KK Bullion – Gold Bullion and Investing in Gold

Gold is now trading back at around $1,780 after steadily recovering from its crash to below $1,600 an ounce and then breaking the $1,800 barrier again yesterday after the Euro zone focus shifted to Italy.

Everybody is aware that there is still no answer as of yet to the Euro Zone’s problems. Every time another half hearted idea appears to be agreed, there is another spanner thrown in works and we are right back at square one again; still faced with the ultimate question, will Greece default or not?

With Italy’s ten-year bond yield rising to over 7%, the highest since 1999, the focus has shifted from the political problems in Greece to the problems emerging in Italy. The market rallied on Monday after incorrect information was released claiming that Mr Berlusconi, the Italian Prime Minister, would step down. Berlusconi denied he planned to resign. However, following the results of a crucial budget vote yesterday where Berlusconi failed to win the majority, he has now agreed to resign after the budget reforms have been passed. Mr Berlusconi has survived more than 50 confidence votes in the past, however after losing the budget vote President Giorgio Napolitano called for his resignation.

It is still unclear whether the Italian President will subject the Italian people to elections or call on political parties to form a unity government. If elections were to be held, the subsequent increased uncertainty for world markets would be bullish for gold.

Italy’s’ rate of 7% is considered by most investors as unsustainable. The higher the yield (the implied cost of borrowing) the more likely it is that the country’s huge economy will need to be bailed out which is something that the Euro Zone has been desperately trying to avoid. Italy now appears to be stuck in a downward spiral. If nobody will lend to Italy, then Italy cannot repay its debts: and if Italy cannot repay its debts, then nobody will lend to it.

The longer the instability continues in the Euro zone, the greater the impact will likely be on the gold price and we will surely see it continue to move upwards. We are already seeing investors pull out of European bonds and invest in gold instead. Based on previous performance, a prediction of $2,300 for next year doesn’t seem like an unreasonable forecast, however with so many factors and the Euro Zone constantly struggling for survival, precious metal prices are far from predictable.

Currently two Euro Zone nations will shortly have new Prime Ministers and these Euro Zone issues are currently the main driving force for gold prices. However the US still faces deficit problems and according to a New York Times/CBS News poll, Congress’ approval rating recently fell to a record low of 9%. A loss in confidence in elected officials globally is traditionally positive for gold and this appears to be happening everywhere.

At the moment gold is reacting to the general market feeling that the European crisis will get worse before it gets better, we do not have a lasting solution and therefore high uncertainty remains. This seems to have provoked gold to returning to its favoured role as a safe-haven asset instead of moving in line with currencies; as such, investors are once again buying gold to position themselves against any further bad news that comes out of the Euro Zone.

Gold prices climbed over $50 yesterday afternoon and still more this morning (26/10/11) amidst more concern over the EU’s debt crisis and disagreement between Germany and the rest of the EU.

Gold’s status in recent weeks as a safe haven asset has been heavily criticised as it has underperformed major currencies, fixed income products and crude oil. However investors have once again turned to buying gold as EU meetings are cancelled and US Consumer Confidence falls.

Last week gold had fallen more than 15% since hitting a record high of $1,920.30 on 06/09/2011, as the dollar strengthened and equities fell. Gold is now behaving like a safe-haven asset again since it appears to have severed its ties to risk assets. If this pattern continues after hearing news from the EU meeting due to take place this evening, we could well see gold prices continue to climb.

When rumours were circulated about a Euro Zone rescue fund, this was bearish for gold; however now we have been told that German Chancellor Angela Merkel disagreed with a phrase in the draft conclusion for Wednesday’s EU summit that calls for the European Central Bank to remain a buyer of bonds in the secondary market. It seems investors are no longer accepting the procrastination of politicians and are instead seeking safe-haven assets yet again.

Japan’s finance minister has instructed his staff to be ready to intervene and halt further appreciation of the Japanese Yen, due to Japans’ slowing export growth. Gold, the JPY, the CHF and US Treasuries are widely recognized as the world’s principal safe-haven assets. By intervening, Japan has effectively degraded JPY’s safe-haven status which is bullish for gold.

