Gold and Silver: the dynamic duo and the uncertain recovery

10th September 2020

Nitesh ShahDirector, Research, WisdomTree

Gold outlook

Gold model

FOR FINANCIAL PROFESSIONAL USE ONLY Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties 2

Source: Bloomberg, WisdomTree price model, data available as of 29 June 2020. Model calibration: April 1996 to April 2017. “Out of sample” period: May 2017 to June 2020

-40

-20

0

20

40

60

80

1996 1999 2002 2005 2008 2011 2014 2017 2020

% y

ear-o

n-ye

ar

95% confidence interval Gold price (actual)Gold price (forecast)

Gold price model in "out of sample" test We have built a model that demonstrates that changes in gold price (in US Dollars) are driven by (direction in parenthesis):

+ Changes in the trade weighted US Dollar (-)

+ Consumer Price Index (CPI) inflation (+)

+ Changes in nominal yields on 10-year US Treasuries (-)

+ Investor sentiment (measured by speculative positioning in the futures market) (+)

What has driven gold prices in the past?

FOR FINANCIAL PROFESSIONAL USE ONLY Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties 3

Source: Bloomberg, WisdomTree price model, data as of 30 July 2020. July 2020 inflation assumed to be 1%.The fitted gold price is the price the model would have forecast. The constant does not have economic meaning, but is used in econometric modeling to capture other terms. It can be thought of as how much gold prices would change if all other variables are set to zero (although that would be unrealistic).

-40

-30

-20

-10

0

10

20

30

40

50

60

-40

-30

-20

-10

0

10

20

30

40

50

60

1996

1997

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2001

2002

2003

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2005

2006

2007

2008

2009

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2012

2013

2014

2015

2016

2017

2018

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2020

% y

ear-o

n-ye

ar

% y

ear-o

n-ye

ar

Speculative positioning Treasury yields Inflation Dollar basket

Constant Fitted gold price Actual gold price

The impact of each variable: attribution of fitted results vs. actual price

Focus on past three years

FOR FINANCIAL PROFESSIONAL USE ONLY Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties 4

Source: Bloomberg, WisdomTree price model, data as of 30 July 2020. July 2020 inflation assumed to be 1%.The fitted gold price is the price the model would have forecast. The constant does not have economic meaning, but is used in econometric modeling to capture other terms. It can be thought of as how much gold prices would change if all other variables are set to zero (although that would be unrealistic).

-40

-30

-20

-10

0

10

20

30

40

50

60

-40

-30

-20

-10

0

10

20

30

40

50

60Ju

l 201

7A

ug 2

017

Sep

2017

Oct

201

7N

ov 2

017

Dec

201

7Ja

n 20

18Fe

b 20

18M

ar 2

018

Apr

201

8M

ay 2

018

Jun

2018

Jul 2

018

Aug

201

8Se

p 20

18O

ct 2

018

Nov

201

8D

ec 2

018

Jan

2019

Feb

2019

Mar

201

9A

pr 2

019

May

201

9Ju

n 20

19Ju

l 201

9A

ug 2

019

Sep

2019

Oct

201

9N

ov 2

019

Dec

201

9Ja

n 20

20Fe

b 20

20M

ar 2

020

Apr

202

0M

ay 2

020

Jun

2020

Jul 2

020

% y

ear-o

n-ye

ar

% y

ear-o

n-ye

ar

Speculative positioning Treasury yields InflationDollar basket Constant Fitted gold priceActual gold price

The impact of each variable: attribution of fitted results vs. actual price

Gold forecast July 2021

FOR FINANCIAL PROFESSIONAL USE ONLY Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties 5

Source: WisdomTree Model Forecasts, Bloomberg Historical Data, data available as of close 30 July 2020

0

500

1000

1500

2000

2500

3000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

$/Tr

oy o

unce

Actual Consensus Status-quo

Gold price forecasts

Consensus

FOR FINANCIAL PROFESSIONAL USE ONLY Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties 6

