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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

Gold Bullion is money itself. The standard investment cycle may not apply…

WHAT IS a "bull" market? asks Julian Phillips of the GoldForecaster.

It is a market in an upward price phase, necessarily creating the expectation that it will be followed by a "bear" or downward phase. This mindset is common to all markets. Sayings like, "Everything the at goes up must come down" are standard, and taken as part of life itself.

But few examine if it is really true. Why should every asset price that goes up come down? For some years now, gold has been thought of as moving in the opposite direction to the US Dollar. So if gold goes up, only to come down, then the Dollar goes down only to come back up. Is that true?

The history of currencies in the last few thousand years tell us something quite different. Currencies have gone down and never come up again, just disappearing instead. Gold has always retained a monetary value. From the early Eighties to 1999, the Gold Price went down, and in this century has gone up. So we take issue with the saying, in the light of the history of gold.

Even though the ‘powers that be’ have tried to discredit gold and underlying money, the vast majority of central banks have retained most of their gold because they believed it to be a very valuable reserve asset.

What sort of market is gold? A very accurate saying is doing the rounds at the moment, it is that, "People Buy Gold not to make money, but because they have money to lose." This has always been true, because gold is the ultimate money! Unlike commodities, it is hardly consumed. Lost yes, but not consumed as other metals and commodities are. It is held as a measure of wealth by bankers, funds and individuals.

The gold market is important in the context of this subject too, because gold is different from any other. It comes into its own when trust breaks down, when fear rises and confidence falls. And pre-1971 it was always money. This is important because the Gold Price has been defined by a currency price since the early thirties.

Why do we say this? Before then, the price of a currency was defined by gold. Each note of currency at one time was described as the number of ounces, grains or grams it represented. It was a bill, a representation of the gold backing it. It was a gold "IOU" in short.

Then the mental switch came, somewhere in the murky monetary days between the dropping of the Gold Standard and the Nixon administration’s floating of the Gold Price four decades later. Where gold had previously backed currencies as the ultimate reserve asset, now it was priced in currency instead. But it remained the ultimate money – always accepted in extremis – unlike today’s unbacked paper.

The next question, then, is how can money be in a "bull" market? It is a misnomer because it conveys the wrong concept to investors. Gold is not in a "bull" market. It is rather money itself, and now in the long process of returning to center stage in the monetary system.

As this happens, prudent individual and institutional investors will continue acquiring it, while they can, ahead of the devaluing of un-backed currencies. We do not believe that the Gold Price is going to fall back below $300 an ounce and probably not below $1,000. Gold will not enter a bear market by falling as equity markets are prone to do today. It is not an item whose demand will fall away. We expect that once its rise does plateau at some point, it will remain at whatever level it reaches. Many do feel that the current Gold Investment demand will peter out once confidence returns to un-backed currencies. But we find it more than difficult to believe that as we watch monetary authorities from the corners of the world moving to acquire more for their long-term reserves while worrying about the future of the currencies they have in their reserves.

Central banks have started to re-acquire gold, while previous sellers of gold have stopped their disposals. Central banks are the very authorities that deemed Gold Bullion to be money before they invented un-backed currencies. As the world’s governments try to retain their international competitiveness by moving their exchange rates down, their role as a measure of value is being debauched. This gives rise to the need for something to measure currencies against.

It will happen eventually, we believe in a careful process. First we expect a basket of currencies to be used. In time, gold will be introduced into that basket, if not from the outset.

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Source:Gold: Not a Bull Market

Gold Investment has soared in recent years, but looks set to rise further…

MANAGING DIRECTOR for investment at the World Gold Council in New York, Jason Toussaint here speaks to Hard Assets Investor about why institutions are Buying Gold for their portfolios today…

Hard Assets Investor: I’m really happy to have you here, the World Gold Council is a very important organization, representing the gold industry.

Jason Toussaint: Yes, the World Gold Council is a market development organization that is owned by the largest Gold Mining companies in the world. Back in the ’80s, they decided to pool their resources into one organization, which we now know as the World Gold Council. And our goal, and our mission in life, if you will, is to create and sustain demand for gold.

We do that across a number of primary sectors, four sectors to be precise. We have an investment sector, which I manage on a global basis, which is informing and educating the investment public about the merits of gold in portfolio construction and long-term diversification. We have a government affairs division, which works with central banks, many of them around the world, to understand gold as a reserve asset.

