May 28, 2022

Gold’s Role in India’s Inflation Battle

In India, the problem with inflation shows most clearly when you examine the country’s current level of gold trade and importation. Shipments have increased to 800 metric tons from 557 tons in the last year. That is an all time high and forecasts say that the number is still rising.

The purchase of all this gold shows clearly the concerns that investors have regarding the local economy and the central bank’s battle with inflation.

Why Buy Gold?

“Gold is being used as a store of value to protect against never ending inflation,” according to the head of fixed income at Canara Robeco Asset Management Ltd., Ritesh Jain.

It makes sense, since in India gold is historically and culturally tied to the concepts of wealth and prosperity. Investors are used to buying into gold either as a physical asset or on the exchange market where gold can be purchased and traded without ever taking physical possession. And while the value of gold has climbed in India—the value of the rupee and of the bonds that support the central bank have not done nearly as well.

The Inflation Situation

In the last year alone, more investment dollars flowed out of India’s economy than in. Global funds sold $250 million more shares in Indian companies than they bought. Meanwhile, inflation has been on the rise, such that food prices have risen by 18.3% in the final weeks of 2010.Citizens and politicians alike are calling for actions to be taken to curb this inflation—all the while investing in more and more gold.

China’s Emerging Influence in the Gold Market

China and its people have a long held interest in the gold market. The country’s history has been marked by periods of unrest, and its people have regularly chosen to heed history’s warnings when it comes to investment. Their general preference has been for investments that they perceive as safe and solid, as opposed to paper instruments. Thus, their top two investment choices are gold and real estate.

During the course of 2010, China’s gold imports grew nearly 500 percent. What is most surprising is that we have this information at all. Normally China is quite secretive about their gold investments and imports.

China Comes Out

Further information on the Chinese gold market reveals that turnover on the Shanghai Gold Exchanges for the first three quarters of 2010 exceeded total global identifiable demand. The number of individual customers on the exchange neared 1.6 million.

When you also consider the fact that China is the world’s top gold producer and the recent joint announcement of ministry promotion of the gold market—its easy to see why China is considered to be a force to be reckoned with in the 2011 gold investment market.

Searching for Gold

The gloves are finally off after all. China has announced its first gold mutual fund and investment demand in the country is increasing from both individual and governmental sources. The country has positively connected their future development of the gold market to the competitiveness of financial markets and made it known to the world that they don’t plan to keep their movements quiet anymore.

Sensible investors and analysts are taking China’s actions into account when trying to predict the movements of the gold market for the coming year. After all, no one wants to ignore one of the biggest players in the room.

Are Investors Abandoning Gold?

The Associated Press reported that gold and silver are responding to an improved U.S. economy by losing ground in the investment market. Since the start of the year, gold has dropped nearly $50 per ounce, measuring a decline of about 3.5% while silver has fallen by $2.31 per ounce, or 7.5%.

Some experts are responding by beginning to question the continued duration of the record interest in gold and other precious metals. They’re looking for signs that the bubble might pop in the face of predictions about gold’s strength.

Looking at Safety?

In their article, the Associated Press looks at gold and silver prices and suggests that as a consequence of the potential comeback in the U.S. economy, investors are willing to risk abandoning safe haven investments in order to seek out something a little more risky.

During the recent years of economic uncertainty, many investors responded by moving their funds into precious metals like gold and silver. Now that things are looking up, investors are reconsidering that choice in order to seek out more lucrative investment opportunities.

Looking to the Future

It is only the third week of 2011, however, so it remains to be seen whether this movement is real or perceived. No doubt, the state of the economy will give us some hints.

After a decade of stellar performance for gold, we may need to reassess based on the changes in the world economy, if not the production levels of the metal itself. In the meantime, however, gold will remain the commodity to watch and enjoy among investors everywhere.

Gold and Silver ETF Holdings Decline As Precious Metals Continue Sideways Price Action

After major upward price movement during the later half of 2010, both the SLV and GLD continue their sideway price action.

