Gold Investments Market Update

Gold
Gold rose in Asian trading and after an initial sell off in early trading in London this morning, it has again rallied to over $949.00. Gold was up $14.30 to $949.10 per ounce in trading in New York yesterday while silver was up 62 cents to $18.32 per ounce. The London AM Gold Fix at 1030 GMT this morning was at $948.25, £470.60 and €600.31 (from $945.75 £473.68 and €602.01 yesterday).

Gold rallied back above $950 in Asia but has since given up those gains. The economic data yesterday was poor with durable goods orders falling significantly. Worryingly, there was the biggest slump ever in demand for machinery which likely indicates companies are becoming more reluctant to invest as the economy heads into a recession (or is already in recession).

More U.S. data is due today in the form of Q4 GDP data and weekly jobless claims. Further poor data will likely lead to further weakness in equity markets and in the dollar and prudent risk aversion.

U.S. monetary and fiscal policy (the guns and butter spending of the profligate Bush presidency) remain very expansionary and inflationary. Negative real interest rates with interest rates well below the official inflation figures is very inflationary and bullish for gold.

Asian Creditors Reject U.S. Assets
More bearish developments for the dollar is the news that one of its many large Asian creditors will no longer buy U.S. Treasuries. South Korea’s National Pension Service plans to no longer purchase U.S. Treasuries, citing falling yields and an urge to pursue a broader range of foreign investments, news reports said. “It is difficult to buy more U.S. Treasuries because the portion of our Treasury investment is already too big and Treasury yields have fallen a lot,” said Kwag Dae-Hwan, head of global investments at the National Pension Service, according to a Financial Times report.

Agence France Presse quotes Tim Condon, head of Asia research at ING Barings in Singapore. “The bottom line is that it would open up a can of worms.”

China’s foreign exchange reserves, the world’s largest, hit 1.53 trillion dollars at the end of 2007, around 70 percent of which is believed to be in U.S. currency-denominated assets, particularly U.S. Treasuries. As part of efforts to diversify and boost returns on its massive foreign currency holdings, China has created a 200-billion-dollar state-controlled investment fund.

But if China suddenly announced it was selling a large chunk of U.S. Treasuries, “the market would find that difficult to absorb,” said Condon. “On the day of the announcement, the dollar would go down sharply and Treasury bond yields would go up sharply,” he said.

“Bit by bit they (China) would like to get out of the intervention game. They would like to get to that more diversified bundle of reserve holdings in a way that doesn’t disrupt financial markets too much,” said Condon.

A reported drop in holdings of U.S. Treasuries by foreign official institutions in August last year triggered concern that countries including China were dumping U.S. assets.

People’s Bank of China and Central Bank Reserve Diversification
The Chinese central bank is on record as saying that they are going to increase their allocation to gold. They are already diversifying their huge foreign-exchange reserves into what they have termed ‘strategic’ resources and metals including gold bullion. Last April The Wall Street Journal reported that People’s Bank of China Vice Governor Xiang Junbo reiterated this intention. So this is no idle speculation rather it is real demand and potentially even greater real demand.

China, the U.S.’ largest creditor may not take kindly to western and U.S. criticism of China’s actions in Tibet and could at the very least sell some of their massive dollar holdings which would result in an even greater fall in the value of the dollar.

Some Chinese economists are urging Beijing to quadruple its gold reserves to 2,500 tonnes from the current 600 tonnes (The U.S. Federal Reserve is believed to have 8,500 tonnes). Tan Yaling, an economist at the Bank of China, backed the call for higher gold reserves to “help the government prevent risks and handle emergencies in case of future possible turbulence in the international political and economic situation”.

Interestingly, a mere 5% Chinese allocation to gold would be very small in the light of the fact that Greece has 80% of its reserves by value in gold, Portugal 79%, Italy 66%, Germany 63%, Netherlands 56% and France 56%. Some of this gold may have already been leased onto the market. Thirty years ago China held 95% of its foreign reserves in gold. Today, China’s gold reserve only accounts for 1.3% of total reserves. A figure well below the average minimum 3%-5% adopted in many other countries. China with an estimated gold reserve of 600 tonnes has a fraction of that believed held in the U.S. with some 8,500 tonnes, the world’s largest holder.

This Chinese demand is not solely governmental and there is a significant increase in private demand for jewellery and investment. It is often forgotten that the Chinese gold market was only opened in 2002 and that was the first time in over 50 years (since 1949) that Chinese individuals could buy gold in jewellery or bullion format. With the huge increase in volatility in the Chinese stock market and fears of a crash, many of their huge and growing middle classes and nearly some 500,000 plus millionaires (in 2004 Merrill Lynch & Co estimated that there were more than 300,000 mainland Chinese with a net worth over $1 million, excluding property) will diversify partly into gold.

The global credit crisis will likely lead to many western central banks curtailing gold sales and indeed likely becoming buyers again under to create faith in paper fiat currencies. Meanwhile there is increasing demand from the Chinese central bank and also what are termed “tier 2” central banks: Russia, Argentina, South Africa and others.

Support and Resistance
Gold’s support is now between $900 and $906 and below that strong support is at previous resistance at the 1980 record nominal high of $860. Resistance is at the recent new record nominal high of $1030.80 and $1000.

Silver
Silver is trading at $18.09/18.05 at 1200GMT.

PGMs
Platinum is trading at $2007/2017 (1200GMT).
Palladium is trading at $450/455 per ounce (1200GMT).

Mark O'Byrne

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