1 Weak Dollar
1.1 Others on the Dollar & Current Account Deficit
- Warren Buffet,Sir John Templeton, George Soros
- Robert Rubin, IMF, Lyndon LaRouche
1.2 US Dollar impact on price of Gold
2 Negative Real Interest Rates
3 Decline of Gold Supply
3.1 Raising the Alarm Bells
3.2 Future Outlook of Gold Supply
4 Increase Demand for Gold
4.1 Producer dehedging
4.2 Introduction ETF's for Gold
4.3 Deregulation of Chinese Gold Market
4.4 Increase demand for Industrial Gold
5 Covering Short positions
5.1 GATA
5.2 Blanchard vs JPMorgan/Barrick Lawsuit
6 Recognition for Gold as Money
6.1 FED/ECB statements on Gold's Monetary role
6.2 Gold's comeback into the Monetary System
6.3 Private remonetization of Gold
7 Flee from Equities to Real Assets
7.1 Diversifying Portfolios into Gold gaining credence
7.2 Japanese Gold Rush coming ?
Summary
1. Weak Dollar :
1.1 Others on the Dollar decline & US Current Account Deficit
Any currency which faces a Current Account Deficit approaching 5% of GDP is in trouble. The estimates for the US Current Account Deficit for 2004 do suggest that it will head to higher levels only ! It seems that the frequency of high ranking Economist warnings is increasing rapidly.
First let's review some of the warnings last quarter 2003
The Economist :
US Current Account Deficit is headed in all probability to an historic 7% of GDP in 2004.
"IMF draft sees potential for more dollar depreciation"
"MILAN, Aug 27 (Reuters) - The International Monetary Fund sees further potential for a depreciation of the U.S. dollar due to the high U.S. current account deficit, according to a draft IMF report obtained by Reuters."
Stephen Roach
Warning Shot, August 1, 2003
There comes a point in every current account deterioration when enough is enough -- when foreign investors demand a premium to keep funding a saving-short economy. History tells us that such a breaking point usually occurs when the current account deficit hits 5% of GDP. That's the threshold that typically triggers the classic current account adjustment process -- characterized by a weaker currency, higher real interest rates, and slower domestic demand that sparks a rebuilding of national saving (see Caroline L. Freund, "Current Account Adjustment in Industrialized Countries," Board of Governors of the Federal Reserve System International Finance Discussion paper #692, December 2000).
Sir John Templeton
Herald Tribune October 14, 2003
Templeton feeling bearish
The legendary investor predicts the U.S. dollar will lose 40 percent of its value.
Sir John, who founded the highly successful Templeton Growth Fund and Templeton World Fund, believes the dollar will lose 40 percent of its value against foreign currencies in the coming months, especially the Japanese Yen and Chinese Yuan.
Warren Buffet
The Capital Times November 3, 2003
Buffett says he is losing faith in the soundness of U.S. currency as an investment vehicle because the United States is running a huge trade deficit -- close to $500 billion, and rising rapidly -- that is causing income to flow out of the country at such a rapid rate that it will soon become unsustainable. In the November edition of Fortune magazine, Buffett warns that the rapidly mounting U.S. trade deficit could lead to a dramatic plunge in the value of the dollar and a host of additional economic consequences that could add up to disaster for American families.
Stephen Roach
Morgan Stanley's Roach Says U.S. Dollar to Drop 20%
Nov. 5 (Bloomberg) -- The U.S. dollar will probably drop a further 20 percent on a trade-weighted basis in the next two years because the world's largest economy may falter, said Stephen Roach, chief economist at Morgan Stanley.
``My guess is that it's got another 20 percent to go,'' Roach told reporters after a presentation at the Morgan Stanley Asia Pacific Summit in Singapore. ``The risk is that it could be in a shorter time period, which could be very disruptive.''
The dollar's index, which measures the currency against a basket of currencies of the country's six major trading partners, traded at 93.29 at 3:57 p.m. local time in Singapore. The currency has declined about 15 percent on a trade-weighted basis the past 18 months. The dollar may fall because U.S. economic growth, which expanded at a 7.2 percent pace in the three months ended Sept. 30, will probably slow in coming months, deterring investment in assets denominated in the U.S. currency, he said.
END.
During the first month of 2004 more strong warnings surfaced regarding dollar-troubles ahead compared to last quarter of 2003.
IMF sees risk of disorderly U.S. dollar drop
Reuters, 01.07.04, 4:02 PM ET
WASHINGTON, Jan 7 (Reuters) - Large and growing U.S. budget and current account deficits raise the risk of an abrupt drop in the value of the dollar, which could hit U.S. and global economic growth, the IMF said on Wednesday.
http://www.forbes.com/markets/newswire/2004/01/07/rtr1201770.html
Rubin warns against growing U.S. deficits
By T.K.Maloy, UPI Deputy Business Editor
WASHINGTON, Jan. 13 (UPI) -- The U.S. federal budget is on an unsustainable path, and in the absence of any significant policy changes, federal deficits could total around $5 trillion over the next decade, former Treasury Secretary Robert Rubin said Tuesday.
http://washingtontimes.com/upi-breaking/20040113-031325-3828r.htm
END.
Just one week earlier Robert Rubin issued similar warnings at the American Economic Association (AEA) conference in San Diego the first week of January.
"The U.S. Federal budget is on an unsustainable path," Rubin observed, warning that the "scale of the nation's projected budgetary imbalances is now so large that the risk of severe adverse consequences must be taken very seriously." These consequences "may well be far larger and occur more suddenly" than analysts expect.
The dire warning got people's attention, as Rubin knew it would. "Mr. Rubin has formally joined the coalition of the shrill," wrote Paul Krugman in a column in the Jan. 6 New York Times. When the "legendary" Rubin, known for his calm in the face of crisis, warns of looming catastrophe, it's time to pay attention, Krugman suggested.
END.
