KK Bullion – Gold Bullion and Investing in Gold

President Nixon abolished the gold standard in 1971 and in 1973 the IMF officially abolished gold as part of the monetary system. Still almost 40 years later gold seems to follow the U.S dollar more than anything else. Traditionally gold seems to move up as the Dollar goes down but recently this pattern has been broken since gold has been going up along with the Dollar. What this actually means is a difficult question to answer but most market analysts believe that gold is acting more and more like a currency. As almost all of the main fiat currencies (Dollar, Euro and Yen) are losing their value, investors need to diversify their portfolio to protect their wealth.

Behind the scenes there is even more confusion about the state of the Dollar and what will happen in the future. Since 2001 the Dollar has lost 30% of its value and since the creation of the FED it has lost 96% of its value. Being the most common reserve currency in the world the value of the Dollar should be relatively stable or at least that is what the investors are hoping.

The largest financiers of America, such as China, have started to move their reserves away from the Dollar and this is creating problems for the FED since no one wants to buy government treasuries. The FED is now forced to buy the treasuries itself and this leaves money bouncing between banks and the government. The banks benefit from this since they get easy money from FED to fill the holes in their balance sheets created by the Credit Crunch. Buying government bonds with the money is way more profitable than lending the money to general public since bonds create around 3% return compared to 1% coming back from loans. This creates a lack of physical money in the economy and slows down the recovery since people can’t get loans from the banks.

The national debt of US stands at $14 trillion and will soon reach 100% of its GDP. With high unemployment rates and slowing economic growth the government is struggling to fund this debt. As a result the FED will keep printing more Dollars, which will decrease the value of the Dollar even more and drive investors to buy more steady assets, such as gold bullion.

On top of the problems with the Dollar, there is an issue with US gold reserves. According to the government, the USA holds about 8.000 tonnes of gold in Fort Knox but there hasn’t been an independent audit of the gold since 1953. It is known that after the 1953, millions of ounces of gold have been sold outside the US but no official figure has been released regarding the current gold deposit. There is a good reason for that since if the US gold reserves are considerably smaller than expected, one can only imagine how deep the Dollar would dive.

The next few months will show what direction the US economy will take since after Labour Day on 6th September the holiday season ends and all the big players come back from their summer break.

We believe that gold investments will keep producing good and secure returns for investors as the growing retail and investment demand from east and west is likely to keep pushing the price towards new records later this year.

Fed, the central bank of America, decided to keep the interest rates low and continue the Quantitative Easing in its meeting on Wednesday afternoon. This was pretty much what the markets were anticipating but still the price of gold dipped before the meeting since some bargain hunters speculated that another outcome would be possible.

The price climbed back up relatively fast after the announcement so the effect on the markets was fairly minimal. The more important outcome of the meeting is that the U.S government doesn’t believe that the country can climb out of the recession on its own. This should be positive for gold in the long-term since when the Fed keeps printing more Dollars the price of gold is likely to keep going up.

Falling bond yields are supporting the conclusion we can make from the Fed’s announcement since, according to conventional monetary theory, a decline in the bond yields suggest that the economy is slowing down and in extreme conditions it might even face a deflation. This is why Fed decided to continue the Quantitative Easing program since pumping more money into the system should prevent the risk of the deflation.

The drought in the Middle-Asia should also support gold prices since it has destroyed a significant amount of the crop in Russia and Kazakhstan. Because gold sits in the same basket with the other commodities, such as grain, oil, base metals etc, it is sensitive to any changes in commodity prices.

Russian’s Prime Minister Vladimir Putin announced that Russia will restrict its grain exports from 15th August onwards. Last time when the crops were damaged by drought and the restriction were introduced in 2007-2008, the gold price went up $350/oz from $650/oz up to $1000/oz. Though, this time the damage shouldn’t affect prices so dramatically since we have had a surplus harvest in the two previous years, it is none the less supportive of gold.

