Wealth Management Research

30 November 2011

Gold
Central bank gold not solving Europe's debt crisis
Selling central bank gold is not solving Europe's problems. Moreover, legal, political and institutional barriers need to be taken into consideration as well. On the contrary, it seems that central banks' interest in the yellow metal as an attractive alternative of holding their foreign reserves is greater than ever. Year to date central banks bought nearly 370 tons. Our 12-month target remains intact at USD 2,200/oz. Price levels below USD 1,700/oz should be used to build up new positions. Limits to central bank gold sales in Europe Several central banks in Europe hold sizable gold positions like the Bundesbank: 3401 tons, Banca d'Italia: 2451 tons or Banque de France: 2435 tons to mention few. Thus, it does not surprise that some market participants have shifted their focus on these assets to address Europe's sovereign debt problems. We think legal, political and institutional barriers will prevent that gold will be used to solve the Eurozone crisis. The current central bank gold agreement (CBGA3) limits the maximal annual gold sale of all signatory European central banks to 400 tons until September 2014. Moreover, gold sales alone will not change the overall debt profile. Gold holdings of Eurozone countries cover less than 10% of their individual debt. And last but not least the gold belongs to the individual central banks and not to the respective governments, which should render protection from a forceful withdrawal by the government. Rules can be broken While rules can be broken, such a desperate move by politicians would create more mistrust, in our view. The swap of hard assets into paper money would likely be counter productive. We therefore rule out gold sales addressing Europe's debt crisis. In case we do see some gold selling, central banks from emerging markets are attractive counterparties. In their effort to diversify ballooned foreign reserves, it appears that they have purchased almost 370 tons ytd with potential for more.
Dominic Schnider, analyst, UBS AG Giovanni Staunovo, strategist, UBS AG

Market data and WMR forecasts (USD/oz)

Spot 3M futures Volatility 3M forecast 12M forecast 1,708 1,711 26% 1,920 2,200

Bullish Bullish

Source: Bloomberg, UBS WMR; Exchange: Comex

Gold price In USD/ ounces

2'000 1'800 1'600 1'400 1'200 1'000 800 600 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Gold: Spot Contract 55-Day Moving Avg. 200-Day Moving Avg.

Source: Bloomberg, UBS WMR

Gold holdings of Eurozone countries cover less than 10% of their overall debt In % of government debt (2010), calculated with a gold price at USD 1,708/oz
10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%

Portugal

France

Austria

Slovakia

Greece

Slovenia

Estonia

Netherlands

Finland

Luxembourg

Cyprus

Germany

Source: World Gold Council, Eurostat, Bloomberg, UBS WMR

Historical performance (in %)

Underlying Gold Silver -1 m -2.1 -10.0 -3 m -4.8 -22.5 -12 m 24.7 16.3 ytd 20.2 2.1

Source: Bloomberg

This report has been prepared by UBS AG. Please see important disclaimers and disclosures that begin on page 2.

Belgium

Ireland

Malta

Spain

Italy

Gold

Appendix
Terms and Abbreviations
Term / Abbreviation
Backwardation BCM CBOT CIF CNIA CONAB COT Crush margin DJ UBS Index E.I.A ETF FAO HH Natural Gas IAI ICE ICSG IMF JM KCBT LNG Mtoe NYBOT OECD PGM S&P GSCI SI TCF TOCOM U.S.D.A UNICA USD/bu USD/lb USD/MT USGS WGC WTO

