Gold to Top $2,000 on Central Bank Buying: Chart of the Day

Gold is trading at USD 1,675.30, EUR 1,214.20, GBP 1,062.30, JPY 129,036.00, AUD 1,634.90 and CHF 1,503.70 per ounce.

Gold’s London AM fix this morning was USD 1,676.00, GBP 1,062.31 and EUR 1,214.31 per ounce. 

Yesterday’s AM fix was USD 1,673.00, GBP 1,065.74 and EUR 1,218.05 per ounce.


Cross Currency Table

Gold is marginally higher in most currencies today and continues to consolidate at the upper end of the range between $1,600 and $1,700/oz. Physical demand for coins and bars remains very strong with GoldCore experiencing a notable increase in demand this week.


Gold in USD – 30 Day (Tick)

Gold is up nearly 3% on the week and looks set to post its biggest weekly gain in more than a month. Markets remain nervous about the risk of contagion ahead of a G20 meeting whose agenda will be dominated by the euro zone debt crisis and steps to tackle the contagion.

Gold should be supported by global inflation data this morning which remains stubbornly high particularly in emerging markets. 

Inflation in China and India remains very high. In India, inflation exceeded 9% for the 10th month in a row and in China inflation is at 6.1% but the key food component of inflation rose 13.4% year-on-year in September.

European inflation accelerated the fastest in almost three years in September on soaring energy costs, complicating the European Central Bank’s task as it combats the region’s sovereign-debt crisis. The euro-area inflation rate jumped to 3 percent last month from 2.5 percent in August. Inflation in Germany also surprised to the upside this week.

The Bloomberg ‘Chart of the Day’ shows the proportion of gold in the international reserves of India, Russia, China and Mexico is significantly lower than the rates in the U.S., Germany and France, based on data compiled from the World Gold Council. The lower panel tracks central bank holdings in metric tons and the bullion price since March 2008.

Central banks last year were net gold purchasers for the first time in two decades.

“I certainly expect international central bank gold buying to continue, especially in emerging economies where foreign reserves are growing,” said Gavin Wendt, founder and senior analyst at Sydney-based Mine Life, which publishes reports on the metals industry. “It’s the safest option for them.”

Central banks, the biggest gold holders, have expanded reserves due to the international financial crisis. Central bank and government-institution buying totaled 192.3 metric tons in the first half of 2011, World Gold Council data show. Gold accounts for 75.4% of the U.S.’s reserves and 72.7% of Germany’s. 

The ratio is just 1.6% for China and 8.2% for Russia, WGC data show.

“Governments in many places like Asia and South America are rapidly embracing gold as a security mechanism,” said Wendt, who expects gold at $2,500 in 2013. “The value of their U.S. dollar foreign reserves has drastically fallen over the past decade.” Thailand, Bolivia and Tajikistan raised reserves in August, according to the International Monetary Fund.

China’s foreign exchange reserves, the world’s largest stockpile, rose by $4.2 billion in the third quarter to $3.2 trillion, the People’s Bank of China said on Friday.

Central bank demand due to concerns about currency debasement and contagion remains a primary driver of gold’s bull market and means that the foundations of the bull market are very sound.

Central bank demand is strategic leading to gradual accumulation and it is long term meaning that official sector demand will provide support to prices for the foreseeable future.

Thus, continuous suggestions that gold is a bubble today and in recent years and of a gold bubble bursting and prices falling sharply as seen in 1980 is uninformed and misguided. 

The world of 2011 is very different to that of 1980.

In 1980, the U.S. was the world’s largest creditor nation. Today, it is the world’s largest debtor nation – the largest debtor nation the world has ever seen.

In 1980, China was a communist country whose citizens were banned from owning gold. Today, there are 1.3 billion Chinese people and a growing middle class who can buy gold.

The Chinese central bank did not have any currency reserves in 1980, today they have $3.2 trillion in foreign exchange reserves.

Similarly, India, China, Brazil and other emerging markets were debtor nations in 1980 today they are creditor nations with massive foreign exchange reserves denominated primarily in dollars.

In 1980, the much of the world was coming out of a period of recession and stagflation. Today, we appear to be on the verge of a recession or Depression possibly involving stagflation again.

In 1980, there was no banking or sovereign debt crisis and no risk of global financial and economic contagion.

For breaking news and commentary on financial markets and gold please follow us on Twitter.

SILVER 
Silver is trading at $31.90/oz, €23.14/oz and £20.22/oz 

PLATINUM GROUP METALS 
Platinum is trading at $1,539.20/oz, palladium at $601/oz and rhodium at $1,525/oz. 

NEWS
(Bloomberg)
Gold Traders Most Bullish Since July

(Bloomberg)
Central Bank Buying Means Gold to Rally to $2,000: Chart of Day

(Reuters)
Gold flat after Spain downgrade

(Yahoo Finance)
Asian stocks retreat on Spain rating downgrade

COMMENTARY
(The Telegraph)
Europe’s grand plan risks slow death by a thousand cuts

(Beacon Equity Research)
Dow Theory Letters Richard Russell: to Tell you the Truth, I’m Scared

(ZeroHedge)
Foreigners Dump $74 Billion In Treasurys In 6 Consecutive Weeks: Biggest Sequential Outflow In History

(Resource Clips)
Fort Knox or Fort Potemkin?

(BusinessInsider)
Art Cashin Offers A Huge Lesson On Weimar Hyperinflation, And The Roots Of Today’s Crisis

 

 

Mark O'Byrne

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