May 29, 2012: I am proud to say that I have been actively trading Gold since President Ford signed legislation that legalized private Gold coin and bar ownership, which took effect December 31, 1974. During those 37 years the Gold price moved from $103 in August of 1976 to $850 in January of 1980, and back to $284 per ounce in February of 1985. The Gold price traded between $250 and $475 from 1985 to 2001, (before the current bull move started), reaching $1,920 per ounce in September of last year. During those years I saw reasons for Gold ownership change from diversification, to speculation, to being an inflation hedge, and a safe haven investment numerous times. However, until now I have not seen sizeable purchasing of Gold from the World’s Central Banks, as a replacement for the U.S. Dollar and Euros, being held as part of their national reserves. That’s just part of the extraordinary fundamentals that make the current price of Gold look like the buy of the century. Let me share these fundamentals with you.
Supply Fundamentals
Over the past two years, Gold/Silver mining shares have under-performed compared to the bullion market price. Many experts have stated that the indicated reason for this was the future negativity of the value of Gold and Silver. However, I believe that the reasons are the following five factors. I have provided some recent examples for each reason showing why mine production is slowing down:
- The increasing amount of union strikes in many of the major Gold/Silver producing countries
Freeport-McMoRan’s Indonesian Grasberg Copper and Gold mine (the world’s largest Gold mine) lost production of Gold by 3 million ounces per day since the strike started and nearly 8,000 workers went on strike on September 15, 2011. On December 14, 2011, a labor agreement ended the strike and provided for a 37% pay increase with improved benefits for unionized employees and created better conditions for contractors.
- Shortages of available labor in the rural areas where mining properties are located
March 2012: South Africa reported that its Gold production fell 4.5% year after year because of the shortage of available workers.
- Environmental holdups
April 2012: Goldcorp Inc, Canada’s No. 2 Gold miner, said that its environmental permit approval for its El Morro Copper-Gold project was suspended by the Supreme Court of Chile.
- Increasing demand for larger royalties, and taxes from local and national governments
May 2012: Aram Shishmanian, Chief Executive of World Gold Council, said that sharp increases in mining costs mean that Gold will need to reach $3,000 per ounce in five years for the industry to remain profitable. Miners currently needed a Gold price of $1,300 to survive, Shishmanian said, but faced steep rises in mining costs, along with the cost of dividends and host nation taxes and royalties.
May 2012: Indonesia is reportedly planning to impose up to a 50% export tax on a wide range of commodities if sold in the form of ores. Indonesia has one of the biggest Copper mines in the world. Around 14 minerals have been identified by the Energy and Mineral Resources Ministry including Copper, Gold, Silver, Tin, Lead, Iron Ore, etc. The export tax is expected to be in the range of 20%-50%.
- Government’s nationalizing mining properties to take over control of their national resources
August 2011: The President of Venezuela, Hugo Chavez, nationalized Venezuela’s Gold mining industry. His action gives the government total control over all Gold being explored and produced in Venezuela. Chavez also repatriated $11 billion in Venezuelan Gold reserves currently being held by U.S. and European central banks
September 2011 Denver Gold Forum
Newmont Mining CEO, Richard O’Brien, thinks that nationalization is a trend but that “it’s part of life.”
David Christensen, CEO of ASA Gold and Precious Metals, said, “[nationalization is] going to play out … the pie has gotten bigger and so the perception is that they should take the larger portion of the pie.” Christensen names West Africa as the nation with the biggest risk.
Mine Production
In the latest report from the World Gold Council, total worldwide mine production of Gold declined in the first quarter of 2012 to 674 metric tonnes from 721 metric tonnes in the last quarter of 2011.
Recycled Gold
Another major source of supply is recycled Gold. This primarily refers to used jewelry and other scrap Gold items that are sent to refiners to be made into new Gold products or put into .999 bars for resale. According to the latest report from the World Gold Council, the amount continues to decline, dropping to 391 metric tonnes for the first quarter of 2012, compared to the 426 tonnes recycled in the last quarter of 2011.
Demand Fundamentals
- World Central Bank Purchases
Thirteen different sovereign government central banks added 456.4 metric tonnes to their reserve in 2011, the most in five decades. Based on the first four months of central bank demand this year, they are tracking to go over 700 metric tonnes this year. While the Gold tonnage demand from central banks in recent months has been significant, Gold is a tiny fraction of most central bank reserves, especially the emerging market creditor nations like China, whose foreign exchange reserves are massive. I believe that the central banks of the BRIC countries (Brazil, Russia, India and China) will accelerate their purchases of Gold given the euro zone debt crisis and the risk of the debt crisis spreading to Japan, the UK and probably the U.S.
The World’s Central Banks are Running Away from U.S. Dollars and Euros and Buying Gold?
The International Monetary Fund announced late yesterday that the Central Bank purchased 70.3 metric tonnes of Gold in April 2012.
