LBMA Precious Metals Conference 2005 - Johannesburg

Good morning Ladies and Gentlemen

And welcome to Gauteng, the province of gold, and to Johannesburg or in Zulu, Egoli – the city of gold. Already you have an idea of why the LBMA decided to hold our 6th precious metals conference here.

When the decision was made to hold this conference in South Africa, there was some debate about which city should be the venue. Cape Town and even Sun City have their attractions of course but I am glad to say that in the end there was a clear majority in favour of Johannesburg.

I have three main tasks in my introductory remarks. The first is to make some announcements about the programme.

Firstly, I have one important and sad piece of information. Minister Lindiwe Hendricks has been forced to cancel her participation in the conference as her mother passed away late last week. As the Ministry was not able to provide a substitute, we will therefore have a shorter first session, and an earlier coffee break.

Next concerning tonight’s dinner, can I ask you all to wear your badges which will help us to fill and despatch the coaches without delay. In fact you will need your badge to gain access to all conference events so if you lose or mislay your badge, please get a replacement from the hospitality desk or one of the LBMA staff. The first coach for the dinner tonight will leave shortly after 6 o’clock from outside the convention centre for those who want to maximise their networking time at Summer Place. Although the invitation card says that cocktails start at 7pm, we will be starting as soon as the first coach arrives. And if you miss the last coach to Summer Place, you will have to take a taxi. If you are going to Summer Place by car or taxi, please have your badge or invitation with you to show at the main entrance. We have been asked to advise you that Summer Place is a non-smoking venue, though you can smoke outside. Finally if you have special dietary requirements can you identify yourself to your waiter at the dinner.

Our regular attenders know that we value your feedback……

I know you are always keen to get the speakers papers We will be giving out the papers of the speakers who have provided them in advance at the hospitality desk end of each half day.

The second thing I have to do is to thank the people behind the scenes who make the conference work. The staff in the Convention Centre and our DMC, GoGirl Events, have been fantastic supports, not only in the last few days but over the last several months. And turning now to our own team, they have been just tremendous. For Susanne and me, this is our sixth conference but for Debbie and Belinda, it’s their first, though with the calm and efficient professionalism they have demonstrated, you would never have known it.

My last task is to introduce you to the digital voting buttons which you will find on the tables in front of you. We are going to use these at various points in the next two days to let you see what you as a group think about certain issues.

The handsets are very easy to use.

Slide (picture of handset)

You register your vote or opinion by entering a number from 1 to 9 from the choices that you can see on the main screens. You will have about 15 or 20 seconds to vote. If you change your mind within this period, you can press the cancel button marked “C” and vote again. We will be asking some questions concerning your views on various aspects of the precious metals markets. In the final session of the conference we will ask the questions again to let you see whether as a group you have changed your minds over the preceding day and a half. We will also ask you to say what kind of company you represent which will allow us to see if the views of different groups are significantly different. We will also give you a printed summary of the views you express at the end of this morning’s sessions. Let’s try it out.

Slide

1. Producer (miner or refiner)
2. Commercial bank or dealer
3. Official Sector
4. Consumer (investor or fabricator)
5. Other

Simply enter a number to indicate what you think you are. Could you all vote now.

Let’s see how many people are here and what they do.

Slide (total button pushers and breakdown)

Now let’s see what you think of the future of our market

(1) Looking current precious metals prices, do you think they are:

1. at their cyclical “peak”
2. approaching their cyclical “peak”
3. still a long way from reaching their cyclical “peak”

Slide showing bar chart for three answers

(2) Over the next three years, do you think that South African gold mine production will:

1. decline significantly
2. remain close to current levels
3. rise significantly

Slide showing bar chart for three answers

(3) Over the next three years, what do you think will be the most significant supply/demand factor affecting prices in the gold market:

1. jewellery fabrication
2. hedging
3. central bank sales
4. investment demand

(4) Over the next three years, what do you think will be the most significant macro factors affecting investment in precious metals

1. Inflation
2. Oil prices
3. US dollar
4. global (in)security

Slide showing bar chart for four answers

(5) In 2007, net gold hedging (-442 tonnes in 2004) will be:

1. -400t
2. -100t
3. +200t

Slide showing bar chart for three answers

(6) In 2007, global central banks (478 tonnes in 2004) will be net sellers of gold of

1. 600t
2. 500t
3. 400t

Slide showing bar chart for three answers

(7) Lastly, How did you rate this presentation?

1. Brilliant
2. Average
3. Terrible

Slide of results

And if you believe that you will believe anything.

Thank you very much.

Ladies and gentlemen, honoured guests.

1. Introduction

Thank you very much for inviting me to participate in this your annual conference being held here in South Africa this time. It is indeed a privilege and an honour to speak to you today. It is also fitting that a conference such as this one is held in Johannesburg. This city was born in 1886 and built on the gold mining industry which flourished as a result of the great mineral wealth present in the rock below us. The African people refer to this place as Egoli or Gauteng which means the city of gold. The platinum group metals (PGMs) also play an extremely important role in the South African economy with South Africa being the major supplier of precious metals to the international market. Our role in the gold refining industry is also significant. The Rand Refinery is the world’s largest single-site gold refinery and it refines gold from as far afield as East and West Africa and Latin America. Since the Rand Refinery was established in 1920 it has refined approximately 32 per cent of all gold produced globally. This is yet another good reason to hold this prestigious conference here.

So welcome, once again, to our 119-year old city. We can guarantee great weather and, to add to the excitement, some volatility in asset prices! Regrettably there is no guarantee as to the precious metals prices, either in dollar or rand terms, but we have certainly appreciated the recent upward trend in their dollar prices. I will leave it to you the experts to ponder the future path of these metals. Once you have done so and once you have sampled the delights that this country has to offer you as business people, we hope that you will return and sample its diverse offerings as a tourist.

2. The precious metals industry in South Africa

The precious metals market in South Africa has experienced significant changes in recent times. Exports of gold have receded from 51,0 per cent of total visible exports in 1980 to 9,4 per cent in 2004. Over the same period the platinum group metals exports have risen from 5,0 per cent to 9,0 per cent of total visible exports. The changing fortunes of these sectors were also reflected in employment: the number of jobs in gold mining receded from 476 000 in 1980 to 175 000 in 2004, while in platinum mining it roughly doubled from 77 000 to 151 000 over the same period.

Over the past decade, the contribution of gold mining to total gross domestic product declined from 3,2 per cent in 1994 to 1,5 per cent last year. At the same time platinum mining’s contribution rose from 2,0 per cent in 1994 to 2,3 per cent in 2004. For all mining sectors combined, the share in the total value added to the economy receded from 9,5 per cent in 1994 to 7,3 per cent last year.

More recently, Chamber of Mines data indicate that South African gold production in the second quarter of 2005 fell by 2,4 per cent from the first quarter and by 18 per cent year-on-year. These declines reflect the industry’s adjustments to the current economic environment and the restructuring that has occurred over the past three years. Although the substantial increase in restructuring costs has resulted in losses for the industry, given that most of the restructuring has taken place, the Chamber of Mines expects the associated costs to decline going forward. This is a welcome development indeed.

The exchange rate is often seen as a source of the mining sector’s difficulties. The necessity to adapt to these new and changing circumstances has impacted not only on the mining sector but on all exporting sectors. Despite the mining sector’s difficult circumstances, South Africa remains the world’s largest producer of gold and platinum.

3. The South African Reserve Bank and gold

The South African Reserve Bank has historically been an active participant in the gold market. Originally all newly-mined gold had to be offered for sale to the Bank within 30 days of production. Subsequently the Chamber of Mines negotiated the right to sell South African gold independently of the Bank in beneficiated forms of one kilogram and less. These direct sales were restricted to one-third of the annual production.

After lengthy consultation, a sea-change in these arrangements occurred when the Minister of Finance announced on 12 December 1997, in a further relaxation of Exchange Control Regulations, that South African gold producers may elect to sell their total output provided the Bank had given the necessary exemption from the relevant Exchange Control Regulations.

This led to a gradual but dramatic decline in the Bank’s transactions in the bullion market. Notwithstanding this, the Bank continues to be keenly interested in the health of the bullion market. This is by virtue of South Africa’s significant gold reserves both in the vaults and underground.

The SARB also remains active in the various forums where the issue of central gold reserves management is explored. The most prominent of these forums is organized from time to time during the annual meeting of the World Economic Forum in Davos, Switzerland, where producers and central banks discuss the prospects for gold.

The general impression that we have gained from these discussions is that the significant central banks which hold gold are very conscious of the impact that their gold sales programme have on the gold price and as such would not want to disrupt the market or cause unnecessary price volatility. The Swiss central bank for example has handled their gold sales in a transparent, honest and exemplary manner. Their programme was pre-announced and followed to the end accordingly.

There is some uncertainty however about what would happen in Germany when the new government starts to function. We can only hope that the current approach adopted by the Bunders Bank will continue.

So the prospects for gold from a central bank perspective is good.

A colleague of mine is participating in one of the panel discussions scheduled for tomorrow and he will enlighten you on the Bank’s management of gold reserves. But, allow me to make the following brief comments. The Bank holds around 4 million fine ounces of gold in its foreign reserves. It has held this net figure stable for the past number of years. Gold is, obviously, an internationally acceptable reserve asset. The Bank is very comfortable holding these gold reserves because of the metal’s war-chest qualities, because gold is no-one’s liability, and because it allows prudent diversification in the Bank’s total reserves. Whilst not being a signatory to the Central Bank Gold Agreement, we abide by the spirit of this Agreement in the management of the Bank’s gold reserves. As I have mentioned, we are very satisfied with the level of our gold holdings. Indeed, as part of our reviews on the composition of total reserves, we may even consider increasing our gold holdings.

4. Recent economic developments

The South African economy has been in an upswing since September 1999, making it the longest business cycle expansion phase on record. During this upswing growth in real gross domestic product has averaged approximately 3½ per cent per annum. Recent data indicate that the sustained growth in real production is also being reflected in some very welcome gains in employment, although the unemployment rate of 26½ per cent remains very high and its further reduction a strategic imperative. Annualised growth in real gross domestic product accelerated from 3,5 per cent in the first quarter of 2005 to 4,8 per cent in the second quarter, with firm growth recorded in virtually all the main sectors of the economy. All the final demand components – household consumption, government consumption, and fixed capital formation – have been expanding briskly.

As could be expected, the upswing in economic activity and expenditure was accompanied by a strong increase in import volumes. Accordingly, the current account of the balance of payments moved into deficit from 2003. The current-account deficit amounted to approximately 3½ per cent of gross domestic product in the first half of 2005. Information on visible foreign trade suggests a larger trade deficit in the third quarter of 2005 than in the first two quarters of the year, but comprehensive data on services and income flows for the third quarter still need to be finalised before the current-account balance for the third quarter of the year can be determined. Relatively favourable prices for most of South Africa’s export commodities have been helping to contain the trade and current-account deficits. At the same time sizeable inflows of financial capital have been recorded over the past three years, exceeding the current-account deficits and enabling the Bank to increase its foreign exchange reserves.

On a trade-weighted basis, the rand appreciated by 11,7 per cent in 2004. During the first 10 months of this year it has depreciated by 9 per cent. The rand’s overall recovery since the lows of late 2001 can be mainly attributed to improved perceptions about South Africa’s economic fundamentals, US dollar weakness, rising commodity prices, positive interest rate differentials, and, of course, a recovery from heavily oversold levels. The emerging view of the rand is that it will respond to changing fundamentals in an orderly manner.

Rising income levels, improved confidence and lower interest rates have bolstered credit extension, resulting in banks’ loans and advances to the domestic private sector increasing by 21,5 per cent over the twelve months to September 2005. Mortgage lending has been exceptionally strong, supported by rising property prices. Average house prices rose by more than 15 per cent over the past twelve months. However, this is already significantly slower than the 35-per-cent peak rate of increase recorded approximately a year ago. As a counterpart to the increases in bank loans and advances, the monetary aggregates have also been rising briskly. Twelve-month growth in the broad money supply, M3, amounted to 16,7 per cent in September 2005.