The debate about what is the most likely outcome of the U.S economic crisis, deflation or inflation, has been going on few months now and seems that both options have a strong support group. Whichever the outcome is going to be, gold should offer a relatively safe protection from both. The latest bull run for gold started in 2001 and between 2001 and 2008 it protected investors from inflation when the economy was growing and credit cycle was expanding. After 2008 it has been a safe haven and insurance for investors in falling markets.

Gold seems to have developed a new feature in the current economic situation since it has been used as liquid money between banks in the past few months. Gold hasn’t been used in this kind of matter in decades, mainly because the U.S Dollar has been the main medium of exchange. The depreciation of the Dollar has been so severe in recent years that banks have been forced to seek another option to secure their liquidity.

The U.S economy is facing many challenges at the moment but we think that the most significant news came from China last week when it announced plans to liberalize its gold markets. This could increase demand for gold considerably in the coming months and years.

Earlier this week the Chinese central bank announced that it will start gradually liberalizing domestic gold markets allowing its banks and producers to seek buying opportunities overseas. Being the largest producer and the second largest consumer of gold, this could be very positive news for the yellow metal. China is the largest growing economy in the world and with the population of 1,4 billion, the size of the new market is mind blowing. The average Chinese citizen saves up to 40% of his income and the government is encouraging them to hold physical gold.

You might wonder why would the largest gold producer open its markets when the price of gold is hitting record high. The reason is fairly simple. The Chinese economy is growing so fast that the domestic suppliers of gold aren’t capable of meeting the growing demand.

Another reason is the weakening Dollar. China is largest financier of America and holds a huge amount of Dollars. China needs to either spend or diversify its foreign exchange reserves to avoid the risk that current actions of U.S government are causing. Even if China doesn’t decide to buy gold from abroad, any movement away from Dollar would be positive for gold.

Before making any hasty conclusions we must keep in mind that it is not in China’s best interest to start buying large amounts of gold from overseas since this would cause the price of gold shoot up. As a result the value of the Dollar would drop even more and as mentioned earlier, this wouldn’t serve China’s best interest – at least not yet. Chinese companies have been active in the western investment markets in the past few months. This could be seen as an attempt to reduce the massive Dollar surplus since all Chinese companies are owned by the government.

In general the gold market seems to be shifting from west to east as the big Asian economies are getting wealthier. China and India have been big markets for gold for a long time but recently countries like Indonesia and Turkey have started to stock up their gold reserves. Gold is also seen more as liquid money in Asia than in western countries, which makes it a more common investment in these growing economies. When adding up the population of China, India and Indonesia, we have almost half of the world’s population getting richer and demanding gold.

The only factor that could hold back the rising demand, at least temporally, is the Chinese government’s plan to implement bank stress tests. These tests would measure what impact a 60% dip in property prices would have in banks liquidity. If the banks fail these tests the impact on markets would be more psychological because 60% drop in housing prices is highly unlikely. Failure could lead to more regulations and delay the markets liberalizations plans. On the other hand if the banks pass the tests, it could kick off another huge gold rally. We are anxious to hear more news from the east in the coming weeks.

Gold Bullion prices fell sharply earlier this week when gold got caught up in short selling before the August options expiry date. The northern summer holidays and recent bank stress test results from Europe have had a negative effect on the gold price but in the long run the markets seem to be bullish for gold for various reasons;

The European bank stress test results slightly relaxed the markets because the sovereign debt risk has moved on the background – or at least that’s what the governments are saying. The ground for every investment is belief, and politicians along with government economists are more than happy to reinforce the fading image of the sovereign debt. Even if the reality is totally different, the governments are prepared to do everything in order to keep up the faith in the financial system. If they fail the result is likely to be a financial disaster, which happened for example in Germany in 1920s in a form of a hyperinflation.

The bad news for the governments is that the truth tends to pop out in the end and as they see the increase in money supply as the solutions to the problem, we might face the hyperinflation again in the future.

