Does Central-Bank Gold-Buying Signal The Top Is Near?

Saturday, July 14th, 2012

Submitted by Jeff Clark of Casey Research

Does Central-Bank Gold-Buying Signal The Top Is Near?

Doug Casey told me in January, “The only thing that scares me is that central banks are buying a lot of gold; they’re historically contrary indicators.” When it comes to buying gold, central banks have such a poor timing record that they’re frequently joked about as a contrary indicator.

Recently, they have been buying, quite literally, tonnes of it. Consider the following:

• Net central-bank purchases in 2011 exceeded 455 tonnes. This was only the second increase since 1988 (the first in 2010) and the largest since 1964.
• Turkey has added over 123 tonnes since last October, buying 29.7 tonnes in April alone.
• Mexico has purchased over 100 tonnes since February 2011.
• The Philippines added 32 tonnes in March, its second-largest monthly purchase ever. Largely under the radar is the fact that it’s buying some of its local production.
• Russia continues buying, adding 15.5 tonnes in May. Its total reserves now stand at 911.3 tonnes, the highest level since 1993.
• Thailand has raised its holdings by more than 80% since mid-2010.
• South Korea has bought 40 tonnes since May 2009, an increase of 180%.
• The World Gold Council (WGC) reported that central-bank purchases totaled 80.8 tonnes in Q1 2012, about 7% of global demand.
• Over the past 12 months, net purchases have averaged almost 20% of total annual supply.

Here’s the picture of what has transpired since the financial crisis hit in late 2008.

(Click on image to enlarge)

Central banks have added a net of 1,290 tonnes since the fourth quarter of 2008. This total excludes China and other nations that don’t regularly report their activity, as well as countries that have been surreptitiously buying their own production.

That’s a lot of gold buying. One has to wonder whether so much buying may in fact signal a top for gold. After all, a number of prominent analysts have claimed for some time that gold is in a bubble and that it’s all downhill from here.

Not so fast. Like many mainstream reports, looking at the short-term picture usually leads to erroneous conclusions. Let’s put central-bank purchases into historical perspective.

(Click on image to enlarge)

In spite of the recent activity, world central-bank holdings are far below what they were in 1980. Clearly, a few years of net buying does not a bubble make.

The difference is greater than you might realize. Consider that since 1980…

• The global population has grown 55%
• Worldwide gold supply has grown 120%
• Foreign-exchange holdings have increased 650% since 1995, and now total $10.4 trillion.

It seems rather obvious that a lot more “catch-up” buying is needed before we start talking about a top for gold on this basis.

Meanwhile, we think the trend of central-bank gold buying will continue. It’s not hard to see why: central bankers around the world know what it must ultimately mean to run the printing presses the way the US has since 2008, even if price inflation is not immediately obvious. It’s no surprise that they want to hedge their bets, moving more reserves into something with actual value… something that can’t be debased with a few keystrokes. The US dollar has been the world’s reserve currency since WWII, and that’s beginning to change – the movement into gold is just one facet of that change.

The entire world may indeed be beginning to understand that it’s operating on a fiat currency system backed by nothing. At the same time, the sovereign debt crisis in the Eurozone is intensifying, and some countries have succeeded in inflating their currencies faster than the Fed has inflated the USD. It doesn’t take Nostradamus to read this writing on the wall… and while the world’s central bankers can lie to the public, they themselves know how bad things are.

In fact, the WGC is so confident that central banks will continue to buy gold that it’s changed its reporting structure: it’s added “official sector purchases” as a new element of gold demand, while eliminating “official sector sales” as a negative supply factor.

Of course, gold will someday top, and Doug Casey believes a bubble in gold and related equities is highly likely at some point, courtesy of the trillions more currency units governments will create in a desperate (and ultimately unsuccessful) attempt to stave off the Greater Depression.

But we’re nowhere near that point. There’s a long way to go before we start legitimately using the “B word” (bubble) or “S word” (sell).

In the meantime, I suggest using the “B word” (buy) or “A word” (accumulate) to make your decisions about gold.

Tags: 911, Bank Gold, Bank Purchases, Buying A Lot, Buying Gold, Central Banks, Doug Casey, Financial Crisis, Fourth Quarter, Global Demand, Image Banks, Nbsp, Philippines, Q1, Radar, Russia, South Korea, Wgc, World Gold Council
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The Enduring Popularity of Gold

Monday, February 20th, 2012

The Enduring Popularity of Gold

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

The World Gold Council (WGC) reaffirmed the power of the Love Trade in its 2011 Gold Demand Trends report released this week. Gold demand grew 0.4 percent in 2011 despite a 28 percent year-over-year increase in bullion’s average price.

After flirting with the top spot for some time, China emerged as the world’s largest gold market for jewelry and investment during the fourth quarter of 2011 as demand in India weakened. This is the first time China’s demand outpaced India’s in 11 quarters. However, India did retain the gold demand crown for the entire year, purchasing 933 tons compared to China’s demand of 770 tons.

