KK Bullion – Gold Bullion and Investing in Gold

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 This didn’t work out because in reality the banks wanted to keep the gold so the limitations were withdrawn.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

Historically the price of gold bullion has risen dramatically. At the end of the last century this was very obvious. In 1980, the gold price peaked at $850oz after this the gold market went through a rather more bearish period and in July 1999 gold fell to $253oz. In this period gold lost about 92% of its value .There was then a turn around in the gold market. Over the long run gold has maintained an excellent track record in maintaining its purchasing power and outperforming other financial assets.

If we look back at the historical value of gold bullion since the 1900’s we can see what has been happening to the price of gold in modern times, where many recessions and wars have occurred..

In 1900 the price of gold was $20.67oz. The United States adopted the Gold Standard de facto in 1879, by making the greenbacks” that the government had issued during the Civil War which could be converted into physical gold. By 1900 the US had taken on the Gold Standard. In 1914 the Gold Standard had been adopted by a large number of countries, although it was not global.

By 1934 gold bullion price had risen to $35 due the government’s tight controls on the buying and selling of gold within the US. Prices of $35oz helped set off a mining boom. US output rose from 2.6m oz in 1933 to 6.0m oz in 1940.

If we skip ahead to 1971 where the average price of gold is $40.81oz. This is a significant time as President Richard Nixon suspended the US dollar convertibility to gold and the central role of the world currency systems ended. This was known as closing the gold window. The central banks of West Germany, Switzerland and Belgium and the Netherlands state that they will no longer purchase dollars at their morning intervention points.

In 1973 the market becomes very volatile and gold goes from $63.90-$127.00oz. Lack of confidence in fiat currencies continues to underpin gold

In 1980 the gold price hits a record for the third year running. The prices are dictated this time by political developments. The soviet invasion of Afghanistan dominates the world’s financial markets and sends the price of gold to $850oz.

During 1990 the price of gold comes under pressures and falls to an average of $383.56oz. This bearish trend continues until 2001 when gold commences its bull run after a long period of sideways trading. The gains are seen not just in dollars but also in Euros and Yen terms. This was the year of the terrorist attack on the World Trade

Centre, NYC. The price of gold rallies after 9/11. Mine producers reduce the

global hedge book by 147 tonnes a year which supports the gold price. The year ends

with the bankruptcy of Enron and the price of gold is at its lowest since 1978 at

$271.04oz.

This however does not alter the gold market as in 2002 the annual gold price is

pushed up to $347.20oz a gain of over 25% . This continues in 2003 at $416.25oz this time demand is driven by growing concerns of US economy and the implications on the Dollar. In addition the hedge book is reduced by a further 310 tonnes and fabrication continues to fall.

Gold began floating on this flood of liquidity nine years ago. It has doubled and

doubled again. Since 2001 the price has gone up 240%. The worlds gold supply grows at 2%-3% a year. It is harder to produce an extra ounce of gold as it is a diminishing resource which must be dug out of the ground.

2008, today the gold price is at $1000 an ounce, fuelled by strong demand for the commodity and the important role of gold as a safe haven due to current economic uncertainty. Rising inflation and the rising price of oil also spur on gold. Some forecast that gold will hit $1,250 an ounce by the end of the year.

Gold’s value is intrinsic and it is one of the few assets that represent no banks, financial institution, multinational corporation or government’s liability or ability to repay. Thus owning gold helps eliminate third party and counter party financial risk. This is particularly important when there are liquidity, credit and global systemic crises. This makes gold an insurance policy against the uncertainties of the financial and economic markets. Investment in gold should be made not in anticipation of economic or financial difficulties but simply incase of them.