The April FOMC minutes revealed that several Fed members were in favour of new actions should economic slowdown become big enough due to U.S. fiscal contraction and European woes. Technically, gold has been in the oversold territory since 8 May, prompting investors and traders to do some short-covering and buying on dips.

News out of Europe continues to be worrisome. Moody’s has just downgraded 16 Spanish Banks after it cut the ratings of 6 European countries including Spain and Italy on 13 February. Fitch also cut Greece’s long-term credit rating from B- to CCC. The ECB said that it would temporarily halt lending to several Greek banks to lower risk. 10-year Spanish bond yield reached 6.31% on Thursday, a rise of almost 60bp since 6 May. Spain is clearly bearing most of the pressure from Greece’s political paralysis and the uncertainty of its Euro membership.

The economic news out of the U.S. and China also disappoints. The Philly Fed Manufacturing Index surprisingly dropped to minus 5.8 in April compared to a median forecast of 10. China’s April industrial production increased only 9.3% year-over-year. The last single-digit increase happened in May 2009. To increase liquidity, the Chinese government lowered banks’ reserve requirement by 50bp on 13 May.

World Gold Council (WGC) reported that China, central banks and ETFs buttressed the demand for gold in Q1 2012. Gold demand fell 6% year-over-year to 1,097.6 tonnes while average gold price was up 22%. However, China’s investment and jewellery demand rose 10% in Q1. Chinese jewellery demand was again the world’s largest, making up 30% of the world’s consumption. Marcus Grubb, Managing Director at WGC still expects China to be the largest gold consumer this year. He also estimates central banks’ purchase of gold to be close to 400 tonnes in 2012. In Japan, pension funds bought gold for their portfolios the first time as gold is considered a good currency substitute.

Next week’s events to watch include China’s HSBC flash PMI index, Germany’s IFO Index and the EU Summit with growth versus austerity and likely Greece at the top of its agenda.

Dominique de Kevelioc de Bailleul:  Sources close to newsletter writer Jim Willie of the Hat Trick Letter tell him the Chinese are finally putting an end to the Fed-sponsored JP Morgan’s gold manipulation scheme—but not until the Eastern juggernaut strips every ounce of physical gold in a brilliant Sun Tzu maneuver against the Comex gold cartel.

With the cartel levered as much as an estimated 100-to-one in the gold market, JP Morgan is trapped into a game it cannot win in the end.  As normal market forces seek higher prices to quell demand, JP Morgan’s price suppression activities only serve to hasten the day when the gold price will be set free—but on China’s timetable and at a level of gold stock the Eastern giant feels comfortable stripping before crushing the hold of the G-8 and the menacing U.S. dollar standard from which China wishes to extricate itself. 

“My firm belief is that a fair equitable gold price will come only after the price goes dark in the normal traditional paper dominated channels,” Willie began his update of the gold market in a piece posted on GoldSeek.com, suggesting that, at some point, the price quoted at the Comex will be revealed as merely a camouflaged official price-fixing mechanism to throw off traders into thinking rallies and plunges in the price of gold are part of a normal price discovery process.

In other words, instead of Treasury announcing on a periodic basis a new pegged price for gold under a broken Bretton Woods configuration, the U.S. can lever dollar against ridiculously low gold reserves to match the dismally low dollar reserves against assets held on the books of Fed member banks via JP Morgan’s gold manipulation scheme.

The customer(s) of JP Morgan that Blythe Masters had referred to in an interview with CNBC is, accounting for the lion’s share in terms of dollar volume, the Fed itself—which makes sense in that JP Morgan is one of the owners of the Fed (contrary to the obfuscation presented on the Fed’s Web site).

“We store significant amounts of commodities, for instance silver [gold for instance], on behalf of customers. We operate vaults in New York City, in Singapore and in London. Often when customers have that metal stored in our facilities they hedge it on a forward basis through JPMorgan, which in turn hedges in the commodities market,” Masters told CNBC on Apr. 5. Emphasis added to text.

“If you see only the hedges and our activity in the futures market but you aren’t aware of the underlying client position that we’re hedging, then it would suggest inaccurately that we’re running a large directional position,” she added. “In fact that’s not the case at all. We have offsetting positions. We have no stake in whether prices rise or decline.”

