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Marino G. Pieterse

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Has the Dollar Become a Better Safe Haven than Gold?

By Marino G. Pieterse      Printer Friendly Version
Oct 3 2008 1:14PM

Today’s global crisis has commenced with a prime mortgage crisis, having emerged to a credit crisis on September 14 with Lehman Brothers declared bankrupt, and has further culminated in a confidence crisis with the dollar showing signs of a better safe haven than gold. Not only the global banking system is gripped by a worsening confidence crisis, as is demonstrated by interbank lending rates leaping up to a 7-year high of 6.88%, compared to a level of approximately 2.5% early this year, but the crisis has also culminated in a political power vacuum in the United States with the House of Representatives voting to reject the Bush administration $ 700 billion bail-out plan.

Wall Street responded with the biggest intra-day fall since 1987. The Dow Jones Industrial Average fell 205 points, a slide of 6.3%, while the S & P 500 lost as much as 7.2%.

The news sent Treasury yields tumbling and the yield on the 2-year note fell as low as 1.65%, down 44 basic points.

Oil prices fell sharply below $ 100 per barrel, with the Brent oil price dropping $ 10.82 to $ 91.32, while also base metals and soft commodities reacted negatively to the bail-out plan

Widely considered as a safe haven for investment, particularly in times of turbulence in the financial markets, gold initially did react in a positive but modest way by adding $ 13.50 or 1.5% to $ 902 (London PM fixing) on Friday, September 26th, but followed by a comparable correction to a present level of $ 880.

During the same short period of time, surprisingly enough, particularly for gold market watchers, the dollar strengthened against the Euro from $ 1.46 to under $1.40, thereby demonstrating that the dollar remains the world’s ultimate currency haven. This is emphasized by the fact that the trade weighed US dollar index, in which the Euro has a weight of 57.6%, the Japanese yen 13.6%, the British pound 11.9%, the Canadian dollar 9.1%, the Swedish krone 4.2% and the Swiss franc 3.6%, has moved recently from a low of 72 earlier this year to the 80 resistance level, already existing since 1991.

The current market reaction clearly demonstrates that gold as a monetary instrument has lost its lustre. Demonetization of gold officially commenced in 1971 with the introduction of a free gold market. Since then, with Western central banks selling part of their gold reserves, Asian central banks have kept away from buying gold as a hedge against the dollar, thereby heralding the end of gold as a monetary instrument.

From an investment point of view there has been positive news with net inflows of Gold Exchange Traded Funds (ETF’s ) rising $ 3.2 billion in just five trading days from the 17th to 23rd of September alone, however, compared with $ 3.4 billion over the full quarter.

The major gold funds tonnage at the start of the quarter was 940 tonnes and at the end of the quarter 1,051 tonnes, a rise of 111 tonnes.

Although I recognise the importance of ETF’s as a new liquid investment vehicle on the demand side in the last few years, having contributed 260 tonnes and 253 tonnes in 2006 and 2007, respectively, their demand was only 4 tonnes in the second quarter, compared to 73 tonnes in the first quarter.

Consequently, rising demand in September must be viewed in its right context, also considering the strong boost in demand of ETF’s in the second half of 2007 to 227 tonnes, which might be difficult to match in the second half of 2008.

Also, the world’s largest gold exchange traded fund, the New York listed SPDR Gold Shares, fell sharply to 659 tonnes on August 12 from a peak of 706 tonnes in July. This demonstrates the strong volatility of ETF trading up and down.

Compared with the jewellery industry, retail investment, and more specifically ETF’s, has a relatively small impact on demand, with jewellery demand representing approximately 65% of total demand, compared with less than 10% represented by implied net investment.

Even more so, is the relatively small impact on the gold market from recent strongly growing interest in gold coins.

As such, from a fundamental point of view, the course of the gold price is not determined by changes in physical retail investment but by jewellery demand, which, according to figures of the World Gold Council, has showed a very negative trend lately by falling to 948 tonnes in the first half of 2008, compared with 1,228 tonnes (- 280 tonnes) in the first half of 2007 and 1,198 tonnes (- 250 tonnes) in the second half of 2007.

Also retail investment dropped significantly to 177 tonnes in the first half of 2008, compared with 238 tonnes in the first half of 2007, followed by a recovery to 39 tonnes in the second half of 2007.

Both jewellery and net retail demand are very price sensitive, as a result of which, in the June-issue of Goldletter International, I altered to the risk of a substantial price correction. Having exploded to a historical record of 1,030.80 at March 17, 2008, I expected the gold price to bottom at $ 810-830, before trying to find a new balance in supply and demand, with demand possibly picking up in India, as the world’s largest gold consumer.

A positive impulse could come from the festival season in India – leading up to Diwali, the Hindu festival of light – which has just begun.

However, with jewellery demand having fallen from 364 tonnes in the first half of 2007 to 165 tonnes in the second half of 2007 and to 189 tonnes in the first half of 2008, demand from India has to recover significantly to have a positive impact on the gold price again.

