KK Bullion – Gold Bullion and Investing in Gold

Last week gold managed to climb above the $1,750 per ounce mark on the back of the co-ordinated move by central banks to boost liquidity. When the US Federal Reserve allowed central banks to swap their own currencies for US dollars, the dollar fell and gold benefited.

Despite the increase in gold prices, Chinese demand continues to be just as high. Although the Chinese government keeps very quiet about its gold reserves it is believed that China holds in excess of 33.89 million fine troy ounces as its reserves and that this is increasing rapidly. In 2007, China overtook South Africa as the world’s largest gold producer and China has been making the most of this cost advantage.

The Chinese however, are also in need of monetary support after The People’s Bank of China made it easier for banks to lend more money, by cutting the level of reserves the banks have to hold. Over the past week, China’s central bank has had to intervene in the currency markets, but for once, it’s not been acting to keep the Renminbi weak against the dollar. The blame lies with China’s property bubble which seems about to burst. The good news is that China’s attempts to prop up the market appear to be working; but the bad news is that investors are beginning to realise that the Reminbi can fall as well as rise.

Also underpinning the gold price was the continued buying by central banks. South Korea is the latest bank to buy gold in an attempt to diversify its foreign reserves and protect against financial instability. A number of banks have disclosed information about their continuing gold purchases; these include Thailand, Russia and Bolivia. Although gold seems to have currently lost its status as a safe-haven asset, increased demand from central banks is supporting gold prices.

EU leaders will be meeting in Brussels this morning (08/12/11) in order to try and agree on a deal to tackle the Euro Zone debt crisis. Most investors and analysts have labelled this the ‘do or die’ moment for Europe. It is now apparent that any solution must be credible and enduring; the markets will no longer be fed drips and drabs of false hope. One way or another, EU leaders must announce a viable plan.

Chancellor Merkel and President Sarkozy are calling for renewed contracts between countries that enforce budgetary discipline with automatic penalties for those who overspend. However, similar sanctions were previously included in the contracts and those clearly weren’t enforced, so how much difference will this really make?

After Standard and Poor’s put all Euro zone countries on credit watch it seems that the main focus is on restoring market confidence and as such EU leaders appear to be hardening their positions. However, if the EU is to survive in the long run there needs to be improved solidarity and collective fiscal union.

The ECB (European Central Bank) has cut its main interest rate back to 1% ahead of the EU Summit. Unfortunately, this is much of the same from the ECB and it doesn’t have the authority to do what is necessary to stop the debt crisis worsening. Italy and its debts are too big to be rescued by other governments so instead the attention continues to circle back to whether or not the ECB will have to surrender and print money. Of course gold would benefit from this, as people would seek to invest in gold again, in search of safe-haven assets and protection from inflation.

Gold prices climbed over $50 yesterday afternoon and still more this morning (26/10/11) amidst more concern over the EU’s debt crisis and disagreement between Germany and the rest of the EU.

Gold’s status in recent weeks as a safe haven asset has been heavily criticised as it has underperformed major currencies, fixed income products and crude oil. However investors have once again turned to buying gold as EU meetings are cancelled and US Consumer Confidence falls.

Last week gold had fallen more than 15% since hitting a record high of $1,920.30 on 06/09/2011, as the dollar strengthened and equities fell. Gold is now behaving like a safe-haven asset again since it appears to have severed its ties to risk assets. If this pattern continues after hearing news from the EU meeting due to take place this evening, we could well see gold prices continue to climb.

When rumours were circulated about a Euro Zone rescue fund, this was bearish for gold; however now we have been told that German Chancellor Angela Merkel disagreed with a phrase in the draft conclusion for Wednesday’s EU summit that calls for the European Central Bank to remain a buyer of bonds in the secondary market. It seems investors are no longer accepting the procrastination of politicians and are instead seeking safe-haven assets yet again.

Japan’s finance minister has instructed his staff to be ready to intervene and halt further appreciation of the Japanese Yen, due to Japans’ slowing export growth. Gold, the JPY, the CHF and US Treasuries are widely recognized as the world’s principal safe-haven assets. By intervening, Japan has effectively degraded JPY’s safe-haven status which is bullish for gold.