Source: WisdomTree, *Bloomberg consensus forecasts taken in July 2020

Consensus

Q3 2020 Q4 2020 Q1 2021 Q2 2021

Inflation forecast* 0.7% 0.6% 0.8% 2.0%

Nominal 10-year yields forecast*

0.78% 0.87% 0.96% 1.05%

US$ exchange rate forecast (DXY)*

95.8 95.6 94.6 93.8

Speculative positioning forecast

250k 250k 250k 250k

Gold price forecast

US$1870/oz US$1930/oz US$2065/oz US$2200/oz

Status-quo on Treasury yields and Dollar

FOR FINANCIAL PROFESSIONAL USE ONLY Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties 7

Source: WisdomTree

Status-quo

Q3 2020 Q4 2020 Q1 2021 Q2 2021

Inflation forecast 0.8% 0.8% 1.5% 2.5%

Nominal 10-year yields forecast

0.55% 0.55% 0.55% 0.55%

US$ exchange rate forecast (DXY)

93 93 93 93

Speculative positioning forecast

300k 300k 350k 350k

Gold price forecast

US$1995/oz US$2080/oz US$2210/oz US$2640/oz

Net gold speculative positioning rebuilding

FOR FINANCIAL PROFESSIONAL USE ONLY Historical performance is not an indication of future performance and any investments may go down in value 8

Source: Bloomberg, WisdomTree, data as of 20 August 2020

-200,000

-100,000

0

100,000

200,000

300,000

400,000

500,000

1995

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1999

2000

2001

2002

2003

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2005

2006

2007

2008

2009

2010

2011

2012

2013

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2018

2019

2020

Net speculative positioning in gold futures

As a percentage of open interest, positioning is far from the 2009 peak, but the drop since February 2020 is also less pronounced

FOR FINANCIAL PROFESSIONAL USE ONLY Historical performance is not an indication of future performance and any investments may go down in value 9

Source: Bloomberg, WisdomTree, data as 20 August 2020

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Net speculative positioning as a percentage of open interest

Gold in exchange traded products rises over 100 million ounces

FOR FINANCIAL PROFESSIONAL USE ONLY Historical performance is not an indication of future performance and any investments may go down in value 10

Source: Bloomberg, WisdomTree, data as of 20 August 2020

0

20

40

60

80

100

120

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Troy

oun

ceM

illio

ns

Gold held in exchange-traded products

Gold price dips have been in line with Treasuries

FOR FINANCIAL PROFESSIONAL USE ONLY Historical performance is not an indication of future performance and any investments may go down in value 11

Source: Bloomberg, WisdomTree, data available as of close 20 August 2020

-2

-1

0

1

2

3

4

50

500

1,000

1,500

2,000

2,500

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%, I

nver

ted

Axis

US$

/oz

Gold (Left) Real Interest rate (Right)

Gold vs real rates (Treasury Inflation-Protected Securities yield)

Gold does not earn negative real yields

FOR FINANCIAL PROFESSIONAL USE ONLY Historical performance is not an indication of future performance and any investments may go down in value 12

Source: WisdomTree, Bloomberg. Period: January 1972 to January 2020. Lines of best fit shown on chart are calculated via Excel function (labelled linear in key above). We use a separate line of best fit for the positive real yield observations and negative real yield observations.

-100.0

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-6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0

Gold

pric

e y-

o-y,

%

US 10-year Treasury yields less inflation (%)

Negative real rates Positive real rates Linear (Negative real rates) Linear (Positive real rates)

Some of gold's highest returns have come during periods of negative real interest rates

During high positive real rate environments, gold returns have

tended to be lower

Relationship between Real Rates (US 10 year yield less inflation) and gold (1972-2019)

The sharp rise in M2 monetary aggregates could unhinge inflation expectations

FOR FINANCIAL PROFESSIONAL USE ONLY Historical performance is not an indication of future performance and any investments may go down in value 13

Source: Bloomberg, WisdomTree, data available as of close 29 June 2020

-5%

0%

5%

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20%

25%

1971

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2019

M2 Money supply Inflation (lagged 3 years)

Figure 1: Gold and central bank balance sheetsChart TitleUS M2 money supply and inflation

