The Outlook Collection On Gold

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Collection of views on gold trends in 2012 1st qtr.

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The Outlook Collection On Gold

  1. 1. Shamik Bhose long and medium term outlook on Gold & Silver price direction in US dollarterms :Emerging Market Central Bank Gold Allocations Could Rise If Dollar-BasedValuations Removed – WGCCentral banks became net purchasers of gold in 2010, with emerging-market central banksleading the accumulation trend as they seek to diversify their growing foreign-exchangeholdings.On average, emerging-market central banks hold less than 4% of their foreign-exchangereserves in gold, which is slightly under the 4.6% to 7% mid-range optimal level suggested byprevious research done by academics, institutions and the World Gold Council for diversificationof reserves.Analysis of optimal gold holdings has normally been conducted in U.S. dollar terms since gold istraditionally denominated in the U.S. dollar. A new research report by the World Gold Councillooks at the role gold holdings denominated in local currency plays in diversification and thereport suggests that stripping out the dollar impact could allow optimal gold holdings to risewithout adding to risk. The new mid-range optimal allocations could be as high as 8.4% to10%, the report said.In the spring edition of RBS Reserve Management Trends 2012, just published by CentralBanking Publications, Ashish Bhatia, manager, government affairs for the World Gold Council,concluded that valuing gold holdings in an emerging-market central bank’s local currency,rather than from a U.S. dollar perspective, minimizes the impact of foreign-exchangefluctuations that normally can occur and improves risk-adjusted returns.The chapter in the spring edition is titled “Optimal Gold Allocation For Emerging-Market CentralBanks.” The book is an exclusive report of a survey of more than 40 central banks on how theyview key questions facing financial markets and the international monetary system. The bookalso includes chapters with expert opinion to allow central bankers to benchmark their policiesversus those of their peersWill the Re-birth of Uncertainty and Consumer Demand Fuel GoldThe rebirth of uncertainty takes place when the Spanish 10-year bond yield surged 40 basispoints last week as investors were expecting Spain, like Greece, Ireland and Portugal, wouldneed to request for international aid. Spain is the most closely-watched country as the
  2. 2. bellwether for Europes sovereign debt crisis. The higher than expected Chinas March CPInumber of 3.6%, compared to median economists forecast of 3.4%, may bring moreuncertainty to Chinas monetary easing.CFTC data confirms that the net speculators positions on gold declined from this years peak of221,542 at end-February to 149,599 as of the week ending 3 April. The technical position forgold appears better as some of the "weak longs" have been removed from the market.Though too early to tell, the re-opening of the Indian Jewellers for business last Saturdayshould bring out the pent-up demand. The Indian consumers will gear up for the AkshayaTritiya festival on 24 April as well as the wedding season. Physical demand especially from Indiaand China is the key supporting factor for investment demand for gold.Gold on Track to Fulfill its Multiple RolesWhile investors and traders are speculating whether the U.S. Fed will engage in QE3 or not andwhere gold price may head, the Euro crisis still has a major bearing on gold price. Europe issimultaneously facing three crises: banking, debt and economic growth crises. According toJefferies Chief European economist, Europe needs to see enough growth to escape from theworst of its problems. To have growth ECB may end up engaging in a fully transparentquantitative easing policy, perhaps as soon as the third quarter, if economic conditions remaindistressed.The latest GFMS gold survey predicted that gold investment demand, especially physical golddemand, is the current key driver of gold prices and can reach 2,000 tonnes in 2012. Centralbanks which became net buyers of 400 metric tonnes in 2011, will remain gold buyers in 2012.However, the head of Metals Analytics of GFMS also warned that production supply will continueto grow at 3% this year as producers are motivated by higher prices, producer hedging willprobably go up after 10 years of de-hedging and investment demand will need to rise as muchas $130 billion in order to fill the gap between supply (mining plus scraps) and fabricationdemand.GFMS predicts gold price will trade this year in the range of $1,530 to $1,920, the peak reachedin early September, 2011, and will likely pass $2,000 in early 2013. For now, gold continues tofulfill its role as a safe asset, an inflation hedge and according to World Gold Council, afoundation asset in portfolios.Gold Rises 6.6% in First Quarter Rating agency Egan Jones downgraded its U.S. credit rating to AA on concerns over growing debt. Managing Director Sean Egan wrote that the U.S. debt-to-GDP ratio exceeds 100% for the first time since World War II. At these levels, "a countrys financial flexibility becomes increasingly strained," he said. Egan Jones has a negative outlook for the U.S. with a 1.2% probability of default in the next year. Minutes released by the Fed this week "indicated that there would be no quantitative easing unless the economy takes a dip for the worse," said Standard Bank analyst Walter de Wet. However, Thomas Simons, money market economist at Jefferies & Co in New York, said the March payroll data "is going to turn up the heat on the debate for QE3."
