David LevensteinThe demand for physical gold remains robust as investors add bullion bars and coins to their portfolios.
7 June 2011
Last year Greece was in trouble. A year later the problem has deepened. While Greece may need up to 70 billion euros ($100 billion), on top of the existing EU-IMF loan, to keep from going bankrupt as it is unlikely to be able to return quickly to international borrowing markets sadly I think the country is doomed: Portugal, Ireland, and Spain are also drowning in debt. Providing financial assistance to bail out these countries will simply end up cost trillions. Yet, the European Union and European Central Bank continue to defer the inevitable with their bail out programs.
Last Thursday, the European Central Bank President Jean-Claude Trichet warned Greece that a failure to stabilise its economy on its own would increase pressure for the international community to do it. The ECB chief suggested creating a second stage of bailouts under which the Eurozone would take limited control of a member country's economic policies if it was not able to successfully implement adjustment programmes.
"Would it go too far if we envisaged, at this second stage, giving euro area authorities a much deeper and authoritative say in the formation of the country's economic policies if these go harmfully astray?," said Trichet."A direct influence, well over and above the reinforced surveillance that is presently envisaged?," he said in the western German city of Aachen after receiving the Karlspreis award for advancing the European cause.
The EU, ECB and IMF are currently heaping pressure on Greece to redouble efforts to rebalance it its finances in order to secure the next tranche of an existing 110-billion-euro ($158-billion) bailout loan agreed in May 2010.
As far as I am concerned, Greece is so deep in the hole, that it simply won't be able to fund its debt. So, unless they want to become a subsidiary of the ECB or the IMF, they will have to default or leave the Eurozone. Alternatively, the financial institutions holding Greek debt will have to shave their heads, as a haircut will not cover the debt. I have mentioned countless times, as the global currency system simply deteriorates, astute investors will turn to gold in order to protect their wealth. In the last year and during the first quarter of this year, investment demand for the yellow metal has been extremely robust.
Demand for gold remains very robust and according to the World Gold Council (WGC) gold demand in the first quarter of 2011 totaled 981.3 tons an increase of 11% year-on-year. This increase which was largely attributable to a widespread increase in investment demand for bars and coins was further enhanced by an improvement in jewellery demand.
According to the WGC report, Gold Demand Trends First quarter 2011, first quarter investment demand (comprising of demand for bars and coins as well as ETF's and similar products) grew by 26% to 310.5 tons from 245.6 tons in Q1 2010. Demand for gold bars and coins provided the main thrust of this growth.
Although there was a net outflow of some 56 tons from ETF's and similar products during the first quarter 2011, total bar and coin demand in the same period came in at an impressive 366.4 tons, an increase of 52% year-on-year. In value terms this represented almost a doubling of demand from US$8.6 billion in Q1 2010 to US$16.3 billion. The demand for physical bullion bars totalled 280.4 tons representing an increase of 62% when compared with figures of a year ago while the demand for official coins also increased by 39%.
Of the major markets, China displayed the strongest growth and became the largest single investment market for the quarter. Demand reached 90.9 tons, a more than doubling of the 40.7 tons recorded in Q1 2010.
As inflation levels continue to rise in China, individuals acquire gold as a hedge against inflation. But, demand in China was also stimulated due to local banks actively promoting gold investment products. In mid-February ICBC and the WGC launched the 'Only Gold Gift Bar', the first gold gifting investment product in China. The product offers bars weighing 10, 20, 50, 100 and 1000 gram bars. The law which prohibited Chinese citizens from owning gold for almost 40 years was changed a few years ago. In South Africa there was a similar law. But what most people around the world don't realize that even though South Africa was the world's largest gold producer for decades, their citizens were not allowed to own gold bullion. This draconian law was eventually amended after some 100 years in 2009. Yet, the current law only allows individuals to hold gold bars of 10 gram, 50 gram and 100 gram. (I am still puzzled why the law does not allow individuals in South Africa to own 1000 gram bars. It makes no sense whatsoever. Individuals are allowed to own 10 bars of a 100 grams and not 1 bar of 100 grams).
Investment demand in Taiwan also improved. Investment demand totaled 2.3 tons, more than reversing the entire 1.8 tons of net disinvestment seen throughout 2010 as a whole. Demand for gold bars and coins among Indian investors also grew, but failed to sustain the record levels of Q4 2010. Demand increased by 8% year-on-year, to reach 85.6 tons. Investment in Thailand jumped by 38% year-on-year as investors reported to be accumulating additional stocks on price dips.
The gold markets in the UAE, Other Gulf states and Saudi Arabia registered increases in investment demand of 21%, 20% and 6% respectively. The quarterly demand in Turkey more than doubled year-on-year to 18.3 tons of which almost 50% of this demand occurred in January as the price pulled back from the highs recorded in December. Gold coins accounted for the majority of the demand although bar offerings are becoming more widespread.
The demand for gold bars and gold coins in Europe almost doubled year-on-year as the sovereign debt crisis deepens. While Greece, Ireland and Portugal have received financial assistance, and even if Greece receives further assistance, I believe that at the current interest rates, Greece will not be able to pay back their debt. Therefore, I am of the opinion that Greece is doomed to fail and rather become a subsidiary on the IMF, it will ultimately leave the common euro currency.
Investment in Germany grew by 103% and demand in Switzerland increased by 117%. However, it was France that recorded the strongest growth in the first quarter with demand growing by a staggering 131%. The Napoleon gold coins remained the most popular form of gold investment in France.
In the U.S. the demand for gold products increased by 54%.
In many of my previous commentaries I have written about the Chinese impact on the gold market. And, unlike people such as Jim Chanos who has maintained that China has been in a bubble for the last few years, I only see more growth from this incredible nation. The transformation that has taken place since 1989 when I made my first visit to the mainland till now has been absolutely amazing. And, when Donald Trump makes comments about China ripping off the US, then I think he should rather stick to the "Apprentice," because he has obviously forgotten about how the US set up manufacturing centers in China and elsewhere to serve their own needs. And, when it comes to the Chinese one must not forget that gold has been an integral part of their rich culture and heritage. And, unlike their Western counterparts who largely believe that gold has few uses beyond jewellery, and that since it pays no dividends it is nothing more than a speculative investment and its value is entirely a function of such speculation, the Chinese have a much more positive view on gold.
Whether you understand it or not, in times like these it is prudent to hold gold in your investment portfolio. And, it is important to maintain a core holding of the physical in either bullion bars or coins or both. And, it is imperative not to confuse gold bullion coins with limited edition medallions which, as far as I am concerned have no investment value whatsoever, and which should only be viewed as collectables.
During last week the price of gold held above $1525 (S1) an ounce which is a positive sign for the yellow metal. And, the upward trend remains firmly intact. I believe that we will soon see a break above $1550 an ounce.
ABOUT THE AUTHOR
David Levenstein is a leading expert on investing in precious metals .He brings over 29 years experience in futures, equities, forex and bullion. And, although he began trading silver through the LME in 1980, when it comes to gold, he has traded gold bullion, gold coins, gold shares, gold ETF, gold funds and gold futures for his personal account as well as for clients. Over the years, David has been published in dozens of publications and has appeared on CNBC and Summit TV (South Africa), and is a regular guest on JSE Direct, a premier radio business channel in Johannesburg, South Africa. He He is also a regular commentator on www.kitco.com and www.mineweb.com David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
For more information go to: www.lakeshoretrading.co.za
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.
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