I always say the trend is your friend, and I believe China’s increasing demand for gold is one trend that is just getting started. Although gold imports from Hong Kong were cut in half in December, HSBC Global Research reports that overall gold imports from Hong Kong were 10 times the historical average from January through November 2011. HSBC expects a continued rise in Chinese incomes will keep demand at a robust pace. The WGC sees domestic demand for gold jewelry and investment driving 20 percent growth in Chinese gold demand during 2012.

China should consider its leadership as the No. 1 gold market a short-term position, though. While China’s presence in the bullion market is strong and growing for jewelry and investment, India’s ancient relationship with the yellow metal is such that “domestic drivers of demand are largely independent of outside forces,” says the WGC. The WGC does not see India’s role in the gold market diminishing over the long term.

Ajay Mitra, the WGC’s managing director for the Middle East and India, recently expressed India’s strong ties with gold in a 60 Minutes feature. Gold has always been a part of India’s history, culture and tradition. I have witnessed firsthand the strength of this bond many times over the years. As the famous saying goes, “no gold, no wedding.”

Don’t Forget About the Fear Trade

The Fear Trade was also recently reaffirmed by the Federal Reserve when it publicly stated its intention to keep inflation at “exceptionally low levels” through 2014. Inflation is the kryptonite to the Fed’s monetary efforts and it’s likely the Fed will take any measures necessary to prevent inflation spikes.

The Fed has targeted a 2 percent inflation rate, which means the U.S. dollar will lose 33 percent of its value over the next 20 years, says The Daily Reckoning’s Charles Kadlec. In the next four years alone, nearly 10 percent of the “value of Americans’ hard earned savings” will be destroyed, says Charles.

Put another way, Charles estimates that it will take $150 in the year 2032 to purchase the same amount of goods you could get for $100 in 2012.

Charles isn’t the only one opposed to the Fed’s “monetary manipulation.” In his latest letter to shareholders, Warren Buffett faults the government and its “systemic forces” for destroying the purchasing power of investors. He argues stock investments offer the best long-term investment opportunity because interest rate levels don’t offset the loss of purchasing power due to inflation.

However, there is one group that benefits from the low interest rate environment—borrowers. This means the largest borrowers in the world, developed world governments, will be able to service their enormous amounts of debt more easily. This year alone, the U.S., Japan and Europe will roll over $8 trillion in federal debt.

CIBC World Markets sees the secular bull market in gold continuing for “several years,” as the firm believes debt in major economies have reached a point “where financial and economic pressures will manifest themselves in ways that have up until now only been dreamed about.” With these manifestations, Ian McAvity equates gold to insurance. He suggests to readers that they wouldn’t cancel fire insurance because their house hasn’t had a fire. “Gold proffers the best ability to protect long-term purchasing power against deliberate devaluation of the paper alternatives,” he concludes.

For evidence of this, one needs to look no further than the significant gold purchases by central banks over the past few years. Emerging markets’ central banks have been the strongest buyers, experiencing a record increase in gold purchases last year. After building up their reserves during most of the post-World War II period, central banks’ gold holdings remained stable. Following the end of the cold war, they began a selling spree, helping to “explain bullion’s profound price weakness” during the 1990s, says HSBC Global Research.

The trend started to reverse about the same time the Fed cut interest rates in 2007, says Adrian Ash from Bullionvault. Now, total gold holdings sit at a six-year high with the total current amount of gold reserves sitting around 31,000 tons. In 2011 alone, the WGC says central banks had a net purchase of 440 tons, the highest figure since 1964.

The WGC says central banks are concerned about the creditworthiness and low yields of their existing reserve assets held in dollars and the euro. Their solution: diversify with gold.

Value is in the Eye of the Beholder

In Bangkok Thailand, the Buddhist temple Wat Traimit is home to the largest golden Buddha in the world. In its lotus position, the statue is over 15 feet tall and weighs five tons; if it were solid gold, it would account for 3 percent of the world’s mined gold.

For two centuries, the statue was thought to be worthless because it was covered in plaster to protect the figure from a Burmese attack.

As the story goes, when the Buddha was moved to a new temple in the 1950s, it slipped from the crane and fell. That night, a monk dreamed the statue was divinely inspired, which prompted him to visit the Buddha image. Through a crack in the plaster, he saw a glint of yellow and the statue’s true beauty was revealed. At today’s price of gold, the Buddha is worth more than $277 million.

Sometimes the true value of things isn’t always apparent. Like the Golden Buddha, the true value of gold miners has remained hidden while the price of bullion has shined. CIBC noted in its February report that gold equities have “undergone significant multiple compression and now trade well below historical averages.”

