Gold (2012-Outlook) CFB Forex Trading

Gold (2012-Outlook)

Executive Summary

There is a strong argument for the prediction that 2012 could be very upsetting, and hence that the prices of various asset classes will vary greatly. For the conservative and safety-orientated investors, this means for 2012, a broad mix of assets should be key. In such a portfolio for 2012, gold should be able to continue defending its share.

Many investors will also view gold in 2012 primarily as“insurance”. They would participate in a potentially positive economic development and a bull market in equities through stocks or mutual funds and they would be glad, if they would not have to rely on their “insurance”.

 The key factors that drive the Gold prices.

• The financial crisis in Europe over the Euro zone—which looks increasingly likely to lead to printing money…and inflation.
• The correlation between rising gold prices and rising market uncertainty is clear. Gold's appeal rises when people are unwilling to take risk in the stock market or fear political and economic shenanigans are devaluing paper money.
• Central banks are buying gold as they move away from the dollar.
• There’s strong demand for gold for jewellery in China, India, and the Middle East.
• Institutional investors may start buying gold—especially if global equity markets remain stagnant.
• The specter of inflation—not just in Europe but all over the world.
• Central banks continued to buy more gold than to sell – to an increasing amount. After many years in which the central banks sold gold, this trend turned around for the first time in 2010 and has accelerated in 2011.
• Investment demand is driving demand increases.

In 2011 has risen from early 2011 until end of December 2011 by just under 8% of its value, there was from mid-September to mid-October also a significant drop by 16% from the interim high of USD$ 1,900 (€ 1375) to USD$ 1,600 (€ 1,176). From this low point, the gold price rapidly recovered by about 8%, but the price of gold fell again in December closing at USD$ 1,534 (€ 1,185) at the end of the year 2011. At the end of 2011 gold was 8% higher as at the beginning of the year.

For many analysts, besides the fear of overvaluation of the gold price, the main causes for the interim price declines of gold in 2011 were the following: multiple increases in margin requirements for trading in gold, profit-taking and declines in other asset classes, e.g. stocks. Declines in other asset classes would have forced institutional investors such as funds to sell assets like gold which has performed very well to compensate losses and to raise cash for margin calls or to meet redemption requests. Some analysts also blame the bankruptcy of MF Global which would have forced many institutional investors to liquidate commodities futures contracts, including gold.

The Big Picture

The monetary system in the West is straining to cope with the mass of debt that some countries have allowed to build up and that is putting considerable pressure on both financial markets and incumbent governments. Judging by how policy makers are handling this unfolding crisis, it does seem as though we may have to accept that there might not be a conventional solution to the problem. Measures taken so far have tended to buy time and the plans that have been put in place often seem inadequate, or unworkable in the long term. When you look at the size of the problem, either masses of debt will have to be written off and that will cause contagion, or else more and more layers of debt will have to be created in which case countries and banks will be saddled with high debt for years to come. Either way, it is hard to see anything other than economic hardship in Europe for the foreseeable future and that is likely to lead to a period of stagflation, or more likely deflation.

The US is in trouble too. At present the US is struggling to keep the recovery going, the second tranche of quantitative easing (QE) has stopped and growth is flagging. However, its debt has taken off since the 2008 financial crisis and is in danger of getting out of control. So far there seems little political will to tackle the budget deficit. This raises the question whether the US will follow the EU into a debt crisis - albeit at a later date.

The measures taken to tackle the financial crises in 2008 and 2009, notably QE and numerous stimulus packages, have gone on to make today’s global problems bigger. The bailing out of banks increased government debt and QE has led to commodity price inflation. The latter has made governments in Asia raise interest rates to combat rising prices and in turn that has lowered growth in the region. China, in an effort to avoid following the West into recession, pumped money into the economy, but the increased spending created property bubbles and bad loans. Deflating and unwinding of these may well mean lower than normal growth for a while, although there is an outside chance of a hard landing too. Overall the EU is in a mess and the US could easily get into one too if it mishandles its budget deficit. Unfortunately, the situations are likely to get worse before they get better. Given the unprecedented levels of debt that needs to be brought under control, it looks highly likely that these regions will suffer recession and with governments’ finances already stretched they may find it hard to avoid deflation. Given this outlook, financial markets are expected to correct further and that is likely to make investors increasingly nervous. The chart of the Dow shows that equities are still holding up well, but we would say the risk lies to the downside.

