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The big picture for gold’s global supply-demand balance…

CENTRAL BANKS used to be steady of Gold Bullion, but switched in 2009 to being net buyers – as a group, worldwide – for the first time in two decades.

Here, Jason Toussaint – managing director of investments, World Gold Council – speaks to Hard Assets Investor about the outlook for central-bank gold buying…

HAI: How do you see emerging-market gold demand playing out from here?

Jason Toussaint, WGC: If we look at China, most importantly, there are two segments of the market which are important to look at: domestic citizens and their affinity towards gold, and also the central bank and government reserves. Now, when we compare China’s national reserves, they hold approximately 1.6% of their total reserves in Gold Bullion, as opposed to Western markets like the US and the UK, which hold anywhere between 65 and 80% of their assets in Gold Bullion.

The People’s Bank of China has just made statements as recently as this month that they are taking steps to make the markets more open for gold buying domestically. We will see, most likely, increased buying by the Chinese central bank, as well as domestic investors. And I think the key there – and you’ve hit it on its head – there is a very historical, very strong bond or affinity towards holding gold as an asset in the Chinese marketplace.

So what we see is that when the demographic changes from somebody who’s been, say, working outside the city and has accumulated some means of wealth, the first thing they want to do is accumulate gold. And that strong affinity is a huge factor for long-term gold demand. And that is also the same paradigm in India.

HAI: Does it worry you that this desire to boost gold reserves comes at a time when we’ve already seen a very substantial increase in the Gold Price? Adjusted for inflation, it still hasn’t surpassed the peak that it hit in 1980, thirty years ago…

Jason Toussaint: Well, times have changed, obviously. And I think one point that should be made is that central banks, before 2000, when they were selling their gold, they would basically come to the market and dump gold on the market, which would destroy confidence in the Gold Price.

So, if you were an investor and you came to the market, and then let’s say a central bank – the British central bank – comes out and sells X-hundred tons in the market in one day; you’ve just lost a lot of wealth. In late 1999, the World Gold Council was instrumental in negotiating what’s called the Central Bank Gold Agreement which Western central banks agreed to.

HAI: That limited those sales, right?

Jason Toussaint: Exactly, in terms of tonnage, but then also how they liquidate that gold on the marketplace so as to not disturb the underlying market by coming with outsized orders. It’s on its third renewal now.

HAI: Is there pressure among some of these European nations currently running deficits to sell gold as a means to cutting their debts?

Jason Toussaint: They could, but we’re not seeing that now. In fact, net-net, central banks have moved from a fairly large sustained source of supply, coming onto the market every year, to a slight six tonnes on the demand side. So in aggregate, Western central banks are slowing their selling. And then, we also have Eastern central banks. Obviously, we’ve had announcements from India, China, Maldives as well, small accumulation, that we think that trend is just continuing.

We would think that central banks may stay on the demand side for a bit of time.

HAI: On the supply side, a lot of new capital investment is going into Gold Mining production globally. How does that bode for the price picture going forward?

Jason Toussaint: There’s two things to look at there. One is what is the current rate of Gold Mining production. And, unfortunately, the older mines, the richest mines, if you will, in South Africa, some of those are three to four miles into the earth. And the ore grade that they are bringing to the surfaces is deteriorating. So, the amount of ounces per ton mined is slowing.

The other, more important aspect, is that gold is becoming even more scarce. It’s obviously a precious asset, and it has been for thousands of years. It’s becoming harder to find. So budgets, both in terms of mining itself and building new mines, is one thing. The more important factor is an explosion in exploration budgets; absolutely through the roof.

However, against that backdrop, mining, overall, is not finding new sources of gold supply. So the easy gold, if you will, has been mined off the Earth. And so it is becoming more and more precious.

One statistic I look at is, if we assume today that no further discoveries of gold are found, and we continue to mine at the rate we are mining today, we would mine all of the gold identified in 15 years.

HAI: Very informative. Thank you.

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Source:Gold Demand Up, Supply Flagging

The SNB can neither squash gold, nor (yet) destroy its own currency. But not for lack of trying…

IT’S A GOOD JOB that Gold Bullion is just an inert lump of metal and holds no grudges, writes Adrian Ash of BullionVault.

Because twice in the last decade, the Swiss National Bank has nearly halved the value of gold as a proportion of its total reserves. Yet still it sits there, helping save the SNB’s blushes when policy fails.

"The Euro-crisis has torn a deep hole in the calculations of the Swiss central bank (SNB)," reports Tages Anzeiger. "It spent CHF 104.9 billion on Euros [US$104bn] in the first-half of 2010, leading to foreign exchange losses of over CHF14bn [$13.3bn].