At a ratio of approximately 100-to-one of paper “hedges” against physical gold, the only customer who would be large enough to cover such a bet for JP Morgan would be a printing press—the Fed.

Back to Willie.  He goes on to say in his article that the “Eastern coalition” has been stripping JP Morgan of physical gold at intervals of $10 in a “reverse pyramid,” or higher amounts of buy orders as the price drops.  As the Chinese lay a net of buy orders of physical during the massive de-leveraging process conducted by the European banks, the gold sold by the EU in an effort to remain liquid shifts from the West to East at fire sale prices made possible by JP Morgan’s paper shorts throughout the gold bull market.

“The gold price will not rise until the Eastern Coalition has had their fill in a Western diet rich in gold,” Willie stated.  “ . . . In the process of de-leveraging, the cartel is losing their gold bullion. They are vulnerable, made worse by their insolvency, aggravated by their lack of liquidity. The paper gold price is imploding, but not the physical price.”

Willie’s intelligence of renewed aggressive Eastern alliance gold buying—as well as the just-released news flash from Reuters of Vladimir Putin’s decision to skip the G-8 summit—appear to dovetail at this time with geopolitical events concerning Iran.  Though Russia is a member of the G-8, China is not.  Escalating aggression by the U.S. against Iran has pushed Iranian allies China and Russia into a formidable alliance against America and may explain Russia’s abstention from the meeting in a show of allegiance with China against their mutual enemy in battle for another gold—black gold—oil.

If the U.S. can secure Iranian oil, China loses its leverage in the currency war and its timetable for the renminbi to be elevated as a world’s reserve currency—which the Russians would benefit as well, as the ruble would be elevated (and included in the proposed SDR with the renminbi) as dollars leave the oil market through bilateral trade agreements forged by anti-American forces, globally.

Gold market insiders sense that, as Willie reports, China and its Eastern partners have a window of opportunity before the U.S. presidential election and/or a Fed announcement of more QE to accumulate as much gold as possible before the gold price moves higher to relieve the massive physical buying at the hands of the Chinese.

But it appears the U.S. could buy more time in the event of a gold raid by the Chinese (akin to Europe’s raid on U.S. gold during the late 1960s) as a force majeure in the gold market would collapse the dollar and the means of funding U.S. military operations against Iran and countless other operations hostile to China and Russia.  That physical gold, not available to JP Morgan, would need to come from the confiscation of private gold assets, such as those held for the GLD ETF .

“Unfortunately, the Eastern gold raids waged against the Western gold cartel might be satisfied with gold bullion pulled from the back door of the GLD exchange traded fund. As the Eastern Coalition observes the de-leverage process and swoops to exploit the insolvent condition compounded by lack of liquidity, the demands made on cartel member gold reserves might come from the GLD fund itself,” Willie speculated.

He added, “The cartel simply shorts the GLD stock, entitling themselves to vast truckloads of GLD gold bars in illicit grabs. The tracks are covered by altered bar lists, whose track record is so abysmal and faulty that new covered tracks are easily made. The GLD fund is destined for a day like Madoff and Corzine before the Congress, but with far more lawsuits. Given the vast conduits between Europe and the United States, any event triggered on the continent will extend quickly to the U.S. and UK.”

Gold traders should realize that Willie’s analysis strikes at the heart of the U.S. dollar, taking Jim Rickard’s thesis to a much deeper and poignant level—a level that Rickards will not dare to go.

In fact, Rickards told TruNews radio that investors of gold will be disappointed by a probably confiscatory tax of “90 percent” on gold held by American citizens, leaving that Rickards comment to beg the question: then where do Americans go to flee the dollar?

The answer is still—GOLD!—and the corollary? Store it outside the jurisdiction of the U.S. and away from a criminal Washington hell bent to sacrifice every American in its effort to achieve its objectives.  But Rickards, the DoD consultant, won’t tell you that, which suggests to anyone who listens to him that it is futile to protect yourself from a fascist U.S. government intent on sacrificing a nation’s privately-held treasure for its globalist agenda.