Gold has historically been a strong inflation hedge

FOR FINANCIAL PROFESSIONAL USE ONLY Historical performance is not an indication of future performance and any investments may go down in value 14

Source: Bloomberg, WisdomTree, data available as of close 29 June 2020

-4%

-2%

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2%

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6%

8%

10%

12%

14%

16%

-60%

-40%

-20%

0%

20%

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60%

80%

100%

120%

140%

160%

1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020

Gold (q-o-q, %, left) US consumer price index (q-o-q, %, right)

Gold price vs US inflation

Silver outlook

Silver model

FOR FINANCIAL PROFESSIONAL USE ONLY Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties 16

Source: Bloomberg, WisdomTree price model, Model calibration: June 1998 to April 2016. “Out of sample” period: May 2016 to June 2020

-100

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2008

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Silv

er p

rice

% c

hang

e y-

o-y

95% confidence interval Actual Fitted

Silver model in "out of sample" test + Silver and gold historically 80% correlated

+ Best way to model silver is to look at gold plus a number of supply and demand variables

+ While physical supply and demand matter for silver, they matter less for gold

Framework for silver

FOR FINANCIAL PROFESSIONAL USE ONLY Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties 17

+ Manufacturing purchasing managers index: a proxy for industrial demand

+ Exchange inventory: a measure of available supply

+ Mining capex: factors in delay in investment change and output

Variable Direction

%∆ gold price +ve

%∆ global manufacturing PMI +ve

%∆ exchange inventory -ve

18 month lag %∆ mining capex -ve

Source: WisdomTree

Our model indicates 50% upside for silver prices by July 2021 when using the Status-quo gold scenario

FOR FINANCIAL PROFESSIONAL USE ONLY Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties 18

Source: WisdomTree (forecasts: 31/07/2020 – 31/07/2021), Bloomberg (historic data: 30/04/1995 – 30/07/2020)

0

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1995

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2021

US$

/oz

Actual Forecast

Silver forecast

Capex growth slowed but still positive

FOR FINANCIAL PROFESSIONAL USE ONLY Historical performance is not an indication of future performance and any investments may go down in value 19

Source: WisdomTree, Bloomberg. Q1 1996 - Q2 2020

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%19

96

1997

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2001

2002

2003

2004

2005

2006

2007

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2018

2019

Inde

x le

vel,

y-o-

y, %

Cape

x y-

o-y,

% (

12 m

onth

lag)

Mining Companies CAPEX (LHS) Bloomberg Industrial Metals Subindex (RHS)

Miners capital expenditure (capex) growth

COVID-19 disruptions to silver mine supply

FOR FINANCIAL PROFESSIONAL USE ONLY Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties 20

Operating – mines that are currently operating, Construction – mine is being constructed, Feasibility – a detailed feasibility study has taken place, Pre Feasibility – a preliminary feasibility study has taken place, COVID Loss – estimated loss of production due to virusSource: Metals Focus. Forecasts from 2020

650

700

750

800

850

900

950

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Silv

er m

ine

supp

ly, M

illio

n oz

Operating & Historic Construction Feasibility Pre Feasibility Other COVID Loss

Silver mine supply

PMIs have staged a vigorous recovery…. Is it sustainable?

FOR FINANCIAL PROFESSIONAL USE ONLY Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties 21

Source: WisdomTree, Bloomberg. 05/02/2009 to 14/07/2020

30

35

40

45

50

55

60

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

JPMorgan Global Manufacturing Purchasing Managers Indices (PMIs)

Above 50 - expansionBelow 50 - contraction

Forecast

Global Manufacturing Purchasing Managers Indices

Inventory growth has slowed in the COVID-19 crisis, but is still plentiful

FOR FINANCIAL PROFESSIONAL USE ONLY Historical performance is not an indication of future performance and any investments may go down in value 22

Source: Bloomberg, WisdomTree. April 1996 – June 2020COMEX is a futures and options trading market, now owned by Chicago Mercantile Exchange

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Thou

sand

troy

oun

ces

Registered Eligible

COMEX silver inventory

Disclaimer

FOR FINANCIAL PROFESSIONAL USE ONLY 23

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