now I wish you a very successful and interesting conference. I hope that by tomorrow afternoon, you will consider your time here in Montreal to have been well spent.

Ladies and gentlemen, thank you for your attention.

LBMA -Montreal, September 19, 2011

What a difference 10 years can make

By Pierre Lassonde

Ladies and gentlemen, dear friends, welcome

Bienvenue a Montreal, my hometown, hockey capital

of the world as well as maple syrup pancake and Poutine. A French-Canadian delicacy invented by a lumberjack! Don't miss it, even McDonald's carries it.

Ten years ago I was a speaker at the LBMA Istanbul
conference. It was a wonderful venue and a magical place that left a permanent reminder with me as I met a very attractive banker who was to become my wife!
Attending a gold conference in those dog days of the
gold market was like going to a church service. The rooms were mostly empty with only a few old people in the back. At ·gold shows there were, in street parlance, more sharks than fish! All sellers, no buyers.

In May 2001, the Dow Jones Industrial average, the bell weather of US and to some extent global economic activity, stood at 10. 735 having broken the 10.000 level just a few months earlier. The US three month T-bill interest rates were 3.9°/o and the Federal Fund rate was set at 6%. Today both rates are near zero. The US dollar was the currency of choice and bought 1.12 Euros. Europe was affordable if not downright cheap. Today the US dollar buys you 0.69 of a Euro or 40% less. Ouch!

In 2000, the USA with a population of 280M people consumed 7.2bn barrels of oil. (25 barrels per person) while China with 1.2bn people consumed 1.8bn barrels (1.5 barrels per person). In 2010 the USA oil consumption was in retreat to 22.6 barrels per person while China had jumped to 2. 75 barrels per person. Economic development requires a lot of energy and that trend is far from over. Finally, China's Foreign Exchange reserves which stood at US $166bn in 2000 are today over US $3.1 00bn. These last statistics are there to give you a glimpse of the role China is playing not only in the gold market but in the entire commodity spectrum.

Now let me remind you of the state of the gold market for the year 2000: That year European Central Banks sold 479T of gold, the global producer hedge book totalled 3,063T, mine production was at record 2,620T with a total cost of production of $319/oz and gold hit rock bottom in April 2011 at $256/oz. It couldn't get any worse and it didn't.

Let's look at the big picture then and the key themes that have developed in the last decade.

1. Central Banks went from sellers to buyers.
2. Producer hedging is dead.
3. Investment Demand has grown from 4°/o to 37%.
4. Jewellery Demand has collapsed from 84% to less than 50%.
5. Recycled gold pushed by higher gold price has more than doubled from 17% to 39% of total supply.

The two components of the gold market that have not changed:

1. Technology Demand has stayed constant at 12% of Demand.

2. Mine production has essentially been flat even though as a percent of Supply it fell from 70% to 61%.

From the mid 1990s the European Central Bankers started to exhibit all the traits of the "Jail Break" syndrome. It was who could sell that useless yellow metal the fastest before the price dropped to zero and those tens of thousands of tons in their vault turned to dust. The lure of the US dollar was just too great. It was the Reserve Currency of choice and paid interest rates while gold just sat there gathering dust and costing money to store.

They sold more than 5,000T and lived to regret it. I should have entitled this slide "the Biggest Losers" but the point is made. The biggest surprise to many is that Switzerland followed by France lead the parade with the UK in third place. The total notional lost, at $1.800 gold, is over $200 Billion. It makes the Greek crisis look like chump change. Just as instructive, looks who's not there, Germany and Italy, the second and third largest holders after the USA. Italy has been in trouble before and pledged part of their gold reserves to refinance. It's far from impossible, in fact I say it's most probable that in the next two years they do it again. Their 2,452T of gold at $1.800 is worth over $145 Billion. Enough to plug a hole or two! It also comforts me that the European Central Bankers responsible for the sale of the gold of their countries have since been promoted to handle the global financial crisis! The gold market is in good hands.

