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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!

What happens to Gold Investment if the Yuan is allowed to rise vs. the Dollar…?

The CHINESE GOVERNMENT is encouraging its citizens into Gold Investment, writes Julian Phillips of the Gold Forecaster, and is working to expand the range of gold products available.

Yet the United States government – and others – believe that Beijing will also allow the Yuan currency to appreciate. Surely the Chinese investor will be hurt if this happens?

We know the Chinese government has been adding to its official gold reserves for at least six years now. Local Gold Mining production is not leaving the country, nor will it for many years to come. At the same time the Chinese government favors the development of new Gold Investment products, opening up local gold markets and encouraging the major Chinese banks to sell gold across China.

This is a particularly important development for the global gold market in the light of the fact that per capita, the Chinese hold the least amount of gold amongst the Asian nations. The savings propensity of the average Chinese earner is remarkable, for they save around 40% of their disposable income. To date these have been held on deposit at the banks, with the more sophisticated venturing into the equity markets there. But in times of volatile ’spikes’, these can behave more like gambling casinos than investment sources.

Gold in the Chinese mind represents true value and leads to financial security. Consequently, the potential for Buying Gold in this nation of 1.4 billion people – now in a rapid process of financial empowerment – is tremendous and could well, in time, make China one of if not the most important investment markets for gold.

The main restraint on Chinese gold buying, whether by individuals or the government, is the small size of the global gold market. Persistent long-term buying is the only way the acquisition of large quantities of gold can be approached. Higher prices over time may well flush out sellers of gold. So we expect Chinese gold buying to remain persistent for the foreseeable future.

For years now, however, the US in particular has been calling for an appreciation in the Yuan. Even the International Monetary Fund (IMF) has told Beijing that it is in the interests of China to let the Yuan appreciate. But no heed has been taken of such demands. Yes, the Chinese have allowed the West to get the impression that they may well let the Yuan appreciate, but a look at the advantages to China of a pegged Yuan to the Dollar tell us another story.

The original reason for the pegging of the Yuan to the US Dollar was to capture the price advantage Chinese goods had over the equivalent products made everywhere else. As the Dollar is the global reserve currency, such prices were easily translated into other currencies. As we see by this week’s export report for May from China, the rise of 48% shows what advantages such pegging and pricing brings as the world slowly recovers. Yes import could be cheaper, but that would only save money not promote industry. After all China wants and needs to develop its economy.

We have been touting the future role of the Yuan as a global reserve currency for well over the last two years now. Since then we have seen the tentative steps that the Chinese need to take to ensure their banks can cope with this changed structure. Since expanding Yuan trade in just Hong Kong, it is now spread throughout the main manufacturing hub of Southern China. When they are ready, we do expect to see a flood of Yuan to all their international trading partners, to pay for imports and then to make Yuan available to pay for Chinese exports. As Chinese trade is already global, there will be a point when Chinese importers will price imports and exports in the Yuan. While this process is in transition, we also expect their pricing policies to widen to include allowing payment for Chinese exports in the broad spectrum of global currencies. This will allow China to diversify its reserves and lower its exposure to just the Dollar or the Euro.

When the internationalization of the Yuan happens there would normally be a tremendous fall in the value of the Yuan as it floods markets, but in today’s context that fall would be absorbed by the pressure for the Yuan that is now being experienced. When it does happen, we believe that China will want the Yuan to either hold current levels of in fact fall.

Having said all the above, we have to ask you if you expect the Chinese government to promote Gold Investment so strongly to its citizens, then knowingly engineer a fall in the Yuan price of gold? Our view is that the Chinese government would not wish to hurt its own like that, but with a large dose of forethought, would have blended to two policies to the benefit of its own citizens. If they didn’t what would happen to Chinese gold demand.

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Source:Gold Investment in China

Why isn’t China Buying Gold from the International Monetary Fund…?

IN THE LAST FEW MONTHS, speculation in the gold market has been rife that China will be Buying Gold from the International Monetary Fund (IMF), writes Daniel Wilson in Beijing for Commodity Online.

But is China really buying IMF gold? Despite the hype about Chinese plans to amass gold reserves in place of the US Dollar, it seems the dragon country is not in the mood to Buy Gold from IMF.

This week, again, the IMF said that it sold 14.4 tonnes of gold in April, carrying out its program of planned bullion sales. The IMF has 403.3 tonnes of gold slated for sale as part of its bullion sales plan. Out of this, India – one of the largest gold consuming and importing nations in the world – bought 200 tonnes in November 2009. India’s gold buying from IMF sent Gold Prices to the dizzying height of $1,227 per ounce in early December last year.

Sri Lanka and Mauritius bought small quantities of gold – 12 tonnes – from the IMF in between. Two months ago, the IMF announced that it would sell the remaining 191.3 tonnes of gold in the open market. So, as part of the open market sale, IMF sold 5.6 tonnes of gold in February, 18.5 tonnes in March and 14.4 tonnes in April. So far, IMF has sold 38.5 tonnes of gold in the open market.

The IMF has now 152.8 tonnes of gold up for sale. The moot question is whether China, that has been eagerly looking at Buying Gold and stepping up the yellow metal reserves, would buy the remaining IMF gold that is to be sold in the open market.

And the surprising question is why China is not buying IMF gold.

Even as central banks of several countries are Buying Gold from the international organization, might the rising price of gold be one reason forcing China to go slow on its own gold buying programme? Or is China, in fact, Buying Gold from the open market and then would come out with a surprising announcement next year that its gold reserves stand at 2000 tonnes? (Currently, the Chinese gold reserves held as foreign exchange reserve is around 1054 tonnes.)

David Lew, a keen gold market follower and bullion analyst, says there are several reasons why China is not Buying Gold from the IMF, though there have been rumors that the Chinese central bank was planning to buy the entire 191.3 tonnes of gold from the IMF once its Indian, Sri Lankan and Mauritian sales were complete.

First and foremost , however, is the fact that gold markets worldwide would turn into an immediate playground of speculation and excessive volatility if China said it was Buying Gold from IMF. "Even rumors that China was buying IMF gold two months back turned the bullion market highly volatile," points out Lew.

China has a relatively small position as far as gold reserves are concerned. The Chinese central bank – the People’s Bank of China – holds only 1.2% of the country’s foreign currency reserves in bullion. The largest chunk of China’s reserves, around 70%, is held in US Dollars.

Secondly, Lew says the fact that China is not jumping into to buy IMF gold does not mean that the country is not interested in amassing gold reserves. "It looks China is Buying Gold these days from gold mines, rather than Gold Bullion. Clearly, China wants to balance its gold reserve position very carefully and meticulously," he pointed out.

Lew feels that another reason for China not buying the IMF gold is that in doing so, the Chinese currency Yuan would appreciate. "China does not want its currency to appreciate by Buying Gold from IMF," Lew added.

China has been nursing ambitions to step up its gold reserves in the last one year, driven by the declining value of US Dollar that the Chinese central bank holds as foreign exchange reserve. China also continues to aggressively promote gold investment. Jewellery shops continue to sprout across Chinese cities, towns and rural areas.

A recent report from the World Gold Council (WGC) said that private gold demand in India and China will continue to grow driven by jewellery demand, in spite of high local currency Gold Prices. In Q1 2010, India was the strongest performing market as total consumer demand surged 698% to touch 193.5 tonnes. In China, demand proved resilient; demand increased 11% in Q1 2010 to 105.2 tonnes.

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Source:China Buying IMF 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?