Here’s just one illustration of how cheap gold stocks appear compared to gold. The yellow line represents the number of gold and silver index units that can be purchased with one ounce of gold. While the historical ratio averaged 4.5, today an investor can buy more than 8 units of the XAU to one ounce of gold. In other words, shares of gold mining companies can be purchased at one of the cheapest levels in nearly 30 years.

Dave Rosenberg from Gluskin Sheff also favors gold equities. He particularly likes miners who can grow production and reserves while keeping costs under control. “Because input costs tend to be more positively correlated in the early years of a rally, history has shown that the equities tend to dramatically outperform the bullion in the later stages of a gold bull market.” He suggests buying undervalued gold mining stocks in politically safe areas with higher-grade projects and a relatively simple way of extracting the metal.

For thousands of years, pharaohs, explorers, rulers and investors have been attracted to gold, as the precious metal has been a vital tool in building and protecting wealth. While gold naysayers focus on the day-to-day fluctuations in price, I believe gold equities and bullion will continue to enjoy “maximum popularity,” as the Oracle of Omaha puts it, for years to come. The allure of gold—whether it is from Fear or Love—cannot be underestimated.

This commentary references the investment theory of an investment as insurance against a separate market event that could negatively affect performance of an investment. The reference does not guarantee performance or a safeguard from loss of principal by investing in that asset.

Tags: 60 Minutes, Ajay, Ancient Relationship, Bullion Market, Chief Investment Officer, Feature Gold, Frank Holmes, Global Research Reports, Gold Demand Trends, Gold Imports, Gold Jewelry, Gold Market, History Culture, Hsbc, Investment India, Term Position, Time China, U S Global Investors, Wgc, World Gold Council
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Perfect Storm Creates Tidal Wave of Gold Demand

Sunday, September 18th, 2011

Perfect Storm Creates Tidal Wave of Gold Demand

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

A few weeks ago we held our Case for Investing in Gold webcast with the World Gold Council’s (WGC) Jason Toussaint, who gave some remarkable insight into gold demand in the East. In these countries, gold is not only celebrated, acquired, worn or displayed during holidays or special occasions; it is seen as an everyday symbol of wealth.

Increases in demand from China and India have driven a 7.5 percent increase in demand for gold jewelry during the first half of the year despite a 25 percent increase in the price, according to a report released this week from GFMS. However, much of India’s potential gold demand remains untapped.

Toussaint highlighted an interesting fact: Of the roughly 800 tons of gold imported to India each year, only the top 40 percent of Indian households purchase all of the country’s gold, says Toussaint. The other 60 percent of Indians, who may have the same adoration for gold and celebrate Ramadan and Diwali, historically may not have had access to purchase gold. This large population represents a huge untapped market. To fulfill demand, the WGC has created a program with Indian post offices to distribute coins and small pieces of gold. Toussaint says right now there are 700 post offices in the rural areas servicing 90,000 customers and he expects that number to grow. This market is worth pursuing based on McKinsey’s research that a “huge wealth creation wave” is developing in India. As Toussaint puts it, “if purchase patterns continue, we will see from 2005 to 2025, a four times larger gold market in India.”

This is a fascinating idea because very few entities other than the post office have the network and infrastructure necessary to reach beneath the surface of the world’s largest gold market.

India may be the world’s largest gold market, but in China, gold buying has become so significant that the country has become the fastest-growing market for gold jewelry in the world. Not only are Chinese purchasing increasing amounts of gold, they prefer pure 24-carat gold. This high-quality gold is given to celebrate special occasions, such as birthdays, and purchased for a bride at her wedding. In 2010, 6.6 million brides will make gold a part of their ritual as the yellow metal signifies the importance of a long-term relationship, says the WGC website.

While jewelry represents a large percentage of gold purchases in the country, Chinese can also purchase gold at their local bank. WGC formed a partnership with the Industrial and Commercial Bank of China (ICBC Bank), the largest bank by deposits in the world. They began offering a “Gold Accumulation Plan” that lets investors buy and accumulate small portions of gold over time. Similar to a bank account, people participating have access to the underlying gold or the cash value at any point. Since it was launched in December 2010 through this summer, the ICBC has an estimated 1.7 million accounts, with an accumulation of more than 12,000 kilograms of gold.

After India and China led the global demand for gold, accounting for 52 percent of 2010 tonnage, the GFMS says the two Asian countries have “continued impressive growth” this year. Gold buying in India jumped 38 percent during the second quarter alone. GFMS reported China’s gold purchases jumped 90 percent on a year-over-year basis through June. This is a follow up to the 75 percent increase in gold demand the country experienced last year.

This share tops all of North America, which accounts for 8 percent, Europe and Russia, which account for 13 percent, and even the Middle East and Turkey, which together account for 12 percent. North American gold demand fell 12 percent during the first half of 2011 due to the slumping U.S. economy and rising prices.

David Lamb, the WGC’s managing director for jewelry, recently told Reuters there is a “significant tidal shift to the Asian markets, to India and China in particular, and gold rising upwards and disappearing from the mass merchandising in the West.”