The situation in Asia needs careful monitoring as any deterioration in China’s economy is likely to spook global markets and that might well boost demand for safe-haven investments. Overall, given the falling confidence in the economic outlook and in governments’ ability to get to grips with the situation, we feel there is a high risk of deflation and in such circumstances investors are likely to turn to cash – this is likely to be bullish for the dollar.

However, because faith in governments has waned with their handling of the crises, we expect investors will not want to rely solely on paper money and will look to spread their risk by holding Gold as well. Greater monetarisation of Gold is likely to be bullish for prices. Now we are going to analyze the current trends in supply and demand of gold

Demand

The Most Useful Metal

Of all the minerals mined from the Earth, none is more useful than gold. Its usefulness is derived from a diversity of special properties. Gold conducts electricity, does not tarnish, is very easy to work, can be drawn into wire, can be hammered into thin sheets, alloys with many other metals, can be melted and cast into highly detailed shapes, has a wonderful color and a brilliant luster.

Throughout the history of our planet almost every established culture has used gold to symbolize power, beauty, purity and accomplishment. Today we continue to use gold for our most significant objects: wedding rings, Olympic medals, Oscars, Grammys, money, crucifixes and ecclesiastical art. No other substance of the same rarity holds a more visible and prominent place in our society.

                         

o   Jewelry: The Primary Use of Gold

o   Financial Gold: Coinage, Bullion, Backing

o   Uses of Gold in Electronics

o   Use of Gold in Computers

o   Use of Gold in Dentistry

o   Medical Uses of Gold

o   Uses of Gold in Aerospace

o   Uses of Gold Awards & Status Symbols

o   Uses of Gold in Glassmaking

o   Uses as an investment vehicle.

Demand

Demand for gold is widely dispersed around the world. East Asia, the Indian sub-continent and the Middle East accounted for approximately 65% of consumer demand in 2011. India, Greater China (China, Hong Kong and Taiwan), US and Turkey represented well over half of consumer demand. A different set of socio-economic and cultural incentives drives each market, creating a diverse range of factors influencing demand. Rapid demographic and other socio-economic changes in many of the key consuming nations are.

Jewelers demand

Jewellery consistently accounts for the majority of gold demand. In the 12 months to December 2011, appetite for jewellery amounted to around US$99.2 billion. India is the largest consumer in volume terms, accounting for 29% of demand in 2011. Indian gold demand is supported by cultural and religious traditions which are not directly linked to global economic trends.

The 2007-2009 financial crises had a significant negative impact on consumer spending. This resulted in a decline in the volume of gold jewellery sales, particularly in western markets, with the United States being hardest hit. However, jewellery demand in India and Asia has since been recovering whilst in China growth in jewellery consumption has been continuous.

Investment demand

Since 2003, investment has represented the strongest source of growth in demand. The last five years to the end of 2011 saw an increase in value terms of around 534%. In 2011 alone, investment attracted net inflows of approximately US$82.9bn

Technological demand

The use of gold in various electronic, industrial, medical and dental applications (together classed as ‘Technology’) accounts for around 12% of gold demand, an annual average of over 450 tones from 2007-2011

Top 10 gold consumers in the world 2011

1-India   Total :                                  933.4 tons year on year change           -7 Percent 2. China Total :                                  811.2 tons year on year change           22 Percent  3. The United States Total :                                  194.9 tons year on year change           -17Percent 4. Germany Total :                                  159.3 tons year on year change            26 Percent 5. Turkey Total :                                  144.2 tons year on year change           30Percent

6. Switzerland Total :                                  116.2tons year on year change            25Percent 7. Thailand Total :                                  108.9tons year on year change            57 Percent 8. Vietnam Total :                                  100.3 tons year on year change            23 Percent 9  Russia Total :                                  75.1tons year on year change           14 Percent 10. Saudi Arabia Total :                                  72.2 tons year on year change           -12Percent

1-India  

In India, traditionally the largest consumer of gold in the world, demand dropped by 7 percent to 933.4 tonnes in 2011 as the high gold prices and the weakness of the Indian rupee made gold more expensive for consumers. However, the demand still remained high in the country where gold is historically associated with wealth. India produces only about 4 tonnes annually, or some 0.4 percent of its gold consumption.

