KK Bullion – Gold Bullion and Investing in Gold

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?

In the next G20 meeting in Seoul starting on 11th November the leading nations will try to find a solution to the global currency policy. Presently most nations are devaluing their currencies to keep up with the falling Dollar. This has pushed the price of gold to new records after the FED’s new QE round last Wednesday.
Usually G20 meeting are no more than a promise to do something but no real steps are taken. This seems to be the story again as even before the meeting China and The U.S are arguing who’s responsible for the currency issues. The U.S has continually demanded that China lets its currency appreciate against the Dollar and China on the other hand is blaming the U.S for devaluing the Dollar.

All political uncertainty is gold positive and a very interesting statement was made by the World Bank president Robert Zoellick. He said that a new monetary system should be created where currencies would be backup by gold and silver. This would take us back to the 1970s when the U.S Dollar was tied to gold and all other currencies to the Dollar.

If this happens, investing in gold would have been the best decision in one’s life. Gold would officially be in the monetary system again and the demand would increase dramatically.

Whether or not this happens in the future, is just speculations but it definitely puts gold on the spot again. An official body making a comment like this increases the general awareness of gold bullion investments more than any jump in the price.

The Sovereign debt worries have return to the Euro zone as Ireland and Portugal are struggling to get their economies back on track. This has pushed gold up in Euros as the currency has been sliding. Last June when gold made its last price records, it was specially the sovereign debt fears that pushed the price up.

Ireland, the most in debt Euro nation, has tried to convince EU that it can clear its debts by cutting public spending but this might not be enough. After bailing out Greece, Germany clearly stated that it will not save any other nations if they have problems with their national economy.

After few weeks of consolidation, the price of gold has been climbing up as investors have realised that no fundamental improvements have taken place in the monetary system and investing in gold is the best method to protect one’s wealth.

Retail demand in India is picking up again after few months of silence as the retailers have accepted the current price levels. This is very positive news for gold as the Indian retail demand is around 20% of the annual production. As long as the retailers are ready to buy gold at these price levels, a major drop in price is unlikely since every time the price dips retailers are likely to buy more and push the price back up.

Recent news has shown that the global economy has not solved any of the issues which drove us to the recession a few years ago and printing more money will not be a long term solutions. As I have mention several times before, these problems need to be solved in a responsible manner and only then the recovery can begin.

On Wednesday the FED announced that it will release a new round of Quantitative Easing purchasing 600 billion Dollar worth of the U.S Treasuries over the next two quarters. That is 75 billion a month which is pretty much what was expected. The price of gold has been very volatile over the last few weeks as everyone has been waiting for the FED announcement. Now as that is out of the way and the program wasn’t considerably larger or smaller than expected, gold can continue to increase its value.

Both investors and retailers have been rather careful when making the decision to buy gold as there has not been a clear direction for the market. The Fed announcement should calm down the market as the U.S government has shown willingness to support the economy whatever it costs. This sounds very positive but the consequences in the long-term might not be as rosy as everyone thinks. The Fed has already bought 1.7 trillion worth of Treasuries and the second round will bring the figure up to 2.2 trillion.

Everyone can imagine what will happen when the unemployment rate starts declining and the money finds its way to ordinary workers pockets. When looking at commodity prices, one can notice that all basic grocery products are already notably more expensive than a year ago. Just to give you few examples what has happened since January 2010:

• Corn: Up 63%
• Wheat: Up 84%
• Soybeans: Up 24%
• Sugar: Up 55%

And all this has happened in falling economy with practically no inflation.

Another important factor effecting gold and the market in general is the U.S election results. The Republicans won the House of Representatives from The Democrats which is likely to create political tension within the U.S as the Senate is controlled by the Democrats and the Congress by the Republicans.

Gold is very sensitive to any political or economical uncertainty and after recent news there is a lot of both coming from the U.S. Whether the government can agree on any of the domestic issues is difficult to say yet but it will not be a walk in a park for Barrack Obama. On top of that the QE2 will keep devaluing the Dollar against all other currencies and it is likely that emerging nations will have to follow the chosen route in order to keep their exports running.

Totally different kind of news regarding gold bullion demand is coming from the IMF. According to its September report it has only 71 tonnes left from its 403.3 tonne annual sales capacity. If the purchasing pace won’t slow down the IMF will sell out its capacity before the end of the year. This would leave the central banks in an interesting position as they cannot buy gold without interrupting the markets before January. Central banks are not price sensitive buyers so if they decide to invest in gold the price might jump up pretty dramatically. Personally I don’t think this will be the case as the banks would prefer to buy their gold from closed markets.

