KK Bullion – Gold Bullion and Investing in Gold

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.

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.