Along with concerns over the debt crisis in the EU, attention could also now be drawn to the unresolved US problems as well. With the focus predominately on the meetings in the EU recently, the US and its debts seem to have been overlooked.

The rising debt-to-GDP ratio is the clearest indication of the country’s deficit problem, and gold prices react to this; if the US fail to reach the 1.5 trillion deficit regulation target, this could lead to credit rating agencies re-examining US ratings, which could trigger a gold rally. If gold re-emerges strongly again as a safe-haven asset we should see bulls investing in gold and rebuilding long positions.

Gold prices were also boosted by Indian demand as they prepared to celebrate the festival of lights today (Diwali). The festival of lights is normally considered a good time to splurge on gold and nearly 35 kilograms of gold was sold on Monday.

In Mumbai, demand for gold coins was so high on Monday that queues were witnessed outside big jewellery stores late into the evening, snaking over half a kilometre outside many stores.

Whatever the outcome from this evenings talks, with all this volatility it’s getting harder to work out what gold’s reaction will be. It seems that gold is moving around trying to establish a new level and while that is going on gold prices will not move in line with other assets in a normal way.

After the recent price slump of 11% this month, it appears spectators are even more divided over gold and its safe-haven role. When the CME group increased its margins and the dollar began to make a comeback, we saw investors rush to liquidate their gold and money flee from the futures market. This of course impacted on the current price of gold and led to September being the worst month since the collapse of Lehman brothers in October 2008.

For some this fall in prices was nothing more than a buying opportunity, but others remained more cautious.
“The increase in gold’s price volatility since early July has rendered it a higher-risk asset. Key characteristics of a safe-haven asset are low price volatility and minimal risk of capital loss. With gold price volatility doubling, and gold prices dropping by more than 10% in just three days, these characteristics no longer apply to gold.” Jeff Christian CPM group MD.

Does this mean that investors should no longer trust gold as a safe-haven asset? The only other safe-haven is government debt, now yielding less than inflation for three years running and exposed to default or deflation. Of course there are extreme levels of volatility across all markets today, but there are a growing number of people investing in gold as a long-term insurance, rather than a short-term safe-haven.

With money fleeing the Euro zone, it only found the dollar as an alternative. The Swiss Franc and the Yen have ceased to be safe-havens because their central banks have intervened to weaken those currencies. This left the U.S. dollar, as the only really liquid place to go. This was not because of any value that could be retrieved, but because it’s the only remaining currency that remains standing under pressure.

There was little denying the surge of strength in the US Dollar last week; however commentators who fear the collapse of the Euro zone still claim gold offers a safer haven than the Dollar.

Gold appears to be climbing again today as news that Greece will miss its deficit targets this year weighed on the financial markets. As the Euro fell to eight month lows against the dollar, gold still managed to trade higher, which is impressive? Does this indicate that the rally isn’t over for gold?

No one can promise that gold will reach further record breaking highs, but as governments struggle to find solutions to the economic crisis, the case for gold only gets stronger.

In the long-term the EU crisis is clearly bullish for gold, it’s touch-and-go as to whether the Euro zone will survive. Reformation must take place in the monetary world; policymakers have two options to deal with today’s debts: default or devalue. Both are bad for creditors and both suggest that many people who now hold or are thinking about buying gold bullion will choose to hang onto it until the threats to their wealth have passed.

Why? Because gold is not a debt – so it cannot default. If you own gold bullion outright, you aren’t relying on a counterparty that may not exist tomorrow. Gold also cannot be created at will, so while its value will fluctuate, sometimes quite violently, it cannot be purposely devalued by policymakers.

According to an anonymous survey of delegates at the London Bullion Market Association’s (LBMA) annual conference on Tuesday, gold bullion is expected to rise to $2,019 an ounce by November 2012., For the past three years prices have risen beyond the expectations of the survey, so could we see gold reaching even higher than $2,019? It won’t however match the record-breaking 50% surge we have seen in the last 12 months.

