Martin Arnold
Director - FX & Macro Strategy
Maxwell Gold
Director - Investment Strategy
ETF Securities Outlook
September 2016
In sync: gold and the US dollar
Summary
1,400
80
1,200
1,000
90
800
600
Exhibit 2: Gold versus the US Trade Weighted Dollar
400
Synchronization
The global economy is recovering at a grinding pace, but question
marks remain. Uncertainty over the sustainability of the recovery
and the path for central bank policy are the key threats that
investors appear concerned about. As a result, volatility across asset
classes is leading investors to maintain a somewhat defensive bias
in portfolios.
5
40
0
20
-5
0
-10
-20
-40
-15
Jan-04
Source: Bloomberg, ETF Securities. Exhibit data from 01/01/04 to 08/12/16. See
important information for further details.
10
60
Annual Change (%)
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
110
2004
200
Gold Spot Price (lhs)
US TWI ( Federal Reserve Broad Index, Inverted, rhs)
80
100
Annual Change (%)
70
1,600
Index lev el
Gold price ($ /ounce)
1,800
Jan-07
60
2,000
Oct-06
DXY Index (rhs)
Jul-06
Gold price (lhs)
2,200
Apr-06
Exhibit 1: Gold versus the US Dollar
There is a potential environment in which gold and the USD can
both move higher – a cyclical US upswing. Moreover, a cyclical US
upswing where the central bank was chasing rising inflation higher
in its tightening cycle would be beneficial for both assets. The
period of US Fed tightening from 2004-2006 coincided with a
decoupling of the inverse gold-US relationship. Indeed, while
longer-term analysis shows a significantly negative correlation with
gold, shorter term analysis suggests that the relationship between
gold has not been significant and indeed a positive relationship can
exist (see Exhibit 2).
Jan-06
Gold has long been viewed as a monetary metal, part asset and part
currency. Gold is traded in US Dollars (USD), and as such has a
relatively strong and persistent inverse correlation with the US
currency. While it depends on the end investors’ perspective into
which category – currency or metal - gold is placed, its relationship
to the US Dollar can be instructive about its future direction (see
Exhibit 1).
Oct-05
Currency or metal?
As a monetary metal, it appears that gold is likely to be well
supported in the current environment of aggressive global central
bank stimulus. Indeed, such excess stimulus, even in the US, may
lead to inflationary problems, with the Fed losing its inflation
fighting credibility. Although the statement from the Fed’s July
meeting was more hawkish, the market reduced its expectations of
further rate hikes in 2016. The market believes the Fed will not
move despite its rhetoric.
Jul-05
Gold and the US Dollar have the potential to rally
simultaneously, as the Federal Reserve (Fed) chases inflation
higher against a backdrop of global monetary stimulus.
Apr-05

Jan-05
US Dollar and gold volatility moving back in sync highlights
gold acting as a currency rather than metal in the current
environment.
Oct-04

With gold being in demand in times of elevated market stress, there
is a belief that gold cannot perform in an environment of cyclical
upswing. However, gold provides more than just a way to defend
against market risk and uncertainty. It also provides a hedge
against monetary devaluation, which potentially leads to an
inflationary spiral.
Jul-04
Gold’s history is inextricably linked with the US Dollar (USD)
and shows a strong negative relationship.
Apr-04

Source: Bloomberg, ETF Securities. Exhibit data from 01/01/04 to 01/01/07. See
important information for further details.
1
Past performance is no guarantee of future results.
Fed inflation fighting credentials appear to be weakening and we
expect the ongoing reluctance from the central bank to raise rates
in an increasingly inflationary environment will further undermine
its credibility, in turn supporting the gold price. Inflationary
expectations are still relatively depressed despite a recent move
higher, when inflationary pressure is beginning to gain momentum
in the US. The Consumer Price Index (CPI) is at 1.0%, below the
2.0% target for the Federal Reserve. However, core inflation is at
2.2%, suggesting that price pressure is building rapidly.