Share prices reached successive new record highs during the course of 2005, and the buoyancy in the share market was also reflected in record turnovers of shares on the JSE Limited in recent months. Non-residents are taking a keen interest in South African shares, and are increasingly involved in sizeable direct investment into South Africa. The operations of the financial markets have continued to grow over the years. The turnover in the equity market has risen from R62 billion in 1994 to R1 031 billion last year. Similarly, the turnover in the bond market has risen from R2 trillion in 1995 to R9,5 trillion last year. Improvements made to the JSE such as electronic clearing and settlement and the dematerialisation of shares and electronic trading has facilitated these developments. South Africa has also made progress in providing access to finance and banking activities to small and micro enterprises and the underbanked communities.

Fiscal policy has been disciplined over the past decade, contributing to the stable macroeconomic environment. Latest estimates provide for a national government deficit before borrowing of approximately 1 per cent of gross domestic product in the current fiscal year, while the government debt as percentage of gross domestic product has been brought down to around 36 per cent.

The inflation-targeting monetary policy framework adopted in February 2000 has contributed to the reduction of inflation to low levels, and has allowed for nominal interest rates to fall to levels last seen at the beginning of the 1980s. Real interest rates have also fallen and become less variable. For the past 25 months, CPIX inflation (i.e. headline inflation excluding mortgage interest cost) has remained within the target range of 3-6 per cent, despite strong output and expenditure growth in the economy.

Although currently we still expect inflation to remain within the target range, the outlook has been clouded by the increased risk posed by the behaviour of international crude oil prices which have more or less doubled in US dollar terms over the past two years. Domestic petrol prices have consequently increased and have recently resulted in a significant upward movement in CPIX inflation, from 3,5 per cent in June, to 4,8 per cent in August, although they fell back to 4,7 per cent the following month. Because monetary policy reacts with a lag, there is little that can be done about these so-called first-round effects. However we have to be vigilant to the possible second-round effects or more broad-based increases in inflation which come about when prices are raised in expectation of a generalised price spiral induced by the higher petrol prices. These expectations are affected to a significant degree by expectations of the Bank's policy reponses to the increases. In other words, the credibility of monetary policy is key.

In such a situation, monetary policy is faced with a dilemma, and indeed this is the dilemma faced by the MPC at present. At this point, there are few signs of second-round effects, and CPIX inflation excluding the first-round effects of the petrol prices increases, has remained remarkably stable over the past year. On the one hand, if no second-round effects emanate, monetary tightening could be unnecessary. On the other hand, if these second-round effects are expected to materialise, because of the lags in monetary policy, it would be appropriate to act sooner rather than later, to avoid being behind the curve. The challenge is to identify or anticipate these second-round pressures in advance. Monetary policy therefore has the difficult task of weighing up the risk of taking potentially unnecessary or incorrect action by being too preemptive, against the cost of delaying too long before taking action. This requires fine judgement on the part of the Committee.

The Bank will, in general, continue to accumulate foreign exchange reserves at a moderate pace and at opportune times. The gross reserves have already reached a level of nearly USD20 billion at the end of October 2005. While there has been a focus on steadily accumulating reserves, given their relatively low level compared to our peers, it must be remembered that we do not target a specific level of reserves. The improved level of reserves is expected to enhance exchange rate stability and improve the Bank’s credibility.

Partly due to the strengthening of our reserves position, South Africa’s credit ratings continue to be upgraded. In January this year, Moody’s upgraded the country’s credit rating from Baa2 to Baa1 with a stable outlook. This upgrade was based on the “substantial strengthening” in the country’s foreign reserves position. Political stability and robust macroeconomic policies also played a role. Just recently, at the beginning of August, Standard & Poor’s upgraded South Africa’s credit rating to BBB+ to match the Moody’s rating of Baa1, awarded in January 2005. Towards the end of August 2005 Fitch, similarly, revised South Africa’s BBB rating to BBB+. These ratings place South Africa at the top of the lower investment grade band and are an endorsement of the country’s economic fundamentals and policies. These upgrades have contributed to the increasingly narrow margins paid on the country’s foreign borrowing.

The Bank will continue to encourage foreign direct investment. The advantages of FDI should not primarily be seen in terms of foreign exchange flows but rather for the benefits of technology and skills transfer, employment creation and enhanced international linkages.

We must continue to ensure an efficient payments and settlement system. Without this you cannot have an efficiently functioning economy. The National Payment System (NPS) is a vital element of financial stability and the Bank continues to enhance its safety and soundness by developing payment system oversight capacity and by maintaining a high standard in the provision of interbank settlement services.

We reached an important milestone in December 2004 when the rand was included in the Continuous Linked Settlement (CLS) system. The rand is now positioned as one of only 15 settlement currencies in the CLS mechanism. CLS is a world-wide industry initiative to reduce the risks associated with foreign exchange transactions by settling the two legs of a foreign exchange transaction simultaneously. As a requirement for the rand to be included in the CLS mechanism, the Bank had to move to a system of same day square-off and an amendment to the National Payment System Act, No 78 of 1998 was necessary.

5. Conclusion

In conclusion, may I wish you a successful conference and an abundance of networking opportunities. While commodities as an asset class are in favour at present, it would appear that globally, according to the latest GFMS Gold Survey, the gold sector is poised for an interesting shift in international focus driven by the surge in demand from fabrication; possible pressure on the US dollar; lower world growth boosting the interest in alternative assets; and inflation concerns stemming from the high price of oil. Platinum group metals have been buoyant, in part aided by the rally in the gold price and the continued autocatalyst demand. This is good news for South Africa, the world’s biggest precious metals producer. So you have much to discuss.

Work aside, please do take the time to experience some of the more relaxing aspects of South Africa once you are done with the business of precious metals. Finally, let me wish you all a very pleasant stay in South Africa and a safe journey home.

Thank you.

Slide 1 - Beneficiation: Route to Sustainable Development

Slide 2 - RBTS

Beneficiation forms one of the three legs to a resource-based technology strategy. The other legs include developing high-tech inputs into the minerals sector and the lateral migration of products initially intended for the mining sector into other sectors. The idea behind this strategy is to leverage the fact that raw materials are found in a country to grow a downstream industry capable of sustaining itself once the raw materials are used up; grow a high-tech inputs industry that can provide inputs into the mining and minerals-related industries; and develop these products to the extent that they can be sold to other sectors of the economy.

Slide 3 - RBTS (beneficiation)

Beneficiation is considered important for countries that wish to maximise economic benefit. In South Africa’s case, many of its natural resources are exported. Since beneficiation takes place elsewhere, other countries derive the benefit of producing the higher-value product, while South Africa’s receives the lower economic returns associated with the lower-value product (in addition to having to cope with the trade deficits that result from it having to import higher-value downstream products as well as the capital goods necessary for its mining sector).

Beneficiation, strictly, involves any treatment of ore or industrial mineral/commodity to improve grade (or physical or chemical properties). In the case of metallic elements, the term is used especially for the processing steps preparing the ore for smelting.

However, those involved in mining often talk about beneficiation as it relates to gold when referring to value-addition and even debeneficiation.

Value addition is the process of adding value to a metal, mineral or commodity. This value addition may occur at any point from the removal of the material from the earth to the finished product.

Meanwhile, debeneficiation involves a fabrication step in which value is added to metals by alloying them with other metals to produce alloys with specific properties (such as 9 ct gold, austenitic steel).

This talk will use beneficiation in a less strict sense and include value addition and debeneficiation, and include discussion on jewellery and the industrial uses of gold.

Slide 4 - RBTS (high-tech inputs)

Many believe that the supply of high-tech inputs into the natural resources sector offers one of the greatest opportunities for economic growth. These can be supplied to various stages of the mining cycle, including exploration, mining, mineral processing and beyond.

In particular, high-tech inputs should be promoted where they represent a particular world-acknowledged strength of the South African economy. Such would be the case in mining explosives, shifting and hoisting technology, drilling equipment and abrasives, cooling of deep mines, rock-mechanics design, metallurgical processes and plants, general underground mining technology and intellectually-based services (including environmental services and consulting).

Slide 5 - RBTS (lateral migration)

Lateral migration occurs when skills and technologies built up in a particular area are transferred to another. This type of technology migration is particularly evident in the Nordic countries, where generic technologies have sometimes been used in alternative industries. This type of movement has led to countries becoming less dependent on their natural resources, and even on supply to the natural-resources sector. Their diversified client base has assisted these companies, and the countries in which they reside, to grow economically.

Slide 6 - Au beneficiation enabling environment

Getting back to beneficiation, which may be seen as a starting point to the development of a country that is not dependent on its resources exports, many in the South African gold mining industry complains that there are more sticks than carrots in government’s proposed beneficiation legislation. They complain that there are too many obstacles in the way for beneficiation to take place. In addition, they insist that gold-beneficiation is not their core strength.

However, what they do agree with is that a gold-beneficiating enabling environment should be created, even though many insist that they are not the ones to benefit from this environment. Some of the key obstacles to beneficiating gold include an absence of skills in this sector, a limited location advantage, the absence of a metal-loan scheme, and a marketing and branding strategy that does not promote South African-produced gold products.

Slide 7 - Au beneficiation enabling environment (HRD/skills)

Some would argue that there is insufficient that is being done to increase the level of skills in the jewellery sector in South Africa and that this acts as an impediment to growth. Institutions that provide training for the jewellery sector include Cape Technikon, Stellenbosch University, Wits Technikon, Tshwane Technikon, KZN Technikon, Vukani Ubuntu and Kgabane, Mintek’s own initiative to train predominantly rural women in jewellery manufacture. Those who argue that skills are important in promoting gold beneficiation would argue that these institutions provide less of the training at the bench than many other institutions in other countries provide.

However, there is also the argument that the gold jewellery sector is unusual in that, although a successful industry does have the highly-skilled mastercrafters, who tend to make the models for jewellery, it also needs those with lower levels of skills to finish off pieces. The jewellery sector is also changing to the extent that the more profitable jewellery businesses have often switched to Cad/Cam alterations of designs, to keep the designs fresh.

Another interesting point is that the number of people employed in the jewellery industry may increase as a result of the Beneficiation and Diamond Bills. The first will try to promote beneficiation in general while the second is likely to further promote the gold jewellery industry since a cut stone set in a ring quickly increases the value of the products. Some 12-million carats of diamonds were produced in 2003, of which 352 978 ct were beneficiated by 3 500 people in an area of between 40 000 m2 and 60 000 m2. Since the Bill intends for 10% of the diamonds mined in the country, or 1,2-million carats, to be beneficiated, this requires a considerable increase in the amount of space and people to be involved in the beneficiation of diamonds alone. If the spin off of this legislation is that it stimulates the gold-jewellery industry, skills in this sector will also be required.

Slide 8 - Au beneficiation enabling environment (Metal loans)

The jewellery industry says that the provision of gold loans is the most important aspect of a gold-beneficiating enabling environment. At present, jewellers need to have 120% collateral for the gold that they borrow, in addition to paying interest on the loan. Most jewellers cannot afford this, and end up producing fewer products than they would have gold loans been available.

This is set to change, with the proposal that collateral for a new gold-loan scheme be provided by the jeweller, AngloGold Ashanti, Gold Fields and by BAE/Saab. The jeweller would put up 33,3% of the collateral, the mining companies put up 33,3% and the defence industrial participation partner would put up 33,3%.

However, it now appears that the scheme will only benefit large jewellery producers. This is because discussions on the table suggest that 50 kg will be the minimum amount of gold that is borrowed. In addition, small-scale jewellers are expected to provide three years of financial information – which will act as another obstacle to gaining access to these loans.

Other gold-loan schemes in South Africa, including one that involved Stanbic, have failed in the past, since it was felt that the risk profile of the jewellers was too high. The current proposal may also fail since it does not boost the SMME sector, which was the priority of the initiative.

