KK Bullion – Gold Bullion and Investing in Gold

Ben Bernanke’s comments to the House Budget Committee indicated that the US would consider launching another round of Quantitative easing if US employment figures continued to be ‘inadequate’. Easing monetary policies and rising global liquidity are generally bullish for gold.

According to a new piece of research from US fund manager GMO emerging market purchases is one of the main drivers of gold’s current rally. “Nearly 80% of the total demand for physical gold has come from retail purchases in developing markets. China and India’s combined demand alone amounts to more than that of the entire developed world.” As governments of emerging markets continue to tighten policies it will become even harder for citizens to invest abroad and as such the short-term prospects for gold are good, as few other investment options remain.

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 This didn’t work out because in reality the banks wanted to keep the gold so the limitations were withdrawn.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.

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 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 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.

Retail investors have realised that gold bullion offers an effective hedge against currency movements, is an effective inflation hedge, and is a proven safe haven in times of financial turbulence.

Volatile markets have created a surge in retail investments in gold bars and coins.

Zuercher Kantonalbank, the Swiss lender that manages around $107 billion has said its gold vault is full after panicked investors sought a haven during the credit crunch.

The U.S. Mint stopped supplies of certain coins due to extreme demands with sales levels not seen since 1999.

“There has been a swing of investors investing in gold in form to investors specifically choosing to invest in physical gold” said Barclay’s analysts.

Today, the people who own gold are doctors, dentists, nurses, teachers, plumbers and building contractors- even bankers and brokers. The very same people who had to bail out the banks.

Make contact with a gold firm you can trust and form a relationship with them. In these times, that will result in a value added to you gold that you cannot put a price on!

Buy Gold When Interest Rates and Inflation Signal a Golden Opportunity.

History has shown that the most powerful safeguard during times of crisis and financial uncertainty is to buy physical gold. The rapid increase in inflation along with slow moving interest rates makes this the best time to buy gold. Owning gold is one of the best ways to hedge against inflation costs that can cut profits and spending power. More importantly how safe is your money in the bank and how do you protect your wealth?

With our major financial institutions under threat, buying physical gold provides the reassurance that you not only have an investment that is safe but that is going to increase in value. High bullion prices are here to stay as the demand for gold won’t wane any time soon.

If you look back over the year the gold price was $667 an ounce but rose to $1000 on 17th March when Bear Stearns collapsed, it then fell back to its current level of around $800.

The question is whether it is a good time to buy gold bullion now. The answer is yes, because the price is largely determined by supply and demand and there is a limited supply and gold is an asset which is not a liability against someone else’s balance sheet.

The current uncertainties within the world economy have brought people to the gold market who would never have considered it before. These people are not so worried about making a profit but want to have peace of mind and security for the wealth that they have already accrued.

Jeremy Charles, Chairmen of the LBMA says “there is an enormous pick-up in investment demand. I have never seen a market like this in my 33-year career. The gold refineries cannot produce enough bars.”

Investors continue to buy gold inspite of a 9 % drop in its value over the last month. Gold is now trading at $835 an ounce losing nearly all its gains. This is mainly due in part to the strengthening of the US dollar. ETF securities, however, reports its Physical Gold Fund has seen more buyers than any other exchange-traded commodity since mid-July, when gold prices first began to fall.

If the dollars strength is short lived, which many believe it will be, the price of gold is likely to go up again. Longer term speculators are using the recent fall in the price of gold as a buying opportunity. Many people have been waiting to get into the market but it was too high and are now looking at this current situation as a great buying opportunity. Many predict that in relation to the dollar the price of gold will end up at $1000 to $1200 by the end of the year.

The Indian market has an effect on the price of gold bars over the summer as this is their festival season. This always causes an over selling of gold and then the market has to realign itself.

Concerns about the long term outlook for the dollar and inflation affect the gold bullion price but at the moment one of the triggers for investing in gold is the economic uncertainties which lie ahead of us.

If you do not have gold in your portfolio you need to think again, as it should be an essential part of it. If you can buy it at $850 or less then it’s a bargain.