KK Bullion – Gold Bullion and Investing in Gold

The demand for gold shifted its trend for the first time in 30 years during 2009 when investors bought more gold than buyers of jewellery. In January 2009 the spot price of gold went from a low of $812 to a record high in December at $1226 and this increase played an important part in the downward shift of jewellery demand. Figures released by the GFMS showed evidence of these changes in 2009:

• Supply of gold scrap was up by 27% in 2009

• Mine production was up by 6%

• Demand for jewellery was down 23%

• New gold investment demand had a year on year gain of 105% from 885 tonnes to 1820 tonnes in 2009.

The combination of high gold prices and a struggling global economy led to a surge in individuals selling off their jewellery to convenient but controversial companies buying scrap gold by post. Traditionally jewellery demand has been the backbone of consumption but with the record high gold prices, demand has fallen by almost half since hitting a peak in 1997 of 3,294 tonnes. Currencies of key consuming countries such as India and Turkey have depreciated against the dollar increasing the cost of bullion locally which in turn has reduced demand. Traders believe the price of gold will need to go back to $1,000 for demand to pick up again.

Following a very weak first quarter in 2009, both jewellery and industrial demand enjoyed three consecutive quarter-on-quarter gains. “While industrial and jewellery demand are expected to strengthen in an environment where economic conditions are improving, this recovery is likely to be relatively gradual,” said Rozanna Wozniak, investment research manager at the WGC.

Philip Klapwijk executive chairman of GFMS said he sensed that a “large amount of money” was poised to enter the gold market this year. He predicted a “bumpy” return to record prices by the summer on the back of loose fiscal and monetary policies and US dollar weakness. He warned that although investors could buy more gold this year, the market would become “increasingly vulnerable” to a severe correction when the circumstances favouring investment disappeared.

From 2005, gold mine production incurred a year on year decrease but output during 2009 reversed the trend with an increase of 197 tonnes. However with demand from investors increasing and major reserves of the world becoming depleted, the GFMS forecast that production in 2010 will likely fall. China is the worlds biggest gold producer, followed by Australia and South Africa in third. Until recently South Africa had been the world’s largest gold producer, marking the lowest production level since 1956. China has surpassed South Africa in being the largest gold producer since 2007. Coupled with declining grades, increased depth of mining and a slide in the gold price, costs have begun to rise and as a result production has been steadily falling.

With the announcement that the IMF is set to sell off a further 191 tonnes of gold and the news that US billionaire George Soros increased his gold holdings by almost double in the fourth quarter of 2009, the demand for investment gold shows no signs of slowing down.

The price of gold bullion is notoriously volatile and 2009 has been no exception. The current financial crisis has seen further fluctuations as buyers have rushed to acquire gold bullion as a safe haven but also sold the precious metal to cover losses in other markets. During the year, gold prices hit record highs when global economic factors had an impact on demand where investors looked to seek a safe haven from weakening currencies and fears of inflation. In February, gold bullion prices breached $1000 an ounce amid fears that the US government might be forced to nationalise some of the country’s biggest banks just days after Barack Obama signed a $787bn stimulus plan into law.

In April, China almost doubled its gold reserves from 600 tonnes to 1,054 in a bid to move some of its large amounts of foreign reserves ($1,954bn) into a more secure asset signalling a revival of gold bullion after years of fading importance. The second half of 2009 saw record milestones in the price of gold bullion, not only breaking $1000 an ounce but also hitting an all time record high of $1060 in October and $1226 in December when the IMF decided to sell half of a 400 tonne allocation to India. For the first time in 21 years the worlds central banks have been net buyers of gold bullion. Smaller emerging economies such as the Philippines, Kazakhstan, Sri Lanka and Mexico have also been shifting their reserves into gold.

Dylan Grice, an analyst at Societe Generale, said recently: “Central banks aren’t known for their investment acumen. Some commentators have mockingly suggested that India’s decision to buy 200 tonnes of IMF gold signals the top of the market in the way that heavy selling by the UK signalled the bottom in 1999.”
However, Mr Grice believes that the continued weakness of the dollar, concern about inflation and fiscal policy will continue to drive the gold price.

Jeffrey Nichols, managing director of American precious metals advisors believes there is more to come from gold prices in 2010 “Despite a recent correction, the four pillars of gold-price strength remain intact. These are Central bank reserves buying rather than selling gold in 2009; inflation-fuelling US monetary and fiscal policies; expanding retail and institutional investor participation in the United States, China and around the world; and declining world gold-mine production.