However, some people also think you should dollar cost average a lump sum. For example, if you had $12,000 that you wanted to invest in a stock index fund, they would tell you to invest $1000 per month over a year, rather than investing the whole amount immediately. The rationale is that market volatility should then work in your favor, because you will automatically be purchasing more shares when the price is low, and fewer shares when the price is high.

As appealing as that theory is, its advantage looks like a myth, as this calculator shows. It uses market data to let you compare dollar cost averaging with lump sum investing for the start date you specify.

Assumptions $10,000 will be invested in a market investment, following two different strategies: (a) the whole amount will be invested on the start date; and (b) equal amounts will be invested at the start of every month for a year, during which the remaining cash will stay invested in a bank account at a guaranteed interest rate. The market investment is an S&P 500 index fund with annual fees of 0.2%. The bank account interest rate is % Select Start Date January February March April May June July August September October November December         Results Investment Value After 12 Months     (a) Using Lump Sum Method: $       (b) Using Dollar Cost Averaging: $

Each strategy wins at least some of the time, but after a few runs you’ll see that DCA is the statistical “dog”, losing about two times out of three.

Of course, dollar cost averaging will win if your start date falls right before a dramatic crash (like October 1987) or at the start of an overall 12 month slump (like most of 2000). But unless you can predict these downturns ahead of time, you have no scientific reason to believe that dollar cost averaging will give you an advantage.

So why do so many people persist in believing that this old dog really knows how to hunt? Maybe because it has a psychological appeal: if the market dips, people will be happy because DCA will be saving them money; and if the market goes up, people will be happy regardless.

Between 1997 and 2008, it slowly declined to $458 billion. After that, it all changed. Our federal debt grew by $5.8 billion in 2008-09, by $55.4 billion in 2009-10, $34 billion in 2010-11, $31 billion in 2011-12. It’s expected to grow by $21.1 billion in 2012-13. Further, it’s expected to grow until 2015-16. In just three years from 2008 to 2011 all the debt repayment ($105 billion) of the previous eight years was completely wiped out.”

Each Canadian’s share of this debt amounts to approximately $16,000. Surely there will come a point where the national debt will stop being an ideological debating point and simply become a mathematical issue – the ability or more accurately the inability to repay in real terms.   

And on the small matter of repayment – lets examine these debt levels in more detail.  When you calculate complete public debt loads for various countries and include that often and conveniently overlooked matter of the future obligations for underfunded social programs, the picture does not appear promising (Note: The country labelled GRE to the left of the US and therefore with LESS public debt is Greece).

Chart 1:  Public Finances (% of GDP)

Source:  Morgan Stanley

But before we become too smug in Canada with our relatively “low” government debt levels let’s not forget that simply looking at public finances does not tell the whole story.  When you take into account total debt levels – Canada is at around 250% of GDP and notwithstanding the hypocritical concern of the Bank of Canada, continues to grow with the support of the historically low interest rates said bank has engineered.  I believe Canada is going to face some debt challenges of its own in the not-too-distant future. 

Chart 2:  G10 Debt Distribution 

Source: Haver Analytics, Morgan Stanley Research

Remember that this chart does not attempt to account for the net present value of future healthcare and pension costs which due, to the proverbial “pig in the python” effect of the retiring baby-boomer generation, are due to escalate significantly.

What happens when a state can no longer service its debt?  Just like any other struggling borrower it defaults.  How often does this happen?  More often than you think and with a disproportionate number taking place in recent history.  

Chart 3: Sovereign Defaults (Total number by period)

Source:  Econopicdata

De jure sovereign defaults also exhibit an alarming tendency to occur in clusters – not a promising characteristic if this were to prove to be the case in our ongoing episode of sovereign debt distress.

Chart 4:  Sovereign Defaults or Restructurings (Number per year: 1824 – 2010)

 Source: UBS AG

Sadly the two charts above actually understate the problem as they only catalogue de jure defaults and of course sovereign borrowers have a path not open to the average debtor on the street – they can print money. There have been many more subtle and pernicious de facto defaults arising from expansionary money supply policies. In fact, one could argue that currency devaluation is the preferred default methodology of modern governments – witness the 97% loss of purchasing power of the US dollar since the inception of the Federal Reserve and the 95% loss of purchasing power of the Canadian dollar since the inception of the Bank of Canada. 