“We’ve heard so much about the perfect storm that has driven gold to where it is now, the odds of it increasing a similar amount have to be a lot less,” says Robin Bhar, an analyst at Credit Agricole.

The European debt crisis and the S&P downgrade happened concurrently and forced the gold price to rise steeply. Had these two events occurred separately, the price may still have risen as high, but certainly not as quickly. However, when this rally ended, speculators who were merely reactive not pro-active sold their holdings and fled. This caused a sharp correction and we are still recovering from this.

Since then, the French bank, Societe Generale, has been downgraded and Greece is being forced further into recession. Despite this, the gold price remains between $1,750-$1,850; Why is it this more recent news hasn’t had quite the same effect?

After the Federal Reserve Bank’s decision to launch a $400 billion programme to shift its $2.85 trillion balance sheet more heavily towards longer-term debt, the Dollar index rose to seven-month highs and gave the greenback’s yield-appeal an edge over that of other currencies, which in turn delivered a blow to gold.

The concern about the Euro Zone debt crisis will lend support to the safe haven aspect of gold in the longer-run, but momentum is lacking for bullion to march towards its record high above $1,900 an ounce, analysts said.

“Looking at gold, you have periods when you have strength in the Dollar and rising gold, when both are seen as safe-havens, but right now, you’d have thought that gold would be well supported given the European situation, the U.S. situation and a slowing China,” said Societe Generale analyst David Wilson.

Gold has fallen by 3.2 percent so far in September, plagued by rising volatility and the strength of the Dollar, although so far this quarter, it has hit record highs above $1,900 an ounce and is up 18 percent in its largest quarterly rally in 25 years.

Smart investors will use the opportunity of recent dips in price, to invest in gold further and build up holdings.

The long-term outlook remains positive for gold, too much money has already been created and more will have to be printed to inflate away all that debt. It appears there is no way that growth can be robust enough to overcome these debt burdens. That is why investors with a long-term view are buying gold.

“The macroeconomic climate remains positive for gold. The fact that there’s a high level of volatility in the market doesn’t take away from its safe-haven status. You’ve got to look at it over time compared to paper assets. If it were treated as a currency, it would have outperformed every other currency in the last 12 months.”

Gold is down some $80/oz from the highs we saw last week and additional downside moves are likely, however the long-term outlook for gold still remains bullish, with prices expected to rise as high as $2,000/oz in the coming months.

Given gold’s recent run, it is not surprising that we have seen price corrections but we didn’t see the great shopping season correction that you typically get over the summer. That doesn’t mean it can’t happen now. If broader market concerns affect the resource sector too, we could well see falling gold prices. If not, then remember the longer-term trend, and remember that gold typically does really well in the autumn. In light of the poor economic outlook, rising mining costs and the Federal Reserve Bank maintaining a low rate though mid 2012, gold forecasts are higher and thus reflect the opinion that gold will continue to act as a safe-haven asset.

Experts pointed out that considering the instability in the US and the Eurozone, gold will climb as investors try to invest in safe-haven assets, whose range is constantly shrinking. According to Goldman Sachs we can expect the price of gold to reach $1,860/oz, while JP Morgan predicts the maximum price at the end of the year to be $2,500. Don’t stay out of the market because something could go lower, based on the above forecasts there is still time to invest in gold, before it climbs higher.

Concerns over the Eurozone arose again as, Angela Merkel and President Sarkozy met to try and work out measures to resolve the crisis, but Germany and France have both reported virtually flat economies; so where is the help going to come from?

Central banks were net buyers of gold for the second successive quarter. Banks included were that of Mexico, Thailand, South Korea and Russia. Central banks’ transformation from net sellers to net buyers caused overall gold supplies to go down 4%, despite a 7% rise in production. Normally you would expect more scrap gold being recycled back into the market, but scrap sales also fell 3%.

