The Worldwide Gold Buying Boom

China, India, Mauritius and Sri Lanka: Just a few of the countries whose central banks are buying gold. Their reasons for this? From using the commodity as a great way to diversify their portfolios against fluctuating stocks and the weakening dollar, to a new buzz-attitude toward the gold market—gold is a varied and uneven playing field. The same can be said for the reinvigorated interest in gold from individual investors, albeit on a different scale.

Looking at the predictions for the potential $2,000-ounce price in 2010, the current ru­mours of a bull gold market have peaked today, and the gold buyers, sellers and mining com­pany stances all vary quite drastically. Worries about the dwindling amount of new gold de­posit discoveries, television campaigns where refiners urge the viewing public to part with unwanted jewellery for cash payments, and the threat of hedge inflation from the U.S., are all part of the huge mix that makes up the world­wide gold-buying boom today.

IRJ investigates the current state of the gold markets, the big buyers and sellers and the private investor demand in the marketplace today—and the conflicting market predictions as we veer into 2010.

Gold today Buyers’ climate and China

The formula is as the dollar weakens, the price of gold increases. This is characteristic of the gold market, and the majority consensus on the driver behind this increase, is the growing market appetite for gold—which is seen as a solid invest­ment in times of financial uncertainty, as well as a great means for portfolio diversification.

However, on November 27, 2009, for exam­ple, gold traded down 2.33 per cent at early trad­ing. While at first glance this does not look like the market behaviour of a stalwart fallback com­modity, the longer-term trend of the gold price still appears to be on the rise. This suggests that figures, such as the drop on this date, show the short-term trading movement of gold is still very much linked to the strength of the dollar.

Long-term investors look set to gain with gold, providing they hold out long enough. Adversely, short-term investors might think about looking elsewhere because figures such as the November 27 trade down suggest that for their timeframe, gold is less reliable. Of course, this is just one market interpretation of many.

Experts stress that it is not gold itself which is changing, but the buyers’ attitude to the commodity.

In considering this, it is important to differentiate between private, singular investors and the Asian central banks and worldwide treasuries which also appear to be leaning towards retaining and replenishing their gold reserves.

More Chinese investors, for example, appear to be turning to gold in light of stock market fluctua­tions and the threat of inflation. World Gold Council statistics show that despite the climbing gold price, Chinese demand actually rose by nine per cent dur­ing the second quarter, while a nine per cent global reduction in demand occurred at the same time.

On Friday April 24, 2009, China admitted it has secretly raised its gold reserves by three quarters since 2003, reaching a total of 1,054 tonnes– equivalent to US$30.9 billion (according to Reuters calculations at the time of reporting).  The weaken­ing of the dollar and uncertainty in the stock market has threatened to harm China’s power to buy, which many suggest has sparked the country’s diversifica­tion into not only gold, but oil and metals too.

On December 2, 2009, China indicated to the world media that the record gold high of $1,217 per ounce will not force Beijing to buy gold carelessly.

“We must keep in mind the long-term effects when considering what to use as our reserves,” Hu Xiaolian, the vice-governor of the Central Bank told press. “We must watch out for bubbles forming on certain assets and be careful in those areas.”

Beijing officials also indicated that China’s wealth of reserves, now sitting at $2.3 trillion dol­lars, meant that the nation couldn’t buy further gold without directly impacting upon the world gold price. Instead, the country says it will buy only when the trading price falls back down. China is now sitting on the fifth largest gold holding in the world and media reports suggest that the country may well surpass India to become the number one gold consumer.

The I.M.F. central bank gold sales

The International Monetary Fund (I.M.F.) is a 186-member-country-strong organization that works to foster global monetary cooperation, secure finan­cial stability, facilitate international trade, promote high employment and sustainable economic growth and reduce poverty around the world.

According to the I.M.F. gold fact sheet, gold’s central role to the international monetary system has dwindled since the Bretton Woods system of fixed exchange rates collapsed in 1973. Despite its lesser role today, the I.M.F. is still one of the world’s largest holders of gold, with 103.4 mil­lion ounces (3,217 metric tonnes) throughout its designated depositories.

The I.M.F.’s Executive Board approved the sale of 403.3 metric tonnes on September 18, 2009, which is set to take place through a Cen­tral Bank Gold Sales Agreement.

The I.M.F. says the reasons for the gold sales are two-fold. Firstly, the decision was made fol­lowing the application of a new income model for I.M.F. in April of 2008. Secondly, it was an­nounced another initial motivation for selling was to raise resources, which would subse­quently allow for further capital lending to low-income countries.

“These sales will be conducted in a responsible and transparent manner that avoids disruption of the gold market. Most importantly, the sales are strictly limited to 403.3 metric tonnes, which is one-eighth of the Fund’s total holdings, so the I.M.F. will continue to hold a relatively large amount of its assets in gold,” Mr Dominique Strauss-Kahn, I.M.F.’s Managing Director, told press.