  3. 3. Jewelry shop owners in India agreed to end a 21 day strike after the nations Finance Minister pledged to roll back new taxes on gold. Lower physical demand from the strike had been negative for gold, along with Chinese gold markets closing for a three-day holiday. Societe Generale analyst Robin Bhar sees "a buying opportunity as we expect the U.S. economy to surprise on the downside over coming months," leading to a third round of quantitative easing. Kinsale Trading President Tom Essaye said that the gold price currently looked "pretty compelling" as an entry point, noting "I would be a buyer of gold at these levels," based on factors including worsening negative real interest rates. "Prices are likely to reach another all time high by the year end," said Eugen Weinberg, head of commodities research at Commerzbank AG. "It is definitely a good buying opportunity."Standard Bank analyst Walter de Wet said the price of gold would probably rise above $1,900per ounce towards the end of the year while Deutsche Bank analyst Daniel Brebner said he wasbullish on gold in the long term and predicted an average price of $1,800 per ounce in 2012Gold Gain 6% for Q1, Beating CRB Commodities and Dollar Indices...The concept of gold as an occasional part of an investment portfolio has tremendousmerits- not necessarily only as a hedge against inflation (or deflation), but morebecause of its role as an insurance policy against monetary debasement. However, with gold having just completed an unprecedented 11 year bull run, the naturalquestion to ask if it’s time to sell or too late to buy. Various investors and globalstrategist have been outlining the reasons why gold should not be sold off yet- tosummarise our rationale along with theirs here are some of our thoughts :Gold futures have given a return 6% for Q1 2012, beating crude oil which would return about4.6% and the CRB Commodities Index which would be flat for the quarter, thoughunderperforming copper which would return about 11%, as of Asian open on Friday. DollarIndex would decline around 1.6% while Euro would gain about 3% for the quarter. The MSCIWorld Local Index for developed world is set to return about 10% this quarter.Earlier last week, the U.S. Fed indicated it would not rule out QE3 or other options to stimulatethe economy and said that recovery is still "extremely sluggish", boosting gold prices. FedsThinking has helped the Gold Rally as the concept of Safe Haven Holds as gold futuresrecovered to around $1,680, helped by Feds Bernankes remarks that the U.S. needs moregrowth to reduce the unemployment rate, recovery is not yet on a firm path and the Fedconsiders all options to stimulate growth....Last week, all markets were fixated upon the newsof both the Euro-area and China PMI falling from the February level. Gold futures dropped $28to an intra-week low of $1,627.5 last Thursday before recovering to $1,662.4, down only $6.6for the week.However as Indian Jewellers strike went on past 13 days over a government levy on non-branded products, the Bombay Bullion Association expected that gold imports in Q1 could dive59% due to retail price rise of 6%, reported by news agencies . This could prevent any majorrise in gold prices according to some analysts. So far physical demand remains quiet from Indiaand China with Shanghai traders only reacting to strong price corrections. After days of protestby Indian jewellers, the government remained firm on import duty on gold which will doublefrom 2% to 4%.
