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Gold, Paper Money and Greater Fool Dependency
Posted by robin in Financial Articles Monday December 7, 2009 7:48 pm
Tuning into the gold market in recent days two messages shout from the rooftops.
First, demand is the principal driver of higher prices, more specifically investment demand. Net central bank sales of past decades have reversed, ETF sales have tripled in the past two years and gold coin supplies are exhausting. Mainstay jewellery and industrial and dental demand has wilted under the pressure: down by more than a quarter and a fifth respectively in the year to September over 2008.
Second, central to investor thinking is currency debasement and inflation. The more paper money you print the less valuable it gets. And there’s a lot of printing going on. In extremis, you wind up with a Zimbabwe dollar.
Zimbabwe’s inflation rate hit 231m per cent in July and influential commentator Marc Faber is “100 per cent sure” hyperinflation lies in store for the US too. And what of the UK, which revealed last week our bank bailout cost £850bn, more than half our national income?
Whether gold is the ultimate currency or a yellow metal reliant on the greater fool theory, it’s clear there is a lot of smart money betting on a rising price for some time yet.
Pre Friday’s better than expected US labour report, gold had a run of good news that made you wonder just how much a market can stand. Here’s a flavour of what’s been said:
“Once again the US Mint has had to suspend sales of its one ounce gold coins, and some fractional ones too, as its supplies of physical gold cannot meet the demand.”
Mineweb
7 December
“This positive new flow is just getting ever greater and in those circumstances could gold pop significantly higher than where it is today? Yes it could. I guess the word caution – and this is something I remind everybody – it really has become a one horse race in some degree. It’s all about investment.”
Paul Walker CEO, GFMS
Mineweb
4 December
“China will overtake India as the world’s largest gold consumer in 2009, with total demand forecast at 432 tonnes.”
Reuters
4 December
“Holdings in all gold ETFs rose to a new high of 1,771.4 metric tons as of Wednesday, according to data collected by Barclays Capital.”
Marketwatch.com
3 December
“We bought our gold in foreign currency terms rather than US dollar terms, for we are convinced the world is turning its back on fiat currencies.”
Dennis Gartman, editor The Gartman Letter
The Sydney Morning Herald
3 December
“Gold will go up, as will other commodities. It’s basically the devaluation of currencies, which is ongoing and will be ongoing for many years to come.”
Mark Mobius, fund manager
The Sydney Morning Herald
3 December
“…reaching a record of $1,217.23 an ounce…analysts noted that the metal had hit fresh highs not just in dollar terms, but in euros, sterling and yen.”
FT
3 December
“Already, currency and gold markets are worried about future inflation.”
“The cost of preserving highly leveraged financial behemoths still has the potential to bankrupt governments and debauch their currencies, wreaking yet more damage to their economies.”
Niall Ferguson, FT
3 December
“Regardless of one’s take on the ‘idea’ of gold as a store of value, there is little doubt the trade has momentum and while there is certainly an end to the party, we remain of the belief that the end of the secular bull market in gold will not be occurring soon”
Dan Greenhaus, Chief Economic Strategist at Miller Tabak, FT
3 December
“US gold futures rose to record highs well above $1,200 an ounce on Wednesday in the face of a stronger dollar, boosted by heavy buying by hedge funds and other gold investment products.”
Reuters
2 December
“Chinese central bank wary of gold bubble.”
Financial Post
2 December
“…even Harrods is getting in on the act by selling gold bars…one of the fastest growing areas of gold investment is ordinary investors actually buying bars of gold.
“…market suggestions…Russia wants to add another 30 tonnes of gold to its cache by year-end, on top of the 15.5 tonnes in October.”
Daily Telegraph
29 November
“Holdings in gold exchange-traded funds have reached record levels, and the US mint has suspended sales of American Eagles, the world’s most popular gold coin, after running out of stock due to strong investor demand.”
FT
28 November
“Gold renewed its record-breaking run yesterday, surging towards $1,200 a troy ounce level, with bullion likely to make further gains after Sri Lanka joined other central banks in buying gold from the International Monetary Fund.
