Gold Investments Market Update
Gold was down $3.90 to $797.20 per ounce in New York yesterday but silver was up 3 cents to $14.30 per ounce. Gold has drifted downwards in Asian and early European trading and is trading at $786.50/787.00 per ounce at 1200 GMT. Gold also fell in pounds sterling and euros to £389 GBP (down from £394) and €541 EUR (up from €546).
The dollar strengthened to a monthly high against the euro and oil fell sharply to below $87 a barrel and this and technical selling is leading to gold's sell off. The recent lows at $775 per ounce should provide support and there could be range trading consolidation between $775 and $845 prior to a likely challenge of the record 1980 high in the coming weeks.
Interestingly, the gold mining stock indices did not sell off yesterday (the XAU was up 0.32% and the HUI was down 0.71% yesterday) and this is often a prerequisite prior to short term bottoming in the gold price.
Yesterday we reported how smart money in the form of Russian billionaires are moving aggressively to build huge stakes in the gold industry. It is not just wealthy oligarchs who are doing this.
The Russian government is also aggressively adding gold bullion to it's gold and foreign currency reserves. RBC (Russian Business News) reports that Russia's gold and foreign currency reserves reached an all time high of $463.5bn on November 30, up $3.9bn, or 0.85 percent, from the previous figure. Between October 5 and November 23, the Bank of Russia's reserves surged $38.7bn, or over 9 percent, as the bank has stepped up buying up dollars on the home market. As a result, Russia has continued to close the gap separating it from the world's leaders in terms of reserves, China and Japan. China now boasts in excess of $1.434 trillion in reserves, up $101bn in the third quarter and nearly 45 percent in the first nine months of 2007. Japan's reserves currently exceed $945bn.
Just a few days ago, Gazprom, the world's largest natural-gas exporter, may start selling its crude and gas production in rubles rather than dollars and euros after the U.S. currency weakened. ``We are seriously thinking about selling our resources in rubles,'' Alexander Medvedev, Gazprom's deputy chief executive officer, told reporters today in New York.
Putin knows that a prerequisite for strong economy and powerful country is a strong and internationally respected currency and increasing gold reserves helps to protect the Russian currency from any possible economic turbulence or instability.
The Daily Telegraph in England reported earlier this year that the Russian Central Bank said they would double the gold component of their fast growing reserves from 5% to 10% or the sizeable amount of some 500 tonnes. Head of External Reserves in the management division of Russia's Central Bank Maria Gueguina argued that holding gold acts as a buffer against political and economic uncertainty.
In June 2004, the Deputy Chairman of the Russian Central Bank, Oleg Mozhaiskov, told a meeting of the London Bullion Market Association in Moscow about GATA's contention that Western central banks had been rigging the gold market to the detriment of the developing world: "Many have heard of the group of economists who came together in the society known as the Gold Anti-Trust Action Committee and started a number of lawsuits against the U.S. government, accusing it of organising an anti-gold conspiracy. They believe that with the assistance of a number of major financial institutions (they mention in particular the Bank for International Settlements, J.P. Morgan Chase, Citigroup, Deutsche Bank, and others), some senior officials have been manipulating the market since 1994. As a result, the price dropped below US$300 an ounce at a time when it should, if it had kept pace with inflation, have reached US$740-760."
He continued that "although there are only a few reserve currencies, an appalling lack of discipline is demonstrated by the US dollar. As things stand today, the United States is indebted to the external world to the tune of $3 trillion. This sum actually exceeds the total official currency reserves of all the nations of the world -- including the USA. . . The evolution of the reserve role of the American currency in recent years gives grounds for a pretty pessimistic prognosis. The relationship between the state of the dollar and the value of gold is obvious. In relation to our discussion today, this means that gold continues to have particular monetary attraction in the minds of all prudent financial investors. . . . The internal imperfections of the international monetary system (which I spoke about earlier) have already led to a number of regional financial crises and still carry the danger of larger upheavals. Under these conditions, the growing interest of investors in real assets, gold in particular, is more than justified."
The German and French Central Banks have indicated that they will be more reluctant to sell their gold bullion reserves. The German Bundesbank has shot down plans by the new government to sell off gold reserves to cover spending. Director of Market Operations at the French Central Bank (Banque de France) Isabelle Strauss-Kahn said that yield is not the bank's sole objective and thus it will remain over-weighted with gold - holding 55% of French currency reserves in gold.
Argentine Central Bank's Juan Basco has said they would increase gold holdings due to their experience with terrible inflation and currency crises in recent years.
Central Banks increasingly want to diversify away from US dollars. Asian central banks, including Japan and China, hold huge US dollar reserves. Even a small shift to gold will have a major effect on its price.