Gold has been performing exceptionally well in Dollars in the last month and incorrectly many investors assume that the nominal value of gold has also been going up as the Dollar has been dipping. This is not entirely the truth. If we look at the gold price in other major currencies, it hasn’t gone up as much as was believed. In Sterling terms gold managed to break through the June records just yesterday and in Euros it is still around €30 below the June levels.

The recent price jump has been more of a result of the falling Dollar than actual increase in gold demand but we must not get confused here. Rapidly rising demand for gold is still very much there, it is just not as vast as the price lets you assume.

The short term expectations for gold in Sterling are pretty similar to the Dollar, as the British government agreed to undertake the second round of Quantitative Easing. This would push the price of Sterling down and make it easier for British businesses to sell their products abroad.

The British government has not succeeded to keep inflation below the EU target levels, which makes it face a dilemma. Growing inflation and slowing economic growth is not an ideal combination. A new round of QE technically should help the economy as there will be more money to go around but a growing inflation even before the new round could cause serious troubles in the long run. The inflation rate is likely to rise after an increase in the money supply, which could damage the already weak Sterling. As the value of money decreases, more investors are likely to be driven towards gold investments.

Recent comments about the currency debate are suggesting that governments are in a race to the bottom with their national currencies to protect their own economies. Even thought this seems to be the main stream solution, the EU has decided not to follow the crowd. Jean-Claude Trichet, the president of the European Central Bank, has repeatedly said that ECB will not carry out any more QE and they are even considering pushing up interest rates in the near future.

The reasons behind the decision are a bit unclear but one thing is sure. This will strengthen the Euro’s status as the most stable paper currency available and persuade investors to swop their Dollars for Euros. Whether this will halt the dawning recovery in the Euro zone depends on the other currencies, especially the Dollar and the Yuan, but presently the effect has not been anything radical.

This might be interpreted as a sign of relief and a reason not to invest in gold but as I mentioned earlier, the main drive for the gold price recently has been the devaluation of currencies not a change in demand. The sovereign debt crisis in the Euro zone is not over yet and as gold keeps increasing in other currencies, the price in Euro terms has to follow; maybe not as rapidly as in other currencies, but it cannot move in the opposite direction for too long simply because of the laws of supply and demand.

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.

On Tuesday after yet another set of bad news from The U.S, gold broke through the $1300/oz barrier and stabilised at $1310/oz. Gold seems to move a lot more in Dollars than in Euros or Sterling which suggests that it might be overbought in Dollars. This might be good news for Sterling investors since if the British government decides to follow the current money printing trend, Sterling is likely to correct its value against the Dollar. So, short-term return for Sterling investors might be greater than the actual rise in the gold price, although in the current climate it is impossible to give any secure short-term predictions.

Long-term expectations for gold remain very positive after the LBMA report provided the green light to higher prices over the next 12 months. The LBMA is known to be very conservative in their comments and the $1450 price target for next September sounds very cautious. The more important message is that everyone from fund managers to governmental bodies seems to believe that gold is the best investment asset in current market conditions.

The biggest news for gold investors this week has been the “currency war” as the Finance Minister of Brazil called the situation. Columbia and Thailand joined the list of nations, which have started to manipulate their currency to keep up with the competition. At the end of the day, whatever other nations do with their currency, China has the final say in this game.

China is the second largest economy after the U.S and holds a huge amount of U.S Treasuries. China is also enjoying almost double digit growth figures and is almost keeping the whole global economy running on its own. One of the main reasons for China’s recent success is the weak Yuan and this is especially annoying the U.S. The U.S government is trying to force China to let its currency to strengthen but this is very a dangerous game to play. If China so wishes, it can trigger the hyperinflation in the U.S just by selling its Dollar reserves and this would totally sink the greenback or what is left of it. If this happens, gold investors will have a very wide smile on their faces as gold would most likely move up as the Dollar dips.

As investors are running out of reliable fiat currencies, investing in gold is starting to seem to be one, if not the only, relatively stable option to protect your wealth. Movements in the gold price are far more subtle than in other assets and the attributes of gold bullion are known in all cultures so selling your gold will not be an issue regardless your location. Gold will not lose its value like stocks if the market crashes and it is hardly consumed in any manufacturing industry. People still buy gold for the same reason as they did thousand years ago, it is the ultimate reserve currency, which will not be wiped away by any of the risks that paper currencies are facing.