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.

Gold has been taking steps towards the June levels in last few days as more worrying news from the U.S has been released. The existing home sales figure dropped 27.2% in July, the biggest one month drop ever, and new home sales followed the day after by dropping down 12.4% to 276,000 units annual rate, the lowest since the series started in 1963.

All the signs from the western economies are suggesting that the recovery is slowing down and might even slide back into a recession. Ireland joined the not so admirable club with Spain, France, Italy and Greece, who have been downgraded by Standard & Poor’s. The U.S is releasing negative figures almost on daily basis and government bonds are more expensive than ever because investors are looking for a safe asset to tie up their money to avoid any further loses.

All this sounds very negative for stock markets and I’m not trying to say that it isn’t but not all assets are losing their value. Precious metals, especially gold, have been performing well in recent weeks as stocks and fiat currencies have been suffering. The total demand for gold in the second quarter was 1050 tonnes, which is 27% more than a year ago.

September is the month when investors are coming back from their summer holidays and everything is getting busier after the summer break. This normally pushes the gold price up since investors are revaluating their portfolios after realising that everything isn’t as it used to be before the holiday.

Looking at purely technical analysis, we can notice that on average the value of gold goes up 2.51% in September and from the last 21 Septembers 17 has been positive for gold. This is driven by rising physical demand from India as the county is entering the autumn gift-giving season. Also the Muslim holy month of Ramadan is pushing up demand in August and September. Although, at the moment the price increase is driven by investment demand not the retail sector since the ever growing price is cutting the retail dealers profits and they are waiting for a price drop before stocking up.

The most important factor affecting the gold market in the long-run will be the way central banks and governments are going solve the over expanded credit cycle issue. Whether governments stop the printing press and let unhealthy institutions die away or print so much money that the debt will be just wiped out – followed by hyperinflation – the average citizen will have to think very carefully where to put their savings.

Gold would be a potential solution since it will not lose its buying power during deflation or inflation. The value of gold might be high or low compared to other assets but the buying power is likely to remain rather unchanged. For example during the period of the gold standard in 1940s, you could change an ounce of gold to $35 and with that $35 you could buy a very nice suit. Today when the price of gold is around $1200 per ounce you can still buy a very nice suit with the same amount of gold, although numerically the price has gone up by 3430%.

Investors should keep in mind that bull market never moves straight up. If it does, it’s called a bubble, and bubbles eventually tend to burst. Instead, gold markets have been moving exactly as predicted, with big sudden movements up and down on the way to much higher prices in the future.

This has happened many times in the past and the summer potholes in the gold price have happened nearly every year. 2009 was an exception because investors sought a save asset to invest their money in the falling markets, which pushed the price of gold up against the expectations. Even this summer the gold has been doing surprisingly well, it hit the record high at the end of June, against the normal market pattern.

So what is likely to happen in the next 6 months?

The price of gold has been coming down from the record high in the last few weeks and the most common explanation for this is the re-evaluation of U.S economy prospects by some gold traders and investors. The other reason is the abatement in perceived European sovereign risk.

Although, this is just the other side of the coin since the economic news in recent weeks has strengthened the rising expectations of U.S economy downturn, also known as “double dip”, along with it the fears of U.S consumer price deflation. The markets are going through a rough path and obviously investors have mixed views of this since some gold selling have been necessary to cover other financial obligations. After all, it’s the investment demand, which is driving the gold price.

Meanwhile in Europe the relative successful refunding of Greek government dept has relieved some of the fears in the markets and strengthened the Euro. Although this is still just a very minor step towards the solutions of the sovereign debt crisis and the Euro will need many more pushes until it will regain its value against the Dollar.

The recent price falls in gold price and any further short-term declines in the coming days or weeks should make the gold even more attractive for the long-term investors.

Inflation has been relatively well under control and the markets are more afraid of the deflation at the moment. This is in the interest of the U.S government since FED is trying to save the economy by pumping more money into it. In the future this will most likely lead into inflation. When the supply of U.S dollars continues to grow more rapidly than the demand for them, each dollar becomes worth less and in the end even worthless, which will push up the general price level.

Not just the demand for Dollars is growing less rapidly than the printing pace in U.S but also amongst the chief financiers of America, particularly in the People’s Bank of China, which will force FED into an even more expansionary and inflationary mode.

Some investors are trying to deny the inflation scenario by saying that there is so much slack in the economy because of the unemployment and idle capacity that there’s plenty of room for rising economic activity and money supply growth without inflation. This explanation does not stack up against thousands of years of recorded economic history. Most of the times high inflation doesn’t occur when economy is growing strongly but when it is sluggish and sinking…and when people are losing their trust in the monetary system.

Rosland Capital’s gold analyst Jeff Nichols comments: “Today, we are witnessing a loss of confidence in the dollar both at home and even more so abroad, that is capable of driving inflation higher even in the absence of high rates of capacity utilization and low rates of unemployment. This loss of confidence has already contributed to the rise in gold prices over the past few years … and will continue to drive gold still much higher in the years to come.”

We can only hope that the loss of confidence doesn’t turn into a rout since the effects on the gold price would be gigantic. Even a controlled inflation tends to push the gold price up not even mentioning hyperinflation.

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.