Despite the gravity of our current problems you might still conclude that sovereign defaults have occurred many times in the past and we survived them so how is our current situation any different?  One word – “scale”.  To put the size of possible current sovereign defaults into perspective with those of the past – the largest nominal sovereign default in the world to date was Argentina in 2001 totalling $82 billion.  The Eurozone PIIGS debt totals $4,800 billion. 

Knowing this, an inflationary default, if pursued, would have to be commensurately large.  Food for thought.  

Certainly, the monetary powers that be show no sign of shying away from the task of producing the raw material for an inflationary default.   I doubt it will come as a surprise to anyone who has been following the parabolic trajectory of global money supply that according to Lawrence Goodman, president of the Center for Financial Stability, the Federal Reserve has effectively become the dominant/marginal buyer and therefore the market for US government debt:  “Last year the Fed purchased a stunning 61 percent of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis …This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.”

US Federal Reserve intervention in the government debt market is replacing demand from foreign lenders. Goodman notes that where once Japan and China had virtually an unlimited appetite for U.S. debt (tied to their need to recycle their US dollar surpluses as part of a mercantilist policy of suppressing the exchange values of their currencies) this may be waning.

Goodman goes on to say that “The Fed is in effect subsidizing U.S. government spending and borrowing via expansion of its balance sheet and massive purchases of Treasury bonds. This keeps Treasury interest rates abnormally low, camouflaging the true size of the budget deficit…Similarly, the Fed is providing preferential credit to the U.S. government and covering a rapidly widening gap between Treasury’s need to borrow and a more limited willingness among market participants to supply Treasury with credit.” 

The possibility that an inflationary default (at the very least in part) will be pursued by the G10 nations should be given some non-zero weighting in your investment decision-making.  Even if you assign a low probability to such an event, the consequences are obviously material.  If you prefer, think of this exercise as buying monetary malfeasance insurance – which via certain asset classes can still be acquired for reasonable prices.

  ]]> http://www.yellowcapital.info/2012/05/10/news/sovereign-debt-central-bank-balance-sheets-and-monetary-malfeasance-insurance-agcapita-partners/feed/ 0 http://www.yellowcapital.info/2012/05/08/news/is-the-sell-in-may-theory-starting/ http://www.yellowcapital.info/2012/05/08/news/is-the-sell-in-may-theory-starting/#comments Tue, 08 May 2012 17:02:18 +0000 yellow http://www.yellowcapital.info/?p=477 By Sudip Kar-Gupta

 LONDON, May 8 (Reuters) – A slump in heavyweight mining stocks drove Britain’s benchmark share index down to its lowest level since the start of 2012, after Greece’s commitment to bailout pledges was put into question – and dealers said further falls were likely.

The FTSE 100 index ended down 100.51 points, or 1.8 percent, at 5,554.55 points – its lowest close since December 28, when it ended at 5,507.40 points.  Dealers said the index had been supported by some technical buying around the 5,600 level, but added that the market appeared on a downward trend.  “This could set the tone for the rest of the week. I would imagine this could be a negative week,” said Richard Curr, head of dealing at London-based Prime Markets Limited.  The results of elections in Greece and France, in which voters soundly rejected austerity measures, raised fresh fears over the euro zone debt crisis and the global economy.

 Greek voters on Sunday punished the two mainstream parties for supporting the austerity conditions of a bailout, and on Tuesday Alexis Tsipras, the leader of the Left Coalition party, said Greece’s commitment to an EU/IMF rescue deal had become null since the elections. (nA8E8E901N)

The mining sector, which tends to fall on fears over the economy since this would lead to lower consumer demand, contributed to four of the FTSE 100′s biggest losers.

Polymetal International was the worst-performing stock, dropped by 8.7 percent. Fresnillo fell 7.4 percent and Randgold Resources and Vedanta closed down 6.8 and 5.6 percent respectively.

 TULLOW OIL BEST PERFORMER

 Tullow Oil closed up 3.3 percent after announcing an oil discovery in Kenya.