Central Banks Load Up on Gold

Demand for gold isn’t only coming from the residents of China and India. There’s been a huge sentiment shift among central banks as well. Toussaint noted how, after many years of selling, central banks have become net buyers of gold.

Tags: Chief Investment Officer, China Gold, Diwali, Frank Holmes, Gold, Gold Demand, Gold Jewelry, Gold Market, Huge Untapped Market, India, Infrastructure, Interesting Fact, Market India, Perfect Storm, Purchase Patterns, Remarkable Insight, Special Occasions, Tidal Wave, Toussaint, U S Global Investors, Wealth Creation, Wgc, World Gold Council
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The 2011 Gold Season is Just around the Corner

Monday, August 1st, 2011

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

The ongoing debate in Washington prompted increased Fear Trade activity in gold this week. The issue over raising the federal borrowing limit caused the yellow metal to remain around its all-time high of $1,600 per ounce this week.

Gold has now increased for 124 months straight, says Deutsche Bank. The rally is in its 11th year, lasting nearly three times as long as other historical rallies going back to 1971. If the metal rose to $2,100 an ounce, it would represent the most powerful percentage increase in history, according to Deutsche Bank.

I believe what’s happening in the market today is a short-term driver of gold prices spurred by ETF investments. While Deutsche Bank believes a “market friendly resolution to the U.S. debt ceiling may trigger a short-term correction in the gold price,” fundamentals seem to be place to keep gold prices elevated over the long run. Even in many economic scenarios today, Deutsche Bank believes gold prices “appear irreversible.”

A more important driver that will keep gold prices elevated over a longer time period is the Love Trade. Marcus Grubb, managing director of investment at the World Gold Council (WGC), highlighted the significant aspects of this trend in his interview with Andrew Bell on the Business News Network (BNN). He says investors need to consider the issues outside of the euro zone, the debt-ridden countries and fiscal deficits.

More important to him is what he calls the “transfer of wealth from west to east” and the accumulation of wealth, particularly in China and India. This is what is driving the longer term strength in the gold price.

He states that the demand for gold is particularly strong in China: The country has a $3 trillion surplus, with some of it in gold, and he estimates that household wealth will most likely rise by five times. China and India also share a strong cultural affinity for gold as an investment and jewelry. For these reasons, Grubb believes this will drive gold demand.

To see the interview in its entirety, click here.

Merrill Lynch has found that there is a positive correlation between gold jewelry demand and rising with increasing wealth. The chart below shows that as the GDP per capital rises so does demand for gold.

September has traditionally been the beginning of the gift-giving season for gold. This is the time of year when gold jewelers are the busiest. The Muslim holy month of Ramadan begins in August and concludes with generous gift-giving in early September. Then it’s Diwali, known as “the festival of lights” in India, Christmas in the U.S., and Chinese New Year. The key to this seasonal strength over the past few years has been demand from China and India.

The spending spree has already begun in East Asia. In the WGC’s second quarter report, physical gold delivered at the Shanghai Gold Exchange was 14.65 percent higher than the previous year. Gold purchases also remained strong across East Asia, with tourists from mainland China buying gold in Hong Kong. In India, coin stocks, symbols of good fortune, were running low during the Akshaya Tritiya annual holiday in May.

Immediately following Marcus Grubb’s interview, I spoke with BNN’s Andrew Bell and expanded on the Love Trade season. We also discussed how today’s financial worries in the market place have caused a selloff in many equities and gold stocks. I talked about how many of these gold stocks are becoming extremely undervalued relative to the price of gold.

Click here to go to BNN’s website to see which stocks we discussed.

With approximately fifty percent of the world’s population controlling the Love Trade, we’re in for an exciting period. To kick off gold’s season, we invite you to join us on our upcoming gold webcast where we’ll discuss the themes above, as well as the opportunity in gold equities which we highlighted a few weeks ago.

Stay tuned for more details.

Tags: Andrew Bell, Chief Investment Officer, Debt Ceiling, Deutsche Bank, Economic Scenarios, Etf Investments, Euro Zone, Fiscal Deficits, Frank Holmes, Gold Price, Gold Prices, Gold Season, Grubb, Household Wealth, India, Ounce, Percentage Increase, Trillion, U S Global Investors, Wgc, World Gold Council
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Asian Tiger Sinks Teeth Into Gold

Sunday, May 22nd, 2011

Asian Tiger Sinks Teeth Into Gold

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

The World Gold Council (WGC) released its quarterly “Gold Demand Trends” report this week and, as always, it was filled with fascinating data on the strength of the global gold market. Gold demand grew 11 percent to 981.3 tons during the first quarter of 2011, worth $43.7 billion at quarter-end’s price levels.

The increase was driven by a significant rise in demand for gold as an investment, up 26 percent from a year ago, as emerging markets look to protect their assets from rising inflation. Demand for gold bars and coins was up 62 percent and 42 percent, respectively.