"Bottom-line losses were reduced to CHF4bn however [$3.8bn] by gains on other foreign currencies like the Japanese Yen, plus the strong rise of the Gold Price, which revalued the gold reserves of the central bank."

What does Gold Bullion have to do to get some respect…?

Long before gold hit last month’s record above CHF 46,600 per kilo, gold’s first plunge as a proportion of Swiss reserves was very deliberate and clearly flagged.

Gold Bullion sales totaling 1300 tonnes between 2000 and 2005 coincided with a gentle rise in total reserves, slashing the metal’s weighting from 44% to below one quarter. Not coincidentally coinciding with the launch of the Euro – bureaucracy’s greatest monetary hubris to date – the Bank wanted to reduce its huge gold allocation, and buy apparently more useful, more valuable things instead.

The surge in the Gold Price vs. the Swiss Franc (and every other currency too) from the middle of last decade soon put paid to that, however. And so the second plunge in gold’s weighting, in contrast, has come thanks to a trebling of the SNB’s total reserves, driven in no small part by its print-Francs-to-buy-Euros policy, aimed at keeping Swiss exports competitive.

But again, no dice! The Swiss Franc has risen vs. the Euro regardless of the SNB’s huge money creation, gaining 12% against the single currency since quantitative easing began at the start of 2009. And gold still accounts for almost one quarter of Switzerland’s central-bank reserves, now massively swollen to US$162bn.

Not that gold enjoys such jokes or historical irony, you understand. It is simply a lump of rare, indestructible metal, after all.

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Source:Oh, the Irony of Swiss Central-Bank Gold!

Those BIS Gold Swaps – what are they and what do they mean…?

In its 2010 ANNUAL REPORT, the Bank of International Settlements said that "gold, which the bank held in connection with gold swap operations, under which the bank exchanges currencies for physical gold, stands at 8,160.1 million in special drawing rights, equivalent to 346 tonnes this year, up from nil in 2009."

Apparently this amount has now climbed to 382 tonnes since the report was issued, writes Julian Phillips at GoldForecaster.

Swaps are financial instruments that allow for the exchange of one asset for another, in this case, gold for currency. They are not gold leasing, futures or options (which both the 1999 and 2004 Central Bank Gold Agreements stated would not be increased; the 2009 renewal did not repeat that statement). Gold swaps, however, could be undertaken by the signatories of the CBGA, as these were not included in any of the three Agreements.

Gold swaps are usually undertaken between central banks: One central bank exchanges foreign exchange deposits (or other reserve assets) for gold with an agreement that the transaction be unwound at an agreed future date, at an agreed price.

The monetary authority acquiring the foreign exchange will pay interest on the foreign exchange received, the rate of which is currently very low. Gold swaps are usually undertaken when the cash-taking central bank may want foreign exchange but does not wish to sell outright its gold holdings.

The Wall Street Journal informs us that the BIS did these swaps with commercial banks. We know of no commercial bank that has 382 tonnes of gold on their books. It is likely then that should these commercial banks have been in the deal, they would have been acting for a central bank (or several over time) who wished to remain anonymous.

The BIS received the gold into its safekeeping for the nation that required the foreign exchange for the swap period. Swaps of this nature are renewable once the time runs out, so it is impossible to say how long the swap will last for. The central bank that undertook the swap would have to be certain that it could return the currencies to get the gold back at some point in the future. If that country defaulted, then and only then could the BIS go ahead and sell this gold. Any sale in the open market would be trumpeted loudly to all as well as reported in the press, or by the World Gold Council, the BIS or IMF.

Why use gold and not currency? The financial crisis has led to a decline in the number of credit-worthy counterparties and a reduction in credit lines these counterparties can offer. This is significant in a world where credit risk and debt problems have been the subject of banker’s fears since the appearance of the Greek debt crisis. For someone in the trouble Greece is, gold swaps allow a central bank’s reserves to be lent in a credit-secure fashion.

In other words, a gold swap allows the lender of currency to benefit from greatly reduced credit risk, as the gold can be held in an allocated account, usually at the Bank of England. The currency deposit is secured with gold throughout the life of the deposit.

Any country such as Ireland, Portugal, Spain, Italy, the UK and the USA. can follow this route. Yes, sales may not be permitted for fiscal reasons under Eurosystem rules, but these are not sales, but swaps. So, of the utmost importance is just who swapped this gold? Could it be one of the countries we just mentioned? If so, their situation is far graver than previously thought. The implication is that the collateral they offered just wasn’t good enough, so they had to use their gold. This is major news for the monetary system.