 Insurer Aviva had been up as much as 5.8 percent after its chief executive stepped down following a shareholder revolt over executive pay, but the market downturn caused it to shed its earlier gains and finish up by just 0.2 percent. (ID:nL5E8G81NU)

 Similarly, Europe’s biggest bank HSBC ended down 1.2 percent despite reporting higher first quarter profits. (ID:nL5E8G85IX)

 The economic uncertainty has caused money to flow out of UK equities and into gilts in recent weeks (ID:nL5E8G8E90).

 Cheviot Asset Management fund manager David Miller said he would considering buying certain stocks if the FTSE fell below the key 5,500 level but added that gilts were a good investment in the current market to protect against any equity volatility.  Miller said he would favour defensive stocks in the current market, highlighting pharmaceutical company GlaxoSmithKline as a preferred pick.

 ”What you tend to do as a fund manager is hold off, while trying to buy the dip on the equity market on a stock-specific basis,” said Miller, whose firm manages around 4 billion pounds ($6.5 billion) of assets. ($1 = 0.6196 British pounds) (Reporting by Sudip Kar-Gupta; editing by Ron Askew)

 Updated 2012-05-08 18:29:17

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Speaking to Mineweb from the Denver Gold Group’s European Gold Forum, Ross Norman explains why gold is not in a bubble and why investors must continue to come to the party.

GEOFF CANDY: Hello, and welcome to this Mineweb.com Newsmaker podcast and joining me live in Zurich from the Denver Gold Group European Gold Forum is Ross Norman. He’s the CEO at Sharps Pixley. Ross, you’ve just given a very interesting presentation about whether or not the gold market is in a bubble – the answer – well I’ll let you give that to us, but I suppose the first question is, is the gold market in a bubble?

ROSS NORMAN: Well it’s a perennial question that comes up in the media and some speculation, bearing in mind of course that gold has gone up by 17% compound year-on-year over 12 years – that’s about a 650% rise over the course of the bull run. So I guess it naturally begs the question whether this is a speculative bubble. The short answer is, no it’s not, and the reason for that is, yes, there is a bubble out there but it’s not in gold, it’s in the other broader financial markets – the US balance sheet more than doubling and indeed the real bubble is in US debt. Gold is merely reflecting those changes and indeed not just gold but actually the broad commodity complex, including oil and foods, so I think there’s an illusion going on that these commodities appear expensive. The simple truth of the matter is that it’s your cash which is cheap.

GEOFF CANDY: I suppose, and you made the point exactly that, it’s not the commodities that are expensive, it’s the cash that’s cheap. What happens when this bubble bursts?

ROSS NORMAN: Well it currently depends whether it goes with a bang or deflates slowly. Bubbles can go in all sorts of different ways and that’s down to policymakers and that’s kind of hard to forecast, particularly in Europe at this moment in time. Gold will respond to that unquestionably. How – if it’s a gentle deflation in the bubble I suspect gold will respond positively as wealth increases – more money will be spent on jewellery demand as wealth increases. If it goes with a bang, on the other hand of course, people will be looking to escape stricken currencies and buying gold as a form of safe haven.

GEOFF CANDY: I wanted to get into your views on the investment side of the market because there’s been a lot of talk about what’s going on with the speculative side of the market, with the exchange traded fund (ETF) side of the market, particularly as we’ve seen people questioning whether or not we’re likely to see further bouts of quantitative easing (QE). In terms of the investment side of the market, it has grown significantly strongly over the last few years – how do you see it placed at the moment?

ROSS NORMAN: Well, at the beginning of this bull run investment demand accounted for about $3bn worth of sales – today it’s $80bn. So yes, investment demand in total is about roughly a third of total demand. So yes, it’s grown very strongly on the back of, primarily on the ETF, which has forged a wonderful conduit between the investment community, particularly large-scale pension funds, and the gold market. So it was quite innovative and gold has benefited, and it’s a big part of the gold bull run story. I think what still is yet to play out is the more retail investor, the Moms and Pops and the buying of coins and bars. Certainly, in Germany there’s been an explosion of demand, almost from nothing to over 200 tons, and the answer there is simply that the Germans not only had the desire to buy gold, the story was great, they also had access to gold because a lot of banks – Sparkasse, the savings banks – do buy and sell gold. That isn’t the case in many other parts of the developed world, particularly outside of Germany, so to that extent I think there’s an opportunity yet to be gained. You touched on speculative demand – well that’s very tidal again, isn’t it? The speculative interest, by speculative interest I mean positions on the Chicago Mercantile Exchange or Comex, as it’s often referred to, has been declining. That is a large part of the story, while gold has come off in the last short few months, but that’s tidal and I’m sure that these investors will be back in the market soon enough.