In 2011, gold jewelry demand in India was 567.4 tonnes, down by 14 percent from 2010. The investment market demand rose 5 percent to 366 tonnes, accounting for 24.6 percent of the world's total bar and coin demand. Gold demand in India expected to grow by over 30 per cent in real terms during the next decade. Driven by rapid GDP growth, urbanization, the emergence of strong middle class and a sustained potentially rising savings rate of 30 -40%  of income.

2012-Outlook

India's demand for gold was hit by higher prices due to a combination of higher global prices, a weaker rupee and new taxes on gold introduced in the federal budget in March. Monsoons are crucial to India's gold demand because they play a big role in determining farm incomes. Most farmers prefer to invest their savings in gold.
The Indian government's weather department forecast a normal monsoon during the June to September season. The season brings about 70 percent of the annual rainfall in India, where more than 60 percent of farmland is rain-fed.

2-CHINA

China was the second largest consumer of gold in the world in 2011, with total tonnage hitting 811.2 tonnes, a 22 percent increase compared to 2010, driven by jewelry and investment demand. The largest rise was in bar and coin investment, where the demand rose 43 percent to 266 tonnes. At the same time, jewelry demand kept rising throughout the four quarters, making China the biggest single jewelry market in the world for the second half of 2011.

The World Gold Council (WGC) believes that gold consumption in China will continue to catch up with the rest of the world following the deregulation of the Chinese gold market in 2001. Demand from China’s two largest sectors (jewellery and investment) reached a combined total of 428 tones in 2009 but domestic mine supply contributed only 314 tones during the same year. This shortfall creates a “snowball” effect as China’s gold industry may not be able to keep pace with the annual leap in domestic consumption despite rising to be the world’s largest gold producer since 2007. Today, gold is regarded as a sign of prosperity, an ornament, a currency and an integral part of Chinese religion. Although the country’s appetite for gold has grown, making China the second largest consumer in the world, demand in China per capita has a lot of catching up to do to equal that of Western economies. In jewellery, the Chinese per capita consumption is one of the lowest at 0.26gm when compared to countries with similar gold cultures.

If gold were consumed at the same rate per capita as in India, Hong Kong or Saudi Arabia, annual Chinese demand could increase by at least 100 tones to as much as 4,000 tones in this sector alone. Near-term inflationary expectations and rising income levels are likely to support the investment case for gold as an asset class, especially given that Chinese consumers are high savers and are looking to gold to protect their wealth. The People’s Bank of China (PBoC) is also playing an increasingly supportive role for gold on the demand side. PBoC’s gold holdings are currently at 1.6% of its US$2.4tn total reserves – a fraction by international standards. If PBoC decides to rebalance its books to its recent peak gold holding as a proportion of reserves of 2.2% in Q4 2002, WGC estimates it could account for a total incremental demand of 400 tones at the current gold price.

In the fourth quarter of 2011, the country consumed 201.6 tonnes of gold, 28.6 tonnes more than that of India, the world's largest gold consumer. It's estimated by the WGC that China will replace India as the top gold consumer in the world for the first time in 2012.

According to the China Gold Association, China's gold output reached a record high of 360.96 tonnes in 2011, cementing its top global ranking for the fifth consecutive year

Gold and cumulative Gold supply and demand (Tones) in China

Seasonally, January, September and November have been the strongest months for gold in the last five to ten years. In China, consumers typically restock during the winter months for Chinese New Year, Christmas and New Year, which has a positive impact on Yuan gold prices. There is no perfect rule of thumb to seasonality but gold bulls will be encouraged to know the China gold market is entering the traditional second restocking wave of the year in April and May.

3- The United States

The United States, which produced 237 tonnes of gold in 2011. Its annual gold demand fell 17 percent to 194.9 tonnes in 2011, due to the prolonged domestic economic woes. Jewelry demand accounted for 115.1 tonnes in 2011, an 11 percent fall from 2010. Bar and coin investment was 79.9 tonnes, down by 25 percent. Its demand of bar and coin investment in the fourth quarter of 2011 was 18.3 tonnes, a significant decline of 43 percent from a year earlier.

Supply

Gold Production and Mining

Gold is a rare metal. All extracted and still available gold has a total weight of 165 thousand tonnes. If the precious metal were melted into a cube, it would measure only 20 meter (65.6ft) into each direction.One third of gold entering the market comes is from recycled sources (jewelry, industry etc.). The rest is from gold mines.