The ‘love’ trade is also certainly favourable for gold at the moment, together India and China account for over 50% of gold demand. Strength in the market remains concentrated in Asia, with buying of coins, bars and jewellery all declining in Europe and the US. The World Gold Council stated that rural housewives in India hold roughly twice the amount of gold that the U.S. has stored in Fort Knox. When the love and fear trade show up together, gold will reach even higher highs, so now would be a good time to buy gold.

“That a majority of respondents expect gold to end the year above current very-elevated levels suggest that the macroeconomic backdrop is expected to remain supportive and that September will again bring a traditionally strong seasonal physical demand” claims the Swiss bank UBS.

At the time of writing gold has risen further to pass the $1890 mark in Europe. Whether gold continues to skyrocket, settles into a new trading range around recent levels, or plummets as high prices discourage buyers and encourage profit-takers remains to be seen.

At some point, however, we will see a correction, perhaps a sizeable one. Gold prices are up more than 36% over 12 months and when it moves that quickly, there is a 90% probability of an 8-15% correction.

Gold prices hit a new high above $1600 on Monday as a result of a powerful cocktail of economic uncertainty, difficult US deficit ceiling negotiations, European Union sovereign debt concerns and the threat of contagion to the banking sector.

Taken singly, the US debt ceiling impasse or the ongoing EU sovereign debt crisis would be sufficient to trigger a gold rally. But together, the affect on gold prices is even more bullish, as investors become wary of USD and EUR assets and seek a safe haven in gold. Based on this, we believe the bullion rally is likely to continue until tangible progress is made on relieving at least one of the sovereign debt issues.

On Friday, the results of a stress test of European banks were released. Eight of the 90 European banks surveyed by the European Banking Authority failed the stress test, well below market expectations, that as many as 15 lenders would need more capital to withstand a prolonged recession.

In spite of massive bailout packages being discussed by the Euro Zone Leaders in Brussels next week, the Euro zone still looks very unstable and Italian and Spanish government bond yields have risen sharply. Ongoing uncertainty over the ability of European officials to agree on a second aid program for Greece and stop contagion from Greece’s troubles spreading to other countries such as Spain and Italy continues to worry investors.

The European debt crisis is definitely not going to go away. If Greece defaults then it seems likely that Ireland and Portugal would follow suit almost immediately, and then the pressures on the much more significant economies of Italy and Spain would be close to overwhelming. European banks could crash and with the interconnections within the global banking system, many non-European banks could collapse as well.

The market’s focus now appears centred on US economic issues, with slightly less emphasis on EU sovereign risk issues. Congress must raise the $14.3 trillion limit on America’s borrowing by 2nd August or the government will run out of money to pay all its bills. The White House and Republicans are wrangling over spending cuts and higher taxes in addressing how to bring down the deficit.

The longer the US debt-ceiling talks drag on, the more supportive they are for gold. If agreement cannot be reached on raising the ceiling and, failing a Presidential “bending of the rules”, the U.S. itself could go into technical default in two weeks’ time and the psychological financial repercussions of this could be enormous. One suspects that a compromise will be reached at the 11th hour, but if discussions continue beyond the deadline, the United States could be stripped of its top-notch credit rating.

Gold is re-emerging as an international store of value and investors and individuals who recognise this will continue to buy gold bullion. It seems that in these times of tumultuous change, more people and banks around the world are becoming less comfortable holding dollars and would rather invest in gold.

Concerns about Greek default, and the knock-on effects which could have drastic consequences on global financial markets, have diminished – for now. However it is far too early to completely write off a Greek default which seems inevitable in the long term. Some analysts say five years until default, but others say this is far too optimistic and Greece will collapse financially well before that.

However, for the moment with the help of a €12 billion loan from the EBC and IMF, Greece has managed to ward off default. Therefore, coupled with the traditionally weak summer period and less demand from Asia, we are likely to see gold remain under pressure for the next month or so.

Although lending further money to Greece seems to be pouring more money down the drain, a default would drive German and French banks near bankruptcy because of the huge amounts they have invested in the debt. The knock-on effects would then descend on Portugal and Ireland, who also face huge debts and which would in turn put stress on the U.K and Spanish banks.