What is significant about this or these transactions is that Gold Bullion is being used in international settlements after so many decades of being sidelined in the monetary system. The transaction itself confirms that gold is being used in international settlements, which is a dynamic confirmation of gold’s return to the monetary system.

A "gold swap" might be the first desperate step in such a transaction with the swapping bank hoping to repay the foreign exchange, but should it fail, the BIS would have to decide either to keep the gold on its books or to sell it. Again, keeping it on its books is part confirmation that gold is active again on the monetary system, a big boost by itself!

Gold, in short, is back in the monetary system.

What appears to have really happened is that one nation or more needed foreign exchange to counter some shortfall in its accounts and raised these funds as a short-term liquidity measure, believing that it would be able to return the currency and receive its gold back. The gold would then be returned at the conclusion of the swap period in return for the currencies swapped. If it fails to return these funds to the BIS, then the BIS could discreetly place the gold with another central bank, should it not want to keep the gold. If it did so, the BIS would simply report its disposal of the gold, the originating central bank would report the drop in its gold reserves and the gold-buying bank would report its increase in the reserves.

This puts the transaction into an entirely different category. It seems that one or more of the developed world’s central bank’s credit is not good enough for other governmental institutions. If word got out as to which this country is, then the financial markets would go into quite a spin, shaking the global financial system to its core.

No wonder the BIS is keeping such a low profile!

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Source:Gold – Back in the Monetary System!

Gold Prices are finding strong support from a dramatic turn in global central-bank policy…

FOR SOME YEARS now, Doug Casey has gone on record with his view that we’ll know the gold bull market is really picking up steam when central banks stop selling their reserves of gold and begin buying the stuff, writes David Galland, managing director of Casey Research.

The following excerpt from a Wall Street Journal article titled "As Gold Hits Record, Central Banks in Focus" indicates that this is now happening…

"The metal has surged over worries about Europe’s debt woes and the slumping value of the Euro. Investors in metals and currency markets have been on alert for any sign that the world’s central banks, and China in particular, are shifting reserves out of the Euro and into gold.

"Though central banks typically are coy about investment decisions, there have been signs lately that they might be shifting out of Euros and into gold."

A key point in this discussion has to do with the Central Bank Gold Agreement under which signatories were allowed to sell 400 tonnes of gold – 14.11 million ounces – annually.

According to the World Gold Council, in 2007 the central banks took advantage of the CBGA to sell on the order of 484 tonnes of gold. In 2008 the number began dropping – to 232 tonnes, followed by a miserly 41 tonnes in 2009, just 1.44 million ounces, or 10% of the amount sold two years before.

And at the same time the banks stopped selling, they began buying…a net 200 tonnes last year and almost certainly more than that in 2010. Thus, we have a swing in demand of some 600 tonnes, or 21 million ounces annually…an amount equal to about 30% of new Gold Mining supply.

This, of course, is a two-edged sword, because, in sum, the central banks, IMF, and the Bank for International Settlements hold some 29,000 tonnes of gold. If push came to shove and the central banks were forced to defend their currencies by selling off their gold reserves, it could have a serious detrimental effect on the Gold Price.

Using the struggling Eurozone as an example, if you added together the official gold reserves of the European Central Bank, Germany, Italy, and France, you’d arrive at a total of 8,791 tonnes of gold available to be delivered to the market. Converted into a more commonly used and understood unit of measure, 8,791 tonnes equals 310 million ounces.

Now that seems like a lot of Gold Bullion, and no question it is. Keeping things simple, at $1000 per ounce, the European central banks are sitting on gold reserves worth $310 billion. So one might be tempted to think that the European central banks could begin to view this very tangible asset as an important part of the solution to the sovereign debt crisis now bedeviling them.

However, when you consider that Italian government debt alone comes to $1.91 trillion and is closing in on $8 trillion for all the Eurozone, it becomes clear that selling their gold would have little real effect. And, of course, selling off their gold reserves would announce for all to see that the sovereigns were nothing more than hollowed-out shells, their currencies dried husks ready to be blown away by the next puff of wind.

Staying on topic, with 8,133 tonnes of gold in its reserves, the United States rates as the world’s largest sovereign holder. In fact, as of March 2010, gold made up 70% of official US reserves. Pretty good, eh? But with total US currency and gold reserves around $410 billion – and total US government debt, not including unfunded obligations, coming in to $14 trillion – total reserves as a percentage of US debt is just 2.9%. And the gold component of those reserves, as a percentage of total government debt, equals 2.2%.