Along with concerns over the debt crisis in the EU, attention could also now be drawn to the unresolved US problems as well. With the focus predominately on the meetings in the EU recently, the US and its debts seem to have been overlooked.

The rising debt-to-GDP ratio is the clearest indication of the country’s deficit problem, and gold prices react to this; if the US fail to reach the 1.5 trillion deficit regulation target, this could lead to credit rating agencies re-examining US ratings, which could trigger a gold rally. If gold re-emerges strongly again as a safe-haven asset we should see bulls investing in gold and rebuilding long positions.

Gold prices were also boosted by Indian demand as they prepared to celebrate the festival of lights today (Diwali). The festival of lights is normally considered a good time to splurge on gold and nearly 35 kilograms of gold was sold on Monday.

In Mumbai, demand for gold coins was so high on Monday that queues were witnessed outside big jewellery stores late into the evening, snaking over half a kilometre outside many stores.

Whatever the outcome from this evenings talks, with all this volatility it’s getting harder to work out what gold’s reaction will be. It seems that gold is moving around trying to establish a new level and while that is going on gold prices will not move in line with other assets in a normal way.

After the recent price slump of 11% this month, it appears spectators are even more divided over gold and its safe-haven role. When the CME group increased its margins and the dollar began to make a comeback, we saw investors rush to liquidate their gold and money flee from the futures market. This of course impacted on the current price of gold and led to September being the worst month since the collapse of Lehman brothers in October 2008.

For some this fall in prices was nothing more than a buying opportunity, but others remained more cautious.
“The increase in gold’s price volatility since early July has rendered it a higher-risk asset. Key characteristics of a safe-haven asset are low price volatility and minimal risk of capital loss. With gold price volatility doubling, and gold prices dropping by more than 10% in just three days, these characteristics no longer apply to gold.” Jeff Christian CPM group MD.

Does this mean that investors should no longer trust gold as a safe-haven asset? The only other safe-haven is government debt, now yielding less than inflation for three years running and exposed to default or deflation. Of course there are extreme levels of volatility across all markets today, but there are a growing number of people investing in gold as a long-term insurance, rather than a short-term safe-haven.

With money fleeing the Euro zone, it only found the dollar as an alternative. The Swiss Franc and the Yen have ceased to be safe-havens because their central banks have intervened to weaken those currencies. This left the U.S. dollar, as the only really liquid place to go. This was not because of any value that could be retrieved, but because it’s the only remaining currency that remains standing under pressure.

There was little denying the surge of strength in the US Dollar last week; however commentators who fear the collapse of the Euro zone still claim gold offers a safer haven than the Dollar.

Gold appears to be climbing again today as news that Greece will miss its deficit targets this year weighed on the financial markets. As the Euro fell to eight month lows against the dollar, gold still managed to trade higher, which is impressive? Does this indicate that the rally isn’t over for gold?

No one can promise that gold will reach further record breaking highs, but as governments struggle to find solutions to the economic crisis, the case for gold only gets stronger.

In the long-term the EU crisis is clearly bullish for gold, it’s touch-and-go as to whether the Euro zone will survive. Reformation must take place in the monetary world; policymakers have two options to deal with today’s debts: default or devalue. Both are bad for creditors and both suggest that many people who now hold or are thinking about buying gold bullion will choose to hang onto it until the threats to their wealth have passed.

Why? Because gold is not a debt – so it cannot default. If you own gold bullion outright, you aren’t relying on a counterparty that may not exist tomorrow. Gold also cannot be created at will, so while its value will fluctuate, sometimes quite violently, it cannot be purposely devalued by policymakers.

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.”

The recent earthquake in Japan had very little affect on the price of gold, only a relatively small £15 dip took place after the news came out but the price recovered fairly quickly. Compared to stocks, gold held its value very well during the few days when markets were falling almost in panic. The reason behind this is that gold is not widely used in the manufacturing industry and there aren’t any big gold mines near the disaster area so the supply chain did not suffer any damages.

The long term affects are more currency related as the value of gold traditionally moves inversely to the main fiat currencies, such as the Japanese Yen. The Japanese government has already pumped more money in to the markets to support the economy. This will depreciate the Yen and push up gold.