A slight pullback in prices during the middle of the quarter and “persistent high inflation levels” pushed China into the position as the world’s largest market for gold investment. Chinese citizens devoured nearly 91 tons of gold bars and coins, more than double the amount of a year ago.

This isn’t exactly a new phenomenon in China. From 2007 to 2010, investment demand grew at a compounded annual growth rate of 68 percent, according to the CPM Group. The firm forecasted Chinese investment demand to increase 34.7 percent during 2011 but based on this new data, it may need to adjust its forecast.

Song Qing, director of Shanghai-based Lion Fund Management, told Bloomberg news that, “Gold has taken on a new role in China amid concern about inflation…Just imagine the total wealth in China and even a small percentage of that choosing to buy gold. This demand is going to be enormous.”

The “Love Trade” was also in full swing during the first quarter. Led by India and China, jewelry demand rose 7 percent on a year-over-year basis. Combined, the countries accounted for roughly 67 percent of world total jewelry demand.

For the first time, the demand for gold in China was so strong during the first quarter it outpaced the combined total of the developed West. If you lump together the gold demand of the U.S., France, Germany, Italy, Switzerland, the U.K. and other European countries, the sum of these countries is still outpaced by China. That’s despite triple-digit increases in demand from France, Germany and Switzerland.

The CPM Group says the origins of this milestone in China’s gold market can be traced back to the late 1980s when the government began lifting restrictions on gold ownership. This led to the establishment of the Shanghai Gold Exchange and other ways Chinese citizens could put a portion of their wealth in gold.

Then in 2001, the government lifted its final controls on the gold market, igniting one of the greatest booms in gold demand history. From 2001 to 2010, China’s annual consumption of gold grew at a 7.5 percent compounded annual growth rate.

This chart shows how China’s demand for gold jewelry has increased from just over 500,000 ounces in the late 1980s to over 12 million ounces at the end of 2010, in spite of gold going from $200 to $1,000 and now $1,500 an ounce.

The rise in gold prices and consumption has coincided with a dramatic rise in China’s per capita incomes. The chart on the left shows that per capita incomes in China have risen from around the $3,000 level in 2000 to roughly $7,000 in 2010. This means that the average Chinese citizen has over twice the income he or she did in 2000. Today, China is second only to the U.S. with a middle class population of 157 million people, according to the Organization for Economic Co-operation and Development (OECD).

The chart on the right shows, at least in part, what many have chosen to do with that additional money—buy or invest in gold. On a per capita basis, per capita consumption of gold in China has more than doubled since 2005.

Despite this strong rise in per capita consumption, an analyst from Standard Chartered Bank said that there is still much room to grow, “In terms of gold consumption per capita, there is no doubt that [China and India] have a lot of catch-up potential and the impact on gold prices could be dramatic.”

One way China’s per capita consumption can catch up is if investors continue to seek safety from inflation in the yellow metal. Demand for gold as an investment has grown at a 14 percent annual clip since the Chinese government deregulated the local gold market in 2001.

This chart, courtesy of my friend Adrian Day, shows Chinese citizens’ gold investment as a savings. Similar to the other charts I presented, it shows how much China’s gold market has changed over the past 10 years.

The total amount of household savings invested in gold has grown from about $200 billion in the late 1990s to $1.2 trillion in 2010. In fact, the total savings invested just during the first quarter of 2011 is equal to the total amount invested in 2004, and more than the previous six years.

Recently, the government and state banks have encouraged citizens to purchase gold and initiated gold purchasing programs. In February, the Industrial and Commercial Bank of China (ICBC) and the WGC launched the “Only Gold Gift Bar” program which offers gold bars weighing 10, 20, 50, 100 and 1000 grams. In less than three months, this program has already generated orders totaling 1.8 tons, according to the WGC.

The first quarter of 2011’s demand trends leads me back to the two drivers I’ve highlighted before and are captured in the new report – Two Key Drivers of Gold Demand: Fear Trade and Love Trade.In the U.S., the Fear Trade, a factor of negative real interest rates and increased deficit spending, is driving demand for gold. In China, India and other emerging markets, the Love Trade, a combination of rising incomes and a cultural affinity for gold, is driving demand for gold.

Together the two are powering gold demand to new levels. Download your copy of the special report now.

Tags: Asian Tiger, Chief Investment Officer, Chinese Citizens, Chinese Investment, Cpm Group, Emerging Markets, Frank Holmes, Full Swing, Fund Management, Global Gold, Gold Bars, Gold Coins, Gold Demand Trends, Gold Investment, Gold Market, Investment Demand, Pullback, U S Global Investors, Wgc, World Gold Council
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Jewelry Drives the Gold Love Trade

Saturday, February 19th, 2011

Jewelry Drives the Gold Love Trade

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

This week, the World Gold Council (WGC) confirmed something we’d already suspected: 2010 was a remarkable year for gold. Overall demand grew by 9 percent to reach a 10-year high on increased jewelry demand, strong momentum in key Asian markets and a paradigm shift in the official sector, the WGC says.