In 2010 gold could be found at more than 19,500 places. At present there are more than 400 mines in the world. Gold mining is geographically dispersed. Forty per cent of the annual gold production and mining comes from South Africa, the United States, Australia and Russia. European gold production is insignificant. The world gold production stood in 2010 at 2,500 tonnes (see table below). This is more than hundred times the production of the 19^th century.  Currently within two years more gold is mined, as in the one thousand years of the Medieval Times. Thanks to advances in technology, it is even feasible to extract gold from stones containing only 1 gram gold per ton.

The Forbes Global 2000 includes 12 gold companies. The biggest is the US Newmont Mining; six are from Canada, two from South Africa, and one from Australia, Peru

Central Banks and Gold

Central banks, international entities (e.g. International Monetary Fund) and governments are the single largest holder of gold in the world. These institutions controlled end of 2009 16.2 per cent (26,780 tonnes) of the worldwide available gold. All ever produced gold is estimated to be 165,000 tonnes (5.321 billon ounces). This corresponds to a market value of 7,950 billion US dollar, based on a gold) value of 1427 dollar per ounce.

The central banks with the five largest gold reserves end of 2010 are the United States (8,133 tonnes), Germany (3,401 tonnes), the International Monetary Fund (2,846 tonnes), Italy (2,451 tonnes and France (2,435 tonnes).

Interestingly, the private gold fund SPDR Gold Shares (not in this list) held 1,300 tonnes of gold in 2010, making it the sixth largest gold holder, after France (2,435 tonnes) and before China (1,054 tonnes).

In 1999, nineteen institutions signed the Washington Agreement on Gold (WAG). This ten year agreement restricts the sale of gold by its members to 500 tonnes annually. Signatories are the central banks having the Euro, the European Central Bank, the central banks of England, Switzerland and Sweden. During that time, the central bank of England and Switzerland were the main sellers of gold.

Central banks in the west have been net sellers of gold, whereas those in the East have bought more gold than they sold. In the last years, several central banks, notably from Russia, India and China, have announced plans to increase their gold reserves. As a consequence, in 2009 central banks have become for the first time in 20 years net buyers of gold. In that year, net buying resulted in 470 tonnes of gold. The invigorated interest in gold can be traced back to the financial crisis, as this precious metal can be used as a hedge.

Annual World Gold Production 2011 Chart

Supply side issues

• Central banks are now buying more gold than they are selling. The world’s central banks added a combined 439.7 tones last year – an almost 50-year high.
• The amount of recycled gold is also trending down. The reason for this? The high gold price, combined with the global recession, at first prompted many consumers to hawk their gold, but that phenomenon is pretty much over. According to Wright, 2011 recycling was down by 2%, and the trend is likely to continue in coming years.
• Gold miners are still trying to make up for years of depleted production. In the 1980s and '90s, when the gold price was low, gold mining companies struggled with low margins and had a hard time replacing reserves. That has only recently begun to change.
•  In 2009, gold production exceeding 2400mt for the first time in three years, and has been rising ever since on the back of high bullion prices. However, new gold mines can't be made to magically appear; the geological and engineering constraints around finding new reserves means that a new find usually takes a decade to move from discovery to production. So gold producers need to be both exploring and developing new mines in parallel with existing operations. That bodes well for gold miners and explorers

Mine supply versus recycled supply

Mine supply.  First thing about mine supply is that all the data is in tones and no one I know thinks about the amount of gold a mine produces in tones, so this chart is in ounces.

Does anyone else think it’s kind of wild that there are only 25 million ounces of gold produced every year?  You could basically fit a whole year’s production of gold into one of those big 500 tone mining trucks. Second, supply is growing.  It is growing, but mine supply alone does not match demand.  Mine production was 746 tones in the third quarter.  Recycled production was 427 tones.  So recycling of gold makes up almost 50% of the total supply.

 

Again this is all about what is the drive at the margin.  Clearly it’s the recycled gold that is going to come when gold prices go up and go away when gold prices go back down.  Just as with jewellery demand, this is another great dampening factor.  Somewhat more intriguingly, one has to wonder if a point will be reached where the recycling has run its course, or at least all the easy recycling has been done.  No signs of a drop so far, but one could point out that even with vastly higher gold prices, recycling has been pretty flat for the last couple years.