Looking ahead to 2010, don’t be surprised to see gold at $1500 or higher by the end of the year”
Ted Scott, the director of UK strategy at F&C Investments also commented “the only way that gold can underperform is if the US and other developed economies recover in a conventional way by cutting spending and raising taxes while at the same time embarking on a period of stable economic growth.”

Given the significant economic challenges ahead, a fragile recovery appears more likely in the long term. Assets like gold bars and coins will remain an attractive investment in such an uncertain environment.

Reserve Bank of India Governer Duvvuri Subbarao has done something the average Indian housewife would readily approve of. The RBI’s decision to quietly buy 200 tonnes of gold worth $6.7 billion from the International Monetry Fund (IMF) has surprised many around the world.

Although Indians are the world’s largest consumers of gold, in the form of jewellery, bars and coins, it wasn’t much sought after by the RBI. Of India’s $285 billion forex reserves, only $10 billion was estimated to be held in the form of gold.

In fact, the proportion of gold as part of its total foreign reserves has gradually declined over the years, from 20 per cent in 1994 to below 4 per cent now. The latest tranche of gold shopping increases its proportion to 6 per cent, making India’s central bank the tenth largest accumulator of gold.

While the sale would provide the cash-strapped IMF with much needed liquidity to enable low interest rate lending to poor countries, India’s purchase is seen as a move to diversify its reserves in a volatile currency market. But some also see a geopolitical motive behind the deal. India, like China, is also seeking closer ties with the IMF to assert its authority on the global economic stage. Prices rose after Sri Lanka too bought a small volume of bullion to diversify its reserves.

Sri Lanka’s move was seen as providing further evidence that central banks in emerging economies have decided to increase their gold holdings to diversify their currency reserves.

The gold price has hit yet another new high on the back of a floundering dollar and rising concerns over major central bank policies. Following the weekend’s G20 meeting to discuss economic stimulus measures, the spot gold price sharply broke through the psychologically important $1,100 per ounce level to hit a high of $1,132.95 per ounce on Monday. “Every other central bank must now be wondering who will move next,” said Francisco Blanch, head of global commodities research at Bank of America-Merrill Lynch.

Nothing that discomfort over the dollar’s weakness was mounting, BofA-Merrill Lynch said India’s decision to diversify into gold could signal a realisation in the developing world that the “beggar-thy-neighbour” policies pursued by some G10 nations to get out of recession had natural limits. Mr Blanch reiterated his forecast for gold to break through $1,500-an-ounce within 18 months. “The market could of course move a lot faster if emerging market central banks rush into gold sooner rather than later” said Mr Blanch.

Gold is selling close to $1,000 (£632) an ounce – up more than 20% over a year. Just five years ago, it was selling for just $400 (£253).
Concerns that inflation could rise are at the heart of the gold boom. While inflation will eat away at the spending power of currency, gold bullion tends to hold its value.

James Steel, precious metals analyst at HSBC, said gold’s ability to rebound over the $1,000 level was impressive as previous rallies beyond this level had been followed by significant price corrections.

“The deterioration in the outlook for the US dollar combined with an improvement in investor risk appetite is propelling gold prices higher” said Mr Steel.  “Gold appears poised to challenge its record highs of $1030.80 an ounce.”

The highest level ever reached by the yellow metal was $1,030 per ounce, which it attained in March 2008, and it is currently trading at just under $1,000 per ounce.

Now the largest bank in Germany has announced that it is increasing its previous price estimate by over 30 percent in predicting that gold will surpass $1,100 per ounce in 2010.

‘It’s likely to be third time lucky for gold: the price has tested the $1,000 mark twice – in March 2008 and in February this year,’ says Bill O’Neill, portfolio strategist at Merrill Lynch Global Wealth Management.

‘If there is even a hint that central banks are being over-generous in their fiscal stimuli, gold will become everyone’s touchstone. Investors worried about the quality of the currency or government bonds they are holding will seek the reassurance of gold.’

Gold reached an 18 month high at $1,017.50/oz in European trading last week. Gold and gold bullion has found its footing in the low $1,000s/oz and looks set to launch an assault on the all time record nominal high of $1,033/oz (on March 17th 2008). It was 18 months ago when gold surged to its record high and much consolidation and base building has been done in the last 18 months.

Traders said that worries about the re-emergence of inflation as central banks continue to pump cheap money into the global economy also contributed to the price jump. In addition, the move back up to $1,017 can be partly attributed to Barrick Gold looking to buy large quantities of the metal to close out hedges.

While small investors and jewellery owners have been selling, high net worth individuals, hedge funds, institutions and large banks are diversifying into gold in a more substantial way. The elephant in the room and one that is being studiously ignored by some bears and those who have been calling the market wrong is the ‘China factor’. With the Chinese central bank worried about their vast dollar holdings and the Chinese government encouraging their citizens to own gold, Chinese demand alone could propel prices to much higher levels.