  4. 4. Traders remarked due to quarter-end, people are not willing to do much on either side. Theamount of pent-up demand when the stores reopen would be important to gauge the physicaldemand from Asia, which should put a floor to the gold price...As physical demand for goldremains quiet and sentiment low, gold prices are being pushed around by macro data releasesand technical trading......However the rise in demand for risky assets and the negative sentiment surrounding goldprompted F.T. to question the golds bull-run, citing Credit Suisse who said that gold is nowconsidered a contrarian trade. Though it is tempting to project short-term corrections into thelong-run, investors should ask has the catalyst for gold waned. Globally major central banks aremaintaining zero interest rates and negative real interest rate could persist for a prolongedperiod. Financial conditions and sovereign debt problems have been eased but not resolved,hence further quantitative easing by ECB, Fed or Japan cannot be ruled out, further debasingnational currencies. Golds function as an alternative currency and hedge, albeit volatile,remains clear.The fact that Bernanke did not rule out QE3 bodes well for gold as an inflation hedge...as doesLTRO phase two in EU ; Last Friday, the market saw and heard the EU Finance Ministers raisethe ceiling to the rescue fund to 940 billion Euros and oversee how the weaker Europeaneconomies are progressing.An agreement among euro zone finance ministers was announced to temporarily increase thelending capacity of the regions rescue funds to $934 billion. In reaction, the dollar fell againstthe euro and gold prices rose. Comments from Fed Chairman Ben Bernanke this weeksuggested that the U.S. labor market recovery may not sustain its momentum in the nearfuture. In a speech to the National Association for Business Economics, Bernanke said "wecannot yet be sure that the recent pace of improvement in the labor market will be sustained."The possibility of accommodative monetary policy if certain conditions, such asemployment, do not improve, is a favorable environment for gold.David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc., said thisweek that the secular bull market in gold could peak at $3,000 per ounce within the currenteconomic cycle of negative real interest rates. Anglo Gold Ashanti Ltd. CEO Mark Cutifani saidthe price of gold could exceed $2,000 per ounce in 2012 on robust demand in fast-growingeconomies such as India and China. "With the increasing middle class in China, many Chineseare choosing gold as a way to store wealth, so I dont think that will change UBS, Goldman andAnglo golds CEO remain firm on their gold price forecast this year - gold can still touch $1,800to $2,000/ozSouth Africas gold output fell again in January and was down a very large 11.3% involume terms in January. Annual gold production is set to be close to 220 tonnes which is alevel of gold production not seen since 1922 (see chart below). The falls were seen only in thegold market with production of other minerals holding up with total mineral production downonly 2.5% compared with the same month last year. South Africa as recently as two decadesago was the worlds largest producer of gold by a huge margin. Only 40 years ago South Africaproduced more than 1,000 tonnes of gold per annum but will only produce some 220 tonnes in2012. Production peaked in 1970 and has been falling steadily and sharply since. The nearly80% fall in South African gold production has led to it being recently overtaken by China,Australia and the U.S. South Africa produces only about 15% of worlds production. DecliningSouth African production largely contributes to the supply constraint in gold.