Lyndon LaRouche
Democratic President pre-candidate Lyndon LaRouche seems to agree with Robert Rubin's statements. LaRouche has said repeatedly:
"The global financial system is hopelessly bankrupt, overloaded with far more debt than can ever be paid back, and must be put through the equivalent of a bankruptcy proceeding. The system cannot be saved through minor adjustments in policies and procedures, nor through hyperinflation. The system is bankrupt, now, and the solution begins with that admission. That is the standard to measure all policies."
http://www.larouchepub.com/other/2004/3103rubin_warns.html
END.
Investment Guru George Soros isn't very optimistic about the dollar either :
Soros tips US dollar will fall further
By Michael Mckee, January 27, 2004
GEORGE Soros, who once made $US1 billion ($1.3 billion) betting on a drop in the British pound, said the US dollar may extend its decline in 2004 even as stocks rise.
http://finance.news.com.au/common/story_page/0,4057,8505217%255E14305,00.html
END.
So what did we see during the first month of this year ? Yes indeed, many more warnings regarding a possible sharp decline in the dollar. Some analysts even argue that the dollar could have declined already to much lower levels today if the Japanese authorities wouldn't have been so kind to finance the US debt by purchasing large amounts of dollars in order to protect their own export business.
Richard Russell :
Feb 3, 2004
"The Bank of Japan spent $167 billion in 2003 and $67 billion just in January 2004 to buy dollar and thus "pressure" the dollar higher against the yen." Good Lord, how much does Japan have to spend to keep the dollar higher and the yen lower? I think the dollar-yen action shows how inherently WEAK the dollar is. Of course, the latest estimates of a 2005 US budget deficit of over half a trillion dollars doesn't help the dollar. Talk about being "out-of-control," you're seeing it now in the US budget deficit. If you're one of our "overseas friends," you've got to have guts, faith, and a strong stomach to hold dollars."
Bill Gross (Managing Director PIMCO)
Investment Outlook Feb 2004
http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2004/IO_02_04.htm
"But folks, all blame aside, I must tell you in advance that this story or movie does not have a happy ending. In terms of timing it may not be high noon, but High Noon it will be in terms of an ultimate outcome. Because in a finance-based economy that depends on more and more low cost money in order to thrive, the game ends when either the "more and more" or the "low cost" modifiers are replaced with "less" or "higher cost.""
"Who could argue that if debt as a % of GDP were still at 1980s levels as shown in the chart, that our consumption of things, our purchases of homes, our investment in technology, or our current government deficits would not be much smaller and our economic growth much lower. We are hooked on debt; we are a finance-based economy. And so? Why not just keep on going. So far so good the New Agers would claim. What's wrong with 400% of GDP or 500% of GDP? What's wrong with dropping it from helicopters if we have to as good Ben Bernanke has suggested? Well, let me tell you what's wrong. Debt levels and debt ratios have limits. When and if interest rates do go up, the servicing costs of an accelerating debt economy eventually bite the hand of its master."
"My point is that at some point on this seemingly never ending ascent of debt/GDP, someone will say "no más." Maybe it'll be PIMCO and PIMCO think-alikes; maybe it'll be foreign holders of bonds grown tired of currency/inflationary erosion of principal; maybe it'll be risk takers in high yield/emerging market/levered hedge funds scared to death from a future LTCM crisis. Hard to tell, but I'm telling you it'll happen, helicopter or no helicopter and with it will come an economic slowdown/recession unseen since at least the early 1980s when Volcker began his vigil. High noon"
END.
So what do we see after all ? People like Warren Buffet, Sir John Templeton, George Soros, Robert Rubin, Stephen Roach and Bill Gross all warning for dollar-troubles ahead echoed by institutions like the IMF and politicians like Lyndon LaRouche, well, I think you'd better take this serious !
1.2 US Dollar impact on price of Gold
So as an Investor we should seriously take into account a further decline of the dollar for reasons well documented above. Now what about Gold and a declining dollar, what kind of price projections we can expect just based upon a dollar decline ? You could argue that if Gold behaves itself as a currency we should expect the price of Gold to have an inverse correlation to the Dollar or a strong correlation to the Euro. Let's see !
This graph shows without any doubt that the price of Gold has a strong correlation with the Euro.
But how strong is this correlation ? Well, according to Jim Sinclair (interview with Moneyweb on Jan 11), it's a close enough correlation that firms like Goldman Sachs and specifically Bear Stearns would work a general level that they would suspect that certain other items should trade, one of which is gold. Furthermore he suggested that the strong currency case for gold trading at $470, $480, on the mean prediction for the high level of the euro by the international investment banking firms that represent a great deal of the leading thought in investments.
The entire interview can be read at www.jsmineset.com (in the search field type "moneyweb")
John Embry (President of Sprott Asset Management) puts it this way :
He says (Interview with Toronto Star, Jan 22) :
"It's a shocking monetary debasement," the veteran fund manager says. "They're just pouring money into the world. They're printing money so the debt load doesn't fall on their heads." He pauses a moment, his voice growing hoarse, then adds darkly: "This will be reflected in interest rates."
It's a strange picture: A great economic power busily printing paper money to pay its bills, which already add up to an unprecedented three times its gross domestic product. So far, its creditors and trading partners seem content with the paper notes even though they haven't been backed by bullion for years and pay hardly any interest.
But that will change, Embry believes. When it does, it could spark a crisis of confidence in the U.S. dollar and paper money generally. Then real money - gold and silver bullion - will prove its enduring worth."
John Embry is on the record by predicting $500 Gold this year.
Newmont's President (Mr Lassonde) comments on the USD Gold Price.
KALGOORLIE, Australia, Aug 4 (Reuters) -
Newmont Mining Corp (NEM.N), the world's largest gold miner, said on Monday it expects gold prices to rise by $100 to reach $450 an ounce over the next 12 months due to a depreciation in the U.S. dollar. "Our view is that gold will go up to $450 in the next 12 months," Newmont President Pierre Lassonde told a briefing at a mining conference in Australia.
Gold last traded that high in 1988. Lassonde, who last year accurately predicted a gold price rise to around $350 an ounce, said he expected a further depreciation in the U.S. dollar as financial markets became concerned at the ballooning U.S. trade deficit.
END.
That was August last year. In an interview with the Mineweb on Feb 4 he repeats his bullish outlook again for Gold.