“The IMF said late yesterday that the Asian Country (Sri Lanka) had bought 10 tonnes of bullion from its reserves for $275m, confirming a trend of central bank buying that reverses two decades of heavy selling.
“The sale was the third from the IMF to a central bank this month after India bought 200 tonnes for $6.7bn and Mauritius purchased 2 tonnes for $71.7m.
“The IMF has still to sell 190 tonnes of the 403.3 it has earmarked for disposal.
“Traders are betting that other central banks, particularly China and Brazil, and sovereign wealth funds from the oil-rich Middle East countries could buy IMF gold.”
FT
26 November
“Spot gold prices rose $20.70, or 1.77 percent, to a record high of $1190.00.
“…gold, which is considered a safe-haven in times of uncertainty, was the standout performer of the day as the weak dollar supported commodity prices. Gold was also fuelled by a published report that India’s central bank was interested in buying more gold beyond the 200 tonnes it purchased earlier this month from the International Monetary Fund. The IMF had no comment.”
Reuters
25 November
“…if gold was forced up to a price that reflects the number of US dollars in issue, what price would it be then?
“(Dylan) Grice (of Societe Generale) reckons around $6,300 an ounce. With 260m ounces of gold held by the US and the Fed’s monetary base currently $1.7 trillion (and printing), I make it a mite higher at $6,538.”
MoneyWeek
25 November
“…the growing taste for gold can be seen as the latest sign that the greenback’s status as the world’s sole reserve currency is in jeopardy.”
“’The choice by central banks to diversify away from the dollar by using gold rather than other currencies is partly a bet that interest rates around the world will stay low for a long time. But it also reflects central bankers’ growing distrust of all paper currencies, not only the dollar,’ says Leo Larkin (equity metals analyst) at S&P.”
“’The growing anxiety about all paper currencies is a reaction to the enormous amounts of debt that many countries have assumed in order to recapitalise their banking systems and pull their economies out of recession’, he adds.
“’Gold is ‘a currency that can’t default. It doesn’t have any counterparty risk. It’s universal money,’ says Larkin.
“Gold does have what Wells Fargo Private Bank called ‘greater fool dependence’ in a Nov. 12 market report: ‘Because it has no inherent earnings power and no intrinsic value, investors in gold are hoping that other investors will come along to bid up their holdings in the future,’ the report said. That may be a common tactic of speculators, but it’s rarely a good long-term investment strategy, the report said.”
BusinessWeek
25 November
“’Don’t be frightened by talk of a gold bubble. There won’t be a bubble unless the cost of money rises sharply, the dollar strengthens and the budget deficits are reduced - scenarios that seem remote.
“’I hate predicting gold prices attached to specific dates, but my gut tells me this current part of the gold bull market, which should last a few more years, is far from over,’ says my gold guru, Frank Giustra, a Canadian mining entrepreneur from Vancouver.’ There is a growing realization that the U.S. dollar and other currencies are not going to offer the safe harbor feature that gold and other hard assets will.’”
Forbes
25 November
“Bull markets are marked by three distinct stages, and when gold climbed above $1,000, it only entered its second stage. In other words, gold has much further to climb in the months and years ahead.”
James Turk, Goldmoney.com
23 November
“Royal Mint cashes in on gold rush as coin output quadruples.”
FT
20 November
“Chinese consumers’ demand for gold reached record levels in the third quarter as the 60th anniversary of the founding of the People’s Republic of China on October 1 provided a boost to sales of jewellery and commemorative items.”
FT
19 November
“The World Gold Council and State Street Securities…gold exchange traded fund launched in 2004 has proved a winner. Now with assets of more than $40bn…State Street’s gold ETF is among the biggest holders of gold in the world. Indeed, ETFs backed by physical gold are now buying the equivalent of more than 20 per cent of new production.”