GEOFF CANDY: In terms of the Indian and Chinese demand for gold it’s a lot easier there perhaps to buy physical gold than perhaps it is in other parts of the world. That clearly must have attributed to the rising demand there.

ROSS NORMAN: Yes, those markets are very efficient, certainly India. The bid-offer spread, for want of a better way of putting it – the difference between the buying and selling price – is very tight. If you’re looking to sell gold in India, it’s about minus 1% – you get 1% below the spot price. If you’re looking to buy fabricated jewellery products you’re paying about 2% above spot and that’s for a very intricate product, whereas in Europe the spread is roughly more than double that, so the European market is less efficient. And the Chinese market you alluded to is the new market and that’s growing in efficiency. It’s a relatively new market, it only liberalised in 2004 for the first time for over 40 years, but it’s showing remarkable growth and the present time while demand in India seems to be stalling, the Chinese seem to be picking up the baton and running with it, because as we’ve seen, imports of gold into Hong Kong have been remarkably strong and the outlook seems to be that that will be maintained.

GEOFF CANDY: In terms of the Indian side of the market there’ve been a few issues from the government in terms of trying to rein in their current account deficit. Do you see those factors as having an impact longer term on gold investment?

ROSS NORMAN: I think for a lot of long-term gold bull watchers, when the government sought to double the import duty from 2% to 4% they might have regarded it as one of those ‘uh oh’ moments. India is a major player in the world gold market as you rightly point out and it seems as if the Ministry of Finance may be backtracking somewhat on this duty. I don’t think it’s one of those moments that we’re beginning to signal the beginning of the end for gold. I think that we’ve seen successive all-time highs of gold in rupee terms and it’s just a question of adjusting to the higher level and I think, not unnaturally, a lot of jobs in India are based around the gold sector. So the strike that took place over the best part of two or three weeks I think was a one-off. I think that they will come to accommodate this higher level of tax. I think on the other hand that it will spur significant smuggling into India – it already happens to some extent, but it may well at this level make it more attractive.

GEOFF CANDY: Do you see the Western markets making it easier, or if the Western markets make it easier to buy gold, do you see people taking up the offer?

ROSS NORMAN: Absolutely. At the moment if you want to get a measure of the fear in the markets there’s a gauge called a Vix (volatility) index and that’s currently holding above 20 – and that’s regarded as a level which signifies you’re in a very high state of tension, if you like, within the financial markets and that reflects very much what’s happening in Europe at this point in time. Presently, with the clamp down on overseas havens for money laundering and such like the governments are doing, the only real alternative to holding your money in domestic assets is to buy gold, which effectively takes you out of that market. So gold is a safe haven for those in these very straitened and difficult times, but it needs to be remembered that gold is a very, very small lifeboat. If you could sell all the world’s gold production at the spot market price, then it has a market cap less than Vodafone and yet it’s compared to the US dollar, the S&P and Dow Jones. It’s a very small lifeboat, so for those that need to get into it, you’d need to be aware of that and to get into it early, really.

GEOFF CANDY: Ross, just to close off, coming back to real interest rates, because you did make the point that it’s definitely a related indicator to gold, most of the big markets at the moment are in negative real interest rate territory – firstly, do you see them going back to positive interest rates any time soon and if so, what would likely happen then?

ROSS NORMAN: In most consumer countries real interest rates are below minus 2% – that’s because of the effects of inflation in those countries. So do we see interest rates rising into positive territory, which would signal to us the beginning of the end for gold? Well the Federal Reserve has indicated that they’re planning to hold interest rates at the current levels certainly until the end of 2014. The short answer is the interest rate cycle will turn when things get a little better. Our expectation is that won’t be for another three to five years. In point of fact our expectation is that at the run rate of gold price increases that we’ve seen over the last decade, continuing for three to five years would suggest to us that gold is actually only half way through its bull run in price terms. We think it could top out at $3 500 an ounce around 2016 and 2017. Looking beyond that, I think, is a mug’s game. One can take a view over the next short few years but we generally feel that the market remains supply constrained, the investment demand remains robust, the dire economic situation will remain in place for a short few years and the compound effect of the increases we’ve had would suggest, as I say, a gold price of $3 500 in a short few years.

