Gold price: Store of value tends to be volatile

Posted by Webmaster | World Gold News | Thursday 10 December 2009 7:50 pm

Gold prices last week surged to new highs of $1,200 a troy ounce, as investors sought refuge from the weakness in the US dollar.

With prices of the precious metal rocketing, everyone is trying to get their hands on some of it, from the Indian central bank – which is rumoured to be buying another 200 tonnes from the International Monetary Fund – to hedge fund manager John Paulson, who is in the process of setting up a gold-only fund. Even Harrods is getting involved by selling gold bars.

It is easy to see why. The price has risen from $660 an ounce two years ago to recent highs of $1,200, and experts predict it could keep rising.

“The past nine months have seen the popularity of gold soar,” says Barbara-Ann King, head of investments at Barclays Stockbrokers. “The credit crisis triggered a flight to safety from investors and gold’s perceived safety and lack of correlation with equities saw investors flock to it.

“From April this year, the equity market rallies dulled gold’s lustre, but its popularity revived this month on the back of the apparent weakness of the dollar and growing inflation concerns driven by the substantial fiscal stimuli and monetary easing programmes and the price moved into new territory.”

She points out that central governments around the world have reacted by suggesting that gold may become the reserve currency of choice over the dollar, as its value drops compared with other safe havens. “If the value of the dollar drops further, there may be a reverse effect on the price of gold,” she says.

The big question on investor’s minds at present is how gold will perform.

Chris Hossain, senior sales manager, ODL Securities, says: “Luminaries such as Jim Rogers have said we will see $2,000 within the next decade, and it is striking to see that Paulson has announced he is starting a gold-backed fund in the New Year, including $250m of personal investment. Nothing speaks louder than putting your money where your mouth is.”

David Wilson, director of metals research at Société Générale, says: “We expect money to surge into gold exchange-traded funds, which could push the price up to $1,400 and it could well reach $1,500 in the middle of next year.”

It is the sharp upward movement of the past few months that have triggered a rise in spread betting on gold and opened opportunities for investors.

Unlike gold-backed ex­change-traded funds and gold bars, spread betting gives investors the chance to speculate on the price of the metal without having to tie their money up in something physical.

There are two main ways to spread-bet gold.

Long-term traders tend to place bets on futures contracts, which have a set expiration date.

Those looking to take a short-term view, meanwhile, usually place bets on the rolling spot price of the metal. One benefit of spread-betting gold is the ability to deal at just about any time of the day, as gold – like foreign exchange – is a 24-hour market.

At many spread betting firms, gold trades are calculated at 0.1 per US dollar. In simple terms, this means that for every dollar you move, you would either make or lose 10 times your stake.

So if you buy £5 ($8) worth of points and gold moves up $2, you would make £100 (£5 x 2 x 10).

It is this leverage in spread betting that investors like. With gold, most firms permit gearing of as much as 20 times the initial stake.

The flipside of leverage, however, is that potential losses are also not limited to your stake. Mr Campbell gives the example of someone who had sold at £1 a point when gold was at $1,173, when it moved to $1,200, that would have produced a loss of £270.

Angus Campbell, head of sales at Capital Spreads, says that one of the attractions – albeit also one of the concerns – for investors is that prices can drop from one hour to the next.

“Gold is quite a speculative product, so it is prey to volatile moves,” Mr Campbell says. “Within one day last week, gold reached $1,192 a troy ounce and then plunged to $1,137.5.

“So that’s 545 points, which is enough to make someone incur a substantial number of points.”

Investors are advised to take advantage of guaranteed stops and limits to protect themselves against some of the more volatile swings seen in the gold price recently.

Especially in view of the fact that there have already been some reports that jewellery consumption, the traditional backbone of the gold market, is collapsing under the weight of record bullion prices.

Posted by Webmaster | World Gold News | Saturday 5 December 2009 2:17 pm

“No other commodity enjoys as much universal acceptability and marketability as does gold.” - Hans F. Sennholz

The price of the yellow metal crashes Rs 500 on Saturday, adding to the 3.34% fall in last 2 days.

Bullion prices have firmly snapped their one-month bull run now. Profit-booking, triggered by the strengthening dollar, pulled down gold prices from their record highs.

In the last two days, domestic prices of the yellow metal have come down by Rs 620, or 3.34 per cent, with a fall of Rs 500 coming today. Internationally, gold has slipped 5.6 per cent in two days. It touched $1,226.44 an ounce on Thursday, while in Asian trade today morning, it fell to $1,161.43.

Ajay Kedia, director, Kedia Commodities, said, “Traders preferred to book profit ahead of the US holidays and, hence, there was low rollover and a fall in open interest in gold futures on the Comex Division of the New York Mercantile Exchange. A similar trend was observed on the Multi-Commodity Exchange (MCX), where the rollover in gold futures was lower than in the previous cycle.”

In the last 7 trading days, MCX’s open interest have come down by 33 per cent.

Kedia, however, feels the fall could be a correction after the recent bull run. In the last few months, gold has been rising consistently. In the last one month, gold went up from $1,059 on November 2 to $1,226 on Thursday.