As the 1990s and the first decade of the 21st Century were defined by European Central Banks selling, I believe that the next ten to twenty years will be defined by Asian Central Banks buying. Most of the Asian countries have emulated Japan's mercantilist policies of the ?O's and 80's and accumulated huge amounts of foreign exchange mostly held in US dollars. The global financial crisis has highlighted the vulnerability of the reserve currency, the dollar and that of the euro, leaving only gold as the currency of last resort. It is our view that the Asian Central Bank will move to a 15% weighting in gold, as a minimum, which represents over 17,000T at current prices. Any significant retrenchment in the gold price will be seen as an opportunity to boost their gold reserves.

Central Banks, as I noted earlier, were not the only sellers of gold in the 90's. A number of producers thought they had found the equivalent of the Financial Elixir of Perpetual Profits in the form of gold hedging. The peak was reached in 2000 when over 3,000T of gold had been borrowed, mostly from Central Banks at near zero interest rates, it was so worthless, and sold to capture the Contango in the 3% range. Hedging was first introduced in finance as a risk mitigating instrument. If you don't take a view on prices and hedge, the result is a zero sum game. Unfortunately, some of the most prominent companies took a view on gold similar to the ECB and ended up with colossal losses. Barrick alone had to pay $58 to get out of their hedgebook and it's a good thing they did when gold was $900/oz as their losses today would be $10B.

There are two reasons why hedging today is essentially dead. First the gold companies' shareholders want their companies to have full leverage to higher gold price and they punish hedgers with lower price to cash flow multiples which makes it more difficult to make acquisitions or raise money. The second reason is rather simple, in this zero interest rate policy of the Central Banks, the Contango doesn't reflect the price rise that we've had so is very unattractive. Will hedging ever come back? Possibly, but not in this cycle.

The most remarkable development of the last ten years, at least in my view and I am biased as I had a hand in its creation, has been the advent of the Gold ETF. The first of its kind and still the leading ETF is the World Gold Council backed GLD now listed on a multitude of exchanges around the world.

For the first time in history, one can buy or sell gold 24 hours a day, seven days a week with miniscule friction costs. In doing so, what we did at the WGC was to renew gold's role as alternative currency and a sound financial asset.

In little more than 7.5 years, some 2,300T of gold have been purchased through the ETFs and the growth seems far from over. The global financial crisis of 2007 /08 brought down the financial systems and currencies of Europe and the USA. The Central Banks were forced to flood the markets with liquidity i.e. cash and drop interest rates to near zero all in a bid to avert a 1930's style Depression. Gold once again is performing its role as the ultimate reserve currency just like it did in the 1970's and the 1930's.

Investment Demand has exploded in the last ten years from a paltry 4% in 2000 to 37% for 2010. I think it has an even brighter future. When you look at Global Asset Allocation and Wealth, gold today accounts for a very small one percent of the total. A simple doubling of this position would represent the purchase of 31,000T of gold at constant gold price. Inconceivable? I think not.

As the gold price was pushed to record lows in the 90's and the beginning of this century, the jewellery market responded by absorbing up to 84% of all gold demand. It followed classic Economic 101 theory: the lower the price, the higher the demand. In fact in the early years of the gold bull market, higher prices validated earlier purchases and led to higher offtake until 2005. Substantially higher US dollar price combined with the 2007 /08 crisis has had a very negative impact on jewellery sales in US and Europe which are down 66% in the last ten years.

However that is not the case for China and India where total jewellery sales continues to grow from 600T in 2003 to 1, 1 00T by 2010 vs. barely 200T for the US and Europe combined. In both cases but particularly so for China the relentless economic growth translates in higher offtake of gold.

From a combined 20°/o of total consumer demand ten years ago China and India are now accounting for close to 60% of total demand. Given the strength of the Chinese economy, the very high personal saving rate, the under developed financial system, and the long term cultural and financial appeal of gold, it is our view that China alone, in the next ten years could account for 50% of total consumer demand pushing the combined offtakes to over 70% of total Consumer Demand.

