2 October 2012

LGT Gold Price Forecasts for 2013

Review of Q3 2012: Monetary Policy and the Gold Price
The price of gold consolidated in Q3, remaining mostly within a bandwidth between USD 1,550 and USD 1,650 from July to August. Gold profited at times from the anticipation of a third round of quantitative easing from the US Federal Reserve (QE3), and also from Mario Draghis announcement of intervention measures by the European Central Bank (ECB). Subsequent events have shown that gold market participants doggedly held expectations with regard to monetary policy have paid off in the form of a higher gold price, and this even earlier than we had expected. In his speech to the Jackson Hole Symposium at the end of August, Fed Chairman Ben Bernanke highlighted the positive effects the two previous monetary policy measures (QE1 and QE2) had had on the economy, as well as their impact on the current situation on the job market. However, he did not give any specific or additional details on the actual mechanisms by which this is taking place, and the timing for QE3 was also left open. Interpreting this as fresh hope, market participants subsequently began pricing in a higher likelihood for this third round of easing being implemented at the next meeting of the Open Market Committee (FOMC) on September 13, 2012. Gold was able to break through strong resistance points on the back of this, and settled close to USD 1,700 in the trading days that followed. On September 6, the gold price received further support from the European Central Bank, which announced an unlimited bond-buying program via the European Stability Mechanism (ESM). Under this program, governments will be able to seek assistance from the bailout fund subject to set conditions, and the ESM would then actively buy government bonds with maturities of up to three years. The intention is for these bond purchases to be completely neutralized and have no net impact on money supply. On September 13, following the two-day meeting of the FOMC, Ben Bernanke announced the next chapter of the monetary policy experiment. In the form of QE3, the Fed is seeking to counter weak economic activity with purchases of mortgage-backed securities (MBS) of some USD 40 billion a month. With these supporting moves, it is also aiming to bring down unemployment from the current rate of 8.2%. Surprisingly, the Fed stated that its bond purchases would be unlimited until the situation on the job market improves, and confirmed that it would leave its current zero interest rate policy unchanged through to mid-2015 at least. Conclusion: With these measures, the Federal Reserve has changed its reaction function to such an extent that, in its dual mandate, it is affording a higher weighting to unemployment and economic activity than to price stability. Given that reducing the level of unemployment is a long-term process, higher inflation as measured by the consumer price index will certainly be tolerated for a time, and the Fed will continue to hold off on countermoves even when economic activity starts to recover. The US central bank has thus implicitly raised the minimum price for gold. With this new monetary policy stance of QE3 for an unlimited period, it will also exert a long-term influence on the gold price. Gold has since been trading above the USD 1,750 mark, which is higher than the price target of USD 1,725 we had previously envisaged for Q4. As is appropriate in light of this changed monetary policy environment, we have updated our short-term price forecast and expect the positive price trend to continue over the coming year.
Metals Gold Silver Platinum Palladium Rhodium Copper Aluminium LGT Forecasts Gold Silver Platinum Palladium Key figures Avg. 2012 Avg. Q1 Avg. Q2 Avg. Q3 High 2012 Low 2012 All time high All time low Curr. Price 1,775.00 34.80 1,670.00 640.00 1,100.00 8,200.00 2,100.00 % YTD 14.60% 24.26% 19.60% 2.20% -21.50% 7.80% 3.88%

Q4 2012 Q1 2013 1,800.00 1,825.00 37.00 38.00 1,700.00 1,725.00 650.00 670.00 Gold 1,655.00 1,690.00 1,615.00 1,650.00 1,790.00 1,550.00 1,920.00 35.00 Silver 30.70 32.65 29.45 29.95 37.45 26.15 49.80 0.72

Source: Bloomberg, LGT CM

Gold price 2012

Source: LGT CM

US: Zero Interest Rate Policy to 2015

Source: LGT CM

LGT Capital Management Ltd., Schtzenstrasse 6, CH-8808 Pfffikon, Phone +41 55 415 92 11, Fax +41 55 415 94 80, E-mail lgt.cm@lgt.com, Internet www.lgt.com. Please refer to our disclaimer on the last page for important legal information.

