KK Bullion – Gold Bullion and Investing in Gold

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.

Putting aside the current issues for the U.S economy and concentrating on the long-term factors affecting the gold price, we can identify several reasons to invest in gold. Gold is well-known for its capability to act as a buffer against deflation and inflation so I won’t be spending too much time on these factors. More important driver for the gold price in the long-term is the likely devaluation of the U.S Dollar.

As I mentioned in my previous article the Dollar has lost 96% of its value since the abolishment of the Gold Standard and the establishment of the FED. In healthy economic situations gold tends to move inversely to the Dollar and the Dollar has lost 30% of its value since 2001, which explains why the value of gold was going up even before the Credit Crunch. Taking a closer look at the U.S economy, we can see more problems ahead.

Before the Credit Crunch the U.S trade deficit was around $60 billion a month because importing goods, mainly from Asia, was much cheaper than buying the same products from domestic manufacturers. This dragged the Dollar down and pushed to price of gold up. Now, when people are more aware of the issues weighing on the current monetary system and the quality of Asian products is improving all the time, it is likely that consumers will keep purchasing the cheaper foreign products, even after the recession. This will increase the trade deficit even more and deepen the slide of the Dollar.

The most alarming news for the Dollar is coming from the East since China, the fastest growing economy and the biggest financier of America, is trying to internationalise and stabilise its currency. If China is successful in this, it would not have to hold a huge amount of Dollars as a reserve currency anymore. As the value of the Dollar has been decreasing for such a long time, it is unlikely that any government would be interested in buying trillions of Dollars floating into the markets from China. The only place where the Dollars could go is home and these trillions on top of what the FED has already printed would cause significant inflation pressure just when the economy is starting to stabilise in the future. This leads us back to the basic virtues of gold investments.

The main physical driver for gold is also coming from China as its citizens are getting wealthier and the government is encouraging them to invest in gold. The Chinese government agreed on plans to liberalize its gold markets a few months ago, which will help banks and private investors to buy gold from abroad. Analysts have forecasted that the China’s per capita gold demand could match the numbers from India in the near future, which would mean a 200 tonne increase in physical bullion demand.

Recent turmoil in the global economy have made investors realise the shocking state of the global monetary system and made them more cautious in their investment decisions. Even slightly disappointing news is driving them towards hard assets, such as physical gold. Some speculators are convinced that gold is the next bubble to burst but when looking at the inflation related gold price, we are not even near the 1980s figures when gold was hovering at around $2200 per ounce.

To conclude, we feel that gold has a long way to go before the past price barriers are going to be an issue for future price growth.

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%.

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.

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.

Bank of International Settlements says on its 2010 annual report that it holds 346 tonnes of gold from gold swaps with other counterparts. The figure was nil in 2009 and apparently it has gone up to 382 tonnes since the repost was released. So what does this mean?

Swaps are financial instruments that allow the exchange of one asset to another. In this case it has been physical gold for a currency. Gold swaps are usually undertaken by central banks, one central bank agrees to swap gold for foreign exchange deposits with an agreement that the gold will be sold back to them in the future at an agreed date and price. Gold swaps usually happen when the cash-taking bank wants foreign exchange but doesn’t want to sell its own gold holdings.

The Wall Street Journal notifies that the swap has been made between B.I.S and commercial banks. We know that none of the commercial banks have 382 tonnes of gold on their books. From this we can conclude that it is likely that commercial banks have made a deal with one or more of the central banks and they are acting on their behalf since they want to stay anonymous.

Swaps like these are renewable after the agreed time expires, therefore it’s impossible to estimate how long the swap will last. The central bank, which requested the swap, must be certain that it can reclaim the gold back at some point in the future. If it can’t, only then B.I.S can sell the gold. Any sell of this scale would be loudly proclaimed in the markets and reported in the press.

In the current economic situation where the sovereign dept risk is on everyone’s lips, gold swaps allow a central bank’s reserves to be lent in a credit-secure fashion. In other words, the lender can benefit from greatly reduced credit risk since the gold can be held in an allocated account, usually at the Bank of England.

Any of the countries, which are struggling to keep their credit rankings, could follow this route. Practically this would concern Ireland, Portugal, Spain, Italy, the U.K. and the U.S.A. Sales are not permitted under Euro system for fiscal reasons but we are talking about swaps now. If the swap was made by one of these countries, it would be major news for the monetary system because the collaterals that the country offered weren’t just good enough so they had to use their gold.

The most significant factor in this or these swaps is that gold is used in international settlements after being sidelined for many decades in the monetary system. This confirms that gold is back in business. If the lender fails in reclaiming the gold back, B.I.S has to decide between selling the gold forwards or keeping it on its holdings. Keeping the gold on its books would back up the assumption that the gold is again active in the monetary system.

What appears to have happened is that one or more nations have some shortfall in its accounts and they needed foreign exchange to counter it. If the nation/nations fail to return the funds to B.I.S then it would have to decide whether to place the gold with another central bank or alternatively keep it on its books. This would put the transaction into a whole new category since it would mean that one or more of the developed world’s central bank’s credit is not good enough for other governmental institutions. If someone finds out which country this is, it would put the global financial market into a quite spin. No wonder B.I.S is trying to keep a low profile.

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.