Description / Definition
When the spot price trades above the prices of futures Billion Cubic Meters Chicago Board of Trade Cost, insurance and freight China Non-Ferrous Metals Industry Association Companhia Nacional de Abastecimento (Brazilian government agency) Commitment of Traders Difference between the value of the oil and meal produced from the soybeans Dow Jones UBS Commodity Index Energy Information Administration Exchange Traded Fund Food and Agriculture Organisation Henry Hub Natural Gas International Aluminium Institute Intercontinental Exchange International Copper Study Group International Monetary Fund Johnson Matthey Kansas City Board of Trade Liquified Natural Gas Million tonnes oil equivalent New York Board of Trade Organisation for Economic Co-operation & Development Platinum Group Metals Standard and Poor's-Goldman Sachs Commodity Index Silver Institute Trillion cubic feet Tokyo Commodity Exchange US Department of Agriculture Sugar and Alcohol Millers Association of So Paulo state US Dollar /bushel USD per Pound USD per Metric Ton U.S. Geological Survey World Gold Council World Trade Organisation

Term / Abbreviation
BCF Bu CFTC CME COMEX Contango CRB Index CTA D.O.E ETC Excess Return (ER) FOB I.E.A ICCO ICO IIZSG INSG JODI LME mbpd NOAA NYMEX OPEC RICI SHFE TC/RC Thomson Reuters GFMS Total Return (TR) UBS CMCI USD/BBL USD/GL USD/MMBtu USD/oz WBMS WTI Crude Oil

Description / Definition
Billion Cubic Feet Bushel (1 ton = 36.7bu Wheat/soybean; 39.37 bu corn Commodity Futures Trading Commission Chicago Mercantile Exchange New York Commodities Exchange When the spot price trades below the prices of futures Index Commodities Research Bureau Index Commodity Trading Adviser U.S. Department of Energy Exchange Traded Commodity Excess return = spot return + roll yield return (rolling of futures contracts) Free on Board International Energy Agency International Cocoa Organisation International Coffee Organisation International Lead and Zinc Study Group International Nickel Study Group Joint Oil Data Initiative London Metal Exchange million barrel per day National Oceanic and Atmospheric Administration New York Mercantile Exchange Organization of Petroleum Exporting Countries Rogers International Commodity Index Shanghai Futures Exchange Treatment/Refining Charges research consultancy specialising in precious metals, base metals and steel market research Total return = excess return + return from the cash collateral UBS Constant Maturity Commodity Index USD per Barrel USD per Gallon USD per 1 million British Thermal Unit USD per oz, (1 oz = 31.10 grams) World Bureau of Metal Statistics West Texas Intermediate Crude Oil

Wealth Management Research 30 November 2011

Gold

Appendix
Global Disclaimer
Wealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisions of UBS AG (UBS) or an affiliate thereof. In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. It is based on numerous assumptions. Different assumptions could result in materially different results. We recommend that you obtain financial and/or tax advice as to the implications (including tax) of investing in the manner described or in any of the products mentioned herein. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS and its affiliates). All information and opinions as well as any prices indicated are currently only as of the date of this report, and are subject to change without notice. Opinions expressed herein may differ or be contrary to those expressed by other business areas or divisions of UBS as a result of using different assumptions and/or criteria. At any time UBS AG and other companies in the UBS group (or employees thereof) may have a long or short position, or deal as principal or agent, in relevant securities or provide advisory or other services to the issuer of relevant securities or to a company connected with an issuer. Some investments may not be readily realizable since the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and options trading is considered risky. Past performance of an investment is no guarantee for its future performance. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in FX rates may have an adverse effect on the price, value or income of an investment. This document may not be reproduced or copies circulated without prior authority of UBS or a subsidiary of UBS. UBS expressly prohibits the distribution and transfer of this document to third parties for any reason. UBS will not be liable for any claims or lawsuits from any third parties arising from the use or distribution of this document. This report is for distribution only under such circumstances as may be permitted by applicable law. Distributed to US persons by UBS Financial Services Inc., a subsidiary of UBS AG. UBS Securities LLC is a subsidiary of UBS AG and an affiliate of UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-US affiliate when it distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected through a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate. The contents of this report have not been and will not be approved by any securities or investment authority in the United States or elsewhere. Version as per October 2011. 2011. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

Wealth Management Research 30 November 2011