KK Bullion – Gold Bullion and Investing in Gold

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

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

• Mine production was up by 6%

• Demand for jewellery was down 23%

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.”