Slide 9 - Au beneficiation-enabling environment (Insurance)

Creating a beneficiation-enabling environment from an insurance perspective could involve the reduction of the amount of collateral needed by jewellers for borrowing gold. At present, while discussions on gold loans have centred around other parties assisting jewellers with the 120% collateral required for a gold loan, a reduction in the amount of collateral required is not being considered.

At a physical level, more secure jewellery-making zones would also help to reduce the costs of doing business for jewellers. This is because areas such as the Gold Zone, at Rand Refinery; Jewel City, in Johannesburg’s CBD; or the airport jewellery zone, which is currently being promoted, reduce the cost of insurance for gold producers.

Slide 10 - Au beneficiation enabling environment (Marketing/branding)

Since the jewellery produced in South Africa would eventually have to be sold, marketing and branding of the products is important. Several South African gold companies, including AngloGold and Gold Fields, are investing in the promotion of gold through their own internal initiatives as well as through contributing to the World Gold Council. However, other gold producers do not see marketing as part of their business and do not contribute to the World Gold Council, which often promotes gold jewellery as a generic product.

Some have suggested that the right way to approach marketing is by creating a product with a distinct South African feel. Mintek’s Kgabane has, for instance, created the Interwoven brand, using traditional basket-weaving skills to weave with gold and silver. It has also created a range of bead jewellery with a unique African feel. The latter range has been quite successful and has reconfirmed that tourism-based retail is an important jewellery niche.

Many argue that South African produced goods will only have an advantage if they have a South African feel, yet South African or African brands of jewellery have a low price point. Many suggest that clients will only pay more than R2 500 for an item if the price is accompanied with status and an extremely professional finish – which South African products are unlikely to achieve initially. In addition, a South African brand would have to appeal to trendsetters who would buy unusual items; production of this type of brand would lead to South African producers missing out on the generic market, which is the market that is the driver behind the jewellery industry … and these are perhaps some of the reasons why a South African brand might not be the most successful way of entering the international market.

However, all this points to the fact that any strategy to create an enabling environment should address the issue of whether a marketing and branding strategy that promotes gold should be generic or whether it should promote a South African or African product.

Slide 11- Au beneficiation enabling environment (Location advantage)

Some countries have a strong location advantage in the form of a developed domestic demand for gold jewellery, an experienced goldsmith industry, and have vertically-integrated industries that encompass some aspects of the jewellery-manufacturing chain, including mining, beneficiation, financing and marketing.

South Africa does not have these advantages. Its only potential advantage is a tiny cost saving in sourcing gold in South Africa for further beneficiation (~15c US/oz = 0.0003%)

Slide 12 - Industrial uses of Au

While jewellery mark-ups to the retail phase can be as high as around 290%, there can be considerable value added through the use of gold in nontraditional ways. There can be an about 650% increase in value if gold is made into electronics and an 820% increase if gold is used in chemicals.

Mintek is involved in the development of nontraditional uses for gold and has 50:50 joint ventures with Gold Field, AngloGold Ashanti and Harmony for the production of materials, catalysts and biomedical applications using gold.

Slide 13 - Industrial uses of Au (Catalysts)

Catalysis is one of the research areas that is expected to result in a considerable offtake of gold.

Some of the highlights in Mintek’s work on catalysts include that:

• Mintek intends to have a gold-catalysis respirator, developed in conjunction with an overseas company, on the shelves by 2007, if it successful in its submission of the product to the National Institute of Occupational Safety and Health next year.
• An agreement has been signed between a large catalyst manufacturer and Mintek and AngloGold Ashanti to produce catalysts on their behalf should this be warranted. This project may come on stream within the next year or two and, should it become a reality, it is likely that the plant will be established in Gauteng.

Mintek projects in this area of research are broadly grouped as air-quality, pollution control, chemical processing, fuel cell and catalyst scale-up projects. All of these are partially funded by AngloGold Ashanti.

Slide 14 - Industrial uses of Au (Medical)

The World Gold Council states that there are possible, emerging or current biomedical applications in dental alloys, anti-bacterial applications, prosthesises and implants, stents, sensors and labelling, cancer treatment, drug delivery and arthritis treatment.

Mintek is involved in cancer-treatment projects, drug-delivery systems, anti-malaria programmes and anti-HIV projects that use the gold. These projects are partially funded by Harmony Gold.

About R4-million of Autek’s total expenditure of R30-million has been spent on the biomedical programme, which involves about 35 people.

Slide 15- Industrial uses of Au (Materials)

Gold’s unique properties are also being looked at to see which new materials can be developed

Mintek, in a joint venture with Gold Fields, uses gold’s properties in the development of new gold-containing alloys, electrochemical applications, shape-memory alloys and nanotechnology.

Slide 16 - The future of gold

So, while about 80% of the gold that is being consumed in the world is consumed in the form of jewellery, it is possible that gold’s other uses may start gaining in prominence. In industrial research and development South Africa has a strong advantage over others who choose to continue to see gold as a store of value. With Project Autek being launched abroad this year, the industrial uses of gold should also be further promoted through funding by the Canadian government and Canadian companies.

The Mineral and Petroleum Royalty Bill

The new draft of the proposed Mineral and Petroleum Bill should be tabled in Parliament in 2006. Royalty payments are set to begin in 2009.

The first version of the Bill proposed taxing miners and oil producers between 1% and 8% of revenue, depending on their specific commodity. In this (the first version) Bill, the royalty rates for gold, platinum group metals and diamonds were set at 3%, 4% and 8% respectively. Mining companies have contested these rates as “too high”. They insist that profit, rather than revenue, would be a more appropriate base on which to impose royalties. However, the Finance Minister has rejected mining companies’ proposal to charge royalties based on profits.

According to Finance Minister Trevor Manuel, the re-drafting of the Bill is in progress, and the document is undergoing substantial refinements in view of comments received, industry financial data analysis, and new cross-country royalty comparisons. The Bill is being re-drafted to accommodate key concerns relating to mineral beneficiation and small-scale mining.

The Bill forms part of an overall review of taxes on mining companies, including an assessment of their tax allowances and deferred tax benefits. The South African Revenue Services (SARS) has indicated it intends to update the tax formula currently used for gold mining companies.

This tax formula has served the industry well for the past 79 years. It enables gold producers to offset losses and/or capital investments. The formula also provides for a sliding tax scale, so that when times are lean, taxes are minimized, giving relief to the industry, thereby preserving value and jobs; and in times of plenty, the industry can pay up to 46% mining tax. The effect of this sliding tax scale has been demonstrated over recent years. Gold mining companies were making significant profits and paying taxes at the maximum rate at the beginning of 2000 through to 2002. These profits were propelled mainly by a 22% depreciation of the rand against the US dollar and an upswing in the gold price US$/oz. Thereafter, revenues and profits declined significantly as the rand appreciated by up to 28% against the US dollar. And so revenues and taxes declined, and the mining sector’s contribution to total South African revenues plummeted – from 15% in 2000/01 to 11% in 2003/04 to just 4% in the latest tax year 2004/2005.

The underlying value of the gold mining industry will decrease should a 3% royalty tax be applied without tax reform. We have calculated that the market capital of the gold mining industry could be reduced by around 6%. The loss in EPS (five years out) is even more significant, at around 10-15%, which in turn will have an effect on dividend yields.

Government will need to review tax reforms with care. It must provide the necessary balance so that reforms are not counter-productive, especially at this time, as the gold mining industry is fast approaching a crossroads with regard to dwindling reserves in South Africa. The industry is capital-intensive, and will require huge capital inputs to replace reserves, which in turn will necessitate tax breaks.

Global industry 10-year cost trends

Between 1996 and 2001, global producer total costs declined 24% from around US$317/oz to US$240/oz. Over the same period, the gold price decreased 30% from US$388/oz to US$272/oz, and the US dollar strengthened by around 40% against the euro.

Between 2002 and 2004, global producer total costs increased 37%, from around US$228/oz to US$313/oz. Over the same period, the gold price increased 32%, from US$310/oz to US$409/oz, and the US$ weakened against the euro by around 55% against the euro.

Given the strong relationship between the US dollar strength and the gold price as well as costs, we believe the significant decrease in costs between 1996 and 2001 were driven most likely by currency valuation and inflation rate differentials against the US dollar not by industry cost savings (as many of the large producers have claimed).

Between 2002 and 2004, Newmont’s costs rose 22%, whereas South Africa’s gold industry costs increased by 100% in US$ terms.
Over the same period, the global industry has had to contend not only with a much weakened US$ but also significant increases in commodity prices, consumables, and equipment.

South African industry cost trends

Over the last three years, the South African gold mining industry has had to contend with a 37% decline in the gold price in local currency terms R/kg, mainly as a result of (a) the appreciation of the rand against the US dollar and (b) an increase in the gold price US$/oz.

Over the same period, the industry has had to contend with significant cost pressures, most of which fall outside the control of the mining companies. Since 2000, water, steel prices and explosives have risen 56%, 62%, and 40% respectively, compared to SA PPI of 25% and CPI of 27%. Labour costs, which comprise some 50% of cash costs, have increased substantially more than the inflation rate (around 3% p.a.) in 2003 and 2004.

The net result (of the dual impact of the fall in revenues and the upward spiral in costs over the last three years) has been a significant fall in margins and profits for gold mining companies. Many of the marginal mines have become loss-making, and have had to be mothballed/closed. Further complicating matters, the industry has had to contend with declining grades which has compounded the decline in margins and profits, and has resulted in a decline in South African gold production – from 427 tonnes in 2000 to a projected level of around 300 tonnes for 2005. South Africa last produced at this level 80 years ago! (1925).

When the gold price was at its lowest level (R76 700/kg), around 70% of South African gold production was loss-making based on cost of sales, and 50% was loss-making based on cash costs. At current prices of around R100 000R/kg, only 10-15% of South African gold production is marginal/loss-making. These loss-making operations are likely to return to profitability in the near future thanks to ongoing cost-saving initiatives.

Despite the upward spiral of costs, declining revenues and falling profits, the South African gold mining industry has consistently focused on improving productivity and reducing costs.

Almost all of the mines have undergone restructuring and reengineering, in some cases leading to shaft closures. The industry has also concentrated on effective ore body management, supply chain management, outsourcing, the introduction of continuous operations (CONOPS), asset consolidation, and downsizing – all in an effort to reduce costs and improve efficiencies. Many of these initiatives have, and are continuing, been effective in controlling costs. Unfortunately, the process of restructuring has led to some 40 000 to 50 000 job losses in the industry since 2000.

The cost-gold price revenue squeeze experienced by AngloGold Ashanti Gold Fields and Harmony is illustrated in the next graph. It shows the quarter-on-quarter costs for each of these companies since December 2000 to June 2005, compared to the gold price received. All these companies began to show, to a greater or lesser extent, the effect of their cost-saving initiatives around March 2004. Harmony completed its restructuring in November 2004 after protracted negotiations with labour unions. The effect of this exercise will likely become apparent in the December quarter.

There has been a significant shift in the composition of cash costs (R/Kg) in the mining industry as a result of the process of restructuring since 2000 through to 2004. The pie diagrams below illustrate this shift. The increase in service costs is significant. However, despite the reduction in mine labour and contractor costs, both service and mine labour costs still comprise over 60% of the cash costs.

Conclusion

The South African gold mining industry is a mature one, and has proved its resilience; we believe it will adapt and change.

Good afternoon ladies and gentlemen. The topic of this panel debate is ‘Jewellery: has it turned the corner?’ It is appropriate that such a question is asked now, particularly after the run that gold jewellery demand has had these last 2 years or so. I’d like to share with you through the next 9 slides some of the information that indicates the extent to which the gold jewellery category has moved and where those moves have been most prominent.

I would also like to raise some issues at the end of the presentation; issues on which I would like to hear the views of our panel members. If anything, I’m hoping these views can be used to kick-start the discussion.