Depreciation of the Yen will most likely affect on other main currencies in the longer term as it will make Japanese products cheaper. This consequently will force other central banks to depreciate their currencies and the money printing race between large economic powers will begin again. This is likely to be gold supportive as we have already seen last Autumn when the FED began the second quantitative easing round and pushed the gold price to new records.

When looking beyond the short term consequences of the earthquake and should people consider investing in gold, it is important to look at the most important factor affecting the price of gold, inflation. Presently European nations, especially the United Kingdom are struggling to keep the CPI below the recommended 3% because of rising commodity prices and increases in money supply mainly in the first two quarters in 2010.

The recent military actions against the Libyan dictator Muanmar Gaddafi are likely keep gold high in the short-term as Libya is one of the largest oil exporters and currently production has stopped. The value of gold traditionally follows oil rather tightly and as the supply side looks very unstable in North Africa, oil is likely to keep rallying.

The price of oil might even jeopardise the recovery in Europe and America, and force central banks to continue with their ultra loose monetary policy. This should encourage people to buy gold as low interest rates with increasing commodity prices will lead into higher inflation in the long-run.

If the unrest spreads to other major oil producing nations in the Middle East and North Africa, gold might reach $1500/oz in the coming weeks. Increasing military tension in the region would significantly harm the global economy and it is unlikely that the U.S would let its Saudi allies slip into a civil war, however the uncertainty is enough to keep the gold train going.

The last few weeks the situation in Egypt has been dominating the headlines and making the markets even more volatile than normal. The gold price has been moving very rapidly since the uprising started. This shows the important role gold is playing in traders portfolios in times of uncertainty. They are trying to protect themselves with gold as it traditionally moves inversely to other equities.

The tension in Middle-East might keep investors on their toes for quite some time as Jordan and Yemen are very close to losing the control of their people too. Investing in gold will offer a safer option to invest one’s money than stocks as long as the inequalities between people keep causing problems in Middle-East.

According to bullion dealers in Hong Kong and Shanghai the physical demand for gold has been unbelievable before Chinese New Year celebrations. Chinese people traditionally buy gold as a New Year’s gift and because of the emerging inflation pressure the hunger for the metal has been at record high ahead of the holiday.

Traditionally the physical demand calms down after the Chinese New Year and won’t pick up until early September but currently the inflation pressure is likely to stop any major falls as governments are pretty helpless in front of market forces. In a healthy economic environment inflation is caused by increasing consumer spending and can be controlled by raising interest rates. Presently inflation is caused by rising commodity and food prices, not people spending too much. This causes politicians a dilemma as rising interest rates would cool down the commodity prices but it also would kill the emerging recovery.

Both the ECB and the FED have stated that they will not raise interest rates until the recovery is on firmer ground and the economy is adding far more jobs than it currently is. Recent employment data from the U.S is backing up this as the country is not creating new jobs fast enough to support the recovery. ECB is expecting inflation to be 1.8% in 2011 which is below the 2% target and would ease the pressure to raise interest rates in the Euro Zone.

As central banks are not currently able to do anything to cool down inflation without affecting the recovery, commodity and food prices are likely to keep rising. Some analyst suggest that rising food prices were the bottom reason for the riots in North Africa as in most of these countries over 50% of family income goes to grocery shopping. As food prices keep rising, it is likely that the anxiety and tension keeps spreading to other developing economies.

Resent economic statements from America and Europe are suggesting that the recovery is picking up but financial markets remain doubtful about it and especially Asian investors are keener than ever to buy gold as an inflation hedge. Whether the western world will follow until it’s too late will be seen in the next few months but a lot of so called smart money from Asia is buying all the bullion they can get.

The value of gold has increased around 30% this year which is a bit more than central banks and other official bodies expected but they are usually rather modest with their predictions. Most independent analysts have said that the price will be between $1400 and $1500 per ounce by the end of the year and that is where we are now.

The main reasons behind the bull-run have been the European Sovereign debt issues and quantitative easing in the U.S. Also increasing investment demand in Asia with lacking new supply has pushed the price to record levels. As more institutions and hedge funds are starting to in invest in gold the lack of new supply might start causing problems in the future. Big institutions are buying from the same market as central banks and as the IMF can only sell 403.3 tonne per annum it is likely that some of the big players have to start using open markets to buy gold.

