Why Gold?

In November 2009, the Reserve Bank of India made a 200 metric ton purchase of Gold from the IMF, at this stage Gold was trading at USD 1,045 an ounce. In December 2011, the Bank of Korea boosted its Gold reserves for the second time in a year – paying over 67% of the price India had paid. It is evident that even at staggering prices Gold is still hot in demand.

Who is buying all the Gold?

Institutions

Asian nations, which have an immense level of foreign currency reserves since the 1998 financial crisis, have shown increased interest

in diversifying out of U.S. assets as the dollar loses value against other currencies. As central banks remain sceptical on all currencies and not just the US Dollar, demand for Gold in exchange for their reserves has significantly increased.

 

The World Gold Council said central bank purchases in the third quarter jumped more than six-fold to 148.4 tons and forecast buying for the year would reach as much as 450 tons. Russia, Kazakhstan, Colombia, Belarus and Mexico added a combined 25.7 tons of Gold to reserves in October, according to data on the International Monetary Fund’s website.

Activities within central banks is increasingly becoming a main driver in the price of Gold, however they release very little on the levels of bullion reserves.  Most of this buying was believed to have taken place in September 2011, after Gold prices fell sharply from record levels of USD 1,900 to USD 1,530. At this period we saw the US dollar under pressure following issues relating to their debt ceiling – which contributed further to the demand for Gold.

Retail

Latest news suggest that China may have overtaken India to become the largest consumer of Gold in the 3rd quarter, this was backed by figures that the Chinese jewellery consumption rose by 13%, while India – known to be the top jewellery consumer – fell by 26%.  The World Gold Council earlier predicted in March 2010 that Chinese Gold demand would double by 2020, however they now believe this may be achieved far sooner.

Citizens of China were previously barred from owning physical gold, however after the policy was dropped and the Shanghai Gold Exchanged opened, demand for this metal in China has been steadily increasing. This follows effort from China to encourage ownership of Gold, wanting the government and the citizens to build reserves in assets stronger than major and weakening currencies. It has now come to a stage where customers can purchase Gold out of a vending machine. The policy change has contributed significantly to the demand of Gold.

Technical Analysis

The chart above represents the quantity of Gold held by central banks and the amount of paper money they have issued. The amount of Gold has been somewhat stable, however the amount of money which has been issued illustrates that all forms of financial assets has grown enormously.

This chart shows that the money in circulation has been growing at a much faster pace compared to Gold which was meant to be backing the money itself. However, it is now important to note that after two decades, central banks are no longer selling off their gold reserve and are now increasing their holding. We believe increasing demand for central banks to back the money in circulation will lead to a higher Gold price.

 

Should we return to the age where Gold is money, the chart above illustrates that Gold will need to trade at USD 10,000 per ounce to cover money in circulation.

As of 5th of December, U.S. Federal Reserve, the European Central Bank and the central banks of Canada, Britain, Japan and Switzerland will decrease the cost of existing dollar swaps by 0.5% and arrange mutual swaps to provide liquidity for other currencies. We believe this move will further increase the price of Gold. An increase in the demand for dollar swap facility would mean further expansion of the Fed’s balance sheet and would be indirectly another form of easing, which will decrease the value of the dollar in the advantage of Gold.

With the ongoing debt issues within the developed nations which is impacting markets globally, we continue to believe Gold will be the safe haven for the next few quarters.

 

 

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