Supply and Demand for Gold (in tones)
	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012
Supply	4205	3701	3763	3625	3937	3412	4016	3572	3471	3513	4034	4108	3994
Production	2602	2618	2645	2618	2621	2493	2549	2486	2474	2409	2584	2659	2810
Producer Hedging	506	-15	-151	-412	-289	-438	-92	-410	-444	-346	-252	-116	12
Sales by Cent.Banks	477	479	520	547	620	479	363	370	484	236	30	87	440
Recycling	620	619	749	872	985	878	897	1126	956	1217	1672	1653	1612
Demand	3911	3821	3727	3360	3194	3498	3733	3405	3552	3806	3493	3812	4067
Jewelry	3139	3204	3008	2260	2482	2613	2708	2248	2405	2187	1760	2060	1963
Electronics	247	283	197	206	233	262	281	308	311	293	246	287	364
Other Industries	99	99	97	83	81	84	88	91	93	87	74	83	50
Dentistry	66	69	69	69	67	68	62	61	58	56	53	50	50
Coins & Bars	359	199	357	339	292	339	386	401	432	862	743	995	1487
ETFs & sim	0	0	0	3	39	133	208	260	253	321	617	338	154
Sum	294	-120	36	265	743	-86	283	167	-81	-293	541	296	-73

World’s Largest Gold Mining Companies

This is a list, for resource purposes, of the world’s top gold producers by size (market capitalization).  For consistency and ease of comparison, I have listed them according to their NYSE ADR tickers and values, in order of their market cap. All values in USD.

1. Barrick Gold (NYSE: ABX) – Canadian company headquartered in Toronto.  Operates 27 mines worldwide.  Market Cap: $34.5Billion. Yield: 1.01%

2. Goldcorp Inc. (NYSE: GG) – Canadian company headquartered in Vancouver.  Note the different ticker symbol for the ADR.  Goldcorp is notable for its recent, fast growth rate and upward growth profile.  Market Cap: $31.0Billion. Yield: 0.43%

3. Newmont Mining (NYSE: NEW) – Headquartered in Denver, Colorado (USA). Market Cap: $22.8Billion Yield: 0.85%

4. Kinross Gold Corp. (NYSE: KGC) – Canadian company headquartered in Toronto. Market Cap: $16Billion. Yield: 0.44%

5. AngloGold Ashanti Ltd. (NYSE: AU) – Headquartered in Johannesburg, South Africa. Operates mines in Australia, South Africa, West Africa and South America.  Market Cap: $16Billion. Yield: 0.34%

6. Agnico-Eagle Mines Ltd. (NYSE: AEM) – Canadian company headquartered in Toronto.  Has a more international profile than Goldcorp.  Market Cap: $11.5Billion. Yield: %

7. Gold Fields Inc. (NYSE: GFI) – Headquartered in Johannesburg, South Africa and primarily trades on the JSE.  Has operations in South Africa, Ghana, Australia and Peru.  Market Cap: $10.3Billion. Yield: 1.37%

8. Compania de Minas Buenaventura (NYSE: BVN) – Headquartered in Peru and is Peru’s largest publicly-traded gold mining company, with significant domestic operations.  With seven domestic mines, it makes for a great, pure play in Peru gold.  Market Cap: $9.8Billion.  Yield: 0.1%

9. Yamana Gold Inc. (NYSE: AUY) – Canadian company headquartered in Toronto.  A relatively young company, having begun operations only in 2003.  Market Cap: $8.8Billion.  Yield: 0.33% For more information on Canadian gold stocks..

10. Lihir Gold (NASDAQ: LIHR) – Headquartered in Papua New Guinea with operations in Papua New Guinea, Australia and West Africa.  Note the different ticker for the TSX: LGG.  Market Cap: $7.1Billion.  No dividend.

The World's Biggest Gold Reserves

The biggest individual holders of gold—central banks, international organizations and governments—are believed to account for approximately 16.5 percent of the world's gold.
The numbers are taken from the monthly report produced by the World Gold Council, which is the gold industry's key market development body. The holdings presented here are as of WGC's December 2011 report.

