KK Bullion – Gold Bullion and Investing in Gold

As mentioned previously, the centre of gravity for gold demand is continuing to move eastwards. Any splurge on gold in the western world quickly provokes an even stronger purchase response from the East. However the world’s biggest gold consumers are falling out of love with wearing their gold as jewellery.

‘Look at college campuses, Indian girls there are not interested in gold jewellery. My wife has about 1kg of gold jewellery but my daughters are not interested’ Biju Daniel, a Financial Advisor.

Demand for gold bullion and other pure investments in India, soared 83% in 2010 from the previous year. Investment demand is predicted to increase further and potentially surpass jewellery demand in the next 3 years.

Unlike Jewellery, investing in gold bullion retains its value better because fabrication costs are less significant and buyers don’t have to worry about their items becoming dated, making them harder to sell.

Bolivia is the latest country to increase their gold holdings. Many countries are buying their own country’s output and it would therefore seem that the amount of gold becoming available to prospective purchasers may be diminishing by the day. However, higher prices and restricted supply has not yet instigated any significant increase in mined output. This is due to declining grades and end of mine lives, counterbalancing any new output.

The Swiss Franc continues to be weakened against the Euro after government intervention. The Swiss National Bank is keeping it at SF 1.20 or weaker against the Euro. The Japanese Yen may also be prone to more government intervention in an attempt to balance world markets as the Euro fell to a six-month low against the Yen. Many people are choosing to buy gold as, the role of gold as an insurance policy is getting stronger each day and is likely to remain the case for years.

President Obama laid his ‘jobs bill’ before congress. A $447 billion package aimed at promoting hiring in the USA. Markets then tumbled worldwide and gold rose again. However this is not a fundamental plan for the U.S. economy, just another attempt to jump- start it.

Gold has also benefited from muted interest in higher risk assets. European shares fell as Obama unveiled his jobs package, after the Federal Reserve failed to unveil any new measures to stimulate the economy and promote growth.

Ministers from the G7 are under pressure to take action as they prepare to meet over the weekend in Marseille, France, amid mounting bets on a Greek default, but if history is anything to go by, little will come from the meeting. The U.S. can do little more than issue another round of Quantitative Easing and with the Euro being further weakened by the halt in rate rises in Europe; it is not hard to look at the state of the world currencies and see that right now gold and silver prices can only keep climbing in the long-term.

“Weaker developed market growth and the enhanced risk of debt-induced deflation in the United States and Europe materially enhanced the appeal of gold as a safe haven asset.” Say Morgan Stanley.

With growing demand, which looks unlikely to diminish in the near future, the squeeze on precious metals prices looks almost certain to drive the gold price onwards and upwards.

The aversion of a US default failed to prick the gold price’s bubble. Despite a deal being made to raise the US debt ceiling, gold rallied to a fresh all time high this morning (3/08/2011) of over $1670. It appears that the gold rally is founded on more than just the debt ceiling issue.

Fatigue is influencing the market; the gold market has now been responding to the sovereign debt crisis for over a year. Can it really continue to be such an influencing factor when it is becoming everyday news?

The US debt ceiling talks failed to trigger the relentless demand for gold bullion we have seen in the past. Demand has been steady; however it is not nearly as big as in the spring of 2010, momentum is flagging. The markets now seem very concerned that the US may see a downgrading by credit agencies. In short, persistently weak economic data coupled with rising global risk sentiment is giving a lift to gold.

When investing in gold, it is generally recommended to invest 5-10% of a portfolio, it is important not to invest too much. Right now gold is being termed ‘the best safe haven investment’, however it possible to have too much of a good thing. Gold will always retain some of its value when other investments are falling but gold holdings provide no real income and prices can be volatile, especially in the short-term.

Data also suggests Global economic growth is also sliding and historically countries facing huge debts grow at a much slower pace, which leads us to wonder whether the US will be able to find its feet again? Raising the debt ceiling means more debt, more mal-investment, more fiscal imprudence, and less likelihood of the debt ever being repaid, all of which helps gold remain bullish in the long-term.

Fear and greed are commonly the two emotions that drive gold, however at the moment it seems fear is winning. When gold stocks rise with gold, greed is at the helm but when gold is climbing on its own, fear is driving.

The accumulation of wealth, particularly in China and India is also a long-term driving force for the gold price. China and India share a strong cultural affinity for gold as an investment and jewellery. September has traditionally been the beginning of the gift-giving season for gold. This is the time of year when gold jewellers are the busiest. There is a positive correlation between gold jewellery demand and rising prices with increasing wealth.

