Gold Up-Date - January 24, 2012
As Global Financial Institutions Argue About Losses on Worthless Government Bonds, the Chinese Continue to Accumulate Gold.
After hitting a six-week high on Monday gold prices have eased slightly due to the lack of physical demand as markets closed in China, Singapore, Malaysia and Indonesia for the Chinese Lunar New Year. Gold prices climbed to their highest level since mid-December 2011 as investors eyed uncertainties surrounding Greece's debt crisis and increased tensions in the Middle East. The euro hit a two-week high versus the dollar, mainly due to strong Spanish and French debt auctions.
It seems that although representatives of Greece’s private creditors left Athens on Saturday without a deal on a debt swap plan that is necessary in order to avert a disorderly default, some progress has been made on the details of the plan during talks between the Institute of International Finance (IIF) and Athens. Charles Dallara, the managing director of– an association of more than 350 global financial institutions – says the biggest loss the bondholders are prepared to accept is in the region of 65%-70%. But, why do these financial institutions demand anything. Don’t they understand that Greece is bankrupt and that Greek bonds have become worthless? When these financial institutions bought Greek debt, they thought they were very clever purchasing such high yielding bonds. Now that they have lost, they want some of their money back. It is the same as asking a croupier for your money back after you have lost on a bet at the casino. It is insane! They cannot now blame somebody else for their poor judgment a year or two ago. The loss therefore belongs to them.
In the meantime the IMF and EU countries, and in particular Germany, want to make sure a deal that puts Greece back on a sustainable track is made before they agree to a new, 130-billion euro bailout. The IMF insists the debt swap deal must ensure Greece's debt burden will be cut to 120% of GDP by 2020 from 160% now, as agreed at an EU summit in October. Greece is suffering from its worst economic crisis since World War Two, with unemployment at record highs and near-daily protests and strikes against austerity measures that have worsened an already terrible recession
The latest news from the International Monetary Fund that it wants to booster its capital by at least $500 billion to help insulate global economies from the Eurozone debt crisis could also be a bullish sign for gold. The euro regained some strength, pushing the U.S dollar down. However, it is still uncertain how the IMF is going to raise this money.
It also seems that China’s government will most likely take steps to stimulate the economy as the latest economic data showed that the Chinese economy grew 8.9% year-on-year in 4Q11, down from 9.1% in the prior quarter. During 2011, GDP growth reached 9.2%, in line with market expectations. Despite adverse global conditions as well as a domestic slowdown, the worlds’ second largest economy still GDP growth was still impressive. Nevertheless, as the Chinese economy moderates, there are signs that the monetary authorities are shifting from a policy of tight monetary control to one of policy easing to limit the downside risks to growth.
While a continuation of monetary easing should help support growth in 2012, a growing wealth in a traditional culture that favours gold, together with economic uncertainty and looser regulations on the domestic gold market will create rapid growth in China’s gold demand.
China, expected to overtake India as the world’s top gold consumer in the next few years, accounted for 23 per cent of the world’s total consumer physical gold demand in the first three quarters of 2011, up from 19 per cent in 2010, according to the World Gold Council (WGC).
Banks in China are offering innovative methods that allow small investors access to gold. Investors can buy as little as a gram a month through the gold accounts offered by some of the banks. While it may seem a tiny quantity on an individual basis it adds up when you consider the number of people signing up.
ICBC’s accounts drew 2.33 million investors by the end of November, according to the bank, just 19 months after the launch, with 22 tons of gold held to back them.
Agricultural Bank of China said that for a similar product launched in September, more than 70,000 clients signed up to buy a minimum of one gram of gold per month.
ICBC, the biggest among the country’s commercial banks in precious metals, also offers paper gold, a way for investors to buy and sell without taking physical delivery, and allows retail investors to trade on the Shanghai Gold Exchange through its platform.
In the first 11 months of 2011, the bank’s clients traded 295 tons of gold on Shanghai gold forward contracts and 615 tons on paper gold. In 2011, the bank sold 50 tons of physical gold products and 70 tons of silver products, ICBC said.
In the first three quarters of 2011, China’s jewellery demand shot up 34 per cent on the year to 376.8 tons, while demand for coins and bars surged 89 per cent to 204.1 tons, according to the WGC.
Albert Cheng, managing director of the WGC, Far East, estimated total jewellery consumption would grow to 500 tons and physical investment demand exceed 250 tons in 2011, which would bring total demand up at least 18 per cent from a year earlier.
“In 2012, both investment and jewellery demand will retain growth, albeit at a lower pace,” Cheng told Reuters in an interview.
He estimated that investment demand would grow 25-30 per cent, and jewellery demand 6-10 per cent, in 2012.
As a sign of surging demand for bullion, China’s gold imports from Hong Kong in the first 11 months of 2011 more than tripled on the year.
China has one of the world’s highest saving rates, and the public faces few investment options. A volatile stock market and a property market under government crackdown are driving investors to seek alternative investment choices. And, as long as China’s banks keep money flowing into bullion investments the price of gold will be well supported.
Gold prices continue to trade and hold above the 200 day MA. I believe that the upward momentum has not stopped and that prices will soon challenge the $1700 an ounce level.
About the author David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.
His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.
David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
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By David Levenstein
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