Gold for Beginners: Conference Call on Precious Metals Strategy

1. ab Gold For Beginners: EM Conference Call Edel Tully, Precious Metals Strategy Edel.Tully +44 207 567 6755 Julien Garran, Metals and Mining Research Julien.Garran@ubs.com +44-20-7568 3540 June, 2010

2. Gold’s Bull Run Persists Source: Bloomberg, UBS

3. Assets and loan flow Capital flows out of the US to emerging economies US authorities reflate This attracts more Capital flows Raises central bank Reserves at commodity exporters Global central banks’ reserves rise This bids up commodity prices Growth picks up, Asset prices rise Local banks lend to local consumers & businesses Source: Bloomberg, UBS

4. Clock watching

5. 2010 markets impacted by European Sovereign Risk Faith in fiat currencies weakens, gold viewed as flight to quality Eurozone sovereign (10y) spreads over Bunds Eurozone Sovereign CDS premium (5y senior) Source: Bloomberg, UBS

6. Gold in Multiple Currencies • Gold in alternative currencies remains popular trade • YTD: XAUEUR +31%; XUAGBP +23%; XAUUSD +11% Source: Bloomberg, UBS

7. Gold and the USD – a negative relationship no more • In May, decoupling of traditional gold and USD relationship • Previously, a stronger USD had negatively impacted gold’s direction Source: Bloomberg, UBS

8. Gold versus the UBS Risk Index • Risk averse market conditions in Q2 – fuels gold strength Source: Bloomberg, UBS

9. The Path to Monetary Policy Normalisation begins… • RBA and Norges Bank have already raised interest rates • UBS economists expect a US rate hike from September, ECB much later • Rising US interest rates (in particular) without an inflation backdrop could be negative for gold Source: UBS FX Strategy

10. Gold and Inflation Expectations • QE actions of 2009 created an inflation potential… • Prompted gold buying but those expectations now stalled • Some concerns foranticipated inflation remain, but time horizon extended Source: Bloomberg, UBS

11. Emerging Markets are telling an inflation story though… • Era of declining inflation in emerging markets is over • Inflation is largely concentrated in Asia • China and India centred – gold positive Source: Bloomberg, UBS

12. Fiscal Indicators – Past, Present and Predicted – inflation risk? Government Debt as % of GDP Government Balance as % of GDP Source: UBS

13. Unstable Debt Dynamics - Potential for Inflation • QE actions of 2009 fuelled significant gold demand • Risk that persistently high levels of public debt will drive down capital accumulation, productivity growth and long term potential growth.  • Long term fiscal imbalances pose significant risk of higher inflation: • Through Debt Monetisation (quantitative theory of money) • But increasing interest rates to fight inflation equals larger debt burden • Potential to inflate away the real value of debt • BIS Paper: The future of public debt: prospects and implications • “History shows that countries that ran high public debts eventually ended up with high inflation because governments were unwilling to pay high interest rates” • Examples of Belgium, Spain and Italy pegging interest rates and resorting to debt monetisation post WW1

14. Lack of confidence in monetary system, gold’s moment?

15. ab Getting Specific on Gold Fundamentals

16. Central Bank Gold Sales: 2009 = Historic Year • Change in multi-decade official sector approach • Overall net sellers of 41 tonnes in 2009, but net buyers in Q2, Q3 and Q4 • One of the largest fundamental shifts in this market Source: GFMS, WGC, UBS

17. Makeup of Gold Official Sector Reserves Asia significantly underweight Gold Source: WGC, UBS

18. CBGA3 – Limited Sales to Date, IMF dominated Source: WGC, UBS

19. Not just the official sector which has altered its gold course • In 2009, gold investment demand was larger than jewellery demand • the first occasion since 1980 • Jewellery fabrication represented just 43% of global mine production • Investment angle takes up the slack • Gold price heavily dependant on investor sentiment; supply and demand balances of limited importance • Main players this year: • Official Sector: continued IMF selling, but overall buying dominated trend • Investors: getting longer • Jewellery holders: priced out of the market • Potential for scrap supply to dampen rallies • Fundamentals of limited importance; externalities of economic forces will drive gold

20. Gold Primary Mine Supply • Mine supply typically follows a downward trend • Increased 7% in 2009 due to new projects • But Q1 2010 South African gold production fell 12.4% YoY • Henry Tax implications - expect lower mine supply Source: GFMS, UBS

21. Jewellery Demand – the negative trend extends Source: GFMS, UBS

22. Jewellery Sales in Traditional Hubs Decline • Current gold price prohibitively expensive • India reflective of other regional hubs Source: Bloomberg, UBS

23. As jewellery demand diminishes, investors now dominate • Sharp surge in investment is the primary catalyst for rising gold price Source: GFMS, UBS

24. Producer Hedging – Story Unchanged • Global Hedge Book at 236 tonnes end 2009 • Anticipate limited demand from this avenue going forward Source: GFMS, UBS

25. Scrap Supply – record high in 2009 • With current gold price, expect scrap supply to resemble 2009 • This will act to curtail rallies Source: GFMS, UBS

26. Gold – Through the Investment Lens • Macroeconomic forces and sovereign crisis have prompted heightened investor flow –> significant safe haven demand for gold • Investment demand is the strongest driver • Through all investment vehicles: Futures, OTC, ETFs, Bars and Coins. • The fear trade: coin and small bar demand • Reflects concern over debt position of many industrialised nations, inside and outside Europe • The diversification trade • The Armageddon trade • Diversification within diversification – increased enquiries about allocated / segregated metal • Underpinning the market: • Official Sector see-change: from net sellers to net buyers • Medium term threat of inflation

27. Intense ETF buying in May – new record high • After a slow Q1, ETF buyers have returned in force • May inflows equal 4.8 moz, largest monthly creation since Feb 09 Source: UBS; WGC, ETFS, ZKB, and others

28. ETFs – Drilling down in on a daily basis • Rolling monthly increase hit 5.34 moz on June 3, levels not seen since March 09 • Closely aligned to demand for physical metal – bars and coins Source: UBS; Bloomberg, WGC, ETFS, ZKB, and others

29. Comex Net Longs Get Longer • Comex speculators /investors near record net long position • Following March’s liquidation, one way path has been followed Source: CFTC, Bloomberg, UBS

30. US Mint Coin Sales - May volume highest since 1999 Replicated across Mints & UBS sales - reflection of the fear trade Source: US Mint, Bloomberg, UBS

31. Gold Train continues – Short Term Thoughts • Investment demand persists • ETF inflows at all time high • Comex net longs near all time high • Persistent coin and small bar demand • Jewellery demand sluggish • Scrap supply risk • In May, this helped to stall gold’s rally; similar to Q1 2009 • $1250 appears to be a significant supply point • So long as fears surrounding the world’s debt baggage remain heightened and sovereign risk concerns continues, gold should benefit • Threat of gold caught in cross-fire of another extreme de-risking event • Buy on dips • Forecast $1300/oz in one-month; $1200 in three months

32. Looking further out • Gold to average $1135/oz this year, $1250 in 2011 • Expect new high in H2 2010 • Exchange investment demand to remain firm • Jewellery demand at current prices to fall, scrap to rise • Extension of safe haven demand • Central banks as net buyers • Anticipate greater diversification flows • Inflation threat to grow • So long as fears surrounding the world’s debt baggage remain heightened and sovereign risk concerns continues, gold should benefit