Before I continue with the presentation, let me take this opportunity to introduce the panel members:

SLIDE 2: 2002: VOLUME DECLINES IN KEY GOLD OFFTAKE MARKETS

Let’s have a look at the slippage in demand up to 2002. Incidentally, the data used in this presentation has been compiled by GFMS and presented by the WGC. From 1997 through 2002, there is evidence of a downward trend in gold jewellery consumption in volume terms, falling 20% or 631tonnes over that period, roughly India’s annual consumption per annum. Most of the declines in demand were in important gold offtake markets like India, China, the ME, and the USA, which, between them, constitute some 60% of global gold jewellery consumption.

The decline was not only in volume terms but value and market share as well.

SLIDE 3: 2002: VALUE AND MARKET SHARE ALSO DECLINES

Again, gold jewellery (in green) decreased slightly in value terms from 1999 to 2002 while luxury goods doubled over that same period. This graph also suggests that gold jewellery’s competition over that period and indeed to today is not only its immediate jewellery neighbours of platinum and diamonds, but lifestyle and luxury goods – be they Gucci handbags or Apple iPods.

The level of marketing spend (shown in the text box above 2002) is particularly interesting because it shows the scale by which gold jewellery as a category is outspent by luxury and diamond players, and even platinum which is about 1/10th the size of the gold jewellery market in volume terms. This mismatch between category size and level of marketing spend relative to gold jewellery’s competitive set has been and still is a fundamental weakness of the gold jewellery category.

However, as the topic of the panel discussion suggests, things now appear to be looking positive for gold jewellery.

SLIDE 4: 2005 H1: IMPRESSIVE RESULTS FOR GOLD JEWELLERY OFFTAKE

2005 is going to be the third consecutive year of growth in demand for gold jewellery. If we look at the first half 2005 volume figures, we see important offtake markets like China, ME, and Turkey experiencing significant double-digit growth. India stands out at an impressive 54% growth year-on-year. The USA, at 3% growth, however, is far less impressive but not discomforting.

In value terms, all these markets are up, due in large part to the rising gold price.

Lastly, we come to the “Others” row in the table. These other offtake markets in total are up only 2% in volume terms and 9% in value, the rise in value being driven by the rise in gold price. These markets, which make up almost a third of total demand, are markets in which the WGC does not operate and therefore markets in which gold jewellery is not as actively promoted by the industry. I would like to come back to these other markets in a few minutes.

SLIDE 5: REVERSING DECLINE, TAKING DEMAND TO RECORD HIGH IN VALUE

So, in volume and value terms, as this graph shows, the overall market for gold jewellery is once again trending upwards. Volume is not yet close to the highs of 1997, but it looks like we’re getting there. From this, it does appear that gold jewellery has turned the corner.

Where is this turnaround coming from?

SLIDE 6: KEY OFFTAKE MARKETS HAVE LED THIS GROWTH

As we saw earlier in the presentation, the key offtake markets are driving the overall growth figures. Also of interest is the correlation between marketing spend and market performance, suggesting there is some evidence to support the claim that increased marketing activities have contributed, certainly in part, to the rise in demand levels. However, keep in mind that this marketing spend is still extremely small and focused to take credit for influencing the entire gold jewellery category.

But there are still some concerns…

SLIDE 7: BUT NOT ALL IMPORTANT MARKETS HAVE IMPROVED

Japan, Europe and the USA have failed to impress, indeed the first two markets are particularly worrying as this slide shows. One has to ask “how sure are we that the turnaround in gold jewellery demand is sustainable if the developed world, shall we say, is still showing signs of demand slippage?” After all, aren’t these developed markets some of the so called ‘opinion forming’ centres of the world, dictating to a large extent the fashion and other trends and MTV youth culture for much of the rest of the world to follow? Shouldn’t we therefore show some concern that the interest of their consumers in gold jewellery continues to dwindle, potentially impacting adversely in the longer-term on the consumers in our developing markets?

Which leads me to my last slide…

SLIDE 8: SO, HAS GOLD JEWELLERY REALLY TURNED THE CORNER?

Has gold jewellery really turned the corner or is what we have seen in these previous charts simply a consequence of booming developing market cycles and therefore ‘right place, right time’?

I offer now two observations/questions for panel members to consider addressing either in their presentations or in the discussion afterwards:

1. we’ve seen encouraging signs of a recovery in gold jewellery demand. But, as we’ve also seen, that recovery seems to be based in the developing world, suggesting that the recovery is riding the wave of positive economic growth in those markets – be it the rise in rural incomes in India, or increased oil revenues in the Middle East. Is this then a self-made recovery by the gold jewellery category or is it nothing more than a fortuitous adjunct to economic growth?
2. What are the signs of a self-made recovery? Is it simply growth in volume and value? Volume and value measures, while obviously very necessary, can be misleading if they mask the true underlying reasons for growth. Strategic measures are as important. But what are these strategic measures? To answer this, we have to ask ourselves ‘why did demand for gold jewellery in these markets fall in the first place?’ We think it is because of three things:
   1. the absence of gold jewellery brands in the marketplace, brands being an almost inescapable aid to the modern consumer’s choice;
   2. the absence of innovative, fashionable gold jewellery product, thereby starving the consumer of choice and the category of appeal;
   3. the absence of sustained and modern marketing and retailing, thereby preventing the category from competing effectively for consumer’s discretionary spend.

Have any of those three things changed in the last 18 months? Have we seen the emergence of powerful gold jewellery brands? Have we seen evidence of changes to the types of gold jewellery product being displayed in our local jeweller – is product now more fashionable, does it appeal more to the youth? Have we seen more modern retailing or marketing of gold jewellery or is there still a glass counter displaying sawn-off mannequin busts draped in chain by the meter?

I’m not sure I can answer any of those questions confidently for the gold jewellery category. That leaves me with the uncomfortable feeling that gold jewellery perhaps has not actually turned the corner and that the strategic problems that caused its downward spiral in the first instance still remain unchecked and, more worrying, that their effects are being masked by market externalities outside the control of the gold jewellery category.

I hope the panel discussion can address some of these issues.

Initially I would like to welcome you all to this valuable event and thank the organisers for inviting me.

If you allow me, I would like to start by briefly introducing Goldaş. The company was established in 1993 and presently has eight representative offices worldwide. It exports to 40 countries in four continents and is presently the largest jewellery company in Turkey. It is the first and only listed Turkish jewellery company.

Goldaş is a proud Associate member of the London Bullion Market Association and is also a member of the International Precious Metals Institute. We are also members of the Istanbul Gold Exchange, Dubai Gold & Commodity Exchange and aim to become a member of the Shanghai Gold Exchange within 2006.

Goldaş is a part of a specialised holding company called “Goldart”. Goldaş is ranked highly with the Istanbul Chamber of Commerce, where it is ranked as 132nd largest company in Turkey. The company is anticipating over a billion US dollars of turnover as of the end of 2005.

Turkey has a very rich history when it comes to gold. The first gold coin in history was minted in Lydia, which is situated in western Turkey at around 700 B.C. Gold has a strong tradition in Turkey for both investment and jewellery purposes.

Turkey itself has the third largest fabrication demand and is by far the largest gold coin consumer and fabricator. According to last year’s figures, over 13 million coins were produced – and this amount was already been achieved by August 2005.

There is estimated to be 6,500 tonnes of gold reserves in Turkey, which are valued at approximately US$70 billion.

Turkey is the fourth largest country in terms of gold demand, with 251 tonnes in 2004, a 17.4% increase from the previous year. This figure has already been exceeded for 2005.

It is presently the second largest jewellery exporter, after Italy, and has exported US$909 million as of the end of last year. This figure will almost double in 2005.

I thank you for your patience and would be pleased to answer any questions.

Introduction

As an Italian producer, the first thought that comes to mind is “There are no corners on the road to nowhere”. What “turned the corner” means is clearly dependant on the point of view, and here I want to look at the changes from an Italian producer’s point of view, focussing on just two key areas.

• The shift from Italy to low-cost producers
• Made in Italy ? So what.

The shift from Italy to low-cost producers

Background/premises

• The majority of gold jewellery (97% ?) is unbranded
• Products are low tech and easily copied
• For a purchaser, cost is thus the main differentiator between one supplier and another
• Effects of duties (US market).

What is different from before (before, say, 2000)?

• Low cost producers had limited capacity (and limited credit capacity)
• Market demand grew through the 1990s as part of the economic boom: such demand had to be met from Italy, even if it was more expensive, as it was biggest producing country – capacity elsewhere was limited
• Thus the post-boom fall in demand fell mainly on Italy. At same time, there was capacity growth in low-cost countries
• Shift in product demand towards stone set (low-value diamond set – NOT high-end jewellery), where Italy had limited skills. Suppliers went to India and China and started to obtain plain gold jewellery as well as stone-set

Italian production strengths and weaknesses

• Automation is a strength (which built Italy’s previously dominant position). But such products are commodities, and prices/product life no longer enables return on investment or R&D
• Labour costs are high and labour is the biggest element of manufacturing costs
• Low labour costs permit higher service levels (samples, order to delivery times). New World operators have less labour restrictions and are hungrier for success (?)
• The “Buy IBM factor”: why AREN’T you sourcing in China?
• Design? Without marketing it is difficult to say if product design by itself can make a difference. And what if designs are rapidly copied by low-cost producers?

Made in Italy: So what?

Everyone thinks this is a part of the solution.

• Italian design and lifestyle undeniably has a strong position as style leadership – BUT for unbranded products…what is this worth?
• You need to market these values to consumers (thanks here to the WGC, who are giving a big hand). BUT your distribution channels are for unbranded products, so how can you get the returns from such channels to recover your marketing investments?

To make “Made in Italy” work, you need to market yourself successfully as a “Made in Italy Brand” and this needs “collaboration” from your distribution as well as cultural change within a producer. At the moment this collaboration is not evident. Distributors are largely locked into reducing purchase costs, even though we are at manufacture prices such that there are no savings left to be had. As for cultural change…

Conclusions

Short-term

• The current dynamics are not good for an Italian producer, as you cannot compete on cost and the ability to differentiate through a brand is complex, costly and not necessarily what your distributors are actually focused on.
• Italian production is likely to continue to fall, perhaps at a slower rate.

Sometime down the road (after the corner ….)

• Sooner or later distributors, not being able to seek further cost reduction advantages, may become more allied to a branding approach (but in their interests, not yours).
• Maybe you need to eliminate a lot more Italian production first, so that what remains has the needed exclusivity.

Good afternoon ladies and gentlemen. It is my great pleasure and challenge to talk this afternoon about the Strategic roles of the Platinum Group Metals. We all know South Africa is the world’s largest miner of PGMs. By normal measures it supplied 77% of the world’s platinum last year, 80% of its rhodium and 32% of its palladium. With over 70% of the world’s estimated PGM resource base beneath our feet that position is unlikely to change. Remember too that PGM production now exceeds gold in South Africa, both by value and volume: the Department of Minerals and Energy reported that for the first half of this year PGM production was 155.9 tonnes, worth R16.6bn against 147.9 tonnes and R12.7bn for gold. Also, since beneficiation is a hot topic here at the moment, know that South Africa produces up to 15% of the world’s autocatalysts, absorbing say one tenth of the value of its PGM production under the MIDP (Motor Industry Development Plan) incentive plan.

A word too about the PGM markets. Platinum reached all-time highs in yen on TOCOM last week and a 26-year high in dollar terms on NYMEX. Talk is of $1000. Rhodium is moving higher too, towards $3000 – but well short of its all-time $7000 high. Palladium also after wallowing under $200 for a while amid forecasts of oversupply has also rebounded. $300 is on the radar screen thanks to positive stories on Chinese jewellery demand.

I have three themes today. First point is the critical role PGMs play in the 21st Century and how these markets are perceived. Last October the autocatalyst was 30 years old. A single catalyst brick contains just 4 or 5 grams of PGMs but production is on a staggering scale: one plant in the US has produced 300 million catalysts alone. 3,000 tonnes of PGMs have gone into autocatalyst manufacture distributed across a global car park of trucks and cars now estimated at 800 million vehicles. Autocatalysts have helped lower auto emissions by an estimated 12 billion tonnes of harmful gases that would otherwise have entered the environment.