As gold and silver prices continue to consolidate, gold holdings in the SPDR Gold Shares Trust (GLD) and silver holdings in the iShares Silver Trust (SLV)  both declined.

The iShares Silver Trust, the largest exchange traded fund back by silver, has a market value of $10.2 billion.  After a one year return of almost 80%, the SLV showed a weekly decline of 191.46 metric tonnes from the previous week.  The SLV now holds a total of 10,725.73 metric tonnes of silver or 344.840 million ounces.

The holdings in the GLD declined by 1.21 metric tonnes in the past week to 1,271.47.  The record high holdings of 1,320.47 tonnes in the GLD was reached last year on June 29 when gold bullion was trading in the $1250 range.

Despite the lack of correlation between gold prices and gold holdings of the GLD, investing in the GLD has produced approximately similar returns to owning bullion, disregarding transaction costs.  The price gain during 2010 was approximately 28% for both gold bullion and the GLD.   For those who choose to avoid holding the physical metal, the GLD was an excellent substitute choice for gold bullion in 2010.

GLD and SLV Holdings (metric tons)

Jan 12, 2011 Weekly Change YTD Change
GLD 1,271.47 -1.21 -9.25
SLV 10,725.73 -191.46 -195.84

GOLD - COURTESY STOCKCHARTS.COM

GLD - COURTESY STOCKCHARTS.COM

Brazilian Gold Mine Robbed

It seems that the current interest in physically backed gold is not limited to investment markets. Last week, it was  reported that a British Colombian gold firm was the victim of an armed robbery. The company in question was the Luna Gold Corp, and their Aurizona Mine in Brazil was attacked early Wednesday morning. The robbery did not result in any employee injuries, but approximately 1,500 ounces–$2 million worth—of gold were successful stolen.

The Target

The Luna Gold Corp identifies itself as a “gold mining and exploration company engaged in the exploration and development of gold deposits and advanced stage gold exploration projects in Brazil.” Currently, their attention is focused on the site that was robbed—the Aurizona gold mine. This mine is only in its initial stages of production and the company anticipates an eventual annual production of 60,000 ounces a year.

The surrounding areas are believed to be home to other major gold deposits as well, but that is highly speculative at the moment. Unfortunately, the mine is also relatively isolated—located as it is between the two cities of Sao Luis and Belem in Maranhao state.

The Fallout

That isolation rendered the facility vulnerable to the robbers, who gained access to the site and escaped without being caught. More importantly, they escaped without harming anyone.

The company’s statement touched upon this and other fallout from the event, saying “The safety and welfare of our employees is our highest priority and we will ensure that those involved receive appropriate support and counseling. Theft in this manner is disturbing and regrettable. The company is co-operating with authorities and will update the market when information becomes available.”

As for the loss, Luna Gold Corp will be filing a claim with insurance while the Maranhao Police continue to investigate the incident.

Looking for a Top in Gold

Investors and analysts alike are looking at the record prices of gold last year and trying to predict the future. Last year the price of gold rose by more than 27%, contributing to an increase of more than 400% over the past decade.

Another year of double digit gains in the gold price has many experts considering whether prices will continue their upward trajectory, or whether there are warning signs for a potential top. The predictions are as varied as their sources:

  1. According to Goldman Sachs, gold will top in 2012 at $1,750 an ounce.
  2. John Nadler at Kitco.com predicts that gold will cap by the end of 2011.
  3. The CEO of U.S. Gold, Rob McEwen believes that the market is “a third of the way” to a mania.
  4. Jim Rodgers estimates that the long bull market in gold will result in a huge bubble for the commodities market as a whole—and he thinks we’re halfway there already.
  5. Scott Redler at T3Live.com predicts that if the price gap is truly filled, gold will stay range bound between $1,320 and $1,400 for a time before mustering up a bigger rally.

Everyone is eying the market and trying to decide what it is going to do next so that they can react accordingly. Surprisingly though, most investors do not own their own gold and have never owned it.