On November 2, 2009, the I.M.F. announced the sale of 200 metric tonnes—almost half of the total 403.3 metric tonnes up for sale—to the Reserve Bank of India (R.B.I.) for $6.7 billion. This deal will increase India’s gold holdings to roughly six per cent–four times China’s share. According to Reuters, on October 23, India’s central bank-held foreign exchange reserves came to $285.5 billion, just over $10 billion of which was in gold.

“This transaction is an important step toward achieving the objectives of the I.M.F.’s limited gold sales program, which are to help put the Fund’s finances on a sound, long-term footing and enable us to step up much-needed concessional lending to the poorest countries,” Strauss-Kahn told press.

Between October 19-30, 2009, daily sales took place, each of which was conducted in accordance with the basis of the then current prevailing market price. This deal marked the first large-scale foreign exchange diversification move by a major central bank. It is estimated that the deal took place at $1,045 a troy ounce, which far exceeds the $850 per ounce expecta­tions stated by I.M.F.’s board when the sale was originally approved.

Pranab Mukherjee, India’s Finance Minister said that the R.B.I.’s move “doesn’t mean we don’t prefer dollars any more or like gold any better.”

The Minister also said that he would have ad­vised the R.B.I. governor to buy gold because the nation’s forex reserve is “comfortable.”

When the I.M.F. was asked about buyers for the remaining gold for sale, the organization said it was in “an initial period to sell gold directly to central banks and other official holders that may be interested in such sales.”

On November 16, 2009, the I.M.F. an­nounced the sale of two metric tonnes of gold to the Bank of Mauritius.

“The sale was conducted on the basis of market prices prevailing on November 11, 2009, with proceeds equivalent to US$71.7 million,” the I.M.F.’s press release states.

On November 25, 2009, the I.M.F. an­nounced a further sale of 10 metric tonnes of gold to the Central Bank of Sri Lanka.

“The sale was conducted on the basis of market prices prevailing on November 23, 2009, with proceeds equivalent to US$375 million,” the I.M.F. press release says.

Nivard Cabraal, Sri Lanka’s Central Bank governor says that the bank is looking at “a more long-term anchor, a five-year investment horizon for gold”. Cabraal told the press that there is strong reasoning to suggest that the gold price will remain strong. He also cited the high demand from China and India as part of that equation.

Russia, too, appears to have bolstered and diversified its reserves through gold purchase, although these did not take place with the I.M.F.. On December 4, a research note from Renais­sance Capital (Moscow) estimated that Russia’s central bank, Bank Rossi, increased its gold holdings by around $790 million, or 130 metric tonnes, during the week leading up to November 27, 2009. This would take the bank’s gold re­serve up to a total of $23.1 billion. Renaissance Capital reports that Rossii’s holdings climbed to $23 billion dated December 1, 2009—a 13 per cent rise. The gold regulator also stated that October saw a 2.6 per cent increase.

BlackRock is a global commodities fund man­ager with $1.4 trillion managed throughout its asset classes. On Monday, November 16, Evy Hambro, a manager of the BlackRock World Mining Fund and Gold and General Fund, said that if the market played out to his central bank gold purchasing fore­casts this coming year, it would be the first time in two decades that the central banks had purchased more of the yellow metal than they had sold.

“The most recent break-out in the gold price in U.S. dollars has caused most gold prices to start trending higher at the same time,” he says to Reuters.

“When you start to see the price rising in a range of different currencies, it is a clear sign of a very strong market to come.”

As these central banks take advantage of the boost in gold appeal against the weakening of the dollar and China reveals it’s wealth of resources, it appears that individual investors have followed suit and their interest in gold has been rejuvenated.

The individual gold investors

On October 15, 2009, Harrods, the luxury depart­ment store of Knightsbridge, London, began selling gold bars. Potential individual gold investors need look no further, as this outlandish move by Harrods, joining with Produits Artistiques Metaux Precieux (P.A.M.P.), a Swiss refiner, made it possible to pop to the shops and pick up gold off the shelves.

“The financial environment has kindled a new demand for physical gold amongst private investors in Britain,” Chris Hall, head of Harrods Gold Bullion told the New York Times. “Up until now, however, London has had no well-recognized name serving this market.”

Hall says that the bars are proving more popular than the coins, with the 100 gram being the most popular customer purchase.  This is not surprising when you consider that in light of the global financial crisis and collapse of banks and shares, many individuals have reverted to safe options and well-established measures of wealth.

Today, every conceivable medium from spread betting and exchange-traded funds (E.T.F.s) to adverts on social networking sites and television campaigns by gold refiners offers individual investors the chance to buy into the commodities market.

While P.R. wagons such as Harrods selling gold bars on its shop shelves makes a much bigger media splash than many, it is far from the only way in which individuals are being invited into the trading sector.

November 18, 2009, marked the five-year an­niversary of a significant breakthrough for E.T.F.s and the access they grant to individual investors in­terested in commodities. E.T.F.s allow individuals to trade gold and other commodities without the need to open a futures account. Instead, a brokerage ac­count and the capital to purchase E.T.F. shares will do the trick and provide an easy alternative to the expensive business of purchasing actual physical gold, then storing and insuring the product.