Christmas holidays in the US start in the third week of December and traders avoided keeping open position as the Dollar index was trading at lower levels, indicating the currency may strengthen in the short term, making gold less attractive.

US employers reduced 11,000 jobs in November, which is the lowest job cut after recession set in last year. This has caused speculation that the US Fed may raise interest rates. Any rise in interest rates is expected to strengthen dollar on rising inflows. Generally, dollar and gold prices moves inversely. The Dollar index rose to 75.91 on Friday from 74.63 a day earlier.

Standard gold prices hardened to its all-time high of Rs 18,255 per 10 gm on Thursday on persistent buying by stockists in view of the rising trend in the global market. However, prices fell by Rs 500 per 10 gm to Rs 17,600 today.

This is the first major correction in prices since the Reserve Bank of India announced buying 200 tonnes of gold from the International Monetary Fund (IMF) a month ago.

Silver also shot up to Rs 30,270 a kg on renewed industrial demand coupled with rising global prices. Today it closed at Rs 29,445, down Rs 825 from its peak during the week.

Gold futures shot up to $1,226.40 an ounce on the Comex Division of the New York Mercantile Exchange following weakness in the dollar, which fell to a 16-month low. Gold closed at $1,161.42 on Saturday.

Barrick shuts hedge book as world gold supply runs out

Posted by Webmaster | World Gold News | Thursday 12 November 2009 8:15 pm

Global gold production is in terminal decline despite record prices and Herculean efforts by mining companies to discover fresh sources of ore in remote spots, according to the world’s top producer Barrick Gold.

Aaron Regent, president of the Canadian gold giant, said that global output has been falling by roughly 1m ounces a year since the start of the decade. Total mine supply has dropped by 10pc as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run.

“There is a strong case to be made that we are already at ‘peak gold’,” he told The Daily Telegraph at the RBC’s annual gold conference in London.

“Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore,” he said.

Ore grades have fallen from around 12 grams per tonne in 1950 to nearer 3 grams in the US, Canada, and Australia. South Africa’s output has halved since peaking in 1970.

The supply crunch has helped push gold to an all-time high, reaching $1,118 an ounce at one stage yesterday. The key driver over recent days has been the move by India’s central bank to soak up half of the gold being sold by the International Monetary Fund. It is the latest sign that the rising powers of Asia and the commodity bloc are growing wary of Western paper money and debt.

China has quietly doubled holdings to 1,054 tonnes and is thought to be adding gradually on price dips, creating a market floor. Gold remains a tiny fraction of its $2.3 trillion in foreign reserves.

Gold exchange-traded funds (ETFs) – dubbed the “People’s Central Bank” – have accumulated 1,778 tonnes, making them the fifth biggest holder after the US, Germany, France, and Italy.

Ross Norman, director of theBullionDesk.com, said exploration budgets had tripled since the start of the decade with stubbornly disappointing results so far.

Output fell a further 14pc in South Africa last year as companies were forced to dig ever deeper - at greater cost - to replace depleted reserves, not helped by “social uplift” rules and power cuts. Harmony Gold said yesterday that it may close two more mines over coming months due to poor ore grades.

Mr Norman said the “false mine of central banks” had been the only new source of gold supply this decade as they auction off reserves, but they are switching sides to become net buyers.

Barrick is moving fast to wind down the remaining 3m ounces of its infamous hedge book over the next twelve months, an implicit bet on rising gold prices over time.

Mr Regent said the company had waited too long to ditch the policy, which has made the company enemy number one among ‘gold bug’ enthusiasts. The hedges oblige Barrick to deliver part of its gold into futures contracts set long ago at levels far below today’s spot prices.

The strategy worked well in the falling market of the 1990s, but has cost the company dear in lost profits this decade. “Hindsight is always 20/20,” said Mr Regent, who was appointed from the outside earlier this year.

Barrick bit the bullet in the third quarter, taking a $5.7bn charge against earnings on hedge contracts. Liberation is at last in sight. In 2001 the hedge book topped 20m ounces.

Mr Regent said the hedge policy has weighed badly on the share price and irked investors, becoming a bone of contention at every meeting. The financial crisis brought matters to a head as markets fretted about counterparty risk. “It was clear to me that there were a significant number of institutions who wouldn’t invest in Barrick because of the hedge book,” he said.

Barrick produced 1.9m ounces of gold last quarter, down from 1.95m a year earlier. Costs have been “trending down” to $456 an ounce, though rising energy prices pose a fresh threat. Total reserves are 139m ounces, far ahead of rival Newmont Mining at 86m.

The hedge book venture has not been a happy one, but those who predicted that Barrick would eventually “blow up” on its contracts may owe the company

China, Bernanke, and the price of gold

Posted by Webmaster | World Gold News | Monday 7 September 2009 2:57 pm

China has issued what amounts to the “Beijing Put” on gold. You can make a lot of money, but you really can’t lose.

I happened to see quite a bit of Cheng Siwei at the Ambrosetti Workshop, a gathering of politicians and global strategists at Lake Como, including a dinner at Villa d’Este last night at which he listened very attentively as a number of American guests tore President Obama’s economic and health policy to shreds.