NEW YORK (Mineweb.com) -- Newmont president and gold bull with money to show for it, Pierre Lassonde, remains upbeat about gold prices for at least the next two and half to three years, mostly due to currency pressures.
"Lassonde's optimism is about more than Japan though. "What has not yet happened is devaluation against the Asian currencies and they're defending [the dollar] to the hilt. . . If there is a contest between Japan buying the currency and the Fed printing the money, I'll vote for the Fed. They can print it faster than the Japanese can buy it.
"The Fed has a very benign, almost neglectful attitude toward the dollar. As long as it doesn't fall too far, too fast, they are going to let it go," he added."
"He also reiterated the gold-positive impact of the growing budget deficit with government spending racing far ahead of revenues and likely to balloon even more as the Bush administration attempts to buy votes by ladling out entitlements.
Lassonde warns: "Who's going to pay for it all? We're currently paying for it through the current account deficit which is at 5 per cent of GDP. . . and it's being paid for by the Asians. We spend, they save. In doing so we're digging ourselves a hole to China - but that won't last forever either."
Consequently, he remains convinced that gold will continue to appreciate this year. And so far, very few people have timed gold as well as Lassonde and his business partner, Seymour Schulich."
2. Negative Real Interest rate
The FED made it clear that the current low interest rates are here for some time to come. That obviously means that the current negative real interest rates will be here for some time to come as well. History tells us that negative real interest rates are one of the strongest drivers for higher Gold prices. The reason for that is quite simple. As a saver you're losing wealth and purchasing power as long as real rates stay negative. So the choice is yours, or stay with your dollars and slowly losing your wealth or seek a flight to quality, a flight to tangible assets, a flight to Gold which has proven its role for centuries now and that is : "protection of wealth" !
The inverse correlation between negative real interest rates and Gold is perfectly illustrated by the following graphs created by Adam Hamilton of zealllc.com.
As Adam says this first graph is a grand strategic chart, which vividly illustrates just how bullish for gold negative-real-rate environments truly are :
http://www.zealllc.com/2004/realgold6.htm , charts published with permission
The following graph zooms in to the current bull-market in Gold which started in 2001
Also here it's painfully obvious that there is indeed an inversed correlation between negative real interest rates and Gold.
Readers who want to study this topic in detail I recommend to visit www.zealll.com and read Adam's Essay "Real Rates and Gold 6" which can be found at : http://www.zealllc.com/2004/realgold6.htm
3. Declining Gold supply
3.1 Raising the Alarm Bells
Exploration budgets have been cut by 67% over the past 5 years due to uneconomical prices of Gold. (Exploration pays off with Gold prices exceeding $350/ounce). The existing Gold reserves will be (at the current rate of production) depleted within 10 years. Many heavy weight insiders such as Bobby Godsell (CEO AngloGold), Pierre Lassonde (CEO Newmont), Alex Davidson (Vice president Exploration Barrick Gold) have raised the alarm bells last year regarding this issue.
Alex Davidsion, Barrick VP Exploration : (March 2003)
"Big mining companies need to spend more on exploration, or else, at current annual production rates, reserves will be depleted in 10 years, he said. It can take six to eight years between making a discovery and starting mine production, and "we're not currently funding exploration at a level required to replace reserves," Davidson said."
Pierre Lassonde, CEO Newmont : (August 31, 2003)
"The 20-year bear market in gold has weeded out marginal gold producers and significantly curbed exploration and production.
"If gold was $1,000 an ounce, it still takes four to seven years to open a mine," he said."
END.
Current gold production is approx: 2500 ton/year. Studies from Beacon Group Advisors and Standard Bank are indicating a drop in Gold production of 30% in the next 5-8 years. See graph shown below !
This means a drop to 2000 ton/year by 2010 ! Why ? Simple ! Due to lack of exploration during the last 5 years. Will it change soon ? No ! Exploration becomes profitable at Gold prices of 350$+, so why spend money on expensive exploration projects when no profit can be made ?
That's exactly the reason why the exploration budgets have been cut by 67% over the last 5 years. You don't need to be rocket scientist to understand what this means for the Gold Industry.
No Exploration, No New Gold deposits !
This is exactly the biggest problem the Gold Industry faces right now. The industry needs new Gold deposits desperately ! And I really mean desperately ! I know this sounds like an alarmist speaking but please take notice of some media reports last year and judge yourself.
April 2002 : AngloGold
AngloGold also sounds alarm on Gold supply !
Gold Mining companies have warned that supplies of the precious metal are poised to fall sharply. The latest producer to sound the alarm bell that the industry was running out of Gold faster than it could replace it was world number two miner AngloGold, which predicted that the big discoveries of the past 20 years would run dry.
Sept 2002 : Denver Mining Conference.
Gold Executives this week gave anecdotal and numerical evidence of trends the industry has long hoped would boost what has been an ailing industry. Those trends include steady drops in yearly global output of Gold as Miners merge or "mothball" properties that can't turn a profit at Gold's current price of $322 an ounce !
Sept 2002 : CBS Market watch.
Global Gold output is seen falling 3% this year. It's biggest drop since 1976
Sept 2002 : Reuters
Gold output on slippery slope. Production levels at Gold Mines might not be sustainable because of depleted reserves at mature North American Mine operations and a fall on new mines on steam.
October 2002: The Australian Institute of Geoscientists.
The decline in Australia's Gold Industry continues.
Declining Exploration in Australia's Gold Industry is continuing to hurt production, with Gold dropping a further 8% in the year to June 30.
March 2003 : Barrick VP Exploration Alex Davidsion
"Big mining companies need to spend more on exploration, or else, at current annual production rates, reserves will be depleted in 10 years, he said. It can take six to eight years between making a discovery and starting mine production, and "we're not currently funding exploration at a level required to replace reserves," Davidson said."
END.
Well, you see ? No Exploration leads to depleted Gold reserves within 10 years !
Please be aware that the actual decline already started and is no longer subject to just warnings. GFMS just released their annual survey and stated :
World gold mine production in 2002 fell by 36t to 2,587t, the first decline since 1994.