One of the biggest threats to gold is the rise of interest rates. If returns on paper money get better, then it could tempt some investors to sell their holdings. There are also fears that the gold price is in “bubble territory” and it’s dangerously close to peaking. Some wealth managers are now avoiding gold altogether, amidst concerns that gold’s climb has run its course and prices will now fall.

Given the run gold has had, it would not be surprising if it starts to correct itself, however there are still fundamental economic issues that remain unresolved and no political will or courage to make the changes that are necessary.

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.

According to the World Gold Council’ latest ‘Gold Demand Trends publication’, gold demand has increased 12% from 2009 totalling 940 tonnes. The largest gold consumer, the jewellery industry, has accepted the new price levels and demand has increased 9% in the last year. The best performing markets have been the traditionally big gold nations; India, China, Russia and Turkey, consuming 63% of annual jewellery production.

Retail demand rose 25% mainly driven by bar investments which went up 44%. The total ETF demand fell 7% mostly because trades were consolidating from record high demand caused by the sovereign dept crises. Industrial demand has climbed back to pre-recession levels totalling 110 tonnes which is 13% more than a year ago. The main reason for the rising industrial demand is the steady economic growth in China and India where the majority of electronic components are manufactured.

These figures support the assumption that despite record high prices investors and consumers are willing to invest in gold even at these price levels. Especially the retail bar demand shows that the general public is more aware of gold as an investment than few years ago. The public don’t buy gold only as jewellery but also as something tangible that is not just numbers on paper.

As the money is floating from western nations to emerging nations in Asian, investment demand for gold bullion is likely rise even further in the coming years. Traditionally people from Asia have seen gold as liquid money and they are willing to keep investing in gold even if the price keeps breaking records. They don’t see gold as an investment that you hold for a certain amount of time and sell when the price is higher. Gold is something they keep buying throughout their life, it is perceived as a status symbol in the same way as a nice house or a car is in western world.

China announced that it will raise banks’ required reserves by 50 basis points to tighten liquidity management and control the credit cycle. This practically means that the Chinese government is preventing the economy from overheating which is a very wise decision. This way they can make sure that recent credit crises in western economies will not happen in China. This might push the price of gold down in the near future but once the price finds a comfortable level, it is likely to bounce back since the pressure of a price bubble is off again.

The General Manager of The China National Gold Corp estimates that gold consumption will rise 4% to 430 tonnes in 2010. This proves that China as a country and its people in general are investing in gold and as they get wealthier in coming years demand is likely to keep rising. Taking this and the latest bank announcement into account, China seems to be able to control its economical growth in a wiser way than western nations do. This should calm down the gold market as it has been very volatile in recent months and keep the gold bubble speculators quiet for a while.

The gold price dropped almost $50/oz on Tuesday after China announced that it will lift interest rates in order to prevent its domestic economy from overheating. This automatically pushed the Dollar up and gold down, especially in Dollars. The correction was not as sharp in other currencies as the price has rallied mainly in Dollars recently.

It’s not very often when analysts say that they are relieved when the value of an asset drops but the gold market has been so overbought in recent weeks that a pullback was more than welcomed. Now the market can take a breath and prepared itself for the next rally. Two very important meetings will take place in the next few days and the outcome of these will define short term direction for the market.

In the FED meeting the board of directors will decide whether or not the U.S needs a second round of Quantitative Easing. Although the meeting will not take place until next week markets have already decided that the second round is coming and this has been largely discounted in the stock prices over last few weeks.

Along with the gold price the whole market has been exceptionally good since the beginning of September. There has not been a clear reason for this as most of the economic figures have been negative and the forecasts for the next year have been pretty glum in general. This suggests that the markets have predicted a second round of QE as there is no other valid reason for the exceptional performance in the last few weeks.
It would be unexpected for Ben Bernanke not to go ahead with the QE2. No QE2 would be supportive for the Dollar but extremely negative for markets and I personally don’t think that the FED wishes to cause any more chaos in the economy.

Short term views about investing in gold look relatively bullish since the QE2 would push the Dollar down and inversely lift gold up. The recent price drop has removed the fear of the gold market getting overheated and now the price can go up again without technical barriers.

The coming G20 meeting will try to settle an agreement between the big nations about how to help the economy without devaluing national currencies. The messages from the meeting have not been too positive regarding a solution to the problem as most of the countries have blamed the U.S for thinking only of its own benefits.

All these disagreements are a valid reason to buy gold. If the outcome of the meeting is not an agreed understanding how to balance the differences between currencies, countries are likely to start driving for their own benefits even more aggressively than before.