Gold has attracted investors since the collapse of Lehman’s Brothers last year as an insurance against the financial crisis, but also amid concern that the extraordinary steps taken by central banks to prop up the global economy could lead to higher inflation in 2010. Gold futures were little changed on Wednesday 23rd September, trading above $1,010 an ounce as investors awaited the Federal Reserve’s announcement on monetary policy. “Further weakness in the greenback could see the metal breach last week’s high, but gold is vulnerable to a test back to $985 to $990 should the dollar bounce.” said James Moore, an analyst at TheBullionDesk.com, in a note.

Gold has climbed recently trading as equity gains and an improving economic outlook boosted demand for the metal as a hedge against accelerating prices.

The MSCI Asia Pacific Index of equities gained for a sixth day after an index of leading economic indicators in the U.S. topped projections, indicating the country may be emerging from recession. Federal Reserve Chairman Ben S. Bernanke wrote in the Wall Street Journal that the central bank “will need to tighten monetary policy” to prevent inflation.

“An improving economic outlook is leading investors to the risk of inflation, which will become more pronounced over time, bolstering demand for gold,” said Hwang Il Doo, a commodities broker with KEB Futures Co. in Seoul. “Still, the metal may face some resistance above $950 in the short term.”

The precious metal has climbed 8 percent this year.

Bullion jumped to $954.99 yesterday, the highest since June 12, as the Dollar Index, a gauge of the dollar’s value against six major currencies, fell to the lowest since June 3. The index was little changed at 78.934.

Gold holdings in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, were unchanged for a second day at 1,094.54 metric tons yesterday, down from this year’s peak of 1,134.03 tons in June, according to the company’s Web site. Investment in Gold exchange traded funds has cooled of from extreme levels during the recent credit crunch, however fear’s of rising inflation could stimulate investors once again.

Gold Bars are classified into two different types- casted and minted – based on their manufacturing method. Where gold is measured in ounces, these are troy ounces, which is heavier than the avoirdupois ounce used for food.

The gold industry relies greatly on refiners whose gold bars are accepted by associations and exchanges as “good delivery” for the settlement of transactions.

The reason for this is that each association and exchange normally requires the specified good delivery bars, and the refiners operating from approved refineries, to meet a broad range of criteria.

The procedure also generates confidence in the relevant market that accredited refiners range of other bars and products would also be manufactured to the same high standard.

The most important list of refiners for the international gold bar market is that published by the London Bullion Market Association (LBMA).

Known as “The Good Delivery List of Acceptable Refiners: Gold” for the settlement of transactions on the London Bullion Market, it records the name of the major refiners around the world that have met its stringent criteria for accreditation.

Each Association and Exchange specifies its own weight and purity. For LMBA the fineness is 995+. The LMBA publishes a list of Acceptable Refiners whose gold bars which weigh approximately 400oz (12.5g) are accepted as London Good Delivery. It also lists Former Melters and Assayers of Good Gold Delivery Bars.

The rise in the price of gold, which has seen it jump from just over $750 an ounce six months ago to over $930, has hit gold jewellery sales hard.

India is the world’s number one consumer of gold, accounting for almost a fifth of gold sales. Gold jewellers, struggling to cope with sluggish sales as a result of the soaring price of gold, are looking forward to next month and the start of the Asian wedding season. The five-month period sees sales of the precious metal rise as brides are adorned with gold jewellery and given gold as part of their dowry.

There are spikes in gold demands both January and September, months when Indian manufacturers typically restock inventories to meet the demands of the two Indian wedding seasons. The first, mentioned above, starts in November and ends in December. The second starts in late March and runs through into early May.
The price of gold has risen 10% since January and with volatility in equity markets and growing economic uncertainty in major Western economies, demand is likely to continue to rise, analysts say.

Ownership of gold takes many forms:

Jewellery

Probably the worst way to invest in gold, mainly because the real value is subjective and prices can change with design, craftsmanship and the inclusion of gemstones.

Bullion bars and coins

Gold coins such as Krugerrands come in a variety of weights and sizes. They are a cost-efficient option for investing in tangible gold as they are exempt from VAT. Coins are available through dealerships, but purchasers need to ensure they buy gold with a hallmark of internationally recognised refiners.
Buyers can visit a reputable gold bullion dealer, and buy and sell small bars of gold over the counter.