So the major companies are facing a problem. They have to replace their reserves one way or the other. As mentioned before, exploration is too expensive with current Gold prices so the easiest way for the major companies to add Gold reserves is by consolidation, acquisitions, etc…
Although this strategy may help the big companies to avoid expensive exploration programs, the big picture doesn't change at all, depleted Gold reserves within 10 years !
Now please digest this carefully, it's extremely important !
Let's repeat once again what Barrick VP Exploration Alex Davidison said :
"Big mining companies need to spend more on exploration, or else, at current annual production rates, reserves will be depleted in 10 years, he said"
That was last year ! You think this year will be better ? Did you hear any announcements regarding new World Class Gold Discoveries last year ? Well, I didn't ! You think Alex Davidson changed his tune regarding depleting Gold Reserves ? No, in fact he warns again for the inevitable gap in gold supply coming over the next five years !
Barrick Gold's New Office Tracks Junior Exploration Cos.
Dow Jones Business News, Tuesday January 27, 10:50 am ET
"In his speech, Davidson noted that only three large gold deposits of 5 million ounces or more have been discovered since 1999, as exploration spending dropped across the industry for many reasons, including the diversion of risk capital to other sectors, and the consolidation of mining companies and subsequent exploration-office cutbacks."
"Davidson noted that gold exploration companies easily raised money in 2003. " But putting it to work effectively is very different," and even if a discovery is made, "you're still looking at three, four, five, six years to production," he noted, adding that the industry has a big gap in supply coming over the next five years."
END.
3.2 Future outlook regarding Gold Supply
So we've seen enough Alarm Bells being raised regarding future Gold Supply. Reading all statements above I think it's fair to say that at least for the next five years no increase in Gold supply should be expected. Indeed, Producers will be struggling to replace their dwindling Gold reserves while demand on the other hand will increase. This puts an ever increasing pressure on Hedgers to close down their remaining hedges as soon as possible thereby even further reducing Gold Supply. It should be obvious by now that bear-arguments such as :" higher Gold prices will be reversed due to propping up Gold production" have no merit at all, at least not for the next five years.
4. Increasing Gold demand
According to the World Gold Council, the actual demand for Gold is Approximately 4000 ton/year.
Put this in perspective to the gold production of 2500 ton/year and declining to 2000 ton/year by 2010 ! The current deficit of 1500 ton/year has been filled for years by Central Bank sales/leasing, producer forward selling and scrap supply.
Is this sustainable ? Answer = No !
Demand for Gold will grow substantially (imo) due to the following :
4.1 Producer Dehedging
Gold Producers turned to net dehedgers this year and according to Newmont CEO Pierre Lassonde dehedging will continue at the rate of 300-400 ton/year thereby supporting the Bull Market in Gold.
Although some analysts may argue that producers will be stepping up their hedging activities again soon because of the rise in POG, the opposite is true.
Just read the following press releases concerning hedging activities and judge yourself :
Newmont CEO Pierre Lassonde
Producer dehedging also featured high on the list of bullish indicators for the gold market, which he said was likely to continue at the rate of about 300-400t a year.
Lassonde expected gold price elasticity of about US$5/oz (increase) for every 100t of hedges closed out. He said the last of the 9.4 million ounces of hedged production Newmont inherited from Normandy would be closed out inside of 18 months.
Australia's WMC exits gold hedge positions
SYDNEY, Aug 13 (Reuters) - Australia's WMC Resources Ltd said on Wednesday it had closed out hedge positions covering 370,200 ounces of gold in the half year to June 30, joining a legion of mining houses seeking greater exposure to world bullion prices.
"There is no doubt that hedging is falling among the mining companies," JP Morgan Securities Australia analyst Geoff Breen said."
"World number two gold miner AngloGold Ltd removed about 800,000 ounces of gold from its hedge book in the last quarter, but still holds 8.3 million ounces pre-sold, although it continues to unwind its positions."
Cambior, once burned, aims to slash gold hedging
TORONTO, Aug 12 (Reuters) - Cambior Inc. (CA:CBJ) said on Tuesday it will all but wipe out its gold hedging program by the end of 2004 while the Rosebel project in Suriname is on schedule to sharply boost production early next year.
The mid-tier producer, whose hedging program nearly pushed the company into bankruptcy when gold prices surged in 2000, said it will slash its hedging to 50,000 ounces by the end of 2004 by accelerating deliveries and buying back positions.
In a conference call with analysts, the Montreal-based company said it has a new policy of not allowing additional gold hedging, unless funds are needed to be earmarked for future project financing.
AngloGold likely to reduce Ashanti gold hedges fast
KALGOORLIE, Australia, Aug 5 (Reuters) - South Africa's AngloGold Ltd (ANGJ.J) said on Tuesday it was likely to act fast to reduce Ashanti Goldfields Ltd's (AGC.GH) gold hedge book if it succeeded in buying the Ghanian mining house -- a move that analysts and traders expect to support the gold price.
"We would be likely to move quickly to reduce their hedge book, as we are doing with our own," an AngloGold spokeswoman told Reuters."
Worldwide gold hedging falls 7 pct in Q2-GFMS
Friday August 22, 12:35 am ET
SYDNEY, Aug 22 (Reuters) - The number of gold hedges worldwide was cut by 5.2 million ounces in the second quarter, underpinning a rally in bullion markets, consultants Gold Fields Mineral Services Ltd (GFMS) said.
Barrick Gold terminates it's Hedging program
LONDON (Nov 21, 2003) - In what had every appearance of being a damage limitation exercise, Peter Munk, chairman of Barrick Gold, made an unscheduled return to the Gold Investment Summit here to announce his company had given up hedging - and would do no more for the next ten years.
AngloGold says to unwind Ashanti hedges over a year
Reuters, 01.30.04, 6:42 AM ET
JOHANNESBURG, Jan 30 (Reuters) - South Africa's AngloGold Ltd said on Thursday it would likely take around a year to sell off excess bullion hedging it will inherit when it takes over Ghana's Ashanti Goldfields in coming months.
