KK Bullion – Gold Bullion and Investing in Gold

Gold prices are climbing on the back of a weak Dollar, however for once banks appear to want much higher hold prices, which is strange considering how until now they have done everything in their power to keep them down.

Although gold prices have risen steadily for 11 years in a row, the increases have been incremental and measured. Governments have used paper futures markets and their central banks to limit the rally of precious metals as much as possible in order to keep attention away from their own failing currencies and unsustainable debt.

With inflation and unemployment growing and Europe in a serious mess, countries want to cheapen their currencies. They won’t admit that they are trying to make their goods competitive in markets, because the political parties have their own agendas; but by keeping interest rates low and issuing quantitative easing countries are able to pay debts and deliver on their obligations with devalued Dollars, Pounds, Euros and Yen. It is a form of taxation and confiscation from the normal citizen, they may be inflating away sovereign debt but they are also inflating away our savings. Investing in gold protects you against such inflation.

Higher gold prices also have the effect of devaluing paper currencies in relative terms and therefore right now governments are more than happy for the prices to climb. Countries that already have large gold reserves will have advantageous positions, which may be one of the reasons emerging economies are stockpiling gold while it is still affordable.

Eventually we may be faced with deep destruction of the world’s financial systems, with issues of economic importance still unaddressed it is hard to say what will happen in 2012 but it is not unreasonable to ponder whether gold will ultimately be the financial asset that repairs currencies.

Although they would never admit it, governments are also preparing for this possibility; central banks are buying gold at the expense of currencies, even the US Dollar. US Dollar exchange foreign holdings are already at record levels in many countries and as such these countries are now accumulating even more gold in an attempt to diversify their reserves.

Many economists are predicting changes that will occur in our financial markets, especially the emergence of a new Global Reserve Currency. Trading is no longer dominated by the US dollar as markets become more international, could its special status be beginning to slip away?

If the US dollar is replaced by a variety of currencies, gold will need to be a featured element in order to provide credibility, after all it is the only real money left in a world of worthless paper currencies that keep hitting the printing presses.

If gold’s role in the monetary system continues to grow, central banks will be very aware of the need to hold as much gold as possible and would consider confiscating citizens gold. Whether held in banks or not, as in 1933 the penalties for not handing over personally owned gold would be severe.

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.

After gold prices regained considerable ground and broke the $1800 barrier they have now slumped back to below $1700 following heightened Euro zone concern, a disappointing Spanish bond auction and record breaking yields in Italy, Spain and Belgium.

The auction saw the Spanish government pay 6.97% for £3.56 billion (a fraction of what it needed to raise) of 10 year Spanish bonds, up from 5.43% when they last auctioned 10 year bonds in October.
Gold has failed to act as a traditional safe haven asset amidst the deepening Euro Zone crisis and instead dropped with equities and other risk assets. This was somewhat due to investors being forced to sell gold in order to obtain Dollars or invest in US Treasuries. The Euro weakness also continues to undermine gold, as the Dollar strengthens and gold becomes more expensive.

At the moment the gold market is tricky to predict because the factors pressuring gold prices would normally be driving investors to buy gold, not liquidate. However, if the ECB is forced to launch quantitative easing we could see gold rally. Gold has also become increasingly sensitive to environments where the US Dollar is strengthening.

In the long-term the outlook for gold is bullish; the solution to the world’s debt problems will probably be inflationary and that’s good for gold investment. Demand for bullion is likely to remain high as long as real interest rates remain negative and the risk premium on US equities remains high.

After the US government’s announcement on Monday that its “Super” committee had failed to meet its target of $1.2 trillion in deficit cuts, confidence in the US and stocks fell. Gold could well benefit from the US deficit problems if attention is now drawn away from the Euro Zone to the US. If combined with a decline in the Euro, gold could well rally.

On Wednesday, European Commission president Jose Manuel Barroso launched a consultation on whether the 17 euro zone countries could issue joint stability bonds. The creation of joint bonds would lead to the stronger nations in the EU supporting the weaker ones but it would supposedly reduce the borrowing costs for all. However, EU nations would need to pledge part of their foreign exchange holdings or gold reserves as security and this has been written off as an absolute no by the Chancellor of Germany, Angela Merkel. The US, the UK and Asia are all calling for more solidarity and consensus within the Euro Zone, which raises the question how much longer can they put off the inevitable?

It has been accepted that it is up to Germany to save the Euro, either by letting the ECB print money or issuing join bonds. However on Wednesday, Germany sold just 3.6bn Euros ($4.8bn; £3bn) worth of 10-year bonds, from 6bn Euros on offer. Markets were certainly rattled by this but bond auctions fail all the time. The problem is far more money was retained than normal and it’s a big indicator that people aren’t so willing to lend money to Germany anymore, whereas the UK and US are still attracting investors. The problem is that even with its yield of 1.98% (far lower than Italy or Spain) Germany is still part of the Euro and investors are becoming increasingly concerned about investing in a currency that could fall apart. The Euro Zone story is going to run and run and it’s not going to end until the weaker countries leave the Euro Zone or Germany lets the ECB print money.