  5. 5. Therefore, the long-term supply outlook will continue be constrained which is a keyfundamental support factor for gold price...world production has however gone up , thoughcertain producers like China, Russia etc have also emerged as major gold buyers in both retailand sovereign fund + ETF funds category...This production rise is buffeted by a majorrise in retail demand form emerging marketsAccording to a study by Amit Bhartia and Matt Seto of US investment firm GMO, the majority ofphysical gold purchases in the past decade have not come from speculators in ETFs. Indeed,ETFs only account for a tiny fraction (around 7.5%) of the near-30,000 tons of goldpurchased between 2000 and 2010. The demand didn’t come from developed marketinvestors or central banks either – in fact, central banks have been net sellers.Instead, nearly 80% of the total demand for physical gold has come from retailpurchases in developing markets. China and India’s combined demand aloneamounts to more than that of the entire developed world. “the main driver for gold’sdramatic rise has been the emerging markets consumer”, While trade liberalisation and thecommodity boom has enabled emerging markets to prosper, their financial systems have notkept up with the pace of modernisation. Combined with a tendency to save – rather than spend– money, this has led to a large build-up of savings. (Or, as economists call it, a “savings glut”).There are of course domestic savings accounts. Unfortunately, in many countries the bankingsystem is either corrupt or interest rates are set by the state-- Negative real interest rates (ieadjusted for inflation) making saving money another aspect of financial repression . The final
  6. 6. course left is to invest savings in hard assets. Property has proven popular. But withprices – in China at least – at record levels, and now starting to fall, this has becomeless attractive. That leaves gold. As the chart below and above indicates that Chinaand Russia have emrged as serious suppliers of gold in the world markets of late,but with demand coming from retail and sovereign wealth fund buyers in China andfund managers and individual portfolios in Russia, not a lot of this excess gold hascome to open markets.Gold shed 5% following last Wednesday evening our time as the U.S. Federal Reserve ChairmanBen Bernankes semi-annual testimony on monetary policy before the House Financial ServicesCommittee this afternoon. In his report he gave no clear indication of further economicmeasures to stimulate the US economy and the outlook for inflation being "subdued. The effecton gold was palpable.In early London trading that day gold had been trading at $1790 and
  7. 7. expected to launch an assault on resistance at $1796 (the November 14 2011 high) as well asthe psychologically important $1800 level. The news that the US Federal Reserve may desistfrom further QE, threw the market into reverse, shedding $84/ounce. The news had a moremodest impact on the US dollar index which rallied by approximately 1%. For the moreexperienced observer and long term we would say : Do Bear in mind this is coming from a FedChairman who has been collateralizing everything at The FRB as part and parcel of the QE floatsBut long term Commodity trends and – Super Cycle Bull runs are characterized by retracementssuch as these and in fact confer greater strength and validity on higher prices in the year tocome. What will be most interesting is to see just how quickly gold recovers from this set backas it will be a good test of the resolve of gold bulls. A test of their combined risk takingcharacter if you like.Either way, market watchers enviously wishing to get into gold at an attractive levelcannot complain that windows of opportunity do not present themselves from timeto time. The long term gold story remains unchanged and that is to say :- - it is largelyunreadable and volatile in the very short term, driven as it is by fast-moving news, politicalactions, policy decisions and economic events that are almost impossible to predict. In thisenvironment, short term speculation is frankly a bit of a game. I feel - however, it remainsvery positive for longer term investors (particularly pension funds) with verypositive fundamentals (the market is supply constrained and demand remainsrobust) and the broad macroeconomic issues remain unchanged.Couple this with shifting pro-gold Asian and Emerging Market Central Bank attitudesplus producers manifestly opposed to hedging (and thereby crushing the bull run)and massive consumer retail interest in India,China, Midldle East plus safe havenasset buying from places like Iran,Syria, Libya and Egypt and you have a compellingcase for buying and holding gold. Best of all, news ways of accessing to gold with amultitude of products over a wide range of regulations /jurisdictions is likely to continue to fuelinvestment demand...anecdotal evidence mounts that jewellery demand in Asian countries havegrown by 79% over the past 10 years with both Indian and Chinese consumers buying gold andsilver regularlyThe tone of my reports and TV interviews might suggest that we are perma-bulls - we are notand we will be first to let you know when our position changes... probably some time afterregulators clear up bank insolvency issues in USA; and EU finds a way to resolve a growingsovereign Bond crisis that has refused to go away but has been tackled with major QE andLTRO projects that lead to printing and debasement of money. Rising oil and food pricesacross the world with implications for inflation and very low yields on sovereignbonds suggest that international investors will look for better return on risk taken,across the world...Precious metals do benefit during such times.Shamik Bhose long and medium term outlook on Gold & Silver price direction in USdollar terms :
