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Posts Tagged ‘foreign central banks’
Who Buys Gold?
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Many people participate in acquiring physical gold worldwide. Some want capital appreciation and others are looking for preservation of principle. It should be noted that gold is foremost a form of financial insurance for the paper assets in your portfolio. This is because gold and paper assets generally have an inverse relationship. Meaning when stocks go down gold goes up. However there have been periods when stocks and gold have risen together.
The types of buyers of gold are diverse. From foreign central banks and governments, to large institutional buyers and individuals looking to protect the money they have. Most buyers of gold today are concerned with the current economic situation worldwide. The main concern in the United States is the erosion of the U.S. dollar. On a side note, as the dollar becomes weaker the value of gold rises so everyday that the dollar weakens a portion of the rise in gold is attributed to gold being priced in dollars. Another portion of the rise in price is supply and demand.
Anyone who is concerned with the weakness in the U.S. dollar is your main buyers of physical gold today. India recently purchased 200 metric tones of gold from the IMF, and sited their concern with the U.S. dollar. There are those that are buying gold for growth in their portfolio as well. Those institutions and individuals that want to capitalize on the appreciation potential that we see ahead.
There are other reasons why people acquire gold:
1. High inflation, or the fear of high inflation
2. Turmoil in stock markets
3. Spiking interest rates
4. Oil and other commodity price shocks
5. Banking crises
6. International loan defaults and other debt crises
7. Geopolitical crisis
Gold generally performs well in all of these circumstances. Those that own gold in their portfolios have to decide how much to own. This is the trickiest part because you have to determine what your goals, objectives and concerns are. If the dollar was to be devalued by 50% one would need to own 33% of their portfolio in gold to offset the losses in their paper assets (this is obviously grossly overstated, but meant to give general understanding). Many governments and individuals own gold, and as the trend with the dollar continues more people will buy into the gold market, driving values higher.
Why IMF Gold Sales Won’t Affect the Gold Market
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While the IMF gold sales are a positive sign, it won’t affect the gold market too heavily. What is positive for the gold market it that India bought the first half of the IMF offering. This points to the fact that foreign central banks will be net buyers of gold in 2009. They have been net sellers for over a decade.
If foreign central banks are buyers it shows that even the brightest financial minds are concerned about the dollar. This concern will continue to fuel the gold market, and buying of the precious metal worldwide. Gold sales are up this year and have been since 1999. In fact, China is encouraging their citizens to acquire precious metals, and stores are popping up all over the country to allow regular citizens to buy gold and silver.
The IMF still has roughly 200 tonnes for sale and there is much speculation as to which country will pick it up. But why will the sale of so much gold not have a major impact on prices worldwide? The answer is simple, about $28 billion worth of gold trades on the market everyday. India’s purchase of $6.7 billion was only about 23% of one day’s worth of trading. The fact is that this volume from the IMF is a drop in the bucket for the gold market.
The fact that foreign central banks are net buyers is very positive for the gold market. The recent purchase by India was very visible to the general public, and stirred up media coverage all over the world. So even though the purchase will not impact the gold market too significantly, the fact that the purchase happened is bringing gold to the fore front of peoples’ minds.
As more people buy gold around the world the price will rise, and will continue as long as demand out weighs supply. The price will rise until we see the third and final phase of this gold bull market where the price will experience a blow off top at which point it will correct and return to fundamental values. Until then enjoy!
India to Buy More Gold from IMF
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As reported by Bloomberg.com, India bought 200 metric tons of gold valued at $6.7 billion from the International Monetary Fund on November 3rd, 2009. That gold purchase cleared out just under half of what the IMF was offering for sale; consequently the IMF is still offering another 203 metric tons for sale. India proclaimed that the purchase was due to their fear of a collapsing dollar and their desire to hedge their foreign currency reserves.
The first purchase by India at $1,045 per ounce occurred over a two week period and made an impact on the value of gold which rose to over $1,190 per ounce just before the Thanksgiving holiday. Since the first purchase India has realized an $800 million profit. What is most significant is that India is currently in negotiations on the other half that the IMF is offering. A second purchase could push gold prices much higher in the near future.
This recent purchase by India highlights the recent shift of foreign central banks from net sellers of gold to net buyers of gold, which will likely continue. The average country has 10% of their foreign reserves in gold, China only has 2%. If China were to purchase the other half it is speculated by David Rosenberg, chief economist and strategist with Gluskin Sheff & Associates Inc, that gold would rise to $1,300 per ounce.
It is likely that we will hear very soon as to which country will purchase the second half of the gold offered by the IMF and when we do watch for new record gold prices to be set.
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