Central bank policy has a lagged impact on the underlying
economy. A central bank therefore needs to be pre-emptive with its
policy setting behavior – something that the Fed does not have a
history of doing. The Fed has, at best, been reactive with its policy
actions in recent decades. Wages are at the intersection of the Fed’s
dual mandate: price stability and full employment. With indicators
showing that the US economy is close to its full employment level,
accelerating wages could be the key feedback loop into inflation. As
a result, prices could begin to overshoot the central bank’s inflation
target if wages continue to move higher at the current pace.
Volatility
USD Index Volatility (rhs)
18
40
16
35
14
30
12
25
10
20
8
Gold price (lhs)
2,000
Real interest rate (rhs, Inverted)
-4
-2
1,500
0
1,000
2
4
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
6
2006
0
Source: Bloomberg, ETF Securities. Exhibit data from 01/02/06 to 07/21/16. See
important information for further details.
2016
2015
2014
2013
2012
2011
0
2010
0
2009
2
2008
4
5
2007
6
2006
15
10
2005
Exhibit 4: Real interest rates matter
Annualized Volatility (%)
Gold Price Volatility (lhs)
2004
Although real rates have been rising of late, they remain negative
and haven’t been rising as fast as nominal rates showing that
inflationary expectations are beginning to rise, albeit from low
levels. Until the Fed begins to tackle the potential inflationary
build-up, the USD is likely to range trade and not be a significant
influence on the gold price. The strength of the correlation of gold
and USD volatility highlights the ‘currency’ characteristics of gold.
The divergence during 2015 highlights the varied role that gold
plays within investment portfolios. At a time of rising USD
volatility as the market was concerned about rate hikes and Chinese
market contagion, gold volatility moderated and prices softened
over the ensuing six months (see Exhibit 4).
As we expect currency volatility to remain elevated, gold prices may
be well supported in the current monetary stimulus environment.
However, downside risks remain if the Fed begins to adopt a more
pre-emptive approach against inflation.
Exhibit 3: Strong correlation among volatilities
Annualized Volatility (%)
A result of central bank’s low and negative rates policy,
accompanied by the threat of rising prices, is that real interest rates
are for the most part below zero. With gold being a non- yielding
asset, one of the headwinds is alleviated that historically holds gold
back in a cyclical upswing.
500
We believe that competitive devaluations resulting from central
bank policy activities has driven currency volatility higher, which
has in turn has flowed into other asset markets. USD volatility has a
strong historical relationship with gold volatility. The strength of
the correlation of gold and USD volatility highlights the ‘currency’
characteristics of gold (see Exhibit 3).
45
Negative real rates
Percent (%)
Inflation erodes the value of fiat currencies. Gold’s historical
tendency to rise in periods of elevated inflation comes from its
perception as a hard asset, from the time when it backed fiat
currencies during the period of the global gold standard and later
during the Bretton Woods system. Gold was therefore the value
against which fiat currencies were priced. Elevated inflation during
the 1970’s was a key episode that highlighted gold as an inflation
fighter. In recent decades, inflation has been mostly contained,
with central banks taking over the mantle of inflation fighters.
Although most major central banks have a specific price stability
mandate, reluctance from policymakers to be proactive in the face
of evidence of rising inflation is threatening this perception.
The divergence during 2015 highlights the varied role that gold
plays within investment portfolios. At a time of rising USD
volatility as the market was concerned about rate hikes and Chinese
market contagion, gold volatility moderated and prices softened
over the ensuing six months.
Price ($ /ounce)
All about inflation
Source: Bloomberg, ETF Securities. Exhibit data from 01/01/04 to 08/30/16 See
important information for further details.
2
Past performance is no guarantee of future results.
Important Information
The statements and opinions expressed are those of the author and are as of the date of this report. All information is historical and not indicative of
future results and subject to change. Reader should not assume that an investment in any securities and/or precious metals mentioned was or would
be profitable in the future. This information is not a recommendation to buy or sell. Past performance does not guarantee future results.
The ETFS Silver Trust, ETFS Gold Trust, ETFS Platinum Trust, ETFS Palladium Trust and Precious Metals Basket Trust are not
investment companies registered under the Investment Company Act of 1940 or a commodity pool for purposes of the
Commodity Exchange Act. Shares of the Trusts are not subject to the same regulatory requirements as mutual funds. These
investments are not suitable for all investors. Trusts focusing on a single commodity generally experience greater volatility.