If we aren’t sitting in traffic we may be sat in front of a PC. PC circuit boards include components bearing milligram amounts of PGMs: by coincidence I believe the ‘global desktop’ also stands at around 800 million PCs. Over 90% of computer hard drives are now being coated with platinum. Per-disk amounts are miniscule – milligrams again per disk - but production is on a vast scale: 90 million units a quarter with upwards of 2 billion hard drives manufactured so far. A computer needs a screen and most now come with a low energy, flat panel, LCD: high purity glass for LCDs is melted in a platinum lined furnace. Annual LCD production is heading towards 100 million units from 30 million in 2002. Unit costs per panel are falling and screens getting larger as manufacturers upgrade to produce larger sizes of mother glass substrate requiring larger platinum lined melting vessels. 200kg of platinum is needed for today’s most commonly used melting units; newer generation units may require up to one tonne of metal each. Expansion has required new metal while upgrading has generated recycling.

PGMs are critical in many less visible products. Gasoline for the non-diesel car park depends on naphtha reforming using PGMs catalysts – a process that dates back to the mid-50s. Hydrogen peroxide for bleaching, the polyester in fabrics and nylon in carpets are produced using PGM catalysts – to raise production efficiency and lower costs. PGMs are also used to manufacture many chemicals including vitamins, dyes and scents. Food production uses fertilizer – again needing PGM catalysts. Cyanide requires a rhodium/platinum catalyst. The list is scarily extensive: an energetic analyst estimated 20% of goods manufactured today either contain platinum or are made thanks to platinum. For many economies and populations these products are considered ‘essentials’ giving PGMs a strategic importance.

A dictionary definition for “Strategic” implies something that is “Essential to the effective conduct of war”. There is some precedent for PGMs. Inevitably it is the US that has at various times displayed the greatest concern about PGMs given its apparent dependency on imported metal. Such strategic concerns led to a ban on the use of platinum by non-essential industries in the US between October 1942 and August 1945. After the 70s surge in commodity prices the U.S. again realised its vulnerability to disruption of non-fuel mineral imports. A 1983 US Congressional Budget Office report concluded that “platinum group metals pose a substantial supply risk” to the U.S and highlighted “the extremely high concentration of platinoid supply in South Africa and the (then) Soviet Union renders this group of metals one of the most critical of all potential mineral contingency problems.” It recommended a modest augmentation of the US Strategic Stockpile for platinum, palladium and iridium. Well, less than ten years later the World had, it seemed, become a much less worrying place. In 1992 the US Congress directed the sale of the bulk of the strategic commodities accumulated in that stockpile and over 400,000oz of platinum and 1.2 million ounces of palladium have been sold since sales began in 1997. There is now effectively no US PGM strategic stockpile. At least not in Government hands.

A foolish move? Some think so. The US National Defence Council Federation argued in March 2004 that “uncertainties surround suppliers of such critical materials as platinum group metals”. They suggested “Russia …. appears increasingly unstable” and that while “the situation in South Africa seems stable at present, it, too, could fall into the sort of turmoil so characteristic of the African continent.” Many here would I am sure wish to disagree with that view. However, debate here in South Africa on enforced local beneficiation and rumours over future ownership of Norilsk may keep the dust flying. Not to mention recent comments by the Rector of the Moscow State Mining University on a visit to South Africa who said of platinum “our governments (i.e. Russia and South Africa) should form a big consortium similar to those of the oil companies”. Let’s hope not.

Nothing can be done to rectify the concentration by Mother Nature of economically recoverable PGM mineral deposits. The US and Canada have just 3.7% between them. South Africa is blessed with 71%, Russia with 13% and Zimbabwe with 11%.

On the surface it might seem a risky scenario for some key industries. My second point today is that solely focussing on primary supply and not fully considering the role of the secondary market exaggerates these risks unnecessarily. This is not the most transparent industry statistically speaking. I have no desire to knock any of the published data. Tremendous efforts are exerted but I do wonder if we can work towards a fuller representation of the PGM flows that now take place and which do impact on market liquidity and day-to-day activity. 30 years back secondary supplies had limited significance: PGMs have been known and used for centuries but in volume applications particularly for industrial catalysts their history is much shorter. Over 80% of all PGMs ever mined have come out of the ground since the early 1980s.

Secondary supply is one of the great unknowns of the PGM market. Attractive margins have encouraged establishment of collection and processing chains for spent autocatalysts and electronic components. But go to Tokyo today and see the volumes of platinum jewellery scrap: it’s an education. With so much primary supply now given under long-term contracts there is a tremendous push now underway into secondary markets to gain access to more metal.

What data do we have on the secondary PGM market? In the main it covers only autocatalysts. JM’s authoritative “Platinum” report has estimated autocatalyst recovery for many years although other demand figures are all net. GFMS adopted a similar methodology. Reclaim of PGMs from spent autocatalysts equates to roughly 10% of new mine production for platinum and palladium.

This is definitely only part of the story. Underneath the ‘hood’ it seems there is already a much bigger engine at work. Umicore and the Oko Instut recently published a detailed study on the “Materials flow of platinum group metals”. Taking 3 years to complete, producing data for one year (2001) it sadly covered only one country (Germany). But it gave a real peak at the engine. It confirmed that volume flow through the PGM markets is much larger than most analyses suggest. It suggests, “it can be assumed that…..secondary production of PGMs is almost of the same volume as primary production, though with considerable differences between particular PGMs.”

Some will cry, “It doesn’t matter. Metal is in closed loop systems.” Partly true but those efficient closed loop systems (97% efficient in the case of the petroleum refining industry) have their own quirks, sensitivities and dare I say even inefficiencies. They create lots of mini pools of liquidity which in aggregate help oil the cogs of the market and ensure when push comes to shove there’s metal to be had. This issue is material to the market and these flows and the liquidity pools can ebb and flow in response to many factors. Look at how different the picture looks for the German PGM market, depending on whether one looks at it on a gross or a net basis and the different roles played by three sectors: autocatalysts, industrial catalysts and glass.

Let’s look at industrial catalysts and the petroleum industry. Net demand from the petroleum industry world-wide is around 150,00oz of platinum annually: new units, less closures, plus an allowance for “top-ups” of losses. 3% of total net demand. There are over 700 oil refineries world-wide, over 500 have a PGM bearing catalytic reforming unit, converting naphtha into high octane gasoline. A large reactor contains 100 tonnes of platinum coated catalyst (Pt/Sn or Pt/Re) and 10 to 15,000 ounces of platinum. PGMs at work in reformers and other units in the oil industry alone exceed 5 million ounces world-wide. Useful life of a typical CCR reforming catalyst is 4 to 6 years but falls if the plant runs at high capacity, as in the US today. We can assume at least 1 million ounces of platinum metal is recycled through the market each year by the oil industry – nearly 50% more than comes from autocatalyst recycling at the moment. Catalyst replacement itself further creates market activity through bridge leasing of up to 9 months. Most important is that a heavy maintenance season generates greater market demand – with significant year-on-year fluctuations. There’s more. That great read ‘Industrial Inorganic Chemistry’ suggests 1.6 million ounces of platinum gauze are also replaced each year by the fertilizer industry.

Industrial demand barely shows up on the demand–side of most analyses but does contribute materially to metal flows and trading through the market and every-day market liquidity. Measuring this of course presents a huge statistical headache but ignoring it might lead to misunderstandings about the market. Moreover, the current interest in “Metal Life Cycle Management” particularly by multi-national oil companies aimed at improving management and efficiency of precious metal handling at individual units and sites could change the current dynamic again.

My third point is the future for PGMs. Industrially, the future for PGMs appears inextricably tied to two sectors: transportation and energy i.e. highly strategic. Motorisation of China and India present fertile ground for forecasting strong growth in the auto industry. The Economist recently suggested that in the next 20 years global auto manufacturing capacity will need to increase to 110 million vehicles a year, from around 60 million vehicles in 2004: more cars will be made in the next 20 years than in the whole of the 100 years history of the auto industry. Not gas guzzling SUVs but mostly with catalysts and emission control systems. They will need fuel: a study by the UK’s Department of Trade and Industry last year estimated the equivalent of 100 new world-scale oil refineries need to be built by 2025. Then there is “Dieselisation” - the “Diesel Surprise” as the Wall Street Journal recently put it in an article. It quoted a US advertising executive’s love of his new VW diesel engine Jetta and his unforgettable line “The engine doesn’t drown out my voice at the drive-through window”. So that’s what it really takes to sell diesels in the US. With only 2.9% of the US passenger, SUV and light truck market in 2004 (against nearly 50% in Europe) the outlook for platinum use in diesel catalysts as well as in diesel particulate filters appears a one-way bet. As long as dealers are allowed to sell them.

Finally fuel cells. Power source of the future. Long-awaited but finally on the road towards volume production. Every automaker is investing in development of fuel cell vehicles (FCVs) built mainly around platinum-using PEM-type fuel cells. Market penetration targets are though a real lottery (forecasts range from a 6 to 60% share by 2030). Remember too that on projected technologies an FCV of similar power and performance requires significantly more platinum than its gasoline powered equivalent. And of course fuel cells are being applied in other areas too – in every portable power situation from motor cycles to laptop computers.

For platinum in particular I believe that the future is rosy under just about any imaginable scenario. It is important though that we devote more attention to the secondary market. It is not easy but it cannot be ignored. My question today is how to achieve that? Of course, from a “Strategic” point of view and if push came to shove then alternative sources of PGMs do exist. I would encourage you to read the fascinating 15 page dissertation by one Brad Blair of the Colorado School of Mines in 2000 – entitled “The Role of Near-Earth Asteroids in Long-Term Platinum Supply”. This essential bed-time reading hypothesized that extraterrestrial sources of platinum group metals will become available in the global marketplace in a 20-year time frame. The mining syllabus of the future looks set to change from the one I studied. Thank you.

Good afternoon ladies and gentlemen. I would like to thank the LBMA for inviting me to give this talk. In this presentation I will give an overview of some other uses of gold excluding jewellery.

Introduction

Gold has for many years been considered a symbol of wealth and adored for its beautiful rich yellow colour resulting in its use for jewellery and decoration purposes. But this precious metal has distinct and unique properties, which make it valuable for industrial applications.

Although gold is a precious metal like the platinum group metals (platinum, palladium, rhodium, ruthenium, osmium and iridium), the metal has not been developed significantly outside the jewellery and electronic fields. This resulted that unlike the platinum group metals, little industrial uses have been commercialized for gold.

Approximately 80 per cent of annual gold been mined, is consumed for jewellery production. The remaining 20 per cent is dominated (approximately 9 per cent) by use in the electronic industry. Some other minor applications include dentistry, decoration, coins and investment. Well, the question could be asked if jewellery and electronic uses are excluded, what is there left to talk about. This said, a renaissance in industrial gold research and development is underway, driven mainly by the discovery of the catalytic properties of gold. The perception that gold is too precious to be useful is changing.

Electronics

In this presentation I will introduce you to new industrial uses of gold and not spend much time on existing uses such as dental and decorative applications. Gold's excellent biocompatibility, corrosion resistance and mechanical strength have engraved the metal and its alloys use in dental applications, such as in crowns, bridgework and with porcelain enamels.

Lets look briefly at the use of gold in electronics as this is a major industrial application. Some of the unique properties of gold such as it nobility, malleability, and excellent heat and electrical conductivity makes it the material of choice for electronic use especially in applications depending on reliability such as telecommunication, automotive use and defense. The use of gold in electronics has increased by 27 tonnes in 2004 to a total of 261 tonnes due to rising economic growth and accompanied higher demand for consumer products, according to the GFMS survey of 2005. This is the third consecutive year of growth to meet a higher demand from consumers producing circuitry applied in e.g. laptops and cellular phones, as well as by the semi-conductor industry. Some of the forms in which gold is applied for electronic use are indicated in the slide.