Bayram Dincer

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2 October 2012
Global gold fundamentals: key supply & demand figures
At the beginning of September, the precious metals specialists at GFMS published their statistics for H1 2012. Based on these aggregated figures for the global supply and demand for physical gold, we can ascertain a positive interim result for the first half of 2012. Global mine production: On the price-inelastic supply side, mining companies produced 1,366mt of newly mined gold in H1. We expect an increase in gold production to 1,514mt in H2. In light of the current situation in South Africa, with ongoing mine worker strikes at various gold mines, we expect to see a drop in the supply volume from South Africa. For the year as a whole, we have adjusted our mining supply figure to around 2,880mt. Scrap and recycled gold: Supply from this category came in at 768mt in H1. Fears on the market that the physical gold market would be flooded with recycled gold proved to be unfounded. We see this as a positive development, and for the immediate future we do not expect to see any increase in supply volumes that would have a significant impact on the price of gold. We expect an increase of 920 mt in H2, and a marginal change in overall supply at 1,688 mt. Jewelry demand: As regards volumes, the most important figure on the demand side is the jewelry fabrication category. The first half of the year was weak in terms of volumes, with demand at just 932mt. As we have reported several times already, the decline in jewelry demand is mostly connected to events in India. That said, fears of a further increase in gold transaction taxes have led to higher physical demand from Indian consumers and dealers in some instances. We expect to see stronger demand volumes in H2, at 968mt. Our estimate for global jewelry demand remains unchanged at 1,900mt. Other fabrication: The industry, electronics and coins sub-sectors which are brought together in this demand category each saw consumption volumes stagnate, with demand coming in at a total of 376mt in H1. We expect this stagnation in demand to continue in H2, with volumes at 374mt. Our demand estimate for the year as a whole therefore remains unchanged at 750mt. Official sector: On a net basis, the central banks accumulated 273mt of gold in the first half of the year. We expect the central banks and especially those from the emerging markets to continue with their purchases in H2 as well, with a net demand volume of 277mt. We are revising our forecast for the official sector as a net buyer, and now estimate a net volume of 550mt. Investment in physical gold bars: Demand in this category came in at 504mt in H1. We expect investment activity to be higher in H2 at 596mt, putting overall investment at around 1,100mt. Implied investment: This category contains all gold transactions not covered by the demand categories above. This residual amount which balances out the model stood at just 40mt in H1. We estimate implied investment in H2 at 219mt, giving a figure of 259mt for the year as a whole. Conclusion: We need make only marginal adjustments to our previously announced estimates for the second half of the year, and we can therefore confirm that the framework and environment for the physical gold market remain intact.
Source: GFMS, LGT estimates blue Source: GFMS, LGT estimates blue

Intact global gold fundamentals

Global mine supply

Jewelery fabrication demand

Source: GFMS, LGT estimates blue

Official sector demand

Source: GFMS, LGT estimates blue

LGT Capital Management Ltd., Schtzenstrasse 6, CH-8808 Pfffikon, Phone +41 55 415 92 11, Fax +41 55 415 94 80, E-mail lgt.cm@lgt.com, Internet www.lgt.com. Please refer to our disclaimer on the last page for important legal information.