As I said earlier when we were looking at the pie charts of the changing gold market, the one component that had not changed is the Technology sector. It essentially remains flat at 11 /12% of total Demand. However what is different is the number of papers and patents that have been issued and awarded for the utilization of gold in medical and commercial use. This is the equivalent of mining company's exploration effort and the odds are about the same that at some point in the future, a significant new application will be found that will have an impact on total Demand. As an example, the first gold based auto catalytic converter went into commercial production for the 2012 model year.

On the supply side, the six fold increase in gold price of the last ten years has had a significant effect on recycled gold which has grown from 17% of total Supply to 40% for the past year. In the USA and Europe people are bombarded with TV ads "sell me your gold, get cash" and given the difficult economic environment, people are responding by selling grandma's and ex-husband jewellery. We see this trend peaking at these levels before stabilizing at one third of overall supply.

Mine supply in 2010 was essentially the same as in 2000 at just over 2,500T or gold. However the true story, as shown on the chart, is that mine production went into a seven year decline prompted by the 20 year decline in gold price that ended in 2001. Since 2008 production has increased sharply and will likely continue to grow at +2°/o per year for the next five to ten years.

Higher gold price has allowed miners to lower their mine's cut-off grades to extract more gold from existing operations. Of course that has come with much higher operating costs but it's still easier than trying to find new deposits.

To me the most remarkable aspect of the ten year bull market in gold, is the decreasing amount of success the mining industry has had in finding new gold deposits. And it's not for lack of trying as industry budget has increased six fold to over $2.8bn a year. In the three preceding decades, geologists found on average one to two giant deposits i.e. +30 to 50M ozs per decade and three to five 15 to 30M ozs deposits per year. Not so since 2000. I don't believe for one second that we have reached "Peak Gold" but I do believe that the industry has to put more effort in exploration R&D and come up with better tools, such as 30 seismic in the oil industry, to be able to replace its depleting ore bodies and ensure future growth. In the meantime, the lack of success will translate in higher prices for new discoveries and constrained growth for the industry. Since August 2001, the price of gold has gone up six fold. The question today is simple, can it continue to rise and for how long. There are many similarities between this gold bull market and that of 1966-1980. Then as today financial demand was the driving factor, then as now the US dollar was being devalued by the printing presses, then as now commodity prices were pushed to new highs. There are also a number of differences including no inflation and zero interest rate today vs a peak of 12% CPI and 21% mortgage rates back then. The most significant difference is the impact of economic development in China and India and their effect on the gold market as well as the entire chain of commodities. These two countries absorb 60% of all consumer gold demand today and it will be more in the years to come as their currencies keep appreciating and their economic development continues unabated. China which has over $3 Trillion of currency reserves can withstand any conceivable financial shock thrown it's way and the yuan will continue to appreciate against the US dollar. We believe that it will gog back to its pre 1990 level of 4.2 to the dollar from 8.3 a few years ago. At least that's our view.

The Dow Jones vs Gold chart was first introduced in our Franco-Nevada Annual Report of 1999. In our Letter to Shareholders, we pointed out that it took 42 oz of gold to buy one unit of the Dow in 1999 while twenty years earlier in 1980, the ratio was at parity. The dot.com bubble was still in full swing, the gold price was hitting new lows, we were lonely voices in the financial desert. What the chart really portrays is the relationship between financial assets, the Dow, and hard assets. Over one hundred years, there have been extended periods where financial assets have clearly outperformed such as 1980 to 2000 and 1943 to 1966. However, from 1966 to 1980 and from 1929 to 1934, gold outperformed.

Two things worth noting from this 100 year chart. The first one is the duration of the last hard asset bull market, 14 years and the second thing is that both previous full market peaked with ratios starting with one as in one ounce of gold buys one unit of the Dow. Back in 2003 where gold was $350/oz I was asked on Australian TV where I could see the gold price ten years out. My answer there is the same as today, gold will have three zeros after the first number but I can't say what that number will be.

Thank you.