Other industrial uses

Various research and development programmes focusing on new industrial uses for gold have received funding from the gold mining houses and/or government programmes over the past decade.

Project AuTEK is a collaboration between the three major mining houses (AngloGold Ashanti, GoldFields and Harmony) in South Africa and Mintek, Council for Minerals Technology, to find new industrial uses for gold. AuTEK Americas has been launched this year and funding mechanism is similar to the South African analogue: government matches funding from the mining houses. The technical work within Project AuTEK- RSA focuses on three main R&D fields, namely catalysis, nanomaterials and biomedical applications. I will expand on these three fields in terms of new industrial uses during this presentation.

Gold catalysis

Traditionally, gold metal was thought to be too inert and noble to be an active catalyst. However, if the metal is highly dispersed as nanoparticles (2 to 10 nm in size) on a metal oxide support an active catalyst for various reactions results. Gold catalysis can be divided into three main application fields, namely

• environmental
• chemical processing
• fuel cells

and I will give some examples of each.

Environmental

Gold catalysts can easily oxidise carbon monoxide to carbon dioxide at ambient temperature. This activity is even enhanced in the presence of moisture. One potential application making use of this unique property of gold catalysts is the use in respirators. Currently a copper manganese oxide catalyst is used in respirators for carbon monoxide oxidation. This material deactivates easily, especially in the presence of moisture. Respirators that are cost-effective, lighter and have a longer lifetime for escape purposes can be obtained with gold-based catalysts.

Chemical Processing

The potential of gold as an important catalyst in chemical processing is well established. The conversion of ethyne to vinyl chloride using a gold carbon catalyst was an early and very significant breakthrough in gold catalysis. Gold catalysts have been found to be about three times more active than the commercial mercuric chloride catalysts.

The direct gas-phase synthesis of propene oxide (PO, used extensively in the production of polyurethanes from propene) using molecular oxygen in the presence of hydrogen offers the opportunity to eliminate chlorine from the production process, as well as reduce water consumption and salt by-products. There is significant industrial interest in this application, and pilot plants are understood to be operating in industry. Bayer researchers have claimed an 8% yield of propene oxide with 95% selectivity.

Potential opportunities for gold-based catalysts in the food industry include the selective oxidation of lactose and maltose to lactobionic acid and maltobionic acid, the conversion of glucose to sorbitol and gluconic acid, and the oxidation of glycerol to glyceric acid.

Vinyl acetate monomer (VAM) has been produced industrially for some time from acetic acid, ethene and oxygen using palladium-gold (Pd-Au) catalysts in a fixed bed process. The first fluidised bed process for VAM has now been commissioned by BP for a new plant in Hull, United Kingdom. The process, which requires only a single reactor, uses a new Au/Pd catalyst developed in collaboration with Johnson Matthey. Vinyl acetate is used in the manufacture of emulsion-based paints, wallpaper paste and wood glue.

Fuel Cells

Recent research has suggested that gold-based catalysts could be effectively employed in hydrogen processing and related fuel cell systems. Four possible areas have been identified where gold catalysts could be advantageously applied in fuel cell hydrogen supply systems and in the fuel cell itself:

• The water gas shift (WGS) for clean H2 production
• Selective oxidation/removal of CO from H2 feedstocks or within the fuel cell membrane to prevent poisoning of the Pt fuel cell catalyst.
• As a CO tolerant electrocatalyst to catalyse the hydrogen reaction within the fuel cell.
• Oxygen reduction in alkaline fuel cells.

Gold nanomaterials:

A nanoparticle consists of a few atoms forming a cluster with size in the nanometer range. A nanometer is a millionth of a millimeter. Considerable attention has been focused during the last few decades on developing and optimising methods for the preparation of gold nanoparticles to size and shape e.g. spherical and non-spherical (triangles and hexagons) particles, as applications of nanostructured materials are dependent on these properties. The colour of ultrasmall gold spheres or clusters also know as nanoparticles has been known for centuries as the deep red ruby colour of stained glass windows in cathedrals and domestic glassware. The colour results from the plasmon resonances in the metal cluster.

Most gold nanoparticles are produced via chemical routes. Biosynthesis, investigated by Project AuTEK, is an alternative route used to create gold nanoparticles with yeast and bacteria resulting in non-spherical particles. These particles have different properties to conventional spherical particles and could further increase the use of gold.

Gold nanoparticles are easily functionalised to further exploit their properties. The term monolayer protected clusters (MPCs) defines surface functionalisation of these nanoparticles by self-assembled monolayers. A cluster of gold atoms or a gold nano-particle can be stabilized by a monolayer of, for example alkanethiolated or phosphine ligands. Gold MPCs provide commercial interest in materials science, biological science and various chemical platforms as indicated in the slide. One example where gold nano-properties are second to none is in the area of medical diagnostics and therapies. Since gold nanoparticles have such good light-scattering properties, as well as easy functionalisation and biocompatibility, it is ideal for a wide range of biological and pharmaceutical applications such as bio-labeling and other types of diagnostics. Research conducted at the University of Liverpool in collaboration with Project AuTEK aims to improve these MPC gold nanoparticles even further, by designing stable, water soluble, biocompatible and functionalised nanoparticles.

Gold is a critical component in certain therapies, more specifically, in the treatment of cancer by hyperthermia and thermoablation. These two therapies use heat to kill cancer cells. In the case of hyperthermia, the cancerous tissue is heated to enhance conventional radiation and chemotherapy treatments, while in thermoablation, the tissue is heated so that the cancer tissue is destroyed by the localised heat. There are two methods one can use to provide heating, infra-red absorption and the application of an oscillating magnetic field to magnetic nanoparticles. At the University of Rice, silica nanoparticles are being developed that are coated with gold nanolayers to form a gold shell around a glass core. By changing the thickness of the gold shell, one can control the wavelength of light that is absorbed by the gold/silica nanoparticle.

Tuned to capture infrared light and coated with cancer-specific antibodies, the nanoshell becomes a precision-guided cancer treatment and works as follows (see diagram).

1. To diagnose and treat cancer, thousands of gold-coated nanoshells are injected into the patient's bloodstream. Each gold-coated nanoshell is about 10 000 times smaller than a white blood cell. Inside the bloodstream, the nanoshells are taken up naturally by the tumour cells via antibodies stuck to their surface.
2. Each tumour is covered by approximately 20 nanoshells and a brief exposure to near-infrared light by a very simple handheld laser, which passes harmlessly through tissue, illuminates the shells. The doctor then delivers a more intense near-infrared dose resulting in heat generated at the tumour.
3. Free-floating electrons on the outer gold shells concentrate the intensified near-infrared energy, heating each individual nanoshell and burn the tumour cells without burning nearby tissue. The tumour tissue heats up to about 55 degrees Celsius.

What makes this technique unique, is that the wavelength of light required is in the near-infrared, and body tissue is transparent to light of this wavelength. Therefore, this is an uncomplicated non-invasive technique of cancer therapy, and preliminary tests will begin next year on patients with soft-tissue tumours, like breast, brain or prostate cancer.

The technique of using magnetic nanoparticles to destroy cancer tissue is already commercially available. One of the obstacles of using these magnetic nanoparticles is that the nanoparticles are not biocompatible. This means that the magnetic nanoparticles have to be injected directly into the cancerous tissue. Research at Los Alamos National Laboratory is focused on coating magnetic nanoparticles with thin layers of gold, since gold is biocompatible and easily functionalised for biological markers. This will allow easier transportation of the magnetic nanoparticles to the cancerous sites, such as orally.

Biomedical applications of gold compounds:

Gold has excellent biocompatibility and the use of gold in medicine in the form of a chemical, pure metal or in alloy form is well known. Some applications of the latter are shown in the slide. The use of gold in medicine has been exploited throughout the history of civilisation. Gold dust and flakes have been used medicinally by the Chinese as early as 2500 BC.

It the late 1800s it was found that potassium gold cyanide, which is generally used in gold plating solutions, was bacteriostatic towards the tubercle bacillus. Gold therapy was introduced in the 1920’s for tuberculosis. The suspicion that the tubercle bacillus was a causative agent for rheumatoid arthritis led, in the early 1930’s, to Jacques Forestier popularising the use of gold(I) salts in the treatment of rheumatoid arthritis. Rheumatoid arthritis is an inflammatory disease characterised by progressive erosion of the joints resulting in deformities, immobility and great deal of pain. Auranofin is a gold salt in capsule form which is often used for treating inflammatory arthritis. It is believed that the gold salt decreases the inflammation of the joint lining. This effect can prevent destruction of bone and cartilage.

The discovery of the anti-tumour activity of cisplatin, cis-[PtCl2(NH3)2], in 1969 promoted the search for other metal-containing anti-tumour drugs. The first comprehensive studies of the anti-tumour potential of gold compounds were published in the 1980’s. Anti-tumour developed gold(I) drugs have a mitochondrial mode of action, meaning that these drugs accumulate in the mitochondria, more commonly referred to as the powerhouse of the cell. On accumulation the drugs become toxic causing cell death. Selectivity is determined by the structure of the drug, which allows it to differentiate between healthy and unhealthy cells. Au(III) anti-tumour compounds, which are presently investigated, are isoelectronic and isostructural to Pt(II), and are expected to have a similar mode of action to the platinum analogues, i.e. targeting DNA.

Chrysotherapy (chrysos- Greek for gold) is the use of chemicals containing gold for the treatment of diseases. The chrysotherapy research platform continues to extend with anti-cancer, anti-microbial, anti-malaria and anti-HIV gold compounds being investigated. Gold’s biocompatibility has ensured its use in medicine throughout the history of civilization and novel biomedical uses for gold can be expected in the future.

Gold 2006:

The first industrial gold conference was held in 2000 in Cape Town South Africa, with a follow up in 2003 in Vancouver, Canada. A significant growth in gold R&D has resulted during this short time span with an increase in papers from 30 to more than 150. The next industrial gold conference will be held in Limerick, Ireland during September 2006.

Conclusions:

Gold has unique properties that can be utilized successfully for industrial applications. The perception that gold is a precious metal and can only be considered as storage of wealth and appreciated for its beauty is changing. I have only shown you some of the novel applications that gold could be used for industrially in the years to come.

Ladies and gentlemen, thank you for your attention.

At an investor conference in early September, Bob Brust, Kodak’s CFO spoke about Kodak’s two portfolios: digital and traditional. For the 2nd quarter of 2005, digital portfolio revenues grew 43% year-on-year to reach $1.843 billion, while traditional portfolio revenues declined 15% year-on-year to the identical $1.843 billion. Each portfolio covers products and services in Digital & Film Imaging Systems, Graphics Communications Group and Health Systems.

Because picture-taking is a popular consumer activity, we have all read about the transition of photographers from film-users to digital still camera (DSC) users and the impact that this rapid change is having on the sales of film, along with how it is affecting silver-bearing product manufacturers. This news is also having an effect on the perception that investors and even consumers have of the silver industry. Let’s look at the facts.

Figure 1 shows how much of the total silver fabrication demand in 2004 is used in the photo imaging industry. Figure 2 shows the demand for fabrication of the different product types within the photo-imaging industry.

As shown in Figure 2, we have broken the silver-bearing photo-imaging products into four segments: photography, graphic arts, motion picture and X-Ray.

Photography Products

Undeniably, avid amateur photographers who used a lot of film shooting pictures have migrated to digital photography. On the professional side, almost all photographs that are used in advertisements and brochures are shot digitally, and more portraits are being created with digital cameras. However, there are still situations where film is necessary to capture all the “image information” although once developed the film can be scanned to create a digital image. And, unquestionably, digital picture-making, the process of turning the “picture-in-the-camera” into prints and other products, has benefited from digital imaging capabilities. But how does all this affect the use of silver?

