KK Bullion – Gold Bullion and Investing in Gold

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.

The gold price has now stayed above $1500 since late April and is expected to reach $1600 this year and then continue to rise the following year due to growing demand from Asia. Indian demand for gold has been a major source of investment for years but now China is also acquiring gold at a rapidly fast pace. Combined with the growing demand from central banks you have a globally, long-term, uncontrollable physical gold demand.

Economists believe 20 year anniversaries are important and we have now had four of these anniversaries since 1931 when effectively the monetary system last collapsed after Austria became bankrupt, followed by Germany and then Great Britain. The similarities between then and now are clear to see so, could we see a return to a gold standard system in 2014, 100 years after the last collapse?

However, previously the majority of money earned from gold normally occurs at the end of these 20 year cycles, the current cycle started in approximately 2000-2001 so now is an ideal time for investors to buy gold and position themselves firmly in the market.

Countries such as Greece, who face billions of dollars of debt, could end up ditching the Euro as their main currency and opting to use their gold reserves to help establish another currency. Western nations do not want Greece to pull out of the Euro because other countries such as Ireland and Portugal could be close behind. This could cause the collapse of the Euro and then effectively start the collapse of our paper-based monetary system. Is this why countries are increasing their official gold reserves instead of investing in Greece’s or Portugal’s debt?

The developed world is also plagued by uncertainty with countries such as the UK, USA and Portugal currently having divided governments, therefore making clear decisions at key moments in time has become challenging and is thus crippling confidence and creating foundations for critical situations.
Paper-money systems have never survived through-out time and there is a significant link to bad debt from paper money. Gold enforces discipline on the government and this could see a gold-standard currency being backed if paper collapses again.

With debt across the world well in excess of $100 trillion, everybody is facing a depression and, as the price of oil and cost of living continues to rise, people are beginning to panic and plan for the worst.

If we are to expect a collapse in 2014, the effects would be far worse than previously in 1913 and this leaves a 2-3 year window for investors to prepare. Therefore now would be the time to invest in gold before the stock market inevitably begins to reflect the economy. Could we even reach the point where demand for gold is so high that producers won’t want to be paid in paper money?

Traditionally the gold market slows down for the summer along with other commodities as the holiday season approaches. Last year was an exception as the European sovereign debt crises hit the market hard in early June. Gold price went to record highs and stayed there until half way through July. The same could happen again as despite the 110bn Euro bailout Greece received from the EU, it has run out of money again and is asking for more.

If the EU and the IMF decide to give Greece more money or to restructure its debts, gold should benefit from this as uncertainty in markets should be gold supportive.

This, combined with high inflation in the Euro zone, is likely to support gold as both the Euro and the Dollar are likely to keep falling. Falling fiat currencies have been the main reason for the latest gold run and when QE2 runs out in the U.S in June, its economy might start slowing down again. This would force the FED to start a third round of quantitative easing and push the Dollar even lower. This normally has an inverse effect on the Euro but with the current issues in several of the Euro zone economies, gold would be the biggest winner in this situation.

Another important factor supporting gold is the central banks, which have carried on purchasing gold bullions in the first quarter of 2011. Mexico announced that it has bought 93.3 tonnes during February and March, which is a clear sign that faith in the Dollar is fading amongst most of the developing nations. As Russia and China are practically buying their whole domestic production, the amount of new bullion coming into the free markets is relatively limited compared to the current demand.

The most important event over the summer will be the end of QE2 and how the U.S economy will react to it. If the FED decides to start supporting the economy with another round, gold is likely to carry on its upward trend throughout the summer. If the economy manages to stand on its own feet, gold is likely to consolidate lower until autumn when the demand for commodities in general picks up.

Whether people should still invest in gold or not, one has to think the reasons why the value has increased so much and have any of the issues in the global economy been solved.

The Dollar is still falling and with a possibility of another QE round it is likely to keep doing so. Sovereign debt issues in Europe are still ongoing and there has not been a clear solution how to cope with them in the future. Economic power is shifting east where people are used to buying gold as a preserver of wealth, which should keep the global demand for bullion high. Taking into account all these factors and the rising oil prices, it is still advisable to keep a portion of gold in your investment portfolio.