The Philippines added 32.13 metric tonnes making their total currently at 194,241 tonnes
Turkey added 29.7 metric tonnes making their total currently at 239.3 tonnes
Mexico added 2.92 metric tonnes making their total currently at 125.5 tonnes
Kazakhstan added 2.02 metric tonnes making their total currently at 98.19 tonnes
Ukraine added 1.4 metric tonnes making their total currently at 30.607 tonnes
Sri Lanka added 2.177 metric tonnes making their total currently at 7.807 tonnes
IMF Buys $2.3 Billion Worth of Gold
After years of selling Gold to help finance developing countries projects, the International Monetary Fund announced in May 2012 that it is now forced to purchase $2.3 billion worth of Gold (1.5 million ounces) on account of rising global risks. The IMF currently holds around 2,800 tonnes of Gold, but facing increasing credit demand and risk from many euro zone countries, it needs to increase the Fund’s Gold reserves. This announcement comes as no surprise, because many Greek, Spanish and Italian banks are badly in need of Euros and U.S. Dollars and have been selling Gold into the global commodity markets to raise funds.
The Deputy Chairman of Russia’s Central Bank, Sergey Shvetsov, said that the Bank of Russia plans to keep buying Gold on the domestic market in order to diversify their foreign exchange reserves.
- Gold Accumulation Programs
For the past two years, the Industrial and Commercial Bank of China (ICBC), China’s largest bank, has continued to increase the size of their Gold Accumulation program. As of April 2012 ICBC now has over 2 ½ million Chinese clients buying Gold on a monthly basis. At this current pace of growth, the bank should have over 5 million Gold accumulation clients by 2015. The ICBC bank is currently holding over a billion dollars of Gold in their vaults. Gold Accumulation programs have not only been very successful in making Gold more accessible in cities, but also in more rural parts of China as well, turning the owners of these accounts into long term investors. This program is responsible for much of the 79 metric tonnes of Gold acquired by China at the end of February, putting China on the path to acquire 479 tons in 2012. Banks in both India and Japan offer Gold Accumulation programs, but they are a fraction of the size of ICBC.
On May 9, 2012 the Federal Reserve Board and China’s Banking Regulatory Commission approved ICBC’s purchase of an 80% stake in New York’s Bank of East Asia. This is the first time a controlling purchase of a U.S. bank was made by a Chinese bank. Speculation is that this is the first step in making the Chinese Renminbi more acceptable as foreign exchange. There is also a strong possibility that once the appropriate staffing and computer software is in place, New York’s Bank of East Asia will start offering a Gold accumulation program to its account holders.
- Jewelry Fabrication Demand
The World Gold Council (WGC) just released first quarter 2012 Jewelry Fabrication Demand numbers. For the first three months of 2012 jewelry demand was 511 metric tonnes, up 80 tonnes (18.5%) compared to 431 metric tonnes from the fourth quarter of 2011.
- Bar and Coin Demand
Public and institutional investment demand for Gold coins and bars have increased dramatically over the past two years. WGC numbers show coin and bar demand for 2009 at 786 metric tonnes, 2010 at 1,210 metric tonnes, and 2011 at 1,524 metric tonnes. Demand has increased 94% in just two years as the average price continues to increase 61%.
Supply/Demand Fundamentals are Truly Astonishing
After reading the above information it should be very clear why I say the fundamentals are astonishing. Supplies from Gold mines and recycled Gold are dropping, while Gold demand is increasing in four different areas. The instability of many currencies caused by the European debt crisis and the monetary stimulus from the U.K., Japan, China and the United States, will only increase demand from central banks and investors.
A Little Known Bullish Fact for Gold
The Basel Committee for Bank Supervision (BCBS), the maker of global capital requirements and whose Basel III rules form the basis for global bank regulation, is studying changing Gold from a bank capital Tier 3 asset to a bank capital Tier 1 asset. Gold has historically been classified as a Tier 3 asset. When determining how much money a bank can loan, the bank’s Gold holdings have traditionally been discounted 50 percent at the current market value. With value cut in half, banks have little incentive to hold Gold as an asset. If the BCBS changes Gold to a bank capital Tier 1 asset, the valuation of Gold will no longer be discounted and Gold will be considered a core asset of a bank’s financial strength from a regulator’s point of view. This will encourage American banks to also hold Gold as a financial asset like European and Asian banks have for years.
Conclusion
The time is right to buy Gold now. The supply/demand fundamentals, the trend, and the future outlook are extraordinary. Gold’s risk/reward ratio is heavily weighted in favor of reward. From the current price levels you are risking $50 per ounce, versus a potential reward of a minimum of $500 per ounce. Â
So, what Gold bullion investment products should you purchase? Well, I believe I have made it clear that Gold/Silver mining stocks are not the best way to own Gold. I would strongly recommend physical Gold coins, 1/5 ounce to 1 ounce (22kt to 24kt) North American and European Gold coins with a premium that is under 15%.
Barry Stuppler – Kitco News – June 1, 2012