GEOFF CANDY: What would the make-up of the gold market look like in that scenario? Say we get to 2017, the gold price is around $3 000 an ounce – clearly that’s quite a high price to pay for gold jewellery. What are we likely to see as a split between investment, jewellery and other types of sectors of the market?

ROSS NORMAN: Well clearly as investment demand comes to the fore, as I mentioned earlier it’s rising very, very sharply – currently over $80bn worth investment gold sold last year – at those levels, yes, there’ll be a significant throttling off of jewellery demand at those higher levels compensated for, and more, by investment demand. So it will be very much an investment-led business. Having said that, should the market settle a little lower we would expect that jewellery demand will pick up some of the slack, particularly in markets which are, shall we say, more price sensitive such as India and China whereas of course in Western Europe there are significant margins attached to gold jewellery. So those markets in particular will struggle more than most, so we would expect the emerging market nations’ jewellery demand to cushion any possible fall in the gold market should it get to that $3 000 level.

While investors and traders are speculating whether the U.S. Fed will engage in QE3 or not and where gold price may head, the Euro crisis still has a major bearing on gold price. Europe is simultaneously facing three crises: banking, debt and economic growth crises. According to Jefferies’ Chief European economist, Europe needs to see enough growth to escape from the worst of its problems. To have growth ECB may end up engaging in a fully transparent quantitative easing policy, perhaps as soon as the third quarter, if economic conditions remain distressed.

The latest GFMS gold survey predicted that gold investment demand, especially physical gold demand, is the current key driver of gold prices and can reach 2,000 tonnes in 2012. Central banks which became net buyers of 400 metric tonnes in 2011, will remain gold buyers in 2012.

However, the head of Metals Analytics of GFMS also warned that production supply will continue to grow at 3% this year as producers are motivated by higher prices, producer hedging will probably go up after 10 years of de-hedging and investment demand will need to rise as much as $130 billion in order to fill the gap between supply (mining plus scraps) and fabrication demand.

GFMS predicts gold price will trade this year in the range of $1,530 to $1,920, the peak reached in early September, 2011, and will likely pass $2,000 in early 2013. For now, gold continues to fulfill its role as a safe asset, an inflation hedge and according to World Gold Council, a foundation asset in portfolios.

As of Asia opening on Wednesday, gold futures recovers to around $1,680, helped by Fed’s Bernanke’s remarks this week that the U.S. needs more growth to reduce the unemployment rate, recovery is not yet on a firm path and the Fed considers all options to stimulate growth. Monday’s U.S. data also showed that both consumer confidence and home prices are slipping. The fact that Bernanke did not rule out QE3 bodes well for gold as an inflation hedge.

VIX retraced back to the level as of July 2007 at 14.26, S&P reached a 3-year high on Monday at 1,416.51 while on Tuesday Euro/dollar bounced to this month’s high at 1.3386 and the Dollar Index slumped 2% from the high in mid-March.

However the rise in demand for risky assets and the negative sentiment surrounding gold prompted F.T. to question the gold’s bull-run, citing Credit Suisse who said that gold is now considered a contrarian trade. So far physical demand remains quiet from India and China with Shanghai traders only reacting to strong price corrections. After 11 days of protest by Indian jewellers, the government remained firm on import duty on gold which will double from 2% to 4%. The amount of pent-up demand when the stores reopen would be important to gauge the physical demand from Asia, which should put a floor to the gold price.

Though it is tempting to project short-term corrections into the long-run, investors should ask has the catalyst for gold waned. Globally major central banks are maintaining zero interest rates and negative real interest rate could persist for a prolonged period. Financial conditions and sovereign debt problems have been eased but not resolved, hence further quantitative easing by ECB, Fed or Japan cannot be ruled out, further debasing national currencies. Gold’s function as an alternative currency and hedge, albeit volatile, remains clear.