Conclusion
With the capitulation of Mega Hedgers Barrick Gold and AngloGold you could argue that Hedging is just dead ! Just take another look at Barrick's statement regarding Hedging :
"In what had every appearance of being a damage limitation exercise, Peter Munk, chairman of Barrick Gold, made an unscheduled return to the Gold Investment Summit here to announce his company had given up hedging - and would do no more for the next ten years."
AND WOULD DO NO MORE FOR THE NEXT TEN YEARS
So with Hedging in a reversed trend (dehedging) this decade will see a continues support for the physical Gold market in a rate of approximately 300-400 ton/year !
4.2 Introduction ETF's for Gold
In March the first ETF (Exchange Traded Fund) for Gold (Gold Bullion Limited) was introduced at the ASX stock exchange. This introduction makes it easier for investors to own physical Gold, www.goldbullion.com.au/news/media_release_030819.pdf
In March of this year Gold Bullion Limited started with approximately 1,000 ounces of Gold. In September this year their holdings increased to 131,073 ounces of Gold. In November their holdings exceeded the 200,000 ounces level. (237,632). The trend is obvious, see chart below !
For a detailed overview of the gold allotment see :
www.goldbullion.com.au/holdings/GOLD_allotment.xls
Trend is obvious and is going upwards. A simple calculation will learn that if the US ETF for Gold will perform in a similar way as the AU fund, we can expect an additional demand for Gold in the order of 200 ton/year.
"Prorated for a U.S. population that is 15 times as large as Australia's, the proposed NYSE product could spark demand of 205 tonnes, or about 6.6 million ounces, says Smith, a well-known gold analyst. That's about the yearly production of a dozen or so mid-tier producers of the metal."
In the mean time Gold Bullion Securities got its listing on the London Stock Exchange under GBS. Gold Bullion Securities total holdings now exceed 1000.000 ounces of Gold which represents a value of about US$429 million.
Conclusion
Introduction ETF's for Gold will create an additional demand for Gold by at least 200 ton/year
4.3 Chinese Deregulation of Gold Market
Chinese citizens do have permission now to invest in physical Gold.
Do the Chinese have an appetite for Gold ?
Well, last year when the first trial took place regarding Gold bar sales, it just took two hours to sell the 15 kg of Gold bars leaving many with empty hands.
Customers Queue for Gold Bullion
Customers lined up to buy investment-grade gold bullion yesterday, when it went on sale for the first time in Shanghai since 1949 -- making a mockery of retailers that refused to sell gold bars earlier this week, claiming there was no demand for it due to high world prices.
Responding to numerous phone calls from eager buyers, Shanghai Lao Feng Xiang Co. Ltd., the city's leading gold jewelry processor and retailer, decided to sell 15 kilograms of bullion on a trial basis. It's safe to say the trial was a success as almost all the gold bars were sold within two hours yesterday afternoon.
END.
Also the appetite for Gold mining shares is tremendous.
Two Chinese Gold Mining companies who went public lately (August 2003) experienced a tremendous investor demand for their shares. Both received much more orders than the amount of stock available ! Zhongjin received 824 times more orders than stock available and Shandong Gold received 2171 times more orders than stock available !
"Gold mining companies like Shandong and Zhongjin are favored by investors as they are assured of stable earnings as gold will always be in demand," said Fang Binyin, a trader at Guotai Junan Securities."
END.
So what to expect from the Chinese Gold Market coming years ?
According to Newmont CEO Pierre Lassonde the Chinese Gold Market will be the biggest Gold Market in just a few years time !
"Lassonde said the 1 June deregulation of the Chinese gold market was an epoch making event for the gold market. He said China had the potential to become the biggest consumer of gold over the next three years, overtaking India at around 600-700 tonnes a year. "We'll see the impact of that in a year or two … China will surpass India in a short time as the largest gold market in the world," he said."
In an Interview with the Denver Post he said : (August 31, 2003)
"Then there's China, where after years of communist controls, the government is deregulating gold, allowing gold companies to have initial public stock offerings, creating a gold exchange and even allowing its citizens to buy gold at market rates.
That's 1.3 billion people who now are permitted to buy gold at market rates as they participate in their fast-growing economy."
"China by itself could become 40 percent of the entire gold market," Lassonde said. "That is the most important thing that's happened to the gold market in the last five years, and yet very few people have picked up on it."
END.
Are there still any pessimists around regarding Chinese demand for Gold ? Well read on !
Chinese Gold demand
NEW YORK -- The Hong Kong edition of Friday's China Daily will be celebrated in gold bug circles after the Bank of China's bullion guru said local consumers could pour $36 billion into the metal, equivalent to around 2,950 tonnes, or more than one year of supply, at current prices.
Xi Jianhua, the Bank of China's gold business expert, is also quoted saying that it would be "safe and feasible" for China swap to some foreign exchange reserves for gold. The country has a little over 600 tonnes of gold in reserve now ($7.3-bn), and $360 billion in foreign exchange.
Pierre Lassonde, CEO Newmont Mining on Chinese Gold demand:
Chinese gold demand could only grow with deregulation. "Current consumption is 0.2 grams per person per year. In India it is over 0.7 grams and grew from a level similar to the Chinese 11 years ago. Indian gold market deregulation grew demand from 200 to 900 tonnes, although it has slipped to 600 tonnes now," he said. "Imagine if China grows from 0.2 to 0.7 grams of gold per person? It will be the largest gold market in the world. It will happen, I can see it."
Conclusion
Chinese deregulation of the Gold Market will create an additional demand for Gold of 300-400 ton/year.
4.4 Increase of use by Industrial applications
Excerpts from the Mining weekly
"The long-standing role of gold as a store of wealth, and its use in jewellery, has largely overshadowed its industrial uses - this although the metal has important uses in electronics, dentistry, and in some pharmaceutical products. Department of Minerals and Energy gold and platinum group metals chief mineral economist Alex Conradie tells Mining Weekly that new technologies have allowed gold to be used in new ways, including some that can save lives."