1. United States Value of reserves:    $418.39 billion Holdings total:          8,965.6 tons 2. Germany Value of reserves:    $174.7 billion Holdings total:          3,743.7 tons  3. The International Monetary Fund Value of reserves:    $144.76 billion Holdings total:          3,101 tons 4. Italy Value of reserves:    $126.12 billion Holdings total:          2,702.6 tons 5. France Value of reserves:    $125.28 billion Holdings total:          2,684.6 tons 6-SPDR Gold ETF (GLD) Value of holdings:   $64.53 billion Holdings total:           1,213.9 tons 7. China Value of reserves:    $54.22 billion Holdings total:          1,161.9 tons

8. Switzerland Value of reserves:    $53.5 billion Holdings total:          1,146.5 tons 9. Russia Value of reserves:    $44.8 billion Holdings total:          960.1 tons 10. Japan Value of reserves:    $39.36 billion Holdings total:          843.5 tons 11. The Netherlands Value of reserves:    $31.5 billion Holdings total:          675.2 tons 12. India Value of reserves:   $28.69 billion Holdings total:          614.75 tons 13-The European Central Bank Value of reserves:   $25.8 billion Holdings total:          553.4 tons 14. Taiwan Value of reserves:    $21.7 billion Holdings total:          465.6 tons

The Three Gold Bear and Bull Markets

1 -The 1970s Bull Market

At the beginning of the 1970s, the gold rate was at US$ 35. Ten years later the price stood at US$ 870 per ounce. This is a percentage gain of 2,485%. In contrast, during the same time the Dow Jones Industrial Average increased only from 809 to 839 points. This represents a total gain of 3.7%; not per year, but for the whole decade.

The 1970s experienced a gold bull market, as his precious metal could now be nationally and internationally freely traded after the Bretton Woods collapse. Besides that, demand for gold also skyrocketed because of the dire economic times through which most western nations went in this decade.

In the 1970s, the US and European economies were characterized by low growth, high inflation and a high unemployment rat. Further, increasing national debt and an expansion of money supply made the currencies less valuable. All these factors let investors diversify their portfolios towards material assets, and gold in particular.

 

Important Events in the 1970s for the Gold Rate

• 1971: Devaluation of US dollar
• 1^st May 1972: One ounce of gold has a value of more than US$ 50. This threshold has been trespassed for the first time since Black Friday (1864)
• 14^th May 1973: Gold leaped for the first time in London to over US$ 100
• 14^th November 1973: Limitations on gold trade were lifted
• October 1973 until March 1974: Oil crisis caused by members of the OPEC who declared an oil embargo. This led to a skyrocketing oil price and dramatic effects on national economies

• 1975: Trading in gold futures began at the New York Commodity Exchange (COMEX)
• 21st December 1974: US President Gerald Ford allowed the private possession of gold; other countries followed suit
• 7^th/8^th January 1976: Jamaica agreement,  floating exchange rates
• 1979: Iran revolution to overthrow Iran’s monarchy
• 27^th December 1979: Gold traded for more than US$ 500
• 4^th November  1979: Iran held 52 US citizens hostage for 444 days
• 24^th December 1979: Invasion of Afghanistan by the Soviet Union
• 21^st January 1980: The London Bullion Market reported a gold price of $850, at the Commodity Exchange of New York gold was traded for US$ 873

The 1980 – 2001 Bear Market

The bull market for gold in the 1970s can be explained by the end of the gold standard, the begin of gold trade, economic stagnation in the West, the oil embargo and several wars and revolutions.

In the next twenty years, the gold price followed a completely different pattern. A gold investor could have made in the previous decade nearly 2,500 per cent profit by buying gold in 1970 for US$ 35 and selling it ten years later at US$ 850. If the same investor had bought gold in January 1980 for a rate of US$ 677 per ounce, he could have sold off his bullions a decade later for only US$ 409. A decade later, in December 2000 gold stood at only US$ 283. This constitutes a decrease of nearly 60%, not considering inflation.

Important Events During from 1980 until 2001 for the Gold Rate

• 1982: New gold deposits discovered in North America and Australia
• 1982: Private possession of gold allowed in the PR China. But only six years later it became feasible for private citizens to buy gold
• 1993: Germany lifts VAT requirements on financial gold
• 3. August 1994: Merger of the Commodity Exchange (COMEX) and the New York Mercantile Exchange (NYMEX) under the NYMEX name.  This is to become the world’s largest commodity futures exchange, located in Manhattan, New York. The COMEX division trades in gold and other metals
• 1994: Russia formally established a domestic gold market
• 1997: US Taxpayers Relief Act, allowing individual retirement account holders to buy gold bullion coins and bars for their accounts, if the gold has a fineness of at least 99.5 per cent
• 20. August 1999: Gold was traded in London for as low as US$ 252.80 (US$ 324,95 inflation-adjusted)
• 26. September 1999: To regulate gold selling & its price, 15 European Central banks signed the Central Bank Gold Agreement (CBGA).  The participating parties were the European Central Bank, the 11 Central Banks whose countries had introduced the Euro and the Central Banks of the United Kingdom, Switzerland and Sweden. CBGA set the annual limit of gold sales to 400 tons, or 2000 for the whole 5-year period of the agreement. CBGA was superseded by CBGA II and III

The Current Bull Market (2001 –)

The beginning of the 21^st century is witness of a long and mostly continuous rise in the gold rate from US$ 265 per ounce at the beginning of 2001 until more than US$ 1400 ten years later. This translates into a gain of 528%, which is a stark contrast to the previous 20-year long bear market.
Which factors contribute towards the steady rise of the gold rate?