The biggest questions mark for gold markets is the U.S and more precisely the FED. The U.S has piled up a huge amount of debt in recent years and cannot afford another recession so they have to turn to the FED to seek a resolution to the problem. Because the price of gold is cited in Dollars and the FED is printing more and more Dollars to save the economy, it is also making gold more attractive in the long run.

The two giant economies from Asia, China and India, are on the way to becoming major players in the gold markets. Especially China has raised its influence in recent years for two reasons; it is the largest financier of America and it sits on an enormous pile of Dollars. Making the Dollar worth less is not in any interest of China. The other reason is the fast economic growth and the market deregulation in China, which will keep pushing the value of the Renminbi up against the Dollar, and the demand for gold is likely to follow.

When talking about the amount money in the market circulation, the numbers are as follows: there are $40 to $50 trillion in bonds and about $30 trillion in equity markets. We are on a historic lows comparing to the 1970s and 1980s when considering the amount of gold in these numbers, it is only 1-2%. It is recommended that investors hold 10-20% of their portfolio in gold so there is still lots of room for gold in the markets spectrum.

To sum up all this, we could say that the recent drops in the gold price could be seen more as a buying opportunity rather than a change in the bullish markets views and getting rid of physical gold might turn up to be a very hasty decision.

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.

The rise in the price of gold, which has seen it jump from just over $750 an ounce six months ago to over $930, has hit gold jewellery sales hard.

India is the world’s number one consumer of gold, accounting for almost a fifth of gold sales. Gold jewellers, struggling to cope with sluggish sales as a result of the soaring price of gold, are looking forward to next month and the start of the Asian wedding season. The five-month period sees sales of the precious metal rise as brides are adorned with gold jewellery and given gold as part of their dowry.

There are spikes in gold demands both January and September, months when Indian manufacturers typically restock inventories to meet the demands of the two Indian wedding seasons. The first, mentioned above, starts in November and ends in December. The second starts in late March and runs through into early May.
The price of gold has risen 10% since January and with volatility in equity markets and growing economic uncertainty in major Western economies, demand is likely to continue to rise, analysts say.

Ownership of gold takes many forms:

Jewellery

Probably the worst way to invest in gold, mainly because the real value is subjective and prices can change with design, craftsmanship and the inclusion of gemstones.

Bullion bars and coins

Gold coins such as Krugerrands come in a variety of weights and sizes. They are a cost-efficient option for investing in tangible gold as they are exempt from VAT. Coins are available through dealerships, but purchasers need to ensure they buy gold with a hallmark of internationally recognised refiners.
Buyers can visit a reputable gold bullion dealer, and buy and sell small bars of gold over the counter.

Allocated accounts

The most secure way to invest in physical gold. A recognised bullion dealer stores and manages an owner’s physical gold, while the account reflects the value of the gold stored. A variation on the allocated account, where transfers and payments in gold can be made electronically – but where the physical assets are stored in vaults by banks or currency operators as ultimate security for transactions.

Gold futures

Like future contracts on any other asset such as shares, gold futures are promises to make or take delivery of a specified quantity and quality of gold on a prescribed date at an agreed price.
The benefit is that the initial margin paid to a broker is only a fraction of the price of the gold underlying the contract. This means substantial profits can be made for small outlays. But the risk is that losses can mount in the same way.

Shares and funds

Funds investing in gold companies, or holding shares in the firms, offer a diversified investment route. Recently, funds such as BlackRock, Merrill Lynch, and Gold & General have topped the tables both in terms of performance and popularity. The fund has outperformed gold itself. But shares in gold mines carry their own dangers, such as the political risks associated with the countries in which the mines operate – often in volatile and unstable regions.

Gold Exchange-Traded Funds ETFs are shares, traded on the stock market and bought through brokers, which shadow the value of their underlying asset. The most popular ETFs track major share indices, such as the FTSE 100, but the funds are also available for bullion and other commodities.

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.