Shift in gold production from tradidional to emerging countries

 ►China has passed South Africa as the world's premier gold producer









Production in tonnes



Production in tonnes








Traditional countries




Emerging countries









South Africa














United States



































Total world production














% total world production













source: GFMS




I am not overall negative on the prospects of investing in gold, but once again most gold market watchers are failing to view fundamental trends in the proper context and even more so don’t know how to separate physical demand from speculative elements determining the course of the gold price. It is the impact of speculative demand on the future markets and trading of hedge funds which are the drivers of the strongly growing volatility of the gold market, comparable with how all commodity markets are acting.

In this respect, I want to refer specifically to the oil market having shown an increase for Brent oil from $ 94 per barrel at year end 2007 to a high of $ 147 just back to early July, followed by a recent steep decline back to the 2007 year-end level.

In contrast to gold, the volatility of the oil and gas markets has a huge impact on the economic world order having increased geopolitical tensions, particularly between Russia and Western Europe, the latter for 30% being dependent on Russian gas supply.

Growing geopolitical tensions have become a worldwide phenomenon, particularly in commodity-rich emerging countries, with commodity prices driven higher. Particularly if oil is involved, this can have a positive impact on the gold price. Which is not running its own course because of not showing a shortage in supply, in contrast to a number of other more economically tighter commodities.

In this respect, having commented to the fundamentals on the demand side of gold, the supply side is also surrounded by myths. The impression is given that gold supply is declining. Yes, it is in traditional countries led by South Africa, but in emerging countries gold output is increasing, keeping total gold output in balance.

Actual facts are in conflict with assumptions, particularly if these don’t recognise the huge impact of the shift in economic growth and social wealth from the United States and Europe to Asia, and particularly China.

The facts speak for themselves. Since having entered the World Trade Organization by the end of 2001, China’s monetary reserves have risen from practically zero to $ 1,800 billion, while in a broader context Sovereign Wealth Funds have stalled $ 3,000 billion for investment purposes of which a substantial amount is available for investment abroad.

It is striking to see that these amounts earned from rising trade balance surpluses and oil prices, by far exceed the amounts involved in the meltdown of the Western capitalism. This makes it easier for Asia to come a big step closer to control of the economic world order.

Is a $ 1,000 gold price justified from the supply side?

A growing number of captains of the gold industry are predicting the bullion price to recover to the $ 1,000 level. Their argument is that the industry needs such a price level to remain competitive. In my view, this is not a valid argument for the price of gold to rise as long as there is a balance in demand and supply and supply not substantially falling below demand within the next few years.

The facts speak for themselves. Primary gold supply through mine output is stabilizing between a range of 2,450 – 2,600 tonnes in the last 10 years, with only relatively small changes on a year-on-year basis. This is in contrast to primary demand showing a decline from above 3,000 tonnes in the period before 2002 to a 2007-level of 2,900 tonnes.

For both, supply and demand, there is a shift from traditional countries to emerging countries, the latter at the demand side, benefiting from growing economic wealth in Asia, and particularly China and India.

Consequently, it sounds like wishful thinking of the captains of the gold industry, in concert with leading investment houses, to predict the gold price attacking the $ 1,000-level again in the near future.

They preach to the converted, particularly since cash flows of gold producers have shown record highs in the first half of this year and gold producers are blaming strongly increasing costs for a cloudier outlook if the gold price doesn’t increase.

Yes, I agree, costs have increased dramatically in the last few years, but even more so did the gold price, thereby widening margins rather than squeezing them

In 2006, at an average gold price of just above $ 600, cash costs were about $ 350; in 2008 they are close to $ 500 compared to an estimated average gold price of above $ 800. This would represent a growth in margin of at least $ 50 but probably closer to $ 100.

At the same time, most of the cost increase is due to the relatively high costs of gold production in traditional countries (South-Africa, United States, Canada and Australia), compared to considering lower average costs in emerging countries (West Africa, Latin America, Asia).

Apart from increasing margins in spite of increasing costs, it has to be noted that major gold producers have valued their reserves under $ 600, which represents an increased “hidden” margin in cash flows and profitability

Also, in contrast to most base metals, having low stocks, there is no shortage in supply of gold, as illustrated by reserves, represent an average of 17 years of production.

Some companies, led by Barrick Gold (124.6 million ounces of reserves compared with a 2007 gold output of 8 million ounces) and Gold Fields (91.6 million ounces of reserves compared with an annual output of 3.6 million ounces), have even increased their reserves significantly since last year.

Based on these hard facts, it is the impact of adjusting the geographic strategy of gold producers to increase their profitability, rather than wishful thinking on heading back to $ 1,000 on the short term.

Reserves compared to annual gold output








Output 2007


Mine life



(mln ounces)

(mln ounces)








AngloGold Ashanti





Gold Fields *





Harmony *










Newmont Mining *

























Kinross Gold










Newcrest Mining *










Minas Buenaventura









per 30/6/08 year-on-year





Marino G. Pieterse,
editor Goldletter International



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