As shown in Figure 3, the number of rolls of color negative film being purchased worldwide has been steadily falling since 2000 – and was already falling before 9/11 when tourism, a major picture-taking activity, dropped dramatically. In fact, from 2000 through 2009, we are projecting a Compound Annual Growth Rate (CAGR), or average annual change, of –8.1%. However, we all need to realize that, whereas the 24-exposure 35mm color negative roll is the main product sold in developed countries like the U.S.A., Japan and European nations, in developing countries the predominant type of color negative film being sold is 36-exposure 35mm rolls. Consequently, the amount of silver being used in the production of photography film will drop at a lower –5.1%/year CAGR during the 2003-2009 period.

This decline in film sales produces a similar drop in the number of prints that are being produced from films. However, there has been an explosion of DSC sales worldwide, along with an even bigger growth in the number of cameraphones being sold. And, while the number of prints being made for each digital picture taken is only a small percentage, the number of pictures being taken is far greater than was being taken with film cameras. As a result, we estimate that the number of prints being made from digital pictures captured on DSCs and cameraphones will grow a CAGR of 47.5% from 2000 through 2009.

Figure 4 shows the estimated number of prints being made from digital and film photography. This chart includes all printing for digital, whether in the home, through an online sharing/printing service or through a retail outlet.

Figure 5 shows our estimate of those prints made at retail and those produced on home printers.

As we all know, printing at home is performed on either inkjet or so-called dye sub (really dye diffusion thermal transfer) printers. Within the retail printing sector, silver-based photography printing has definite advantages: it is less expensive and substantially faster. However, it does require chemicals for processing and the capital investment is significantly more expensive than the other technologies. Still, a vast majority of prints being made at retail are on silver-based paper. And, through 2009, our projections for the growth in photographic paper usage for digital prints will result in a CAGR of +0.5% for the 2003-2009 period.

Combining the decline in silver usage for manufacturing photography films with the slight increase in silver demand for making photography papers gives the result shown in Figure 6. In the consumer and professional photography segment, worldwide use of silver in product fabrication was 73.64 million tr. oz. in 2003, with a projected 2009 usage of 58.20 million tr. oz., representing a CAGR of –3.3%/year.

Graphic Arts Products

Like the photography segment, the transition to digital in the graphic arts segment has been occurring faster than was anticipated only a couple of years ago. In developed countries, there is a strong trend towards variable data printing – meaning that each impression, or printed piece, contains different information (personalization). This is promoting a rapid growth in sales of digital presses, which do not use any silver-based materials. As a result, graphic arts films prices have been falling every year. Recording film has experienced an average price drop of 7.0% per annum from 2003 to 2009, and contact and camera film prices are falling 2.0%.

Silver is also used in burgeoning Computer-to-Plate (CtP) systems that are created for long-run production without the intermediate steps (many involving silver-based products) previously required. This growth of CtP has accelerated the decline in film usage, and new, non-silver-bearing CtP technologies are gaining popularity.

As a result, silver usage in the manufacturing of graphic arts products is projected to decline from 27.08 million tr. oz. in 2003 to 17.74 million tr. oz. in 2009, representing a CAGR of –6.8%/year for that period, as shown in Figure 7.

Motion Picture Film Products

The one exception to a rapid transition into digital is the motion picture industry. While amateur cinematographers have long abandoned their 8mm ciné cameras for camcorders, directors in the motion picture industry all prefer to use silver-based film for shooting rather than digital. The motion picture industry is also growing rapidly in both India and China, with the number of movie theaters also rising in both countries, although in China, in particular, there is a growing concern about the illegal DVDs being created almost before the general release of major films, which affects industry revenues and a greater growth in film usage. In many developed countries, consumers are opting to watch newly released movies at home, either through on-demand TV/entertainment channels or via purchased/rented DVDs.

Still, as technology makes it easier to use digital image projection systems and the cost for such systems decreases, more cinemas may shift to digital. This could possibly affect growth towards the end of this decade, but almost certainly will affect growth beyond 2010. Consequently, our projections for the silver demand in this segment are shown in Figure 8.

The projected silver demand for manufacturing motion picture products from 2003 through 2009 is +0.7% CAGR. But, at 12.62 million tr. oz. in 2003 it is the smallest sector in photo imaging for using silver. In 2009, projections indicate a usage of 13.18 million tr. oz.

X-Ray Products

There is also a strong move towards digital medical and dental diagnostic systems. However, despite the transition into digital diagnostic technology occurring in developed countries and major cities in developing countries, traditional X-Ray films are still being consumed in large amounts. While growth is still being projected in developing countries, it is insufficient to offset declines in the developed nations. In 2003, it is estimated that 79.23 million tr. oz. of silver was used to make silver nitrate allocated for manufacturing medical, dental and technical/industrial X-Ray films. This is projected to drop to 67.58 million tr. oz. in 2009, representing a CAGR of –2.6%, as shown in Figure 9.

There are significant advantages to digital diagnostic systems, such as the ability to rapidly obtain the opinions of experts, regardless of their location on the globe. However, in developing countries, outside of the major urban areas, medical/dental care facilities are still lacking. So, there will be continued demand for basic X-Ray films in these countries, although the loss of demand in high-population urban areas is not offset by the increased demand in low-population rural areas.

Although the amount of silver recovered for recycling from the manufacturing waste and processing of these silver-bearing products by segment, application and even country, overall we estimates that 50% of the total silver used in manufacturing photo-imaging products is recovered and recycled.

Consequently, we project that the net demand for silver in the manufacturing of photo-imaging products will drop from 97.39 million tr. oz. in 2003 to 79.46 million tr. oz in 2009, representing a CAGR of -3.3%. This is shown in Figure 10.

More details on the trends in this industry are contained in a newly-released report from The Silver Institute entitled A Review of The Worldwide Silver-Halide Photo-Imaging Products Market 2003-2010.

Monetary authorities have held gold and other precious metals for a great deal of time. Kings` treasuries, state treasuries, international reserves… gold was used initially for money circulation, then for securing currency issues, then to support international liquidity and most recently for diversification of reserve assets. It has always acted as a store of value and rather rarely as a source of yield.

During last twenty years, gold stocks were repeatedly used for “extraordinary purposes” by the monetary authorities, and among such purposes for the sales, we saw “struggles” against budget and balance of payments deficits, especially in European countries.

Nowadays central banks are well experienced in different types of transactions, such as deposits, swaps, options. Sometimes these have good returns, but I would characterise them as reducing opportunity costs rather than earnings enhancement. In spite of this, it appears to be a question: maybe central banks sell gold because they compare lease rates between gold and currencies, and they assume that only the price differential can produce a profit? But at the same time central banks sell dollars and buy euros – a currency with lower rate at present, and they limit themselves in GBP investments, which carry higher rates. In order to answer this question, let us examine the manner which central banks use in the reserve management process.

The collapse of the Bretton Woods system of fixed exchange rates signalled the start of unprecedented growth of international reserve assets. Between 1970 and 1980 the global holdings increased almost in five times and then doubled each of the following decades. The first and recent “oil price explosions” was and still remain one of the important factors of expansion of reserve assets in oil producing countries. Export orientation of the emerging economies and developing countries grounds their accumulation of international reserves. Even the fact that some of these countries used large amount of their reserves to protect their national currency during the crises of the end of 1990s could hardly had marked effect on the longer–term trend.

The size of reserve holdings exerts an influence on reserve management policy of monetary authorities. If the size of reserve holdings exceeds the amount required according to different criteria of adequacy, the country often starts to create a so-called investment portfolio, or more sophisticated nation’s wealth fund. These portfolios and funds usually consist of wider range of instruments than traditional reserve managers use, including longer-term investments and other instruments with higher yield. Such a policy raises the necessity of risk-control and risk/return management approaches.

Derivatives used for hedging purposes are not the only risk-limiting measures. One of the key aspects of the modern reserve management process is the optimisation of the composition of reserve assets and instruments. It is assumed that as a result of the diversification of the structure of reserves, there must be a stable increase in the value of the reserves.

The application of statistical models of risk measurement such as VAR has become typical for central banks during last 5 to 7 years. In general this method “permits consistent and comparable measurement of risk across instruments and portfolios, irrespective of the level of aggregation”. In practice, far from all central banks use this model to determine the proportion of gold in their international reserves (sometimes because of political reasons), but many of them use the calculations as a long-term “reference point”.

In 2000 Professor Gordon Gemill and Doctor Robert Hillman prepared an accurate (comprehensive, detailed) report on the appropriate proportion of gold in reserves. Their research was based on data from 1980 to 2000 and it answers two questions: a) how changing the proportion of gold affects risk and return, based on historic data; b) what is the “risk/return choice” for a typical central bank, so that an “optimal” currency/gold mix may be found from the efficient set of risk/return combinations.

Authors apply both the variance-minimisation approach and the Value at Risk minimisation approach to calculate the gold/currency mixture for dollar-numerated, euro-numerated and yen-numerated portfolios. They show the influence of approach, data period, numeraire of portfolio, risk/return requirements of the bank on the final proportion of gold in the reserves that, according to calculations, could form from 0% to 45% of international reserves of the country. The application of the so-called “fuzzy utility” approach, which allows the approximation of the preferences of a “typical” central bank, suggests that an acceptable range for gold is 12-18%. Despite the report having been prepared five years ago, it still seems useful to apply its methodology at present.

Calculations of the Central Bank of Russia made three years later but in the same manner showed that about 10% of gold in reserves would be appropriate with regard for special requirements.

Today the proportion of gold in our reserves is about 5% in market valuation, the result of outstripping the rise of foreign exchange earnings over gold revaluation. According to market conditions (close to zero lease rate) and existing internal regulations, we are not as active in the gold market as we were some years ago. Now we consider the possibility of using new instruments, such as interest rate swaps and gold bonds from the World Bank in our reserve management practice.

At the same time, the Bank of Russia has had very good experience in silver and PGM operations. This experience convinces us of the possibility of the use of other metals in yield accumulation.

Ladies and Gentlemen,

It is a pleasure for me to join this panel discussion. Thank you for giving me the opportunity to share a few ideas with you.

Let me go back five years:

I was speaking at a gold conference in Paris in June 2000 and I recall mentioning at that time, that the behaviour of investors and participants in the gold market can change, and if it changes it will change quickly.

At that time we experienced low inflation rates, low raw material prices, a booming stock market and a relative political stability worldwide at the end of 8 years of the Clinton administration.

Gold was priced at $ 280/ozf and $ 300/ozf respectively and the mood of the audience in the Paris Intercontinental Hotel was grim, more experts expecting a gold price at $ 250 than at $ 300 at that time.

Well, soon after that conference the behaviour of the market players changed, and it changed quickly.

• Gold mines suddenly stopped hedging their production
• the stock bubble burst
• terror hit the USA
• the new US administration changed their way to handle international conflicts dramatically
• oil prices shot up
• boom in Asia after the emerging market crisis at the end of the nineties

to mention a few changes.

I don’t have to tell you where gold is quoted today. But the recent increase in the gold price has little to do with the inflation rates, as bonds are as expensive as never before!

Our topic is yield:
Gold has given a great yield to investors over the last few years. Not through interest rates, they have gone down from low to almost zero.

But the price increase delivered a higher yield, than we could have expected from the classical gold story as an inflation hedge.

For the general public, gold is a “safe haven” in times of uncertainty, such as uncertainty about inflationary pressures or political crisis of pessimism about economic prospects. From my point of view, the factor “uncertainty” has been only one driving force behind the rise of gold prices. An important fact is the radical change in the behaviour of the mines to stop hedging their future production. Under these circumstances gold is a “real value” for many investors. Moreover, gold is available in any denomination and can be easily exchanged.

Last but not least, the low interest rates for most currencies have also made gold more attractive as an investment.

People’s trust in gold has been unbroken in the past, and will continue to remain strong in the future.

For a central bank gold will remain an important asset, but not only as a hedge against inflation. It serves a more prominent role now in a strategy to diversify its monetary reserves.

There are not too many currencies left which serve the purpose of a reserve currency (USD, Yen, Euro,), some are very small currencies (CAD, AUD, SFR). So if you have a Euro-denominated balance sheet, the gold position can be a good hedge against a USD fall (2003,2004).