First, a reduction of gold supply: From 2001 the global gold production fell within a decade by 10%. Still, demand in jewelry and by industry continues to increase due to India’s and China’s steady economic growth. Additionally, at the end of the decade central banks began to step up their gold reserves.

Other important factors are the since 2001 increasing US national debt and the weakening of the US dollar relative to other currencies. Further, the financial crisis of 2008, during which the US government nationalized the two biggest US mortgage lenders and the biggest US insurer, drove up demand for physical gold and exchange traded funds. SPDR Gold Trust, the biggest ETF gold fund holds currently more gold reserves than the Chinese Central Bank.  To stimulate the economy, the US Treasury reduced the federal funds rate to a mere 0.25 per cent. This low interest rate also made gold investments more attractive.

Important Events from 2001 Onwards for the Gold Rate

• 11. September 2001: On this date, the gold price experienced a spike of 5% within one trading day. Usually, price differences are between ten and twenty times smaller
• 2004: Launch of SPDR Gold Shares (SPDR Gold Trust). This exchange traded fund tracks the price of a tenth of an ounce of gold.  With approx. 1,299 tons (37.9m troy ounces) of gold held, SPDR Gold share is the sixth largest gold holder in the world, behind the central bank of France (2,435 tons) and ahead of China (1,054 tons)
• 14. March 2008: At the New York Mercantile Exchange,  gold was traded for more than US$ 1000 per ounce
• September 2008: The US government nationalized the two biggest US mortgage banks, Fannie Mae and Freddie Mac. This led to sharp declines at global stock markets. After the insolvency of the investment bank Lehman Brothers and the nationalization of AIG, the biggest US insurer, the gold rate reaches in New York its highest daily increase in history. This is 11.8 per cent, or a rise of US$ 92.40 to US$ 872
• 2009: For the first time in two decades, central banks become net purchaser of gold
• 2010: The London PM Fix reaches 35 successive heights
• 2010: Several central banks announced plans to increase their gold reserves. These include the central banks of China, India and Russia
• March 2011: Gold reached in New York an all-time record of US$ 1440 per fine ounce. Seen from another perspective, the US dollar (and the Euro) is compared to gold as weak as never before.

The Gold-Dollar Correlation: A Mess Since 2009

The Gold-Dollar Correlation: A Mess Since 2009 A relationships between gold and a currency can only be relative to a foreign exchange rate. Therefore, the US Dollar Index is used (USDX), which is a measure of the US dollar’s value relative to a basket of six currencies. These are the euro, British pound, Canadian dollar, Swedish krona, Swiss franc and Japanese Yen.  When the US dollar increases in strength, the USDX goes up.

Fact 1: Between 2004 and 2006, the correlation between gold and the US Dollar Index was -0.44, between 1997 and 2006 it was -0.28, and between 1989 and 2006 the relationship was -0.28. Here, -1 means perfect inverse correlation (when the USDX goes up, gold goes down).  Zero means no correlation at all.

Fact 2: Australia is the third largest producer of gold. Between 1999 and 2008 its correlation (AUD/USD) with gold stood at 0.84. That means, when gold rises, the value of the Australian dollar increases as well. A weaker correlation of 0.77 is between gold and the Swiss franc. This was true from beginning of 2006 until beginning of 2009.

Fact 3: From 2001 until 2009 gold and the US dollar had a nearly perfect negative correlation. When the dollar decreased, gold increased, and the other way around. However, since the end of 2009 this is no longer the case.

Global Gold Supply & Demand (From Morgan Stanley's Global Metals Playbook)

Gold demand and supply statistics for Q1 2012

First quarter gold demand of 1,097.6t was down 5% in comparison to Q1 2011 though in line with the average of the preceding eight quarters. The value measure of gold demand was 16% higher year-on-year at US$59.7bn.

