Posts Tagged ‘foreign central banks’
Gold Bubble?
I found this chart produced by Casey Research.com and I couldn’t stop looking at it. It is by far the most convincing chart I have seen in regards to showing that gold is not in a bubble. The chart compares previous familiar bull markets in the Nasdaq and gold in the 1970’s. Take a look and decide for yourself.
It looks like we are heading for extreme upward action in the not to distant future. Gold has only increased 400% in this bull market thus far, whereas in the last gold bull market gold increased from $35 per ounce to $850 per ounce, which is an increase of over 2,300%. Looking at this chart and the figures we are a long way out before we can use the term bubble.
Look at mentalities at the end of a bull market. Everyone is trumpeting the investment. There are a lot of naysayers for gold in the media today. When the third and final phase hits, everyone will want in. It is nearly impossible for anyone to resist the panic phase of a bull market, and thus the reason why prices rise rapidly. Most of these naysayers do not own gold, but one day they will. But I would rather be in now before the price skyrockets.
Look at what foreign central banks around the world are doing. The World Gold Council (WGC) reported that Russia, Venezuela, the Philippines, and Kazakhstan all bought gold in the first quarter; and China which is the largest gold producer in the world buys every ounce they produce. This shows us that those in the know want gold as a protection against fiat paper.
Gold can definitely correct in the near-term and hopefully it does because it will be another buying opportunity. Jeff Clark editor at Casey Research said “Stocks are vulnerable, bonds are toast, currencies are fiat. Other than cash, where are you going to put money right now?” Gold and silver in my opinion are the only option.
Central Banks Join the Gold Rush
In an article dated June 18, 2010 on CNNMoney.com, central banks around the world have been buying into the gold rush as fears of Europe’s debt crisis mount in conjunction with a slow worldwide economic recovery. All of this fresh buying has pushed gold to new record highs. Gold closed at a new record high yesterday at $1,248.70 and so far today has reached a new intraday high of $1,263.50.
For the first time since 1997 foreign central banks are net buyers of gold. Prior to last year they were all pretty much net sellers with the exception of China who has increased its gold reserves 76% since 2003. Most central banks like to diversify their holdings in order to decrease risk, but with the US dollar and the euro under extreme pressure due to money printing, central banks are turning to gold as a hedge against paper currencies. Because unlike fiat paper currencies, gold has an intrinsic value that cannot be manipulated by any governments’ economic policies.
The countries that are buying the most gold are Russia (26.6 tonnes 2010), Kazakhstan (3.1 tonnes 2010), Philippines (9.6 tonnes 2010), India (200 tonnes last year) and China (454 tonnes last 7 years).
Look for the trend to continue as sovereign debt crisis continue to mount. As the gold prices continue to rise rare gold coins will benefit as they tend to lag behind spot gold in their price action (this is not always the case but has been lately). As spot gold rises in value it signals the general public to buy, and most buyers of rare gold coins are private individuals not large institutions. The supply of rare coins in the market is limited by the fact that there are only so many of them in existence. Therefore relatively small changes in demand can have big effect on value. The more new private buyers that enter into the market for rare coins the faster the prices rise. This simple set of circumstances explains why rare gold coins tend to out perform gold bullion in the long-term.
Fundamentals on Gold Remain Strong
The basic fundamentals that move the price of gold are supply and demand and dollar fluctuations. The price action on a daily basis can be measured in terms of predominant buying and selling of gold, and strengthening or weakening of the dollar.
Even though we are off of our most recent record gold price of $1,218 in December of 2009, the fundamentals for gold remain strong. Gold is one of the scarcest resources in the world. Mining output has increased as the bull market has raged on but demand has still outpaced the new supply increases. This has come from new investors and NGO’s (non-governmental organizations). In addition, foreign central banks have become net buyers of gold as of late, whereas before they had been net sellers for many years.
The World Gold Council said that “investor flows, specifically from western markets, have provided a key means of support during the course of the credit crisis as investors sought to diversify their exposures to other assets and protect their wealth against market shocks.” It is simple, demand is outpacing supply, and therefore the price of gold is rising, and has been for the past 9 years. The fundamental demand for gold continues to grow.
On the dollar side of the equation we continue to see the central banks around the world print money at will. This helps gold in two ways. The first way it affects gold is the more money that is printed the more fear it produces in citizens of that respective country. People become fearful of inflation or a collapse and want to divulge themselves of their currency. The more fear that exists the more demand there will be for gold. The second way that money printing affects gold is the more money that is printed the less that currency will be worth over the long-term. This is simple inflation, which can lead to hyperinflation which can lead to a currency collapse. As the value of a currency falls, the value of gold will rise in that currency.
Investment demand for gold worldwide is strong and the central banks are helping to fuel that fire. In my opinion they will continue to do so as it is the path of least resistance in addition to making debt easier to afford, and the world is deep in debt. So look for the fundamentals on gold to continue to show strength for years to come.
Who Buys Gold?
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
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
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.