Demand for jewelry was the biggest contributor to gold demand, accounting for 54 percent of the total. That’s a 17 percent rise despite gold prices jumping 26 percent in many currencies. Gold demand for technology increased 12 percent. Surprisingly, investment demand declined 2 percent as investment in gold ETFs dropped 45 percent. Even with the drop, 2010 was the second-highest year on record in terms of investment demand.

India led the world in gold jewelry demand with more than 745 tons. China was a distant second at just under 400 tons and the U.S. third at 128 tons. While the pace of consumption has slowed in several countries, gold consumption for jewelry remains at elevated levels around the world.

The story behind the rise in demand is one you’ve heard from us before. The WGC’s data is validation that the love trade is firing on all cylinders.

Ignited by the Diwali Festival of Lights, Indian jewelry demand rose 47 percent on a year-over-year basis during the fourth quarter of 2010. For the year, Indian jewelry demand rose 69 percent to surpass peak levels set back in 1998.

Historically savvy gold buyers, India’s influx of buying implies an expectation that gold prices still have much higher to go. The WGC says that “Indian consumers appeared almost universally to expect that the local gold price was likely to continue rising.”

In Hong Kong, gold jewelry demand rose 26 percent to hit a 10-year high, according to the WGC. In China, buyers didn’t shy away from record-high gold prices either. Purchases of gold jewelry accelerated 25 percent during the fourth quarter leading into the Chinese New Year.

The love trade is significant and unique to gold. People buy gold out of love and those in emerging markets are especially amorous of the metal. In fact, the four strongest markets for gold jewelry demand (India, Hong Kong, China and Russia) accounted for 60 percent of the entire jewelry market in 2010.

The rise in Chinese gold demand goes hand-in-hand with a rise in average incomes for Chinese citizens. Last year, 20 million migrant workers in China saw their incomes rise 24 percent. Compare this to the U.S. where the job market has shown some signs of life, but continues to sputter.

With these higher income levels, many in China’s middle class are looking to gold as a means for long-term savings and a possible hedge against inflation. The success of the WGC’s gold accumulation plan is an example. It allows Chinese consumers to purchase small amounts of gold on a routine basis to build a portfolio.

With more than 1 million participants, the program has been so successful in its first year that the WGC and its domestic partner, ICBC, is launching a new program to encourage the gifting of gold bars. Gold bars as small as 10 grams can be stamped with the Chinese symbol for joy and given to another.

The director of the program in China says, “Gold enjoys a prestigious status with Chinese consumers due to its unique features and association with Chinese tradition. In recent years, the giving of gold as a gift has become an emerging trend.”

What’s important to remember is that this trend is just getting started. You can see from this chart that China consumed roughly one-quarter of a gram per person in 2009. This is significantly less than Hong Kong and Saudi Arabia, which are the most avid consumers, and lower than other Asian countries with cultural affinity for gold.

Gold will be interesting to watch as a barometer of good and bad government policies. In countries such as China, where the embrace of free market principles has ushered in economic growth, gold demand levels should remain strong.

This is what makes today’s gold market different from the 1970s. Back then, today’s emerging market powerhouses, such as China and India, had no global economic impact. Now, these countries aren’t just at the forefront of the gold market, they are global leaders in economic growth.

It is by no coincidence that 30 years after Deng Xiaoping took office in China and began instilling the concepts of free markets, the country has grown to become the world’s second-largest economy behind the U.S.

If countries like China and India continue to grow by 7 to 9 percent a year, the corresponding rise in incomes should keep the fire of the love trade burning. In this scenario, gold can continue to slowly appreciate.

Tags: Chief Investment Officer, China, China Buyers, Diwali Festival Of Lights, Emerging Markets, ETF, ETFs, Firing On All Cylinders, Frank Holmes, Gold, Gold Buyers, Gold Consumption, Gold Demand, Gold Etfs, Gold Jewelry, Gold Price, Gold Prices, India, Indian Consumers, Indian Jewelry, Investment Demand, Paradigm Shift, Peak Levels, Russia, U S Global Investors, Wgc, World Gold Council
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India and China Continue to Drive Gold Demand

Sunday, November 21st, 2010

The World Gold Council’s (WGC) latest quarterly recap shows global gold demand is getting stronger despite rising gold prices. Gold rose 28 percent to record the highest average price for a quarter ever at $1,226.75 an ounce while gold demand jumped 12 percent on a year-over-year basis to 921.8 tons during the quarter.

Jewelry demand, which increased 8 percent on a year-over-year basis, accounted for 57 percent of overall demand, while investment demand rose 19 percent to account for 31 percent of total demand.