Demand in the jewellery sector of 519.8t was down 6% year-on-year, which when considered against a rise in prices of 22% shows resilience in jewellery demand. Increasing prices are leading to a re-premiumisation of gold, as it becomes even more exclusive. In US$ terms, the value of jewellery demand grew by 14% to a record US$28.3 billion.

The average gold price of US$1,690.57 was 22% higher than the average of Q1 2011. As a result, in value terms, virtually all sectors of gold demand posted year-on-year increases, with the exception of physical bar demand, which was broadly flat, and the official sector, where purchasing activity was below Q1 2011's exceptional levels.

First quarter gold investment demand (including gold bars, coins, ETFs and similar products) grew by 13% year-on-year to 389.3t. In US$ terms, this equated to a demand value of US$21.2bn, 38% higher year-on-year. Increases in demand for ETFs and medals/imitation coins meant that demand reached 389.3t, 45.8t above Q1 2011 despite declines in demand for physical bars and coins.  At 107.7t, demand for gold used in the technology and industrial sectors was down by 7% compared with year-earlier levels. 

Gold Forecast. 2012

Tight  Supply. Increased   Demand. So it’s a Good Time to Buy Gold

Let’s start by taking a look at some big players in the market. In past blogs, we’ve mentioned that Middle Eastern and Asian countries are big buyers of gold.

• Qatar has been buying more than a ton of gold every month for three years.
• Russia recently bought more than 15 tons of gold from its mines.
• The Reserve Bank of India bought 200 tons of gold the IMF sold.
• Even tiny Mauritius bought 2 tons of gold in November.
• China plans to buy gold: approximately 6,000 tons in five years.

It’s not easy to find this sheer quantity of gold. The supply of gold remains low. New mines are opening but it takes at least five years for a mine to produce at significant levels. With high demand, low supply, and a volatile global market, there’s a good reason that many commodities analysts are predicting significantly higher gold prices for 2012.

• UBS has forecast $2,075 an ounce.
• Barclays has forecast $2,000 an ounce ($35 an ounce for silver).
• Morgan Stanley predicts a range between $1,819 an ounce and $2,085 an ounce.
• HSBC predicts $2,025 an ounce.
• TD Securities predicts $1,975 an ounce.

Gold Price Prospective 2013 and beyond

Trend in terms of supply & demand of Gold

Like all other commodity Gold price are also driven by basic rule of supply and demand. Demand of gold is categorized mostly in four sector i.e. Reserve bank (central bank), jewelry, industrial & investment. In most of country reserve bank is adopting approach to buying gold continuously, we hope this trend will be continue in 2013 and beyond. Over the last decade jewelry demand for gold decreased in relation to demand from other sectors, mainly the investment sector. High gold prices and economic uncertainties will likely keep gold demand from jewelry moderate in 2013

Besides jewelry, we have seen major boost of adopting gold as investment this may be due to availability of various investment options like Gold ETF, Paper Gold etc. This investment boost is likely to continue. Industrial demand for gold in 2011 was 10% of total demand and due to higher price demand in this sector likely to get reduced In addition to demand side supply side is also important for deciding trend. Gold production by mining reached a new high in 2010 and is expected to increase by about 10% until 2013

Trend in terms of Global Financial Situation:-

Other governing factor for gold price in 2013 and beyond will be global financial situation. Global financial situation is not so good today, level of debt taken by western countries are not sustainable. They are trying hard to improve financial situation either by taking more debt or by reducing current debts. Eventually this situation is causing significant rise in inflation rates & rise in value of western currencies. In the long run, the gold price has to go up in relation to paper money, there is no other way. To what price, that depends on the scale of the inflation – and we know that inflation will continue.

Some forecast may seem to be speculations but one thing is for sure that from here gold price are intended to appreciate more. This may be due to economic uncertainties, unfortunately the global financial problems are not yet sorted out, you might have heard about bad financial situation about Europe and other western countries. This may cause gold price to rise further.          

Gold price forecasts 2013

• BNP Paribas has forecast $2,280 an ounce.
• Thomson Reuters GFMS has forecast $2,000 an ounce.
• Morgan Stanley has forecast $2,175 an ounce.
• Newmont Mining has forecast $2,500 an ounce.
• Standard Chartered has forecast $2,000 an ounce.

 Asad Khan
Financial Analyst  (CFB)
050-8774861
asad@cfb.ae