"World gold consumption is set to increase by 300 to 400 tons a year over the next five to ten years, as a result of new industrial applications of the metal, according to the World Gold Council, concludes Conradie."
www.miningweekly.co.za/min/utilities/search/?show=38507
Conclusion
New industrial applications will create an additional demand for Gold of 300/400 ton/year.
Summary
Current demand for Gold approximately 4000 ton/year.
| Demand will increase due to : Producer degehding Introduction ETF's Deregulation Chinese Gold Market New Industrial Applications |
 |
300-400 ton/year 200 ton/year 300-400 ton/year 300-400 ton/year |
Current Gold production approximately 2500 ton/year. This level is not sustainable and will drop the next coming years due to lack of exploration efforts during the past 5 years.
You don't have to be a rocket scientist to see that the demand/supply deficit is only to grow bigger upcoming years. So with a demand for Gold approaching 5000 ton/year, who's going to supply the Gold ? Yes, people will realize soon that Gold is precious and hard to find !
Just repeat once again what Newmont CEO Pierre Lassonde said regarding China and Gold :
"China by itself could become 40 percent of the entire gold market," Lassonde said. "That is the most important thing that's happened to the gold market in the last five years, and yet very few people have picked up on it."
END.
Yet very few people have picked up on it, hope you will !
So future Chinese demand for Gold will be huge, but I wonder who is going to supply the Gold ? " The Central Banks ? I don't think so, they already bombed the gold market with half of their reserves past decade (see next section - covering short positions), the Producers ? No way, even with Gold prices at $1000/ounce, it still takes 4 to 7 years to open a mine Pierre Lassonde of Newmont said, so forget about additional supply coming out of the mines coming years. So what's left ? I really don't know ! Investors will realize soon that Gold is precious and hard to find these days !
5. Covering Short positions
5.1 GATA
When the Gold Anti Trust Action Committee (GATA) presented their case regarding a manipulated Gold market four years ago, they were regarded as a bunch of nuts by most main stream analysts. Claims by GATA of short positions reaching 15.000 ton were categorized as being science fiction. But things are changing fast now. John Embry (President Sprott Asset Management) already praised GATA's work in an interview with ROB-TV in January this year. He said :
"The GATA group did some outstanding research in the field, they are not some lunatics like some people would like to paint them, they are some smart intelligent guys who have done some great great work. They would submit that there is most probably closer to 15.000 ton of CB Gold that has come into the market primarily through the leasing mechanism"
In his Essay "15 reasons to own Gold" (Sept 26,2003) John Embry mentions the large short positions again.
Large Short Positions
To fill the gap between mine supply and demand, central bank gold has been mobilized primarily through the leasing mechanism, which facilitated producer hedging and financial speculation. Strong evidence suggests that between 10,000 and 16,000 tonnes (30- 50% of all central bank gold) is currently in the market. This is owed to the central banks by the bullion banks, which are the counter party in the transactions.
http://goldmoney.com/en/commentary/2003-09-26.html
END.
Gold veteran Frank Veneroso confirms in an interview with Tom Calandra of CBS Marketwatch (September, 2003) that the amount of serious investment professionals who take GATA's position is growing rapidly. This is what Frank Veneroso said about GATA :
On the Gold Anti Trust Action Committee :
"Bill Murphy used to work with me. Bill was convinced this was a managed market. He went of to create LemetropoleCafe.com and GATA in 1999. As time passed and with the 1999 Washington Accord (limiting central banks' sales of Gold), it became clear the logic of his analysis had to be correct. The implications of all this were huge."
On the 'managed' Gold market :
"GATA has made a lot of publicity about management of the Gold market, and they are basically correct. Three years ago, this was regarded as crazy talk. Now when I am in Europe, I am shocked by the number of serious investment professionals who take this position, that the Gold market is manipulated"
END.
So what will happen when the big picture unfolds in front of the main stream Investor ? What will happen if the main stream Investor recognizes that half of the CB Gold is gone ? Panic ?
Although a bit dated but the article published in February this year by Kelly Patricia O Meara from Insight Magazine "Panic Is Near if 'The Gold Is Gone'" is a must read for everyone interested in GATA's claims.
http://www.insightmag.com/news/370641.html
And last but not least, talking about gaining credence. What about a President candidate supporting GATA ? Well, hold on to your seat because here it is ! Bill Murphy had the pleasure of announcing his candidacy during the last New Orleans Investment conference. Here's what Bill Murphy said :
I'm going to introduce you to a man I've known for five years who is going to announce his candidacy for the President of the United States next week as an Independent.
A man who is not afraid to get the truth out there about gold and many other issues.
He ran for Governor in Nevada and got 30% of the vote in a 4 man race in 1998.
He is a staunch GATA supporter, fervent gold advocate, and while gold is only one of his points, he will be the ONLY Presidential candidate talking about gold in the coming Presidential election.
He has my support, along with that of James Turk and his longtime friend Richard Russell, along with many others in the Hollywood crowd. There will be much press coming out on this soon and he asked me to tell you he will bring up the gold issue in the Presidential debates. - MY FRIEND AARON RUSSO"
5.2 Lawsuit Blanchard vs JPMorgan/Barrick
In December 2001 GATA filed a lawsuit (Howe vs. Bank for International Settlements et al) in which it accused the BIS,FED,US Treasury and some Bullion Banks of Gold market manipulation, Although this case ended up being dismissed (just on two technicalities), many people concluded that enough evidence was presented here to prove the price-fixing claims.
Unfortunately for the price manipulators Blanchard and Co. filed a similar suit last year in US District court in New Orleans against Barrick Gold and JPMorgan. This time however, the Judge denied to dismiss the Lawsuit so this case will enter the discovery stage.
Blanchard CEO Donald Doyle did an interview with Jay Taylor (www.miningstocks.com) December last year in which he explained what this suit is all about and can be reviewed at :
http://www.lemetropolecafe.com/img2003/DoyleInterview1203.pdf
Blanchard accuses Barrick Gold & JPMorgan for manipulating Gold prices by excessive Hedging arrangements between the Gold miner and Investment Bank.
Everytime when Barrick increased its shortposition in Gold substantially, the price of Gold dropped and vice versa. Just take a look at the graph below and judge yourself.