Commodities generally are volatile and are not suitable for all investors. Trusts focusing on a single commodity generally experience
greater volatility. Please refer to the prospectus for complete information regarding all risks associated with the Trusts. Shares in the Trusts are not
FDIC insured and may lose value and have no bank guarantee.
The value of the Shares relates directly to the value of the precious metal held by the Trust and fluctuations in the price could materially adversely
affect investment in the Shares. Several factors may affect the price of precious metals, including:
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A change in economic conditions, such as a recession, can adversely affect the price of the precious metal held by the Trust. Some metals
are used in a wide range of industrial applications, and an economic downturn could have a negative impact on its demand and,
consequently, its price and the price of the Shares;
Investors’ expectations with respect to the rate of inflation;
Currency exchange rates;
interest rates;
Investment and trading activities of hedge funds and commodity funds; and
Global or regional political, economic or financial events and situations. Should there be an increase in the level of hedge activity of the
precious metal held by the trust or producing companies, it could cause a decline in world precious metal prices, adversely affecting the
price of the Shares. Should there be an increase in the level of hedge activity of the precious metal held by the Trusts or producing
companies, it could cause a decline in world precious metal prices, adversely affecting the price of the shares.
Also, should the speculative community take a negative view towards the precious metal held by the Trusts, it could cause a decline in prices,
negatively impacting the price of the shares. There is a risk that part or all of the Trusts’ physical precious metal could be lost, damaged or stolen.
Failure by the Custodian or Sub-Custodian to exercise due care in the safekeeping of the precious metal held by the Trusts could result in a loss to
the Trusts.
The Trusts will not insure its precious metals and shareholders cannot be assured that the custodian will maintain adequate insurance or any
insurance with respect to the precious metals held by the custodian on behalf of the Trust. Consequently, a loss may be suffered with respect to the
Trust’s precious metal that is not covered by insurance.
Commodities generally are volatile and are not suitable for all investors.
Please refer to the prospectus for complete information regarding all risks associated with the Trust.
Investors buy and sell shares on a secondary market (i.e., not directly from Trusts). Only market makers or “authorized
participants” may trade directly with the Trusts, typically in blocks of 50k to 100k shares.
Definitions: The Federal Reserve (Fed) is the central banking system of the United States of America and the Federal Open Market Committee (FOMC) is a
committee within the Fed charged under the United States law with overseeing the nation's open market operations. The European Union (EU) is a politicoeconomic union of 28 member states that are located primarily in Europe. The U.S. Commodity Futures Trading Commission (CFTC) is an independent
agency of the US government that regulates futures and option markets. Gross domestic product (GDP) is the monetary value of all the finished goods and
services produced within a country's borders in a specific time period. The International Monetary Fund (IMF) is an international organization created for
the purpose of standardizing global financial relations and exchange rates. The World Bank is an international organization dedicated to providing financing,
advice and research to developing nations to aid their economic advancement. Brexit is an abbreviation for "British exit," which refers to the June 23, 2016,
referendum whereby British citizens voted to exit the European Union. Year over year = the percent change over a full calendar year. Annualized volatility is
Volatility is a statistical measure of the dispersion of returns for a given security or market index. The trade-weighted US dollar index, also known as the
broad index, is a measure of the value of the United States dollar relative to other world currencies. Consumer Price Index (CPI) is a measure that examines
the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The DXY Index is an index that
tracks the spot price of the US dollar relative to other currencies.
Commodities generally are volatile and are not suitable for all investors. This material must be accompanied or preceded by
the prospectus. Carefully consider each Trust’s investment objectives, risk factors, and fees and expenses before investing.
Please click here to view the prospectus.
ALPS Distributors, Inc. is the marketing agent for ETFS Silver Trust, ETFS Gold Trust, ETFS Platinum Trust, ETFS Palladium
Trust and ETFS Precious Metals Basket Trust.
Maxwell Gold is a registered representative of ALPS Distributors, Inc.
ETF001019 09/30/17
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