Right now investors are liquidating to buy US treasuries and invest in US Dollars; however this isn’t expected to last long, once liquidity is satisfied we will see investors once again investing in gold.

Gold is now trading back at around $1,780 after steadily recovering from its crash to below $1,600 an ounce and then breaking the $1,800 barrier again yesterday after the Euro zone focus shifted to Italy.

Everybody is aware that there is still no answer as of yet to the Euro Zone’s problems. Every time another half hearted idea appears to be agreed, there is another spanner thrown in works and we are right back at square one again; still faced with the ultimate question, will Greece default or not?

With Italy’s ten-year bond yield rising to over 7%, the highest since 1999, the focus has shifted from the political problems in Greece to the problems emerging in Italy. The market rallied on Monday after incorrect information was released claiming that Mr Berlusconi, the Italian Prime Minister, would step down. Berlusconi denied he planned to resign. However, following the results of a crucial budget vote yesterday where Berlusconi failed to win the majority, he has now agreed to resign after the budget reforms have been passed. Mr Berlusconi has survived more than 50 confidence votes in the past, however after losing the budget vote President Giorgio Napolitano called for his resignation.

It is still unclear whether the Italian President will subject the Italian people to elections or call on political parties to form a unity government. If elections were to be held, the subsequent increased uncertainty for world markets would be bullish for gold.

Italy’s’ rate of 7% is considered by most investors as unsustainable. The higher the yield (the implied cost of borrowing) the more likely it is that the country’s huge economy will need to be bailed out which is something that the Euro Zone has been desperately trying to avoid. Italy now appears to be stuck in a downward spiral. If nobody will lend to Italy, then Italy cannot repay its debts: and if Italy cannot repay its debts, then nobody will lend to it.

The longer the instability continues in the Euro zone, the greater the impact will likely be on the gold price and we will surely see it continue to move upwards. We are already seeing investors pull out of European bonds and invest in gold instead. Based on previous performance, a prediction of $2,300 for next year doesn’t seem like an unreasonable forecast, however with so many factors and the Euro Zone constantly struggling for survival, precious metal prices are far from predictable.

Currently two Euro Zone nations will shortly have new Prime Ministers and these Euro Zone issues are currently the main driving force for gold prices. However the US still faces deficit problems and according to a New York Times/CBS News poll, Congress’ approval rating recently fell to a record low of 9%. A loss in confidence in elected officials globally is traditionally positive for gold and this appears to be happening everywhere.

At the moment gold is reacting to the general market feeling that the European crisis will get worse before it gets better, we do not have a lasting solution and therefore high uncertainty remains. This seems to have provoked gold to returning to its favoured role as a safe-haven asset instead of moving in line with currencies; as such, investors are once again buying gold to position themselves against any further bad news that comes out of the Euro Zone.

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.”

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 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.

After North-Korea shelled one of the South-Korean islands near the sea border the tension in the region has been rising day by day. The U.S has sent one of its aircraft carries and a nuclear submarine to the area to join South-Korean military training. This is annoying China as it is the only ally of North-Korea and the presence of the U.S military might lead to further conflicts between the countries.

All military conflicts are very gold positive as investors are likely to pull their money away from stocks and look for something tangible to invest in. Whether China wants to get involved or not, the already fragile relationship with the U.S will be on the line if more bullets start flying.

The Euro zone debt worries have been pressuring markets for the last few weeks and even the confirmation of Ireland’s bail out didn’t calm investors. They are afraid that this is just the beginning and the next one the list is Portugal. Even bailing out Portugal wouldn’t jeopardise the Euro but the rumours about Spain are the real threat. The size of Spain’s economy is so much larger than Greece, Ireland or Portugal that the EU would find it difficult to gather the funds for the bail out.

Whether any other bail outs will happen or not, the fear of them will keep pressuring Euro and pushing gold up, at least in Euro terms. Investing in gold seems to be the only solution to keep one’s money safe as all reserve currencies are under a significant devaluing pressure. The Dollar might look like an alternative solution but after the $600bn stimulus package and the possibility of a conflict in the Korea region, it seems to be just the lesser of the two evils.

The latest gold reports from India are expecting the total gold imports to reach 750 tonne in 2010 which would be a new annual record. This would be a 35% increase from last year when the imports totalled 560 tonne. Analysts’ have been sceptical about Indian gold exports as they have predicted that the record high prices would stop Indians from buying gold.

The Bombay Bullion Association has confirmed that investment demand for gold has remained record high despite the current price levels so the figures released in the report might well be achievable. Traditionally Indians tend not to buy gold as eagerly after the festival season in November but currently the investment demand is so strong that it will keep pushing the total demand towards 750 tonne.

There is likely to be a lot of volatility in the gold price in the coming weeks as both the Korean and Euro zone issues are pressuring markets. Once we get some kind of confirmation on how the EU is going to guarantee that the Euro will not disintegrate gold will probably stabilise in Euros. It is hard to predict what will happen in Korea but the presence of China should make the U.S think twice before starting a new war with North-Korea.