Bayram Dincer

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2 October 2012
Outlook: monetary policy and LGTs gold price forecast
In the short term, market participants will be focusing their attention on the upcoming US presidential election. Another key issue for gold investors will be the impending fiscal cliff in the US, with a whole series of tax increases and austerity measures set to enter into force automatically in January 2013. The price of gold should also profit from this heightened uncertainty. Looking at the long term, we see the continuation of the monetary policy experiment in the US as being a positive price-determining factor. The unlimited quantitative easing program that has been announced, tied as it is to full employment, is a long-term structural process. Critics are already voicing initial doubts over the effectiveness of this program, and accordingly its future success. We do have some misgivings here, because in our opinion this third monetary policy move has implicitly paved the way for additional measures. A simple example highlights our concerns. The long-term average US unemployment rate from 1990 to 2012 was 6.0%. The current rate is 8.2%, i.e. around two percentage points higher than the long-term norm envisaged by the members of the FOMC. Let us optimistically assume that the monthly USD 40 billion purchases of MBSs lower the unemployment rate by 0.1% on average. The result after 22 months (around Q3 2014) and USD 880 billion in bond purchases would then be an unemployment rate of around 6.0%. It is questionable whether the measures implemented will actually bring about this desired result. Investors therefore believe it is probable that we will see yet further unorthodox monetary policy decisions. In the scenario outlined above, the Feds current balance sheet of USD 2,823 billion would be further inflated. A doubling of this figure would represent a critical level. In addition to the Federal Reserve, numerous other central banks are seeking to stimulate economic activity via monetary policy. With a fully functioning transmission mechanism, this expansion in central bank balance sheets would have an inflationary impact in the real economy. The fears that this increase in money supply could result in a phase of higher inflation rates in excess of 2% p.a. are justified. Furthermore, the currencies involved would be devalued. With its qualities as a stable real asset and as an alternative currency, gold thus offers investors an opportunity for diversification. In our baseline scenario, we expect a consolidation phase over the short term in Q4, with the price of gold tending slightly higher through to the end of the year. Accordingly, we recommend using any temporary price weakness as buying opportunities to increase strategic gold allocations. As we have argued several times already, the fundamental environment for the global physical gold market remains intact. We therefore do not expect to see any noteworthy changes in the market fundamentals over the coming year that would have a negative impact on the price of gold. We remain of the opinion that both the traditional and macroeconomic arguments in favor of gold investments next year point to an even higher gold price. We have made a slight upward correction in LGTs gold price forecast for Q4 to USD 1,800. That said, we do not expect any new nominal record prices above USD 1,925 before the end of the year. In our view, a new price regime with gold prices above USD 1,900 would be realistic only from next year onwards.

US Unemployment 1990-2012

Source: LGT CM

US GDP QoQ

Source: LGT CM

US Fed asset balance sheet

Source: LGT CM

Investments and average gold price

LGT Gold Price Forecast to 2013: Q4 2012 USD 1,800 Q1 2013 USD 1,825 Q2 2013 USD 1,850 Q3 2013 USD 1,900 Q4 2013 USD 1,950

Source: LGT CM

LGT Capital Management Ltd., Schtzenstrasse 6, CH-8808 Pfffikon, Phone +41 55 415 92 11, Fax +41 55 415 94 80, E-mail lgt.cm@lgt.com, Internet www.lgt.com. Please refer to our disclaimer on the last page for important legal information.

Bayram Dincer

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IMPORTANT INFORMATION

This document is intended solely for the recipient and may not be duplicated, distributed or published either in electronic or any other form without the prior written consent of LGT Capital Management AG. This publication is for your information only and is not intended as an offer, solicitation of an offer, public advertisement or recommendation to buy or sell any investment or other specific product. Its content has been prepared by our staff and is based on sources of information we consider to be reliable. However, we cannot provide any undertaking or guarantee as to it being correct, complete and up to date. The circumstances and principles to which the information contained in this publication relates may change at any time. Once published, therefore, information shall not be understood as implying that no change has taken place since its publication or that it is still up to date. The information in this publication does not constitute an aid for decision-making in relation to financial, legal, tax or other consulting matters, nor should any investment or other decisions be made on the basis of this information alone. It is recommended that advice be obtained from a qualified expert. Investors should be aware that market conditions can change and the value of investments can fall as well as rise. Positive performance in the past is therefore no guarantee of positive performance in the future. Forecasts are not a reliable indicator of future value developments. The risk of price and foreign currency losses and of fluctuations in return as a result of unfavourable exchange rate movements cannot be ruled out. There is a possibility that investors will not recover the full amount they initially invested. Data and forecasts are sourced from Bloomberg (www.bloomberg.com), Datastream (http://thomsonreuters.com), LGT Capital Management (www.lgt.com), or other source as stated

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Source of data and forecasts

Germany: This document is intended solely for sophisticated investors.

Country-specific important information

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LGT Capital Management Ltd., Schtzenstrasse 6, CH-8808 Pfffikon, Phone +41 55 415 92 11, Fax +41 55 415 94 80, E-mail lgt.cm@lgt.com, Internet www.lgt.com.

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