It appears consumers and investors, especially in India, China, Russia and Turkey, are growing accustomed to higher gold prices. At the end of the third quarter, gold demand in India had already exceeded that of 2009 and demand levels in China are ahead of last year’s pace.

The WGC says “these results demonstrate that consumers in these countries are becoming accustomed to high price ranges…and consumers are preferring to make gold jewelry purchases at current prices in order to avoid purchasing at higher prices in [the] future.”

Investment demand rose despite a 7 percent decline in investment in ETFs, which has been the biggest driver in investment demand of late.

Chinese investors seeking protection from rising interest rates directed a considerable portion of their savings into gold products, causing demand for gold bars to jump 44 percent. Net retail investment in China reached 45 tons, breaking the previous record of 40 tons set in the first quarter of 2010.

We’ve said this many times, as the economy recovers and per capita incomes in countries such as China and India rise, consumers and investors within those countries will likely see gold as a key investment vehicle because of the cultural connection carried over thousands of years.

Additionally, the official sector—central banks—were net buyers of gold with Russia, Sri Lanka, Thailand and Philippines increasing their holdings. This offset the International Monetary Fund’s continued selling of gold under the current Central Bank Gold Agreement.

Tags: Buyers Of Gold, Central Banks, China, China Russia, Chinese Investors, ETF, ETFs, Gold Bars, Gold Demand, Gold Jewelry, Gold Prices, Gold Products, Hellip, Incomes, India, India China, Investment Demand, Investment Vehicle, Jewelry Purchases, Price Ranges, Retail Investment, Rising Interest Rates, Rsquo, Russia, Wgc, World Gold Council
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Gold Market Diary (October 18, 2010)

Saturday, October 16th, 2010

Gold Market Diary (October 18, 2010)

For the week, spot gold closed at $1,368.40 per ounce, up $21.66, or 1.61 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 0.61 percent. The U.S. Trade-Weighted Dollar Index fell 0.47 percent for the week.

Strengths

• The price of gold reached another record high of $1,382.50 per ounce this week on speculation the Fed will further ease monetary policy due to the weak initial jobless claims report.
• Gold, according to the World Gold Council (WGC), can be an integral part of a cost-effective investing strategy for both the short- and long-term without giving up return. The WGC’s research has also shown that even a small allocation of gold in a portfolio may decrease the Value at Risk (VaR). Also, the WGC’s research showed gold differs from other assets in a number of ways, one being that it tends to exhibit lower volatility on negative returns than it does on positive returns.
• “There is a distrust of currencies, and gold is the only solution,” a head of bullion trade in Geneva said. “A lot of money is going into precious metals and there’s demand from India because of the country’s festival season,” he said.

Weaknesses

• The 2010 Ernst & Young Business Risk Report revealed that capital allocation is the number one risk this year for mining companies. The volatility of prices, cash flow, risk appetites and availability of capital during the recent global financial crisis have all made the decision on how to allocate capital in mining and metals companies more complex, the report noted. The second-most important risk of concern to mining companies was skills shortages. Third was cost management.
• According to Financial Research Corp., total net investment in gold from this year through July was $2.7 billion compared to $22 billion invested into emerging markets mutual funds and approximately $155 billion invested in bond funds. The amount invested in gold was minimal. According to GFMS, Ltd., the London-based consultancy, U.S. investors bought about 45 metric tons of gold bars and coins in the first half of this year, less than half the amount purchased the year before.
• Institutional investors fear a government policy mistake far more than inflation, terrorism, a housing double dip, a weak dollar, poor earnings or any other potential risk to the economy, according to a survey of 100 mutual fund, hedge fund and pension fund managers by Citigroup Global Markets. “Government Policy Missteps” garnered more than a third of the votes. Another 15 percent cited “Protectionism,” which is also strongly-tied to the actions of the White House and Congress.

Opportunities

• Goldman Sachs has raised its 12-month forecast for gold to $1,650 an ounce, citing expectations for further quantitative easing in the U.S. and prospects for long-term interest rates to continue falling. Thus, Goldman said it is raising its gold price forecasts to $1,400, $1,525 and $1,650 on a three-, six- and 12-month horizon. Goldman said its updated forecasts point to an average of $1,575 an ounce in 2011, which is $175 higher than previously expected.
• Gold may climb to $1,400 an ounce by the end of the year as investor demand will remain strong because of low interest rates, the European sovereign debt crisis and fears about an economic slowdown, GFMS said. Paul Walker, CEO of GFMS, recently said “The investment climate for gold at the moment is very strong, so there is no doubt that it could go higher, the price could exceed $1,400 and is unlikely to drop below $1,300 within the next six months.”
• As investor demand for access to gold markets is increasing rapidly. Two money managers in China are vying to launch the country’s first gold funds by the end of the year to meet investor demand for the precious metal. “The products would for the first time give Chinese fund investors’ full exposure to a new asset class and explore investment opportunities in gold,” one of the fund managers said.