Mr Cheng was until recently Vice-Chairman of the Communist Party’s Standing Committee, and is now a sort of economic ambassador for China around the world — a charming man, by the way, who left Hong Kong for mainland China in 1950 at the age of 16, as young idealist eager to serve the revolution. Sixty years later, he calls himself simply “a survivior”.

What he said about US monetary policy and gold – this bit on the record – would appear to validate the long-held belief of gold bugs that China has fundamentally lost confidence in the US dollar and is going to shift to a partial gold standard through reserve accumulation.

He played down other metals such as copper, saying that they could not double as a proxy currency or store of wealth.

“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market,” he said.

In other words, China is buying the dips, and will continue to do so as a systematic policy. His comment captures exactly what observation of gold price action suggests is happening. Every time it looks as if the bullion market is going to buckle, some big force steps in from the unknown.

Investors long-suspected that it was China. We later discovered that Beijing had in fact doubled its gold reserves to 1054 tonnes. Fait accompli first. Announcement long after.

Standing back, you can see that the steady rise in gold over the last eight years to $994 an ounce last week – outperforming US equities fourfold, even with reinvested dividends – has roughly tracked the emergence of China as a superpower in foreign reserve holdings (now $2 trillion).

As I have written in today’s paper, Mr Cheng tades a dim view of Ben Bernanke’s monetary experiments at the Federal Reserve.

“If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.

This line of argument is by now well-known. Less understood is how much trouble the Fed’s QE policies are causing in China itself, where they have vicariously set off a speculative boom on the Shanghai exchange and in property. Mr Cheng said mid-level house prices are now ten times incomes.

“If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.”

“Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down.”

Of course, China cold end this problem by letting the yuan rise to its proper value, but China too is trapped. Wafer-thin profit margins on exports mean that vast chunks of Chinese industry would go bust if the yuan rose enough to close the trade surplus. China’s exports were down 23pc in July from a year before even at the current exchange rate, and exports make up 40pc of GDP. “We have lost 20m jobs in this crisis,” he said.

China’s mercantilist export strategy has led the country into a cul-de-sac. China must continue to run its trade surplus. It must accumulate hundreds of billions more in reserves. Ergo, it must buy a great deal more gold.

Where is the gold going to come from?

Gold, silver hit 7-week highs on weak dollar

Posted by Webmaster | World Gold News | Monday 3 August 2009 3:52 pm

LONDON (Reuters) - Gold and silver prices climbed to their highest in seven weeks on Monday, as the dollar’s slide to its lowest since mid-December boosted interest in hard assets.

Spot gold hit an intra-day high of $961.00 an ounce, its highest since June 11, and was bid at $959.10 an ounce at 2:29 p.m., against $953.90 an ounce late in New York on Friday.

U.S. gold futures for August delivery on the COMEX division of the New York Mercantile Exchange rose $5.70 to $959.40 an ounce.

“At the moment we’re seeing the dollar as the key factor to movements in the gold market,” said Eugen Weinberg, senior analyst at Commerzbank.

“In the past few months (gold) has gone from being a safe haven to becoming a dollar play. The dollar right now is so weak because no one is looking for a safe haven — because corporate results are so good and stock markets are performing so well.”

Silver was at $14.40 an ounce against $13.89, earlier it touched a high of $14.47, the highest since mid-June.

“Silver tracks gold in both directions,” Weinberg said.

The dollar hit a 2009 low versus a basket of currencies, stung by buoyant risk demand. The dollar index , a gauge of the U.S. currency’s performance against six other major currencies, fell to its lowest since December.

Appetite for risk was boosted by rising stock markets. European shares hit a nine-month high, as financials advanced after earnings results from Europe’s biggest bank HSBC cheered investor sentiment.

Rising equity markets also boosted interest in oil, with prices hitting a one-month high. Stronger crude prices support interest in gold as a hedge against oil-led inflation.

SILVER INFLOWS

Silver took further support from fresh inflows into exchange-traded funds last week.

The largest silver ETF, the iShares Silver Trust, said its holdings rose to a record 8,828 tonnes on Friday, while Switzerland’s Zurich Cantonal Bank said its silver holdings rose 1.929 million ounces last week.

Investment demand for gold and jewellery buying remain lacklustre, however. Holdings of the largest gold ETF, the SPDR Gold Trust, fell nearly 50 tonnes in July.

ETFs issue securities backed by physical commodities, and constituted a big source of gold demand in the first quarter.

Jewellery demand was also weak as Indian consumption softened on the back of higher prices. “Traders are waiting for lower prices,” said one dealer.

Among other precious metals, platinum was at $1,218.50 an ounce against $1,207.50, while palladium was at $267.50 against $261.50. Platinum traders are awaiting U.S. car sales data due later in the day for direction.

Government measures to boost demand for new cars supported European car sales in July, data showed, with French sales rising 3.1 percent, helping to lift both platinum and palladium which are chiefly used in automobile production.

“We view the development in vehicle sales as a positive signal,” Standard Bank said in a note. “We view this as a bullish signal for platinum, palladium, aluminium demand.”

In Japan industry-wide auto sales fell 5.2 percent in July from a year earlier.

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