Whether or not the following has anything to do with this Lawsuit I don't know, but what I do know is that Barrick stunned the Investment world by a turnaround of 180 degrees on their Hedging policies within just one single day !
LONDON (Nov 21, 2003) - In what had every appearance of being a damage limitation exercise, Peter Munk, chairman of Barrick Gold, made an unscheduled return to the Gold Investment Summit here to announce his company had given up hedging - and would do no more for the next ten years.
This appeared to be a complete reversal of his spirited defence of hedging in a keynote speech only 24 hours before. Reports of his remarks, as usual made off-the-cuff without notes, might not have gone down well with some shareholders.
END.
6. Recognition of Gold as Money
6.1 FED/ECB statements on monetary role for Gold
Despite the fact that even the Federal Reserve and ECB acknowledge the fact that Gold is money many investors are still in denial.
"Gold still represents the ultimate form of payment in the world." - Alan Greenspan, Testimony before US House Banking Committee, May 1999.
"Gold will remain an important element of global monetary reserves." - Statement by the European Central Bank, September 1999.
Gold is the ultimate form of payment because it is the only money that is not someone's liability. Because of this important attribute, gold is an essential monetary asset.
Why do these leading authorities on money make these statements about gold? Because gold is money, and it serves this role exceptionally well by providing a long-term store of value.
6.2 Gold's comeback into the Monetary System
John Embry (Sprott Asset Management)
("15 reasons to own Gold" ) http://goldmoney.com/en/commentary/2003-09-26.html
Gold as Money is Gaining Credence:
Islamic nations are investigating a currency backed by gold (the Gold Dinar), the new President of Argentina proposed, during his campaign, a gold backed peso as an antidote for the financial catastrophe which his country has experienced and Russia is talking about a fully convertible currency with gold backing.
END.
Some believe that China will make its currency (Renminbi) convertible in time as well and that it will be backed by Gold.
Richard Russel on Gold , November 3
In due time the renminbi will be made convertible. I believe it will have gold backing, making the renminbi one of the strongest of all currencies and directly competing with the fiat US dollar.
http://www.gold-eagle.com/gold_digest_03/russell110503.html
END.
So what we are witnessing here is a strong revival of Gold as being an important Monetary Asset. Malysia, Argentina, Russia, China all talking about convertible currency with Gold backing proves this point.
An interesting note from Paul van Eden in an interview with Mineweb.
Paul van Eden (International Speculator) on Gold and currency
Paul van Eeden: I realized in 1997 that the gold price was insensitive to physical supply and demand paramaters such as those typically used to analyze commodities. Instead, believe it or not, gold was acting like a currency, and the gold price was responding to changes in money supply and exchange rates. This is, of course, what one would expect, since gold is money.
Steve Matthews, Commodities strategist for Tudor Investment Corporation Mineweb November 4,, by Tim Wood
Matthews : There is an increasing tendency among funds to view gold as a foreign exchange instrument rather than a commodity. Whilst the macro factors count against fiat currencies and mainstream securities, bullion ETFs could be especially important to professional investors. This view was backed up by Ian McDonald, vice president and manager of precious metals at Commerz Bank, who says that gold has resumed its currency role after a two decade hiatus.
6.3 Private remonetization of Gold
One of the front runners in seeking transformation of Gold into a currency is James Turk, founder of Goldmoney.com. Goldmoney allows members to use Gold to pay for goods and services on-line. James Turk says :
"We want to make gold into an international cross-border currency, which is its rightful role…it is more efficient because you are circulating an asset as a currency, rather than a liability as a currency,"
GoldMoney recently announced a deal with South African Gold producer Durban Deep in which the producer has an option to spend $2 million to increase its stake in GoldMoney to 14,3%.
Ian Murray, DRD's chief executive, said the option was likely to be exercised in March. Murray says DRD's non-South African directors will have the option of receiving a portion of their remuneration in GoldMoney's goldgrams.
So far, GoldMoney has about 10.000 members and a ton of gold stored in a Via Mat vault in London.
http://goldmoney.com/en/company-news/2004-01-26.html
7. Flee from Equities to hard Assets
7.1 Diversifying Gold into portfolios gaining credence
In uncertain times (fear of monetary chaos / dollar crash) Gold always performed its role of ultimate safe haven quite well. I think the following press release says it all.
Swiss bank puts wealthy clients in gold
GENEVA (Reuters) - Swiss private bank Lombard Odier Darier Hentsch has said it is luring wealthy clients back to gold, plugging the diversification, protection and potential growth benefits of the asset.
"Against a background of geopolitical uncertainty and very turbulent equity and bond markets, investing in gold is a good way to protect and diversify assets while still aiming to achieve an absolute performance," the bank said.
Its multi-manager "World Gold Expertise Fund" which it launched on August 7, has already attracted over $150 million and LODH believes it could double by the end of this year.
"We've no specific target but we think we could double the size of the fund within a couple of months," Cyrille Urfer, head of fund research and multi-management at LODH told Reuters on the sidelines of an investor briefing.
The fund invests in four fund managers each with a slightly different perspective on the gold market but all with a focus on gold mines. It has two reference currencies -- the euro and the dollar, and carries an annual management fee of two percent.
Apart from diversification, which has regained importance in many portfolios decimated by an over-reliance on stocks when the bull run ended, gold also offers some protection against rising inflation in a negative environment for the U.S. dollar.
"Diversification has been rediscovered, but it's not only in alternative investments. Investors can also find it in traditional assets," Urfer said…
7.2 Japanese Gold Rush coming ?
As seen above, in uncertain times people intend to diversify into Gold seeking protection against turbulent equity and bond markets. Even some big Investment Banks such as Morgan Stanley, Lehman and Merill Lynch do suggest to diversify 5% into Gold.