Presently it looks like that banks are not even considering raising interest rates in the near future which will drive people to put their money in something tangible, such as gold bullion. As more private investors are getting interested in investing in gold, the mints are struggling to keep up with the demand and the price of smaller bullions and coins is likely to rise even faster than other gold related investments.

The latest comment from both of the most problematic economic regions, the U.S and Europe, are suggesting that they are prepared to introduce more quantitative easing in 2011 if and when the economy will continue to struggle.

The issue with quantitative easing is that the money is not going where it should be. It should go down to small and medium size businesses to help them to get loans more easily and this way create more new jobs. Currently the money is just going from central banks to commercial banks and it is only benefitting stock markets and other investment institutions. This keeps investors happy but is not solving any of the issues which are causing the current situation.

The issues occurred when banks started lending money to people who couldn’t pay it back and now governments are providing cheap money to banks helping them to plug holes in their balance sheets. The banks are getting away Scott free and the tax payers are left alone to pay the bill.

2011 looks yet another gold positive year as none of the issues that pushed gold up in 2010 have been solved and in fact more have been added as the domino has started to collapse. It is likely that there will be more bail outs in the Euro zone as more nations have to admit that their banking systems are on edge of a meltdown. The FED probably has to introduce one or more new rounds of quantitative easing as the U.S economy will keep slacking and without new fiscal stimulus the country will face deflation which would be even worse than the inflation following the quantitative easing.

In a nutshell we will probably see a lot more volatility in the gold price than we are used to in 2011 but there are not any valid reasons why the bull-run would end before the problems mentioned earlier are solved.

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 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.

Yesterday gold finally managed to break through the psychological $1265 per ounce barrier and rallied all the way to $1274/oz. Markets have been waiting for this for the last few weeks and now the gold price seems to be on the way to the $1300/oz figure. Uncertainty has returned to the markets after a few seemingly optimistic trading sessions and more new investors are starting to realise the advantages of gold bullion.

The race between central banks seems to heat up day by day as the economy stubbornly remains sluggish despite the efforts from governments to kick start it. Since the biggest economies have chosen the inflation route to climb out of the recession, everyone else has to follow and print out more money. This creates a money printing race since no one wants to keep the value of their domestic currency high as it would disadvantage their exporting industry.

This benefits gold in two ways. As the value of fiat currencies depreciates, gold moves in the other direction because its value cannot be manipulated by any governmental institution. Some day, when we manage to overcome the issues in the monetary system and the economy starts growing again, the extra money pumped into economy will create fast growing inflation. This can be already seen in the UK’s economy as the government isn’t able to keep the inflation rate below its 3% target level.

China has a giant economy, which is facing a different sort of problem with its currency. China is confronting lots of pressure from the U.S to internationalise the Yuan since the cheap currency is attracting consumers to buy products from China instead of domestic markets. Internationalising the Yuan would help Chinese companies to do business internationally because they wouldn’t have to play around with the falling Dollar all the time.

Letting the value of the Yuan rise as much as the U.S is demanding would cause a lot of volatility in domestic markets. The U.S is stating that a 40% rise would bring Yuan into satisfying levels but this would also mean that an average Chinese citizen would lose 40% of his/hers savings, which are tied up in any internationally traded assets, such as gold bullion. Keeping in mind that the Chinese government has been encouraging people to invest in gold, it is unlikely that they will let the Yuan to rise any significant amount.

China could internationalise the Yuan by flooding markets with the currency and just wait that the demand will meet the inflation created. This would satisfy its citizens but not the U.S since it is trying to stop other nations from diversifying their reserves away from the Dollar. It is more likely that China will rather keep its people happy than do what the U.S wants since being a Communist country, maintaining the complacency of its people is far more important than worrying about the Dollar.

In recent weeks governments have been trying to convince investors that the economy is back on the right tracks again but when taking a closer look at the figures one can see that some of the numbers have been manipulated and no significant moves to solve the issues have been made. As long as the fundamental problems in the monetary system remain unsolved, we believe that gold is likely to keep rallying towards new records in 2011.