UBS, Goldman and Anglogold’s CEO remain firm on their gold price forecast this year – gold can still touch $1,800 to $2,000/oz.

HOW MANY PAPER CONTRACTS CAME ONTO THE MARKET TODAY ONE WONDERS?

Author: Julian D. W. Phillips
Posted:  Saturday , 31 Dec 2011

Many of the leading fund managers in the U.S. and elsewhere are expecting that governments will confiscate their citizen’s gold. This will not be for the same reasons used in 1933. It will be to facilitate loans, swaps lower interest rates, and shore up international confidence in the turbulent, stressed paper-currency world in which we live. Each nation issues paper as money, dependent on the trust that nation can engender at home and abroad. But is this going to be sufficient, moving into an ever more turbulent 2012?

TRADITIONAL USE OF GOLD IN RESERVES

When gold was deemed money in the world under the Gold Standard, money was issued against the stock of gold a nation had -this formed the basis of the money supply. In 1933 as the Depression wreaked damage to the U.S. economy, the government needed to expand the supply of money to the economy, dramatically. The first step was to confiscate their citizens’ gold at a price of $20 per ounce. Two years later in 1935, the U.S. government devalued the dollar by 75% to $35 an ounce. This expanded the U.S. money supply by far more than 75% because of the additional gold in government vaults.

As U.S. influence spread abroad after the war, the need for a vast increase in global money supply and, in particular, the number of dollars outside of the U.S. (then limited to the amount of gold in U.S. coffers) the restraint on money supply was unbearable on the U.S., so it eliminated gold from its active role in the money system and replaced it with the USD, tied as it was to the oil price.

Thereafter, gold was relegated to the vaults as an important but passive, reserve asset. Now, we’re led to believe that central bankers feel that the amount of gold they should carry is either 3-months’ worth of international trade, or between 10 and 15% of total foreign exchange reserves -as though this is all it would take to resolve a crisis. Such formulae test credibility to the limit.

USES OF GOLD IN RECENT YEARS IN THE MONETARY SYSTEM

But in 2011, the use of gold to fund a Eurozone bail-out was raised. In a draft of the European Commission study on joint Eurobonds is the suggestion that gold could be used as collateral for them. It did not receive more than token recognition; the issue, however, was at least addressed in theory. Its use was not related to the expansion of the money supply -the suggestion did not imply any mobility as money at all. A new role for gold in official uses was starting to get recognition.

In 2010, gold was used by the Bank of International Settlements in currency swaps, giving little-to-no information as to the identity of the clients. Over 500 tonnes of gold were used in the currency/gold swaps. These did not relate to practical money raising, but to gold being used as collateral to facilitate cheaper and larger loans to the banks to provide liquidity where it was drying up. The stories came that gold was being used by commercial banks -who don’t hold gold on their balance sheets-but the only place they could get gold from was from central banks. So was it a dire need by commercial banks for liquidity or was it an attempt by central banks to cap the gold price? We might never know…

But in 2011 these swaps were reversed, and the gold left the B.I.S. in the second half of the year [2011] gold lease rates dropped heavily into negative territory, telling us that central banks were lending gold again to banks at incredibly cheap rates -this coincided with the fall in the gold price from over $1,900 to current levels.

Irrespective of the reasons why, the most important feature of these actions was that gold came into use in the interbank monetary system yet again. And this happened at a time when European central banks had ceased selling their gold and the rest of the world began to steadily increase their central bank holdings.

Despite its passive role the U.S., Eurozone central banks hold nearly 20,000 tonnes of gold -worth nearly a trillion dollars; however and much to politician’s angst, this gold is not available to fund government borrowing; it would contravenes the Maastricht treaty which founded the Eurozone. Gold remains far too important to use in such financing. It will only be used if the very national structure of its money is in danger or in support of making a nation’s monetary system function internationally. But bullion could and is being used as collateral.

For prospective investors (no doubt including emerging market governments, sovereign wealth funds, and the like) the appeal comes from the likely hedge that gold would provide against an immediate default. If a country such as Italy were to default, most believe the price of gold (in Euros and in the USD) would skyrocket…

Julian Phillips for the Gold and Silver Forecasters – www.goldforecaster.com and www.silverforecaster.com