Allocated accounts

The most secure way to invest in physical gold. A recognised bullion dealer stores and manages an owner’s physical gold, while the account reflects the value of the gold stored. A variation on the allocated account, where transfers and payments in gold can be made electronically – but where the physical assets are stored in vaults by banks or currency operators as ultimate security for transactions.

Gold futures

Like future contracts on any other asset such as shares, gold futures are promises to make or take delivery of a specified quantity and quality of gold on a prescribed date at an agreed price.
The benefit is that the initial margin paid to a broker is only a fraction of the price of the gold underlying the contract. This means substantial profits can be made for small outlays. But the risk is that losses can mount in the same way.

Shares and funds

Funds investing in gold companies, or holding shares in the firms, offer a diversified investment route. Recently, funds such as BlackRock, Merrill Lynch, and Gold & General have topped the tables both in terms of performance and popularity. The fund has outperformed gold itself. But shares in gold mines carry their own dangers, such as the political risks associated with the countries in which the mines operate – often in volatile and unstable regions.

Gold Exchange-Traded Funds ETFs are shares, traded on the stock market and bought through brokers, which shadow the value of their underlying asset. The most popular ETFs track major share indices, such as the FTSE 100, but the funds are also available for bullion and other commodities.

The volatility in global markets amid the credit crunch makes it difficult to forecast how currencies are going to move. So what will 2009 bring for the gold price? There have been sharp fluctuations in the gold price and gold has seen daily swings widen.

The Bank of England can now engage in quantative easing, effectively printing money, which boosts the money supply and raises inflation. This does not bode well for sterling. The more the focus is on the UK banks the weaker the pound is likely to be. So this is leading to even greater borrowing by the government and you may be wondering if we can really afford all these measures.

The euro is also under pressure due to lack of confidence in the euro zone. The European slow down will see the euro tumble to $1.20 which is an 8% drop in current levels.

The yen strengthening is causing real damage to its exports and the bank of Japan is likely to intervene in the currency market to weaken it this year.

The dollar looks to be devalued by the Federal Reserves moves to boost the economy.

America does not need a strong currency in a global downturn and the temptation maybe to inflate away its debt.

A strengthening in the dollar and the yen, global data just looks grimmer and the banking sector is far from sorted out. The trend, therefore, is to look towards risk aversion in investments. Gold is the sole asset that can be turned into cash at a profit and its performance when considering the current global conditions is astounding. In complete contrast to all other investments it is selling at all time highs in all currencies. Euros, rupees, yen, British pounds, even Turkish lira. Precious metals consultancy GFMS predict highs of above $1000 an ounce as investors begin to worry about the collapse of the American dollar.

The LBMA panel’s estimates from 2009 are for a gold price high of $1,074, a low of $721 and an average of $881. Gold is on track to $920 – $940 by the end of the month. This was July’s top, so when gold clears that barrier it will draw lots of attention forcing it to rise even faster.

In China gold is not only a symbol of wealth but also of good fortune. The latest gold rush in China has been fuelled by a combination of factors, such as the depreciation of the US dollar, and the price risen a wide range of commodities, including oil. In Beijing, 300kg gold bars minted by China gold coin Inc to commemorate the year of the Rooster, retailing at 125 Yuan (US$15.60) a gram, were sold out within 7 hours on November 19. Again on the 26 of November demand exceed supply even though the price had increased to 128 Yuan.

The strong demand for gold in China has been embraced by the nation’s banks and other financial institutions. The Bank of China’s Shanghai branch, in November introduced “Gold Treasure”. This has been designed to make it easier for the public to invest in gold. Instead of taking delivery of the gold the investor is given a document issued by the central bank certifying the amount purchased. The investor can sell the gold back to the bank and surrender the certificate.

The population of China is 1.2 Billion and China’s potential demand for gold is 37,000 tonnes A Reuters news report recently announced that Financial News, a newspaper published by Peoples Bank of China, urges an increase in gold reserves to diversify the nations forging exchange holdings. Chinas gold reserves stood at nearly 13 million ounces at the end of September, unchanged from the end of last year, official figures showed this nowhere near compares with the US government reserves of 262 million ounce. The newspaper also said Beijing should allow individuals to freely buy and sell gold and encourage residents to store gold. Until now Chinese residents have only been able to buy gold jewellery through retail stores.

It should be noted that the Chinese have used gold jewellery as a form of saving since time immemorial. “In case of an economic crisis, the state could buy gold form residents and use it to pay back foreign debt” the Financial News said.

China’s impact on gold could be as much as one ounce per capita as with the US, so should china achieve the same financial backing it would require 1.2 Billion ounces of gold or 37,000 tonnes. This is the same amount of gold in deposit today in all the Central Banks in the world. This sort of demand will send the price of gold soaring.