Investment demand for gold is increasing because investors are nervous about prospects for the dollar because of the US's huge budget and fiscal deficits.
By comparison Asian Central Banks only hold some 5% of their reserves in gold and this percentage is expected to increase significantly as they diversify out of their largely US dollar denominated assets.
Even a small portfolio reserve allocation into gold by the Asian Central Banks would create a very large increase in demand for gold.
Since both China and Japan hold less than 2 percent of their reserves in gold, there is a real possibility that they may increase their gold holdings in order to diversify out of the U.S. dollar and foreign debt instruments and this will have huge ramifications for the price of gold.
The head of the Shanghai Gold Exchange and senior Chinese central bankers have said that China should increase its gold reserves to lower its foreign exchange risk from growing foreign exchange reserves.
"I suggest that China should diversify its national reserves to different types of low-risk products such as gold and oil in the longer term," said Shen Xiangrong, chairman of the Shanghai Gold Exchange board in an interview with Dow Jones Newswires.
In our newsletter of August 2nd 2005 entitled - China to use Gold in order to undermine US political and economic dominance , we wrote how China may use it's massive US dollar reserves and US Treasury purchases as a form of geopolitical weapon against the US and as a way of furthering their growing global political and economic aspirations. The newsletter examined an excellent article that was written by Richard Lehman and appeared in Forbes - 'A Golden Solution To The China Syndrome?'
Putin's endorsement in 2005 of the Russian Central Bank's plans to diversify the Russian reserves out of fiat currencies and debt instruments and into gold bullion was seen by some as as much a political act as an economic one. Putin's overt and PR like choreographed endorsement of gold was replete with many interesting and highly unusual photos. It is the first time in recent years that a head of state of one of the larger and more powerful G8 global players has expressly endorsed it's Central Bank buying gold and probably the first time that a head of state has been photographed many times holding and admiring gold bullion bars.
Michael Kosares of Centennial Precious Metals astutely noted at the time that:
- We should not forget that it was central bank buying that broke the back of the anti-gold cartel in the late 1960s early 1970s. This paved the way for the massive bull market of the 1970s.
- Ulyukayev is not talking about paper trading for speculative purposes. He's talking about buying physical gold and storing it in reserve as a long-term asset.
- This policy is a major, decisive departure for the G-8 in that one of its members will be exchanging currency reserves for gold -- and after a public disclosure. Russia now is receiving a large amount of foreign exchange for its oil and gas (this will not change for quite some time), probably in the form of dollars and euros. This looks like the first step in a long-term program.
- Russian gold buying will become a new element in the physical gold market, and likely will put even more pressure on those short the metal to cover now while it is still cheap -- of course, that Russia follows through. But I can't see why they would announce such a plan without meaning it.
- I rate this announcement by the Russian central bank as the equivalent of the Washington Agreement in 1999, which kick-started the current gold bull market. It amounts to a de-jure action that could have a major impact on the gold market and comprise the primary driving force for the second leg of this bull market.
Putin's calculated gesture may be the most important statement on gold by a head of state since French President de Gaulle praised gold as the ultimate from of money and wealth: "There can be no other criterion, no other standard than gold. Yes, gold which never changes, which can be shaped into ingots, bars, coins, which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par excellence."
Some have posited that Putin may have been sending a "shot across the bows" of the US government as De Gaulle was doing some 35 years ago. Putin and many in Russia are increasingly nervous and wary of Washington's increasing military and economic presence in what they have always considered their backyard - Eastern Europe, Eurasia and the Caspian.
Putin, like the Chinese and all other 'strategic competitors' to the US are all too aware of the predicament which the US finds itself in. While it is the world's remaining superpower and overwhelmingly superior to all it's rivals in military terms, it has a dangerously exposed achilles heel in the form of it's fiat paper reserve currency, over dependence on Middle Eastern oil, it's massive indebtedness and balance of payments issues.
Russia, like China, is now one of the US' creditors and thus has considerable leverage which it has so far chosen not to exercise. Should it do so there would obviously be a marked increase in geopolitical tension and a marked increase in the price of gold.
Silver is trading at $14.04/06 at 1200 GMT.
Platinum was trading at $1452/1458 (1200 GMT).
Spot palladium was trading at $342/348 an ounce (1200 GMT).
World oil prices fell to below $87 a barrel despite OPEC plans to hold current production steady. Oil prices may sell off further however the sell off is likely to be short term and oil is likely to resume it's upward trend unless the increasingly likely US and UK recessions massively impact the global economy and thus contribute to a global recession.
Mark O'Byrne, Director
6 December 2007
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