Threats

• Citibank recently reported their caution for gold in long term by saying, “We expect prices to rally further in the short term, but we have less conviction for sharper moves one year from now as the global recovery gains traction and policy actions start being unwound.”
• Natixis’ head of commodities research said “We are projecting that at some point in the next three to six months we will have reached the peak and gold prices will decline from then on. So we will be looking for prices to perhaps fall below $1000 per ounce by the end of next year.”
• Don’t be an idealist and believe that quantitative easing will fix anything. Everybody is expecting the Fed to pick up the free money tab of “cash-for-clunkers” and other programs at the expense of tax payers. Government policies that create additional debt so we can buy things we can’t afford and, in turn, make company earnings look better does not address key structural imbalances. Don’t be a pessimist either. “Even in the worst of times someone turns a profit.” Rules of Acquisition, Number 162.

Tags: Business Risk, Capital Allocation, China, Commodities, Dollar Index, Emerging Markets, Global Financial Crisis, Gold, Gold Bullion, Gold Equities, Gold Market, India, Initial Jobless Claims, Market Diary, Metals Companies, mining companies, Philadelphia Gold, precious metals, Price Of Gold, Risk Report, Silver, Silver Index, Skills Shortages, Spot Gold, Value At Risk, Wgc, World Gold Council
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Gold Demand Trends

Monday, May 31st, 2010

This article is a guest contribution from Frank Holmes, US Global Investors.

The World Gold Council (WGC) sees a bright year for gold in 2010, with strong investment demand coming from the U.S. and Europe, and rising jewelry demand in China and India.

That was one of the key messages delivered by the WGC in its webcast this week that went over the gold demand trends for the first quarter of 2010.

The chart above shows how gold jewelry bounced back in the latest quarter compared to the first quarter of 2009, despite significantly higher prices. In emerging markets, jewelry demand was up 43 percent year-over-year.

In India, the demand was about 148 metric tons (4.8 million troy ounces), nearly fourfold higher than a year earlier.  The WGC says gold consumers in India and China, where the increase was also notable, are getting used to the idea of higher prices. In the U.S., jewelry demand was down slightly.

Industrial demand was up 31 percent – much of this is related to improved conditions for the electronics industry.

While total identifiable demand was down on a year-over-year basis, net retail investment demand was up 26 percent in the quarter.

This trend was led by the developed world, where sovereign debt concerns, contagion worries and massive budget deficits have shaken confidence in paper currencies as a store of value. The WGC says purchases by gold-backed ETFs have risen in the current quarter, and that gold demand is especially brisk among German and Swiss buyers.

Click here to view the presentation slides. You can view the full Gold Demand Trends report for free at www.gold.org.

Tags: Budget Deficits, China, Contagion, Electronics Industry, Emerging Markets, ETF, ETFs, Frank Holmes, Gold, Gold Demand Trends, Gold Jewelry, India, Investment Demand, Massive Budget, Metric Tons, Paper Currencies, Presentation Slides, Retail Investment, Sovereign Debt, Trends Report, Troy Ounces, Us Global Investors, Wgc, World Gold Council
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China’s Appetite for Gold

Wednesday, March 31st, 2010

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By Frank Holmes, U.S. Global Investors

March 30, 2010

What would happen to the price of gold if China’s annual consumption went up tenfold?

That’s the high-end demand case laid out by the World Gold Council (WGC) in its new report “Gold in the Year of the Tiger,” which focuses on China.

The WGC says China’s gold consumption of 423 tonnes in 2009 works out to about one-quarter of a gram per person, which is lower than other Asian countries with cultural affinity for gold (chart). The Saudis consume more than three grams per person, and in Hong Kong, it’s more than two grams.

“If gold were consumed in China at the same rate per capita as in India, Hong Kong or Saudi Arabia, annual Chinese demand could increase by at least 100 tonnes to as much as 4,000 tonnes in the jewelry sector alone,” the WGC writes.

OK, 4,000 tonnes (128.6 million troy ounces) looks pretty extreme, even for the most enthusiastic gold devotees. The WGC offers a more reasonable but nonetheless bullish outlook: China’s gold demand has nearly doubled over the past five years (13 percent growth per year), so it would not be a huge stretch for a doubling to roughly 850 tonnes per year in the next decade.

Gold demand is rising as China’s middle class expands, and while the nation is the world’s largest producer, domestic supply falls short of demand by some 100 tonnes per year and that gap will almost certainly widen with rising demand.

As more foreign gold is diverted to the Chinese market, the impact on world prices could be significant.

Tags: Asian Countries, Bullish Outlook, Capita, China, Chinese Demand, Chinese Market, Devotees, Frank Holmes, Gap, Gold Chart, Gold Consumption, Gold Demand, India, Price Of Gold, Saudi Arabia, Saudis, Tonnes, Troy Ounces, U S Global Investors, Wgc, World Gold Council, Year Of The Tiger
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