All in all the next few weeks will determine the direction the market is going in the medium term. After the U.S elections on 4th November we will know more about the U.S government’s policy regarding spending cuts and how to create new jobs. I feel confident to say that whoever wins the elections, investing in gold will keep generating steady returns and recent price drop can be seen as a buying opportunity.

Last week I wrote that the next price barrier for gold is $1300/oz and recently the price has been hovering around $1298/oz for few days. Few months ago most analysts expected the gold price to be on these levels by the end of the year but recent news from America and Japan has encouraged investors to jump on board faster than predicted.

Last week the Japanese government announced that they will interrupt the markets by weakening the Yen for the first time in six years. This is a rather significant move from the Japanese government since they haven’t injected any stimulus into the markets since the last recession in 1990s. The falling Dollar has caused problems in Japan since their large exporting industry has been suffering because of the strengthening Yen and the government was forced to take actions. All this is gold positive because one more of the few reserve currencies have been manipulated by the government.

The counter strike from the Dollar came on Tuesday when the FED announced the readiness to introduce a new round of quantitative easing to boost the economy. After the announcement gold has been very close to the $1300/oz mark and once this level is reached, investors need to revalue their price targets once again.

The depreciation of the Yuan compared to the Dollar has caused a growing tension between The U.S and China in recent weeks. The U.S is blaming the cheap Yuan for its economic issues and even financial sanctions against China have been on the cards. If these two giant economies are starting to threaten each others, the impact on the ever slowing recovery could be enormous. Both of the nations are key players in the global economy and how they manage to support the economic growth and stability will have a major effect on all economic regions.

According to the IMF, a growing number of central banks, especially from Asia, have been topping up their gold reserves in the last 12 months. Russia, China, Saudi Arabia, India, Mauritius, Bangladesh and Sri Lanka have been the main purchasers and the changing attitude towards gold investments from central banks has encouraged investors to buy gold.

Gold has gained 17% since January and has been the best performing asset by miles. Still most people don’t see gold as an investment since it doesn’t pay any dividend. This is a totally wrong approach to hard asset investing. Investors should keep gold in their portfolios to balance the risk aspect of investing. Every time something goes wrong in the global economy, people go for gold. This has been proven several times in last few years and is likely to be proven many more times before the recession is over.

“Betting against gold is the same as betting on governments. He, who bets on governments and government money, bets against 6000 years of recorded human history.” As Charles de Gaulle, the former president of France said.

It seems that not many investors know what government money or fiat currencies are, they only see money as the medium of exchange. The current monetary system used by governments has no intrinsic value and is not backed by reserves, which should arouse your curiosity.

Governments around the world have confirmed their currencies as legal tender and the value of this is simply established through a network of currency traders around the world. As fiat money is not linked to physical reserves, it has a risk of becoming worthless due to hyperinflation. This occurs when governments rescue themselves with the printing press, making their currency worth less and gold worth more. Gold has always risen the most when confidence in government is at its lowest. In the end when people lose faith in a nation’s paper currency, the money will no longer hold any value.

Historically, all systems of fiat currencies have ended in total failure, and this is one of the main reasons why we have seen the price of gold move upwards over the last nine years. Gold has always protected people’s wealth when their country’s monetary system has failed. When the price of gold increases, it acts like a barometer, measuring the relative value of global currencies.

If the price of gold rises in dollars or Euros, you can pretty much bet on there being some problems with these currencies. We have seen this happening in the last few days after U.S released more disappointing news about the possibility of its economy sliding back into the recession. Although, the traditional lack of demand in the summer is preventing the value of gold hitting the $1200oz benchmark.

Another major reason for investors to look at gold as an asset class is because it will always maintain an intrinsic value. Gold will not get lost in an accounting scandal or a market collapse. On top of that gold is practically indestructible. It cannot be wiped out by a fire or even a war.

We have also seen a change of attitude of many central banks around the world, and for the first time in twenty years they have become net buyers of gold instead of net sellers. During the month of June the central banks of Russia, Venezuela and the Philippines bought more gold to their reserves.

We may see frequent drops in the price of gold we have to bear in mind that this is normal market function. As the price of gold is influenced by so many different factors, it will always fluctuate. As governments are likely to print more money during the next few years to prevent the double dip recession, we are going to see a further debasement of their currencies and this will push the price of gold higher. Eventually all this money creation is going to lead to an inflation or even hyperinflation. When this happens the price of gold is likely to go through the roof.