Wednesday, November 7, 2012

The future of gold

Which factors will influence the yellow metal’s direction? Our experts weigh in

Commodities and precious metals in particular have had a wild ride in the last 24 months. Last September, gold hit a nominal all-time high of $1,921 a troy ounce (although it was lower in real terms than a peak in 1980. Since then it has declined markedly to about $1,600. What’s behind its movements and what can business and investors expect in the coming months? Business without Borders hosted seminars on precious metals, featuring Leo Abruzzese, global forecasting director of the Economist Intelligence Unit, and James Steel, precious-metals analyst for HSBC Bank USA in June in Vancouver and Toronto. The experts offered explanations about gold’s behaviour, ranging from the state of the world’s economy, the popularity of President Obama and even the behaviour of Indian monsoons.

The future of gold

Photo: Jose Luis Pelaez
The foundation for understanding precious metals’ outlook is the performance of the global economy. Abruzzese said that the three main engines of the global economy—North America, Europe and China—face a difficult year. “The reason we’re talking about a pretty uncertain year this year, and even going into 2013, is that Europe is already in a recession. When you have a $15 trillion economy that’s contracting, that’s going to be an anchor globally.”

And while China has had what Abruzzese called “a great run” in the last 22 years it too is slowing down. “China’s economy as recently as a few years ago would grow by 11% or 12% a year. This year it might do 8%.”

Finally, there is the United States, which is not in recession but neither is it booming.


How does all this affect the price of gold? For gold bugs it’s perversely good news. Abruzzese said that if the economy were to take off at a time when there is a lot of liquidity in world markets, the price of gold would probably plunge, something he said investors should worry about.

There are several factors that make up the price of gold, Abruzzese said. One is jewelry, which accounts for 50% of global gold demand, and most of the remainder is consumed for investment. Jewelry consumption was flat last year after demand in India collapsed owing to declining consumer confidence in government policy and a slowing economy. India is traditionally the biggest consumer of jewelry gold.

The supply-demand balance for gold remains tight. Supply of new gold entering the market is barely sufficient to meet demand, which is being further stoked by a return to gold buying by central banks. For two decades beginning in 1988, central banks such as the Bank of Canada reduced their gold holdings. But now, with global economic uncertainty, many of them are turning away from U.S. dollars, whose value continues to decay. In the absence of another truly global currency the banks are repurchasing gold.


James Steel, HSBC gold analyst, said that gold is the only commodity to serve as a currency and that it “has kept its currency-like status for 5,000 years.” Since the economic crisis began in 2007, gold has out-performed all other asset classes, he said — until this year.

Steel suggested that gold has been behaving independent of other asset classes. Unlike so-called “risk-on” investments such as equities or emerging-market currencies, and unlike so-called “risk-off” ones such as U.S. Treasuries or German bonds, gold has been cutting its own path throughout the crisis. “Since the crisis started gold has neither acted like a risk-on asset or a risk-off asset. It’s actually been neutral, and that makes it very valuable as a portfolio diversifier. That’s one of the things that I discuss with hedge funds — if they’re looking for portfolio diversification it’s very hard to beat gold right now.”

Why is gold relatively stable compared to other commodities? Steel said that exchange-traded funds’ holdings of gold are now far bigger than those traditionally traded via the Commodity Exchange, Inc., a division of the New York Mercantile Exchange (COMEX). ETF holdings have grown to four times the size of COMEX’s. “It’s an enormous amount of gold,” he said. “ETFs really have dominated the traffic.”
What’s significant is that unlike the speculative traffic that flows in and out of COMEX, ETFs aren’t as liquid so they are steadying the price of gold. “Why is this type of investment solid? It’s because of the investor profile,” Steel said. “A lot of retail people in ETFs have high net worth, a lot of them are holding it for inheritance and so this gold could be held for a generation or more. We have a lot of pension funds in the ETFs. They also have a very long-term time horizon. They’re not worried about gold going down $50 or $100. They’re going to keep it there for 20 years.”

Another influence on gold’s price, Steel said, is Americans’ approval of their president. “Two [of the] most popular presidents in the post-Bretton Woods period have been [Bill] Clinton and Ronald Reagan, and in both cases the gold market collapsed. What we have for Obama is very interesting. You see the peak of his popularity was the day he assumed office, and that has been the low of the gold price. Ever since then his popularity has slid, and when it broke critical levels of 40% the gold market took off.”