As a relatively new opportunity, many E.T.F.s have only existed for up to two years. As a result, they are still enjoying a lot of attention as a great alternative from futures contracts which were previously the means for individual investors to join in. Although gold E.T.F.s are tracked by the metal’s price, they do not equate to the same trade commodity prices. Instead, they represent a fraction of the physical resource, although their rise and fall in trade price does correlate to the corresponding fluctuations in actual commodity price. They also carry far less risks than taking shares in a gold mining company or companies otherwise involved in the gold industry.

Scout online for a few minutes and there is a seemingly never ending number of, “How to trade commodity E.T.F.s,” tutorials and guides. This is a strong indication

of E.T.F.s’ surging popularity because it shows that others in the know have already found a way to make a profit out of potential individual investor’s interests.

However simple following the path laid out by the central banks to pick up gold may seem, there are significant pitfalls for the individual investor to consider. Yes, the central banks have chosen to buy gold in order to diversify their reserves, but this presents practical problems on an individual level. Buying and subsequently owning gold will not provide any stream of income for the investor. The Internal Revenue Service classes E.T.F. shares as col­lectibles rather than securities, meaning tax rates on E.T.F.s are higher than those attributed to stocks and bonds. Despite each side to the E.T.F. coin, some industry voices strongly re­gard their influence upon the rising gold price as a result of the individual investor’s quest for a weak dollar and inflation hedge.

Gold 2010

On December 7, 2009, Reuters reported that the National Australia Bank revealed gold price predictions averaging $1,149 for the first three months of 2010, $1,174 for Q2 2010, $1,204 for Q3 2010 and $1,234 for Q4 2010. These predic­tions were attributed to the gold demand driving the price increase over the coming year.

Another optimistic forecast came from Mi­chael Hewson, an analyst from C.M.C., a deriva­tives company based in the U.K. Speaking to the Associated Foreign Press (A.F.P.) in the week beginning Monday November 30, 2009, Hewson said that as the safe-haven status of gold invest­ing continues, future prices could climb up to $1,500 an ounce.

“It is a store of value while investors have se­rious doubts about the global financial system. It is something that is not going to lose its value like a currency,” he says to A.F.P.

But forecasts get more sensational than that. Following gold’s 60 per cent surge over the last 12 months, some industry heads predict that gold will reach $2,000 an ounce. It’s certainly not a prediction which everyone shares, but it has been presented as a serious forecast by various market commentators. Analysts argue that firstly, as the dollar looks set to continue weakening throughout the first half of 2010, gold will con­tinue its bullish growth.

“Recent large fluctuations in many of the world’s major currencies have pushed many investors to purchase physical gold, gold futures, gold options and gold E.T.F.s to shelter them­selves from currencies that are becoming worth less and less. This demand may push gold fu­tures prices as high as $2,000 an ounce over the next 12 to 18 months,” states a P.R. web press release from T&K Futures and Options Incorpo­rated, a commodity trading company based in the U.S., on December 2, 2009.

Due attention must be paid to the state of the U.S. dollar. The U.S. central bank has pumped in excess of two trillion dollars into the nation’s economy in the last two years in light of the global financial crisis. Recent comments on “subdued inflation,” by Ben Bernanke, the U.S. Federal Reserve Chairman, have had an instru­mental negative effect on gold futures the week of December 7, 2009.

“The Fed is committed to keeping inflation low and will be able to do so,” Bernanke told economists in Washington, adding that inflation, “appears likely to remain subdued for some time.”

On the following day, Tuesday December 8, 2009, the dollar depleted again after Bernanke discarded rumours of an upcoming early U.S. inflation rise, and gold recovered somewhat. This exemplifies the fragility of the gold market and the ways in which it is so easily impacted.

Then there are the rumours that cite our current rising gold price to be nearing the final curtain. Some experts suggest that we have now reached the gold peak, and are advising investors to act accordingly.

On November 11, 2009, Aaron Regent, President of gold mining heavyweights Barrick Gold, said that the global gold output has been slid­ing since 2000 at a rate of roughly one million ounces per year.

Speaking to British broadsheet The Daily Telegraph at the R.B.C. Capital Markets Confer­ence in London on November 11, 2009, Regent said that record gold price highs and sterling ef­forts by mining companies to discover new gold deposits was not enough.

“There is a strong case to be made that we are already at ‘peak gold,’” he told the paper.

“Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly dif­ficult to find ore.”

Regent told conference attendees that Bar­rick has taken “a number of important steps to enhance its strategic positioning in a strong gold price environment. We have dealt decisively with our Gold Hedges, which will be completely elimi­nated within 12 months.”

Investors and industry commentators are now speculating whether Barrick petering out its hedg­es is a sign of the peaking bull market for gold.

And so the debate continues. From mining companies ready to move into production, to Bar­rick’s ready to move off, the production side of the gold boom is an intricate and technical matter to grasp. Similarly, the direct effect it has on the gold market, coupled by that of the fluctuating dollar strength, is equally delicate and tumultuous to fol­low. Regardless of the outcome, 2010 is going to be a big year for gold. The question is, as always, do we buy or sell? The answer, for whoever holds it, is truly the most precious commodity of all.

For more information on the changing gold market, visit www.irjonline.com

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