We have an industrial sector, which is dealing with semiconductor manufacturers, etc., to increase and find more uses for gold in the industrial segment. And then, of course, last but not least, the jewelry sector, which is the most important and has the largest demand.

HAI: You work with the Gold Investment area. Is it only recently that we’ve seen larger investors, institutional investors, taking sizable positions, and owning gold as a real asset class?

Jason Toussaint: Right. The biggest shift that took place – and I would call it a paradigm shift in this market – is not necessarily the merits of Gold Investment, because those have been around for quite some time, and we’ll discuss those, but the access. And when we launched the SPDR Gold Shares here in the US in 2004, having an exchange-traded product with all the guaranteed two-way markets – infinite liquidity, if you will – of trading on the market, overcame a lot of the issues that investors have had in the past with accumulating gold.

HAI: We should just state that the World Gold Council created the GLD, the very popular Gold ETF that is currently out there right now, and has really taken off among investors.

Jason Toussaint: We sponsored it, through a subsidiary based in New York – World Gold Trust Services. Its market cap is now just below $50 billion, and we are now the second-largest ETF in the world. What is very interesting, if we look back to when we launched the product in November 2004, it surpassed $1 billion in assets under management in its fourth trading day. So, we were absolutely tapping into latent demand by investors who wanted to invest in gold, but didn’t necessarily know how.

Before the ETFs, if you wanted to invest in gold, it was buying Gold Bars and coins, primarily, which is fraught with issues such as price discovery, where do I purchase these things. And then, of course, there are costs associated with transport insurance and storage.

HAI: What percentage of gold demand, prior to the ETF, was represented by investor demand? And, what percentage, let’s say, was jewelry fabrication?

Jason Toussaint: Before the ETFs, investment demand was roughly probably 15% of aggregate gold demand. Now it’s upwards of…depending on quarter to quarter…20 to 30%. It’s pretty much doubled.

HAI: So, the biggest component of overall demand, the most important, is the investment side now?

Jason Toussaint: Right. And I think, kind of coming back to the access vehicle, looking at SPDR Gold Shares and, frankly, other Gold ETFs backed by physical bullion available in the world, has really made gold investable for the first time, for many classes of investors.

For instance, you mentioned pension funds. Pension funds are absolutely asking about the merits. We work with them closely now, about why they should Buy Gold. And then, more importantly, how they do it. Because you can imagine, if a pension fund wanted to buy a billion Dollars’ worth of gold previously, then they would need to worry about, "Well, where do we store it? How is this valued? How do we trade it?" etc. And, trading gold is quite specialized. By putting it on exchange, it is now part of the professional investment process.

HAI: So we’ve seen a doubling in investment demand – you definitely see that growing further?

Jason Toussaint: We absolutely do see investment demand continuing. Even at $50 billion, I like to tell people we’re just barely scratching the surface now. There is a vast market out there that does not hold gold.

HAI: How large is the total capitalization of the gold market, roughly?

Jason Toussaint: Six trillion Dollars.

HAI: Six trillion? So, in the scheme of things, it’s not really all that big – global GDP, what, $60-$70 trillion?

Jason Toussaint: Right…but then, we need to also understand that the primary driver is jewelry. And the primary buyers of gold jewelry, the largest markets, if you will, are the Middle East, India and China. And looking at continued demand, and the relative balance between jewelry and investment, I think what we will see is a continued increasing demand for jewelry in those markets. Because, if you think of their domestic growth rate, and the fact that in the case of China and India, most importantly, the creation of a new middle class, new wealth and an affinity towards gold, that is, I think, a very, very long-term structural shift in gold demand, which I think is often overlooked.

HAI: Well, we’re out of time right now. I want to thank Jason for stopping by.

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Source:Gold Investment Outlook

The price of gold has so far defied the "deflation scare" in bond markets…

SO FAR, the prospect of Japanese-style deflation spreading to other G7 industrialized nations hasn’t scared off the hard-core gold bugs, writes Gary Dorsch at Global Money Trends.

In New York, the yellow metal is still changing hands above $1200 an ounce, or nearly double the levels that prevailed five years ago. Intuitively, one could expect that the Gold Investment market would thrive in an environment of near zero-percent interest rates, coupled with massive monetization of government debt by central banks, and bailouts of the banking oligarchs.