A third more temporary influence is more colorful — the Indian monsoon season, Steel said. Two-thirds of gold in India is purchased in the agricultural regions. When the monsoon is good it results in a good crop and rural income for farmers who, Steel added, “are closer to a jeweler than they are to a bank, so they tend to keep their wealth in gold. When the monsoon is bad you don’t get a lot of gold-buying.”

While Indian gold consumption has been flagging in recent years China’s consumption has been rising. “This is a function of income,” Steel said. “Based on the demographics alone and rising income we think that the jewelry market will probably continue to get bigger [in China].”

Could desperate European nations sell gold stocks or issue gold-backed bonds? Leo Abruzzese said the optics of such a move would be disastrous. “At that point they’re basically selling family jewelry, which means they’re a goner. When you see that happen, look for that country to be out of the eurozone a few months afterward. It’s not going to save them.”

Steel offered a final long-term prognosis, one rooted in the physical. In 1970 it took one tonne of rock to yield an ounce of gold. Today it takes 2.5 tonnes. And this decline is happening around the world. “There’s no Saudi Arabia of gold,” he said. “Ore grades are dropping around the world.”

As well, young people are not taking up mining as a profession — 50% of mining engineers are over the age of 54. “We don’t have enough engineers, we don’t have enough geologists, we don’t have enough geoscientists,” he said.

Original post:

Saturday, October 20, 2012

10 nations that control the world’s gold

It is now more obvious than ever that gold is becoming the new global reserve currency. Continuous and aggressive central-bank actions from the United States and Europe are driving the demand for gold. Investors have not yet seen any of the real hyperinflationary pressures that seem likely down the road.

Gold’s substantial rise in price should speak for itself. In dollar terms, gold returned 11.1% in the third quarter and was up by 16% year-to-date through the end of the quarter. The World Gold Council said that gold has a low stock-market correlation through time. That was not the case in the third quarter. Gold still outperformed almost all the major equity markets in the largest gold-holding nations in 2012.

24/7 Wall St. analyzed how the gold rankings compare to each major nation’s gross domestic product and how those figures compare to the top 10 holders of gold. What is surprising in some cases is how countries with the largest GDP are not necessarily the largest holders of gold. Two small nations, the Netherlands and Switzerland, are major holders of gold. Under the terms of the Central Bank Gold Agreement among major European states, many countries are supposed to be selling gold but are not.

The United Kingdom’s $2.43 trillion in GDP is the world’s seventh largest, but its gold holdings of 310.3 tonnes rank only 17th in the world and account for only 15.9% of its total foreign reserves. Does the old term “pound sterling” mean that the British banks really care more about silver? Another standout exception is Brazil, which has tiny gold reserves compared with its GDP. Its $2.5 trillion in GDP ranks sixth in the world, yet it holds only 33.6 tonnes of gold, or 0.5% of foreign reserves. Brazil ranks a surprising 52nd in the world among gold holders.

The International Monetary Fund is the third-largest official holder of gold, with more than 2,814 tonnes. The European Central Bank ranks right behind India, with 502.1 tonnes and 32.3% of its total foreign reserves held in gold. Central bank buying of gold was recently undertaken by Russia, Turkey, Ukraine and the Kyrgyz Republic. Turkey went as far as raising the gold reserve requirements for its commercial banks.

The World Gold Council report shows low borrowing costs and the support of financial markets spur gold accumulation. Gold is no longer just an inflation hedge; it is the key protection against a global race to devalue currencies, even if consumer prices are somewhat stable. Bonds pay historically low rates and stock market volatility has spooked many investors, so gold is becoming the true safe haven.

Major central banks are growing their balance sheets by purchasing trillions of dollars in paper assets. The World Gold Council said that research showed that a 1% change in money supply, six months prior, in the United States, Europe, India and Turkey tends to increase the price of gold by 0.9%, 0.5%, 0.7% and 0.05%, respectively. The Council also said that inflation is still several years off and many central banks have been more worried about deflation. Investors would be well advised to heed a warning from bond king Bill Gross, who told global investors to have exposure to hard assets, which will rise in value with inflation.

24/7 Wall St. has listed the 10 nations with the largest gold reserves, along with the percentage of total foreign reserves held in gold, each nation’s 2011 GDP and how it ranks in the world, and the local stock market performance. We have added analysis about how the potential unraveling of the euro could play into the future buying or selling of gold by European nations. For nations outside Europe, we have provided some historical context and predicted the path that their central banks are likely to follow in the years ahead.