The recent earthquake in Japan had very little affect on the price of gold, only a relatively small £15 dip took place after the news came out but the price recovered fairly quickly. Compared to stocks, gold held its value very well during the few days when markets were falling almost in panic. The reason behind this is that gold is not widely used in the manufacturing industry and there aren’t any big gold mines near the disaster area so the supply chain did not suffer any damages.

The long term affects are more currency related as the value of gold traditionally moves inversely to the main fiat currencies, such as the Japanese Yen. The Japanese government has already pumped more money in to the markets to support the economy. This will depreciate the Yen and push up gold.

Depreciation of the Yen will most likely affect on other main currencies in the longer term as it will make Japanese products cheaper. This consequently will force other central banks to depreciate their currencies and the money printing race between large economic powers will begin again. This is likely to be gold supportive as we have already seen last Autumn when the FED began the second quantitative easing round and pushed the gold price to new records.

When looking beyond the short term consequences of the earthquake and should people consider investing in gold, it is important to look at the most important factor affecting the price of gold, inflation. Presently European nations, especially the United Kingdom are struggling to keep the CPI below the recommended 3% because of rising commodity prices and increases in money supply mainly in the first two quarters in 2010.

The recent military actions against the Libyan dictator Muanmar Gaddafi are likely keep gold high in the short-term as Libya is one of the largest oil exporters and currently production has stopped. The value of gold traditionally follows oil rather tightly and as the supply side looks very unstable in North Africa, oil is likely to keep rallying.

The price of oil might even jeopardise the recovery in Europe and America, and force central banks to continue with their ultra loose monetary policy. This should encourage people to buy gold as low interest rates with increasing commodity prices will lead into higher inflation in the long-run.

If the unrest spreads to other major oil producing nations in the Middle East and North Africa, gold might reach $1500/oz in the coming weeks. Increasing military tension in the region would significantly harm the global economy and it is unlikely that the U.S would let its Saudi allies slip into a civil war, however the uncertainty is enough to keep the gold train going.

The last few weeks the situation in Egypt has been dominating the headlines and making the markets even more volatile than normal. The gold price has been moving very rapidly since the uprising started. This shows the important role gold is playing in traders portfolios in times of uncertainty. They are trying to protect themselves with gold as it traditionally moves inversely to other equities.

The tension in Middle-East might keep investors on their toes for quite some time as Jordan and Yemen are very close to losing the control of their people too. Investing in gold will offer a safer option to invest one’s money than stocks as long as the inequalities between people keep causing problems in Middle-East.

According to bullion dealers in Hong Kong and Shanghai the physical demand for gold has been unbelievable before Chinese New Year celebrations. Chinese people traditionally buy gold as a New Year’s gift and because of the emerging inflation pressure the hunger for the metal has been at record high ahead of the holiday.

Traditionally the physical demand calms down after the Chinese New Year and won’t pick up until early September but currently the inflation pressure is likely to stop any major falls as governments are pretty helpless in front of market forces. In a healthy economic environment inflation is caused by increasing consumer spending and can be controlled by raising interest rates. Presently inflation is caused by rising commodity and food prices, not people spending too much. This causes politicians a dilemma as rising interest rates would cool down the commodity prices but it also would kill the emerging recovery.

Both the ECB and the FED have stated that they will not raise interest rates until the recovery is on firmer ground and the economy is adding far more jobs than it currently is. Recent employment data from the U.S is backing up this as the country is not creating new jobs fast enough to support the recovery. ECB is expecting inflation to be 1.8% in 2011 which is below the 2% target and would ease the pressure to raise interest rates in the Euro Zone.

As central banks are not currently able to do anything to cool down inflation without affecting the recovery, commodity and food prices are likely to keep rising. Some analyst suggest that rising food prices were the bottom reason for the riots in North Africa as in most of these countries over 50% of family income goes to grocery shopping. As food prices keep rising, it is likely that the anxiety and tension keeps spreading to other developing economies.

Resent economic statements from America and Europe are suggesting that the recovery is picking up but financial markets remain doubtful about it and especially Asian investors are keener than ever to buy gold as an inflation hedge. Whether the western world will follow until it’s too late will be seen in the next few months but a lot of so called smart money from Asia is buying all the bullion they can get.