I think the technical term is "a drop in the bucket".

Even so, one doesn’t want to be naïve about these things – 29,000 tonnes of gold is roughly the equivalent of seven years’ supply. Which is another way of saying that it would be a mistake to completely discount the possibility that desperate governments won’t eventually attempt to dump their gold to defend their currencies, as counterproductive as that might be, given that it would send the price sharply lower.

For the time being, however, the central banks are net buyers – and so they are very supportive to the Gold Price.

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Source:Central Banks Pushing Up Gold

What’s the point of Gold Bullion reserves, if not to be sold when times are hard…?

SINCE the start of the fourth Central Bank Gold Agreement last year on September 27th, gold sales by European central banks have been nearly non-existent, writes Julian Phillips at GoldForecaster.

This slump in gold sales came before the Euro began to implode, however. Now fractures have appeared in the Eurozone itself. Governments have to fiercely cut back expenditures. They must do this to the extent that the reaction is certain to be social unrest.

As it is, Greece is not only suffering already but its key revenue driver, tourism is suffering badly (25% down already this year). So cutting tax revenues and balancing the government’s books is even more difficult. To many people out there, the gold holdings of such banks should be sold to shore up such shortfalls. But would European central banks agree?

Take a look at the table here (supplied by BullionVault). In all cases, the contribution that the proceeds of gold sales could make would, in all cases, barely dent the problem.

So selling gold is not a cure for Europe’s national debts. But you may ask, what purpose do gold reserves serve, if not to be sold when times are hard? The only way to answer this is to take an individual as the nation.

Imagine this individual has some gold hidden away for a rainy day. He is asked by his bank manager to repay his overdraft, but he can’t – not without a long-term plan to pay it off slowly against income. His bank manager tells him to liquidate his Gold Bullion and put that into the account. But if he were to do this, selling his final "back-up" reserve, any emergency that hits him out of the blue from then on will simply destroy him financially.

So he decides that when those dire times hit, he will keep his gold for the time when nothing he says and does is believed or accepted. Then, when he produces gold it has a value that his actions cannot affect. It has a value everywhere to anyone. This external value is what will keep him in business and allow him to slowly recover. Essentially that is the role of Gold Bullion as a reserve asset.

You may then ask why European nations chose to sell gold starting from the late 1990s. But every time nations sold gold over the last 35 years it has been not to raise emergency funds, but to try to give credibility to a new role for a currency.

The US did it in the 1970s, as the US Dollar – as well as being the world’s petro-currency – went international. Nixon cut the Dollar’s link with gold first in 1971. The Treasury then sold gold throughout the decade that followed.

The International Monetary Fund (IMF) sold gold in the late 1970s because it and the US wanted the Fund’s Special Drawing Rights to replace gold in the monetary system. (note that national governments would not accept this, which is why the SDR remains a paper currency only in the IMF’s books.) Then, in the late 1990s and early 21st century, Europe sold gold when the Euro was launched.

In the first two instances, the impression was given by the US and the IMF that gold sales would go on until gold was no longer part of the system. This forced the price of gold to fall from its peak of $850 to $275. Accompanied by "accelerated production and sales" of gold in the market, this campaign was believed, until this century.

But when European central banks decided to sell, they emphasized that it was still an important reserve asset and that they would sell no more than a maximum amount. The removal of the unlimited gold sales allowed the market to quantify the impact on the Gold Price. As a result, the Gold Price has moved from just under $300 to the peak of $1250 thus far – an average price increase of 43% per annum on the lowest price.

Now, no longer a "barbarous relic" as J.M.Keynes called it during the Great Depression, gold is preserving value at a time when currencies are losing theirs. Each week in the GoldForecaster newsletter we report the activity of central banks in the gold market, and while Eurozone selling has been minimal, other central banks – notably in Asia – have bought over 350 tonnes since September of last year.

Behavior was similar in 2009 when over 400 tonnes of gold were bought by central banks in total, and sales turned to a trickle. Since February of this year, European central banks have sold just one tonne of gold between them.

The true value of gold for a central bank – and for a nation – is that when its currency is threatened, whether by deflation or inflation, confidence falls in national currencies. Amid the worst circumstances of war-time, gold is exchangeable, even between enemies. This quality transcends its value as "just" money.

Fortunately, of course, we are not there yet. This is not such a desperate time that all else has failed. So central banks will keep a firm grip on the gold they have, for now, while others with too little – particularly in Asia – will do all that is reasonable to acquire more.

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Source:Why Do Central Banks Hold Gold?