The prospects for gold remain strong as the gold price continues to hang around $1500. At the moment (1/07/11) gold is trading in the low $1,490s however, this is largely from relief that Europe has not actually imploded financially yet. However, there is more than enough economic distress to keep gold prices from falling further:

• Massive structural problems exist in the U.S. The housing sector continues to be a problem and the fiscal deficit is large.
• Worries over the increasing possibility that Greece will default will resurface over the next few weeks and months.
• Greece defaulting would produce a domino effect, forcing Portugal, Ireland, Spain and Italy into the same position- European lenders still have almost $2.trillion linked to these countries.
• The weak US dollar is gradually losing its status as a global currency, which is a logical consequence from the quantitative loosening; however the US only has until the 2nd August to make a decision whether or not to raise its debt ceiling.

The safe haven aspects of gold investment will return especially from September so now is the perfect opportunity to buy gold while prices are sitting lower. Although technical factors could drive gold down further in the short term, things are likely to get worse for the Global economy, which will see gold continue upwards again; therefore this is perhaps not the time to be selling gold. Until the economies of countries in Europe and the USA begin to pick up (which seems some way off yet) inflation will continue to increase and as such gold prices will continue to climb.

Overall, given the chronic uncertainty the financial world is facing and the trust lost in central banks, we believe that investing in gold is the right answer. The situation for the Euro and the US Dollar only seems to be getting worse and therefore the global expansion of monetary supply should continue to provide gold investments with a positive environment to thrive in.

After North-Korea shelled one of the South-Korean islands near the sea border the tension in the region has been rising day by day. The U.S has sent one of its aircraft carries and a nuclear submarine to the area to join South-Korean military training. This is annoying China as it is the only ally of North-Korea and the presence of the U.S military might lead to further conflicts between the countries.

All military conflicts are very gold positive as investors are likely to pull their money away from stocks and look for something tangible to invest in. Whether China wants to get involved or not, the already fragile relationship with the U.S will be on the line if more bullets start flying.

The Euro zone debt worries have been pressuring markets for the last few weeks and even the confirmation of Ireland’s bail out didn’t calm investors. They are afraid that this is just the beginning and the next one the list is Portugal. Even bailing out Portugal wouldn’t jeopardise the Euro but the rumours about Spain are the real threat. The size of Spain’s economy is so much larger than Greece, Ireland or Portugal that the EU would find it difficult to gather the funds for the bail out.

Whether any other bail outs will happen or not, the fear of them will keep pressuring Euro and pushing gold up, at least in Euro terms. Investing in gold seems to be the only solution to keep one’s money safe as all reserve currencies are under a significant devaluing pressure. The Dollar might look like an alternative solution but after the $600bn stimulus package and the possibility of a conflict in the Korea region, it seems to be just the lesser of the two evils.

The latest gold reports from India are expecting the total gold imports to reach 750 tonne in 2010 which would be a new annual record. This would be a 35% increase from last year when the imports totalled 560 tonne. Analysts’ have been sceptical about Indian gold exports as they have predicted that the record high prices would stop Indians from buying gold.

The Bombay Bullion Association has confirmed that investment demand for gold has remained record high despite the current price levels so the figures released in the report might well be achievable. Traditionally Indians tend not to buy gold as eagerly after the festival season in November but currently the investment demand is so strong that it will keep pushing the total demand towards 750 tonne.

There is likely to be a lot of volatility in the gold price in the coming weeks as both the Korean and Euro zone issues are pressuring markets. Once we get some kind of confirmation on how the EU is going to guarantee that the Euro will not disintegrate gold will probably stabilise in Euros. It is hard to predict what will happen in Korea but the presence of China should make the U.S think twice before starting a new war with North-Korea.

Until President Nixon abolished the Gold Standard in 1971, central banks had full control of the gold market as the value of the Dollar was tied to the gold price. It was illegal for a U.S citizen to own gold so all the gold in the markets was held in the bank’s vaults. This system ensured a steady but slow economic growth since governments could just create more money to boost the economy.