FT
20 November 2009
“Demand for investment gold was up by 280% Q1 09 versus Q1 08 as retail awareness increases and significantly, pension and hedge funds have sized physical gold as an integral part of their ongoing portfolios.”
Professional Adviser
19 November 2009
“Housing savant Paulson now looks to gold.”
“Billionaire John Paulson, who earned his hedge fund billions when he made a bet against the housing bubble, is making a new noteworthy bet.
He is investing as much as $250 million in a new gold fund next year.”
CNN
18 November
“Gold climbs to record as Indian Central Bank buys IMF bullion. (200 tonnes)
“’It is the biggest single central-bank purchase in that we know about for at least 30 years in such a short period’, said Timothy Green author of ‘Ages of Gold’”.
Bloomberg
3 November
“Physical Gold has joined Pointon York with Pointon York SIPP Solutions to offer UK retail investors the opportunity to include solid gold bars in their self-invested personal pensions.”
FT Adviser
17 September
“Gold breaks through US$1,000 as investors seek out wealth preservation.”
World Gold Council
8 September 2009
“…the Chinese government is doing an extraordinary thing…it is encouraging their citizens to put at least 5% of their savings into precious metals.”
Casey’s Gold & Resource Report
“Demand for gold from Exchange Traded Funds (ETFs) in Q2 2009 “was robust on a historical basis but…marked a significant reduction on the 465.1 tonnes experienced in Q1 2009”
Q1 465.1 tonnes
Q2 56.7 tonnes
“…identifiable investment demand…up 46% on year earlier levels”
World Gold Council
Sept 2009
Online physical gold seller Bullionvault.com which started trading in March 2005 boasts 120,000 customers holding 18 tonnes of gold.
Supply and Demand
(tonnes)
2006 2007 2008 2009 (to end of Q3)
Supply 3,569 3,475 3,508 2,958
Demand 3,423 3,552 3,805 2,569
Demand
(tonnes)
2006 2007 2008 2009 (to end of Q3)
Jewellery 2,288 2,404 2,186 1,234
Industrial & Dental 460 462 435 274
Bar & coin retail 424 446 649 317
Other retail investment (8) (14) 213 181
ETFs & similar 260 253 321 563
“Inferred Investment” 145 (77) (296) 389
Source: GFMS/WGC
“Inferred investment” is described as including institutional investment other than ‘ETFs and similar’ amongst other factors.
Demand categorised ETF and similar has tripled year to date in two years. It accounted for almost 22% of total demand up to the end of the third quarter of 2009, against a little over 7% in the equivalent period in 2007.
In contrast, the other two demand categories - jewellery and industrial and dental demand - have fallen 27.5% and nearly 21% respectively to the end of Q3 2009, over the equivalent period in 2008.
Biggest gold stashes…and the UK..!
Tonnes % of Reserves
US 8,133 77
Germany 3,408 69
IMF 3,217
Italy 2,451 66
France 2,445 70
China 1,945 2
GLD (Gold ETF) 1,095
Switzerland 1,040 29
UK 310 17
Total World 29,633
Source: World Gold Council
Between 1999/2002 the UK sold around 395 tonnes from a holding at the start of the programme of approximately 715 tonnes. (And no, I can’t make it add up either!)
The average price from a series of auctions was around $250/troy ounce.
The proceeds, around $3.5bn, were reinvested in “foreign currency interest-bearing assets…broadly in the proportion: 40% dollars, 40% euro and 20% yen.”
According to a 2002 Treasury report: “The motivation for the restructuring was one of risk reduction. With nearly 50 per cent of the net foreign currency reserves invested in gold, the exposure to a single asset was too great.”
Venezuela and Portugal today each hold more gold than the UK.
Gold v FTSE
FTSE 100 Gold (GBP)
1yr 4.5 26.5
3yrs (1.4) 24.6
5yrs 5.6 21.6
Source: Global Insight/World Gold Council
September 2009
One currency where gold is not (yet) making new highs…
The Aussie dollar - Australia is unique among G20 nations in having raised interest rates in October and November 2009 by a quarter of a per cent each time.
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