The US Treasury issued $165 billion of fresh debt during July, and so far in the first 10 months of fiscal 2010 (ending Sept 30th) the shortfall has totaled $1.17 trillion. July’s deficit marked the 22nd straight month of red ink for the US government, the longest string on record. If the US economy slips into a "double-dip" recession, it could weaken tax revenues. Thus the Fed’s sleight of hand, announced last week, in shifting maturing debt in mortgage-backed bonds into Treasury bonds.

US President Barack Obama has made a last-minute pitch for aid to financially struggling states. Obama and the Democratic led Congress aim to send $16 billion for Medicaid and $10 billion for schools in order to prevent states from defaulting on their debts.

US states could face budget shortfalls of more than $120 billion this year. Thus, the Fed could soon be in the business of bailing out individual US states, and not just Washington and banksters. For Gold Bullion bugs, more government debt equals more printing of US Dollars by the central bank. Bernanke didn’t authorize a new round of money printing last week, just a shuffling of paper money already in circulation. Yet a resumption of full-scale Quantitative Easing still looms on the horizon.

Deflationist enthusiasts, rushing to gobble-up Japanese government bonds, also face a major price risk that could lead to severe losses, and within a relatively short period of time. On August 11th, Japan’s Ministry of Finance sold ¥2.4 trillion ($28 billion) of five-year JGB’s with a 0.30% coupon, the lowest in seven years.

The auction attracted bids that were 4.7 times the volume on offer, the highest since 2005. That compares an average bid-to-cover ratio of 3.47 from the past 12 auctions. Note that Beijing has been a buyer of ¥1.7 trillion ($20 billion) of JGBs so far in 2010.

Still, traders are mindful of the bursting of the JGB bubble in mid-2003, when yields quadrupled within four months as prices sank.

Traders were lured into bidding-up JGBs until the 10-year yield had fallen to a historic low of 0.43%, under the influence of the Bank of Japan’s hallucinogenic QE-drug. However, JGB yields suddenly reversed and surged sharply higher to 1.65%. JGB losses continued to mount through 2006, when the BoJ scrapped its QE-scheme, and 10-year yields climbed to 2%.

Someday, it might dawn on bullish speculators in US Treasury debt that the fear of a deflationary spiral is just a propaganda ploy, devised by central banks, to drive down the cost of financing government debt. If you think there’s deflation in the air, look around you. Prices are not falling for basic services, food, or energy. However, the American middle class is under siege from slumping home prices and cuts in wages and medical benefits.

But as John Maynard Keynes used to say, "The market can stay irrational longer than you can stay solvent…"

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Source:Gold Price Defies Deflation Scare

China is driving the Gold Bullion bus, likely meaning a Chinese "put" is in play…

IT SEEMS pretty clear to us vultures that the Chinese, who hold just under $900 billion in US debt, are convinced that the United States has a huge incentive to reduce its debt burden by inflating (devaluing) the greenback over time, writes Gene Arensberg in his Got Gold Report.

Mid-summer this year, China made it clear to anyone looking that they value gold and silver more than they do "paper". Multiple news sources say that China opened the Shanghai Gold Exchange to more foreign involvement. China is encouraging its banks to finance acquisitions in the bullion sector. The Chinese command and control wants its business leaders involved in bullion projects across the globe.

China is also encouraging its citizens to own gold and Buy Silver. Bullion is available at government-run banks. China is paying premiums for raw ore to be shipped there for contract milling (or milling at discounted prices)…and China has shown its gold-loving hand regardless of their official protestations to the contrary.

So sound the klaxons for ‘China Forex Diversification’ and ‘China Embracing the Gold Trade’ – a new dynamic is unfolding in the bullion markets.

With China on the demand side – on the bull side of the gold market – who is going to take the sell side? It certainly hasn’t been Western central banks lately. Globally net-net, central banks have become buyers. We can say now there is a Chinese "put" under the bullion markets. That just means that bullion bears have less to work with.

You might want to keep that idea in mind as you look over the various indicators in the Western Gold Investment markets’ data pile. How on earth can anyone consider being bearish of gold when they are up against more than a billion potential buyers, so to speak?

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Source:China Going for Gold