Original copy:

Wednesday, October 17, 2012

Gold holds near $1,750/oz

(Reuters) - Gold held near $1,750 an ounce on Wednesday, underpinned by gains in the euro after Moody's rating agency affirmed Spain's investment grade status, fuelling hopes that Madrid will soon apply for formal aid from its European Union partners.

The euro hit a one-month high and the dollar index .DXY dropped to its lowest in nearly two weeks following the Moody's decision. A weaker greenback makes dollar-priced commodities more attractive for buyers holding other currencies.

But investors' confidence in gold's ability to extend gains was muted after its drop to a one-month low on Monday, following forecast-beating U.S. data that called into question the extent of the Federal Reserve's latest quantitative easing programme.

The launch of QE3, which is expected to benefit bullion by keeping interest rates at rock bottom and fuelling inflation fears, helped send gold to its 2012 high at $1,795.69 earlier this month. It has struggled to maintain that rally, however.

"Markets are following fears that QE3 might end soon and it is not, as many believed, QE infinity (open-ended)," said Peter Fertig, a consultant at Quantitative Commodity Research.
Spot gold was flat at $1,747.54 an ounce at 1432 GMT, while U.S. gold futures were up $3.30 an ounce at $1,749.60.

Prices were expected to remain in a tight range as investors waited for fresh direction on Europe, where a summit of European Union leaders begins on Thursday.

"Normally I would expect that with the ratings outlook for Spain being confirmed as investment grade by Moody's that would be a positive, however you have the EU summit this week on Thursday which is a focus for markets," Fertig said.

Data released Wednesday showed groundbreaking on new U.S. homes increased by 15 percent in September to a seasonally adjusted annual rate of 872,000 units, its quickest pace in more than four years.
Investors will also be watching China's third-quarter gross domestic product figure due later this week.

Weak data would be considered likely to point to stimulative policies that could be supportive for gold.
"The overall attitude towards the yellow metal remains positive looking out over the months ahead, but hesitancy to express that view in the near term is becoming an obstacle. It feels like gold needs a healthy clean-out at this juncture," UBS analyst Edel Tully said in a note to clients.

"A further correction from here would ultimately be beneficial though, given the sharp run-up in prices since mid-October, the repeated failure to breach $1,800 and the degree of speculative length," Tully added.


Holdings in bullion-backed exchange-traded funds inched up by almost 16,700 ounces on Tuesday, as a 28,000 ounce inflow to New York's Comex Gold Trust more than offset an 11,500 ounce outflow from ETF Securities' holdings.

Meanwhile, silver ETF holdings slipped by 1.3 million ounces, following outward flows from the iShares Silver Trust and ETF Securities.

In South Africa, where industrial unrest has gripped the country's mining sector, bullion producer Gold Fields (GFIJ.J) said on Wednesday that an illegal strike at some of its facilities had ended.
It said 6,200 employees returned to work at its Beatrix site, which is expected to produce 360,000 ounces of gold this year.


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Friday, September 28, 2012

Gold posts biggest quarterly gain in over two years

Gold eased on Friday, but the metal posted its biggest quarterly gain in more than two years as market stimulus and easy monetary policies by central banks around the world boosted bullion's inflation-hedge appeal.

The metal is within reach of its 2012 high, while open interest for U.S. gold futures surged to a one-year high on heavy buying related to fund positioning before the quarter end. (OI hits 1-year high:

Gold priced in euro terms hit a record for a second straight day, highlighting the currency's weakness and bullion's safe-haven status among Europeans in times of economic uncertainty.

Bullion found support after an audit of Spain's major banks showed they would need extra capital to ride out an economic downturn, and France's Socialist President Francois Hollande unveiled higher levies on business and a 75-percent tax for the super-rich in a 2013 budget.

"Gold is being utilized as a protest by investors against governments which are failing miserably to solve their deficit and debt problems," said Jeffrey Sica, chief investment officer of SICA Wealth Management, which has over $1 billion in assets.

Sica said that gold should rise to a record $2,000 an ounce in the fourth quarter as investors piled into the safe-haven metal while other assets such as equities and bonds fell out of favor.

Spot gold was down 0.4 percent at $1,770 an ounce by 2:33 p.m. EDT (1833 GMT), sharply off an earlier high of

Gold still climbed around 11 percent this quarter, its best quarterly gain since the second quarter of 2010. September's gain of almost 5 percent also extended its monthly rise to a four consecutive month.

U.S. COMEX gold futures for December delivery settled down $6.60 an ounce at $1,773.90, with trading volume about 20 percent below its 250-day average, preliminary Reuters data showed.