Turning to the ESCB’s role as a gold investor, the ESCB as a whole holds a very substantial part of worldwide official gold reserves.

The importance of gold for the ESCB is underlined by the two Central Bank Gold Agreements and by the internal information system on gold transactions of the ESCB. These initiatives cover not only sales of gold by euro area NCBs, but provide for an exchange of information on all operations involving gold, such as deposits, swaps, interest rate swaps (IRS) and options. The combined maximum volume of gold that the signatories may lend under the agreement has not changed since 1999. The volume of actual lending transactions has in fact gone down, however.

This transparent and smooth strategy of actively managing and reducing the NCBs’ gold holdings should support the gold market.

The OeNB believes in the role of gold as an important element of global monetary reserves and a store of value, and we continue to hold an important part of our reserves in the form of gold.

However, I should add that the role of gold has undergone a significant change; while gold holdings used to be “untouchable” assets they have since turned into actively managed assets.

The way we handle gold is more and more the way we deal with any other currency. At the OeNB, this change occurred during the last decade.

Until 1993, our gold holdings were very stable at around 645 tons. Then you see a continuous reduction, mainly through sales to the AUSTRIAN MINT (100% owned by the OeNB) for the minting of “Philharmoniker” gold bullion coins.

Since 1999, we have reduced our gold holdings for 2 reasons:

Firstly, transfer of 22.3 tons to the ECB.

Secondly, under the first CBGA, the OeNB sold 90 tons. The volume that we may sell under the current agreement is smaller than that, and we feel comfortable with the level that we will have reached when this agreement has expired.

The hunt for yield combined with a wide range of instruments in place let us expand the duration considerably.

The investment strategy of the OeNB-reserves also changed in the last 6 years.

We have heavily reduced our dollar reserves. At the same time, we have increased our euro investments (incl. own funds). While we sold gold in those 6 years, as I mentioned before, the relative position of our gold reserves has nonetheless increased. As a euro-based Central Bank, we find gold to be a good hedge against USD volatility. Today, the euro share of our reserves is higher than our share of FX reserves, and we hold more gold than USD-denominated assets.

To sum it up:

Gold continues to be an important asset class in a highly diversified reserve portfolio.

Yield has become a lot more important for the portfolio managers of the Austrian Central Bank.

And we have to be actively involved in the markets where our assets are traded. We have to understand the driving forces in the market, we want to take advantage of new developments and investments in the gold market and we want to act as professionally in those markets as possible.

Thank you for your attention!

UBS is a global bank with more than $2 trillion dollars in assets under management, 70'000 employees across the world and is a major player in the gold market. As UBS's gold analyst for more than six years I guess I am well placed to talk about Over The Counter - or OTC - gold investment.

But before I move onto this topic, I would like to share some thoughts about commodity investment in general and some concerns that I have about this growing trend.

UBS recently expanded its efforts in commodities. We have had a large precious metals business for fifty years and recently added base metals, expanded our energy trading and exchange traded commodity business and added a commodity index structuring group to create a large team of professionals located in one place on our FX trading floor.

Conversations within this team, together with some recent client meetings during LME week have confirmed a suspicion that I have held for a while.

There is a Wall of Money heading for commodity markets - a Wall of Money that is driven by non-traditional players in commodities and it is set to overwhelm what have been traditionally small, largely professionally-driven markets that have had only modest speculative and investment involvement to date.

The Wall of Money is coming from real money managers who are looking to diversify into alternative asset markets due to poor returns from their traditional fields of cash bonds and equities. One of the three key themes from our global economics team in 2004 was the challenge of declining nominal returns across asset markets and this move into commodities, I believe, is an attempt by fund managers to overcome this low return environment.

I am concerned about this because asset allocation is a top down process and that too much account may be taken of historic returns and not enough about current valuations. The charge into this asset class has been led by European pension funds, one of which presented to the LBMA conference in Lisbon, explaining this strategy. But the trend is spreading and, according to one client who has monitored these developments closely, is beginning to take off in the United States, which is apparently a couple of years behind Europe in this regard. Once the actuarial consultants become comfortable with a new asset class, it is only a matter of time before pension funds follow their recommendations.

The Wall of Money is on its way and it is coming to a commodity market near you.

Our clients are demanding access to - and more information about - commodity markets and we have responded to these demands in the following manner:

• Firstly UBS investment bank's asset allocation team, headed by our Chief Economist Larry Hatheway, added alternative assets to their more traditional asset mix back in 2004, including an allocation to commodities.
• Secondly, this year UBS Wealth Management, our private bank, added a commodity team and are now recommending a sizable weighting in commodities.

The extent to which this investment has impacted on commodity prices is hard to judge. I am no expert most of these markets and copper at an all-time high of $4200/t and oil at $60 dollars a barrel may be justified by fundamentals. But open interest in copper, crude oil and gold has collectively increased sharply over the past couple of years as can be shown on this chart.

For precious metals specifically, all four exchange-traded precious metals have seen increases in open interest and larger speculative long positions – as well as the remarkable success of the ETF products in gold.

Another way that the investment in commodities is showing up is in the flattening of commodity yield curves. Markets that have traditionally been in backwardation have seen investors buying and lending - another way of saying buying forward – to take account of high commodity interest rates. In precious metals, the most notable example of this has been in platinum, where three-month deposit rates have fallen from 10% to 2% since the start of 2003 despite high prices and a market in deficit over the whole period.

An interesting example of increased investment in commodities comes from the sugar market, which has seen open interest quadruple over the past few years. Tim Woodward, our head of exchange traded commodity derivatives business tells an anecdote about a new client attracted to sugar’s fundamentals who wanted to buy what would have been half the total open interest in the sugar market – clearly this could not take place.

I have not found any reliable statistics on how much money is invested in commodities. Anecdotally I have heard of sums between 50 and 100 billion invested in commodity index products, although that could be more. But this is a tiny fraction of global funds under management. When I presented to the LBMA a few years ago, the market capitalisation of all bond and equity markets was about 50 trillion dollars – and is probably more now.

If real money continues to move into commodity markets in a meaningful way, investor interest could increase by a factor of 10 or more.

So what are the consequences of all this investment? Well obviously prices have moved sharply higher, lifting some commodities well beyond consensus estimates of long-term equilibrium prices.

But does this matter? One of the reasons that commodities tend to be mean reverting is that high prices leads to demand destruction and investment into new production capacity, bringing the markets - after some delay - into oversupply, dropping prices. Won’t this happen again?

At the risk of using some of the most dangerous words in the investment world,

We believe this time it is different.

Even if high prices return markets to oversupply then the weight of investment money can easily mop up these surpluses; what looks like a large surplus to a commodity analyst is small in the context of real money investment. This will limit or even eliminate traditional cyclical weakness.

The final points I will make about the Wall of Money entering the commodity markets is to analysts of other commodities.

To them I say: Welcome to the world of a gold analyst. Classical supply and demand analysis will matter less in the future. Investment flows and speculative positioning may become the dominant drivers of your markets.

And just because prices are going up, it will not make your job easy. As one Alex cartoon from the 1990's said. “You may think my job as a dot-com analyst is easy, but try taking the investment case of 'buy it because it is going up' and turning that into an 80 page report.”

Gold's position in all of this is rather odd. It has superior depth and liquidity compared to most other commodities - which makes it one commodity that can accommodate substantial investment due to vast above-ground stocks.

But these stocks make gold fundamentally less attractive to commodity investors. Gold is almost always in contango and producer de-hedging and central bank lending look set to keep gold interest rates low. Still, gold is a part of most of these commodity indices and should continue to attract basket-based buying irrespective of these disadvantages.

Aside from the asset allocation argument, gold has traditionally attracted investments interest due to the metal's supposedly unique attributes. For the purposes of this presentation please suspend your disbelief about some of these attributes and remember the Keynesian beauty contest.

• In a portfolio of currencies, gold has diversification characteristics - and not just against the US dollar.
• Gold is a hedge against inflation, especially where investors do not have access to - or confidence in - other usually more effective inflation hedges.
• Gold is the only financial asset that is nobody else's liability - although other real assets like real estate and commodities fit into this category as well. Real assets give protection against systemic financial sector risk.
• Gold returns are uncorrelated with other asset classes and arguably negatively correlated with other assets during extreme negative events.

UBS’ main investors in OTC gold are wealth management clients – certainly in terms of the number of investors but also in terms of activity. You will understand if I generalise and draw broad conclusions for reasons of discretion and client confidentiality: UBS is a Swiss Bank, after all.

There was a trend during the 1990s for clients to reduce gold holdings. Equities were booming and gold prices were falling, at least in dollar terms, encouraging metal investors to liquidate their holdings and buy tech stocks instead.

But this behaviour stopped in the early years of this decade and we have seen substantial interest from clients globally to buy gold. The reasons for their purchase were diverse and largely selected from the list above, although from North America we received considerable interest from investors concerned about the US dollar and the wider asset markets.

Our OTC clients invest mostly in gold via metal accounts. These accounts are like normal currency deposit accounts and are unallocated – which means that you have a bank account with ounces of gold in it. . Metal account holdings of gold allow investors to use their metal via structured products, which I will describe in some detail below.

Some clients hold gold in allocated, segregated accounts. Clients hold specific bars of gold in our vault - like keeping dollar bills in a safe deposit box for safekeeping. Since this gold cannot be lent out by UBS, it is more costly, but fractionally safer, for the client to hold gold in this manner.

We do have some clients that buy gold and remove it from UBS's vaults – although as you can imagine, we don’t recommend this. But some clients believe that holding their own physical gold gives them the most security, although clearly there are risks that the gold will be stolen or indeed lost. I know of one client that heads out every weekend in the summer with a metal detector trying to find his stash of buried Krugerands on his estate.

In addition to purchases and sales of physical gold, clients also use high gold volatility to enhance the yield on cash deposits.

There are many examples of these products. For simplicity, I will describe only two: The precious metals double currency unit or DOCU and the Guaranteed Return on Investment or GROI.

The precious metals DOCU is a combination of a money market instrument and a sold call option on gold and is suitable for clients that own gold. The premium from the sold gold call is embedded in the interest rate and at expiry the investor receives the interest coupon plus the principle either gold or in the base currency.

The example here shows that the when gold was trading at $467.20 per ounce a one-month DOCU with a strike at $480/oz would yield an interest rate of 7.10% per annum.

If at expiry the gold price is below $480/oz the investor receives gold back and an interest rate of 7.10% per annum paid in US dollars.

If the price of gold is above $480/oz at expiry the investor receives dollars converted at a price of $480/oz plus accrued interest at 7.10% per annum, paid in US dollars.

Clearly this client has to be prepared to sell his gold under certain circumstances in order to transact a DOCU.

For investors who do not own gold but are prepared to buy gold under certain circumstances, a DOCU can be structured whereby the investor will invest dollars and sell a gold put. If the price of gold at expiry is below the strike price, the investor will get his capital back in gold back rather than US dollars.

The Guaranteed Return on Investment or GROI combines the potential trading revenue of the gold market with those of a money market instrument. It offers a full or partial refund of investment at expiry together with participation in an option strategy. The partial or total capital protection element makes this suited to a more conservative investor who nevertheless is prepared to take some risk to try and increase returns compared to a traditional money market investment.

The example shown here is a Range GROI. Here the investor places dollars on deposit and takes a bet that gold will stay in a range over the entire three-month period. If gold does remain in the range for the whole period the investor receives his money back plus interest at 5.5% per year. If gold does trade outside of this range, the investors only gets his capital back.

These examples demonstrate some of the ways that OTC gold investments can be structured with gold options to enhance yield on money market deposits.

In conclusion, I have tried to explain some of the interest we get in gold from our wealth management customers, explaining why they buy gold, how they hold it and what they can do with gold once they have it.

I have also explained some of my current thinking about commodities and about the consequences of continued Real Money investment in this new asset classes.

I hope this has been of some interest I would like to thank my colleagues Tim Woodward and Cristie Parker in London for their help with the non-gold examples in this talk.

Thank you.