  8. 8. Gold is highly sensitive to US QE, as every dollar of QE goes into M0, triggering the debasementof the USD. the simple case that the worse things get, the stronger the response by globalcentral banks will be. Here is the key quote for those worried that : "A major liquidity crisisshould not occur this time, as we think we are on the eve of major QE in the UK, US and(a bit) later on in the EZ. The next question is "How big will QE3 be"? Fed did preannounceit in the January 2012 FOMC statement, the monetization will last from March 2012 until theend of the year, and will a total of greater than $600 billion , probably in the $1.5 trillion rangeas the Fed will finally say "enough" to piecemeal solutions. Most observers like us have somesimple advice:Buy gold ahead of QE3 as money creation has a strong impact on prices in order tocatch up with the increase in the monetary base since 1920 (as it did in the early80s). Or to close the gap with the monetary base increase since July2007(QE1+QE2).So go long a real asset, which will always have value and mayquadruple in short notice? The answer seems simple to me....Problems in the Euro-zone and a potential sovereign debt default will escalate theproblems of monetary debasement and bring forms QE from the ECB to postponethe reckoning : The huge political costs aside that’s the way to protect yourself becauseif the system survives in the next couple of years, it will only be because there is massivemoney printing.... Without that they cannot survive.But because of the massive risks to the financial system, I think it’s absolutelycritical that investors hold a part of their funds outside of the co-relation investmentarena via alternate assets like precious metals ; If you look at every central bank in theworld they are in an absolute mess and they need to print unlimited amounts of money. So wewill have a lot of zeros after the price of gold in many currencies. But even in today’s money Isee gold going up many times from here The risk that many banks will fail is major. Theauthorities and central banks, around the world, are going to try to rescue them, but it’s notcertain they can or will. That’s why, again, it’s important to hold some alternate assets ;whether it’s gold or silver or assets in the ground.
  9. 9. 1. Reflation.......as discussed above ; excess money printing2. Increase in Chinese Gold Reserves ; new emerging country specific buying including andespecially -- Sovereign Wealth Funds Buying Gold, The sovereign wealth funds of China, Qatar,and Saudi Arabia have begun heavily investing in commodities world-wide to diversify out of fiatcurrency (dollar, euro). Look for more SWFs to follow.3. Scarcity of Gold :Throughout history only 160,000 tons of gold has ever been mined. Forfolks who might not know, all the gold that’s ever been found would fit into two olympic-sizeswimming pools! At today’s prices that equates to $9 trillion dollars vs $60 trillion in outstandingfiat currency. As fiat currency continues to be deliberately debased look for this pricerelationship to invert.4. Central Banks Becoming Net Buyers of Gold ; Total central-bank gold purchases in thethird quarter more than doubled from the second quarter and were almost seven times higherthan a year earlier as countries continued to diversify reserves, according to a World GoldCouncil report...Central banks are in the process of switching from net sellers of goldto net buyers, this is a major secular change and is likely to continue as othercentral banks look to follow suit diversify reserves away from heavy fiat currencyexposure. Gold Lures Central Banks also.........Purchases Accelerated in ThirdQuarter Amid Debt Crisis5. Major Fund Managers Buying Gold ; Respected and widely followed fund managers arepublicly piling into gold and/or out of the dollar and other fiat currencies including John Paulson,Bill Gross, Paul Tudor Jones, Kyle Bass, Andrew Hall, David Einhorn, Paolo Pellegrini, JohnBurbank, Sri Kumar, David Rosenberg (economist), John Hasenstab, Evy Hambro, Donald Coxe,John Brynjolfsson, Henry McVey, Eric Sprott, Steve Leuthold and David Tice. Look for othermajor mutual funds, hedge funds and pension funds to follow the leaders.6. Gold Hedging Concluding as miners seek to maximize gains riding on the coat tails of ETFand Sovereign Funds : Traditional gold hedgers (producers, miners etc) such as Barrick, theworld’s largest gold company, are eliminating their hedge books…essentially taking the cap ofthe market…as gold supplies dry up producers are no longer locking in prices by selling massivequantities of futures contracts…this takes selling pressure off and indicates producers believeprices will be going much higher. Look for all producers to unwind their hedge books.

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