After the abolishment of the Gold Standard, the price of gold rose from $43.35/oz up to $850/oz because everyone wanted to invest in gold. People didn’t trust the paper currencies as they weren’t backed by any physical asset. This didn’t please central banks so the U.S with the help of the IMF tried to limit gold sales through auctions. This didn’t work out because in reality the banks wanted to keep the gold so the limitations were withdrawn.

After that the banks tried another tactic, which worked out well up until 1999. They lent their gold to gold miners to finance their operations, which created a massive over supply of gold and the price fell as low as $275/oz. This technically allowed central banks to keep their gold reserves since miners would pay them back with gold from the mines.

At the same time central banks threatened that they would sell all their gold over time, which ensured the Dollar’s position as the only reserve asset as it was the only currency to purchase oil with.

After Gordon Brown in all his wisdom decided to sell half of UK’s gold reserves in 1999, the IMF decided to limit annual gold sales to 403.3 metric tons. This removed the fear that central banks would sell all their gold and the gold price started a new bull run.

Central banks still had some form of control over the gold price after the IMF announcement until last year. For the last 20 years European central banks have been selling their gold reserves and that way controlling the gold floating into markets.

Last year gold sales from the central banks stopped and they have started to buy gold bullion. When the banks stopped controlling the supply of gold bullion, they also gave up the control of the price.

As the old Western nations are paying the consequences of their loose monetary policy, the emerging economies from the East are enjoying healthy GDP growth figures. Such large nations as Russia, India and China have been buying more gold than the miners can supply, which has pushed the gold price up to the current levels.

Western central banks are facing a dilemma with their falling currencies and the rising gold price. If they start to purchase large amounts of gold, they would be admitting that they don’t believe in the current monetary system. This would cause panic and would destroy even the smallest hope of recovery.

Will we see a new gold standard in the future? It is impossible to say but as long as central banks continue to buy gold and devalue their currencies, gold is likely to keep breaking records.

On Tuesday after yet another set of bad news from The U.S, gold broke through the $1300/oz barrier and stabilised at $1310/oz. Gold seems to move a lot more in Dollars than in Euros or Sterling which suggests that it might be overbought in Dollars. This might be good news for Sterling investors since if the British government decides to follow the current money printing trend, Sterling is likely to correct its value against the Dollar. So, short-term return for Sterling investors might be greater than the actual rise in the gold price, although in the current climate it is impossible to give any secure short-term predictions.

Long-term expectations for gold remain very positive after the LBMA report provided the green light to higher prices over the next 12 months. The LBMA is known to be very conservative in their comments and the $1450 price target for next September sounds very cautious. The more important message is that everyone from fund managers to governmental bodies seems to believe that gold is the best investment asset in current market conditions.

The biggest news for gold investors this week has been the “currency war” as the Finance Minister of Brazil called the situation. Columbia and Thailand joined the list of nations, which have started to manipulate their currency to keep up with the competition. At the end of the day, whatever other nations do with their currency, China has the final say in this game.

China is the second largest economy after the U.S and holds a huge amount of U.S Treasuries. China is also enjoying almost double digit growth figures and is almost keeping the whole global economy running on its own. One of the main reasons for China’s recent success is the weak Yuan and this is especially annoying the U.S. The U.S government is trying to force China to let its currency to strengthen but this is very a dangerous game to play. If China so wishes, it can trigger the hyperinflation in the U.S just by selling its Dollar reserves and this would totally sink the greenback or what is left of it. If this happens, gold investors will have a very wide smile on their faces as gold would most likely move up as the Dollar dips.

As investors are running out of reliable fiat currencies, investing in gold is starting to seem to be one, if not the only, relatively stable option to protect your wealth. Movements in the gold price are far more subtle than in other assets and the attributes of gold bullion are known in all cultures so selling your gold will not be an issue regardless your location. Gold will not lose its value like stocks if the market crashes and it is hardly consumed in any manufacturing industry. People still buy gold for the same reason as they did thousand years ago, it is the ultimate reserve currency, which will not be wiped away by any of the risks that paper currencies are facing.