COMEX futures' open interest surged 11,579 lots or 2 percent to a one-year high of 492,149 lots as of Thursday. The gauge which measures outstanding long and short gold futures contracts has rallied more than 25 percent in the past 30 days.

Some funds had added gold to "dress up" their third-quarter performance before the quarter ended, said George Gero, vice president of RBC Capital Market.

Bullion prices took off after the U.S. Federal Reserve said earlier this month it would pump $40 billion into the economy each month until it saw a sustained upturn in the weak jobs market. Gold investors also took heart on signs the European Central Bank and the People's Bank of China will ease their monetary policies to stimulate growth.


The precious metal has posted a positive quarter in terms of investment in gold exchange-traded funds. ETFs tracked by Reuters are on track for their biggest quarterly inflows in well over a year at around 3.3 million ounces.

Coin dealers said sales of U.S. American Eagle gold coins rebounded as bullion prices rallied, and they are optimistic about sales in the fourth quarter.

Read more:

Thursday, September 27, 2012

Gold Sets Records in Euros and Francs on Currency Concern

Gold climbed to a record priced in euros and Swiss francs on concern that central banks’ moves to boost economies will devalue currencies, spurring demand for the metal as an alternative investment.

Bullion for immediate delivery in London reached 1,379.32 euros an ounce and has rallied 14 percent this year, data compiled by Bloomberg show. Gold priced in dollars rose 13 percent this year to $1,771.30 by 4:49 p.m. local time and is trading 7.8 percent below the all-time high set in September 2011. The commodity set a record 1,667.18 Swiss francs today and peaked in Indian rupees earlier this month.

Bullion, typically priced in dollars, is extending 11 consecutive annual gains as the Federal Reserve announced a third round of quantitative easing and as central banks from Europe to China to Japan also pledged more action this month. Nations from South Korea to Kazakhstan are boosting their gold reserves and metal held in bullion-backed exchange-traded products rose to a record 2,551.9 metric tons valued at $145.3 billion on Sept. 25, data compiled by Bloomberg show.

“Central banks are weakening their currencies to boost their economies and gold is a beneficiary,” Matthew Turner, a precious metals strategist at Mitsubishi Corp. (8058) International (Europe) in London, said today by phone. “The story of weak currencies and strong gold is back in play and it’s not just the dollar, it’s all currencies.”

Fed Stimulus

The Fed said Sept. 13 it will buy $40 billion of mortgage debt a month and probably hold the federal funds rate near zero until at least the middle of 2015. The Bank of Japan (8301) said last week it will add to a fund that buys assets, the European Central Bank announced an unlimited bond-purchase program Sept. 6 and China approved a $158 billion subways-to-roads construction plan.

The 17-nation euro area is contracting as leaders strive to rein in the debt crisis. European bar and coin demand rose 15 percent to 77.6 tons in the second quarter, according to the London-based World Gold Council.

Higher local prices in India, last year’s biggest buyer, may curb consumption. The country’s imports slipped 56 percent in the second quarter, according to the World Gold Council. Jewelers there held a strike in March and April to protest government taxes on imports.

Gold reached an all-time high of 97,644.88 rupees on Sept. 13, data compiled by Bloomberg show. While gold in British pounds is about 8.5 percent below its September 2011 high, it still climbed about that much since the beginning of January.

“The dollar price is still the focus of the market and sometimes what it is showing is a weak dollar, rather than strong gold,” Turner said. “When gold is at a high in many currencies, it’s not a currency effect.”

Originally appeared here:

Monday, September 24, 2012

Gold falls on weak commodities

Gold fell on Monday, retreating from the previous session's nearly seven-month high as broadly lower crude oil and grain prices prompted investors to take profits.

Palladium dropped 4 percent for its biggest one-day decline since March on signs of platinum output returning to normal in top producer South Africa, triggering heavy speculative selling.

Traders said volatility could increase ahead of Tuesday's U.S. COMEX gold option expiration, while open interest in U.S. gold futures rose to a one-year high for a third straight session.

Bullion's rally is showing signs of fatigue after five straight weeks of higher prices. Repeated failures to break above key technical resistance above $1,790 an ounce to set a new 2012 high also prompted some investors to lessen their bullish bets.

"There is no question that gold is consolidating its recent gains, but every dip seems to be bought," said Anthony Neglia, president of Tower Trading and COMEX gold options floor trader.

Gold could come under pressure as current prices may be too far away to reach the popular $1,800 call strike at Tuesday's option expiry, and that could prompt some disappointed futures investors to sell, Neglia said.