When the Japanese government ended state guarantees on term deposits in April of 2002, the Japanese public literally ran for cover and started buying Gold like crazy. Gold buying skyrocketed in the January-March quarter of 2002 to the amount of 45 tonnes (46% of the total purchases of the entire year 2002). A similar event is on the Horizon right now and industry officials are predicting an increased appetite for Gold later on this year due to the planned ending of a full state guarantee on bank deposits in April 2005. They call it a flight to quality. Signs of an increased appetite for Gold by the Japanese are already there. General Manager Osamu Ikeda of Japan's top bullion house Tanaka Kikinzoku says private investors continue to see gold as a way to diversify their investments. Other Japanese bullion houses confirm the increased appetite for Gold. Well, just see the following press release which says it all.
Japan gold rush seen ahead of bank deposit reform
Fri January 9, 2004 03:48 AM ET
(Page 1 of 2)
By Miho Yoshikawa
TOKYO, Jan 9 (Reuters) - All that glitters is gold.
From cuff links to a bonsai tree with finely crafted spiky leaves, virtually everything on display at the store in Tokyo's ritzy Ginza district is made of the shiny metal.
The store, run by Japan's top bullion house Tanaka Kikinzoku, was doing a brisk business at the start of the year with more than a dozen customers filling the room, most queuing at a counter to buy or sell gold bars and coins.
Osamu Ikeda, general manager of the bullion house, said private investors continue to see gold as a way to diversify their investments.
"There is more buying than selling taking place...because most private investors see gold as a long-term asset rather than a way to make a quick profit," Ikeda said.
As evidence of how good business has been, he said Tanaka Kikinzoku has sold about 300 wooden chests filled with 10 kg of gold bars, at a price tag of about 15 million yen ($141,300), in the three months since it began offering them.
Though few might buy a miniature potted pine tree or a statue of Buddha -- both of which cost several times the market value of their weight in gold -- as an investment, Ikeda said gold coins and bars continue to sell well.
Other Japanese bullion houses and industry officials also testify to private investors' appetite for gold, which many expect to intensify this year.
INVESTMENT TOOL
Against the background of worries over Japan's economy and sagging real estate values, the idea of buying gold as an investment tool has taken root, industry officials say.
They say buying this year will be fuelled by the planned end of a full state guarantee on bank deposits in April 2005. They point to a precedent. Gold buying skyrocketed in the January-March quarter of 2002, just before the government ended state guarantees on term deposits in April of that year.
Buying of gold bars and coins by Japanese in that quarter alone amounted to 45 tonnes, or almost 46 percent of the total bought in 2002, data from the World Gold Council (WGC) showed.
WGC regional director Itsuo Toshima sees purchases of gold bars and coins gaining momentum in the latter half of this year.
"I believe the market will become nervous as the date (of the end to state guarantees) approaches, leading to a significant shift in funds to gold in the latter half of this year," he said.
"There will be what you could call a flight to quality."
Sales petered out in 2002 after ballooning in the first quarter, Toshima said. But purchases of gold coins and bars were likely to be brisk for a longer period this year, he said.
This year's purchases of gold coins and bars are seen possibly larger than the 98.1 tonnes reported for 2002.
Spot gold futures rose to a 15-year peak of $430.50 an ounce this week, as a weak dollar prompted investors to move to alternative currencies and precious metals.
The yellow metal, also favoured as a safe haven due to continuing concerns about geopolitical instability and terror attacks, rose 20 percent in value in 2003.
Many in the market believe gold will move higher this year.
"If the U.S. dollar's weakness continues, the price of gold will go up more," Tanaka Kikinzoku's Ikeda said, predicting it could hit $450 an ounce in the first half.
Summary
So after all, what do we see ? Indeed, the investment case for Gold just gets stronger month by month. Unfortunately lots of average Gold investors are getting confused by preaching Gold Bears especially on corrections in Gold like these. I really don't mind a different point of view on Gold but what I do mind are anti Gold statements without any backup. Let me give you an example. Last week a Gold analyst predicted the price of Gold heading into the $280 -$320 range. (Perhaps he read a bit much of Prechter lately). OK, fair enough, you are bearish on Gold ? So please explain me why ? The main reason I can't swallow these bear statements is quite obvious. First of all, didn't we just see that the price of Gold has an almost perfect inverse correlation to the dollar ? So by predicting a price of Gold below $300, you are predicting a dollar value which competes with its all-time high. Excuse me, but I just don't see that happen. Predicting new dollar highs is denying that the extreme US budget deficits do matter. This report presented enough quotes from high ranking economist to support the view that extreme budget deficits really DO MATTER ! Or will the dollar gain in strengths by an improving economy ? But how ? By more tax cuts ? By more record budget deficits ? .Sorry, but I just don't see that happen either. The only thing I see is higher unemployment month after month The bears fail imo to address this dollar-issue completely.
So just from a dollar perspective you can make life miserable for the bears, but that's only one shot. You want more ?
Well, here's an easy one. Just take look at Gold and its historical norm. Just calculate the 30 year average price of Gold. Inflation adjusted you'll see that the 30-year average price of Gold exceeds $500 / ounce. So to the Gold bears I would like to say :
"Can you give me just one single reason why the price of Gold should be trading below a 30 year average despite a declining dollar, despite a historical current account deficit, despite a declining Gold supply, despite a growing demand for Gold, despite the negative real interest rates, despite the fact that Gold as money is gaining credence, despite the fact that an increasing amount of private banks are putting their wealthy clients back in Gold, can you ?"
Furthermore I would just like to say : "Keep it simple"
The bear market in Gold was characterized by a gaining dollar, excessive producer hedging, CB sales and Gold carry trade.
We all know and experienced that the bear trend in Gold reversed painfully slow, the bottoming process took more than two years (1999-2001). But on the other hand when a trend has been reversed it will stick to that trend for years. Why do you think that Barrick Gold made statements such as :
"the company would do no more hedging for the next ten years"
In fact they are saying that they believe that Gold won't come down anytime soon.
So we see that the bear characteristics all have been inversed right now :
Did you hear anything lately which reverses one of the characteristics mentioned above ? I didn't. As long as that being the case, I'll be a Gold Bull fully committed to my Gold investments.
Well Ladies and Gentleman, that's it. Hope this report can assist you in your research of the Gold market and please feel free to send any comments to :
Eric Hommelberg
ehommelberg@planet.nl
February 6, 2004