According to The Street, you’re much more likely to see people selling gold than buying it. Still, the media excitement about gold prices, not to mention the prices themselves, is generating new investors. The SPDR Gold Shares added 155 tons this year, for example. Longtime investors are waiting for the day when everyone jumps on the bandwagon, resulting in the gold bubble they’re currently trying to predict.

Gold and Silver: Investment Differences

Gold just had an amazing year, in which it reached a new all time high, rising about 25%. Silver provided an even more stellar performance, with a gain of about 75% and counting. It’s no wonder then, that more and more investors are becoming interested in the potential offered by silver.

One of the most pronounced differences between gold and silver is the price per ounce. Gold is currently around $1,400 per ounce, while silver is at $30. The difference has not always been so large.

The gold-silver ratio, or the number of ounces of silver it takes to buy one ounce of gold, is currently around 47:1. Historically, this ratio has been around 16:1, which closely corresponds to the ratio of gold to silver within the earth’s crust. Thus on an absolute basis, the difference in price is justified, but not to such a degree as current prices have suggest.

Another key difference between gold and silver is the price volatility. While gold has enjoyed a string of ten straight years of annual gains, silver’s price performance has not been as constant. Some years have been downright disastrous, such as the 27% drop silver experienced during 2008. From the start of the year to the low, silver had experienced a decline of nearly 40%. During 2008, gold had booked a 4.32% gain, with a maximum decline of 14.54% from the start of the year.

Finally, while gold and silver are both metals that store value, silver has been long served as an industrial metal. The recent case for gold demand has been as a hedge against inflation or a safe harbor from fiat currencies. Demand from these factors has offset declines in demand from gold jewelry, which has historically been the predominant source of demand. Silver, on the other hand, can serve in a dual capacity, with possible appreciation in value in times of both economic distress and prosperity.

Silver’s roles may be expanding once again, as it is starting to be utilized for its antibacterial qualities.

With an impressive year nearly in the books, the story for silver seems hardly over. Next year might be telling as to whether silver will continue to make progress in catching up with the historic ratios and start to challenge the label of “poor man’s gold.”

Gold and Silver: Investment Similarities

Gold and silver just seem to go together. They’re two precious metals that we love to invest in, especially after the strong performance of the metals during 2011, and gold’s string of consecutive annual gains stretching back a decade.

This year, gold futures have grown as much as 25% this year and silver futures as much as 75%. It’s this last figure that really interests us though. It is indicative of growing investor interest in a metal that is much more affordable than gold, but still offers many of the same benefits in the precious metals market.

Gold and Silver Investment Options

The major similarities that we can point to are related to the various ways that gold and silver are sold and traded among investors. In most cases, a potential investor has a few different options:

  • They can invest in bullion coins
  • They can invest in numismatic coins
  • They can invest in exchange traded funds or ETFs

Gold and silver bullion coins are produced by a number of different world mints. A few of the most widely traded options include the American Silver Eagle from the United States Mint, the Silver Maple Leaf from the Royal Canadian Mint, and the Silver Philharmonic from the Austrian Mint. These coins are issued each year and are generally sold based on the market price of silver plus a mark up. The mark ups might be $2.50 to $4.00 per coin, depending on the quantity purchased.

Numismatic gold and silver coins are those which are valued not only based on their intrinsic value, but also their rarity and condition. In some cases, a rise in the price of precious metals might not result in an increase in value for numismatic coins since other factors come into play. It takes some understanding of the coin market and grading scales to invest in numismatic coins.

For many beginning investors, Exchange Traded Funds provide a useful alternative. Precious metals ETFs are traded on stock exchanges in the same manner as stocks and generally track the price of the underlying metals. There are different types of ETFs, which use either physical metal or futures and contracts to track the price of the underlying metal. The largest and widely held precious metals ETFs are the SPDR Gold Shares ETF (GLD) and the iShares Silver Turst (SLV).

Four Approaches To Gold Investment

In its quest to determine the best way to make money from investing in gold, the Wall Street Journal recently took an in depth look at four different gold investment strategies. Each was represented by a preeminent investor, one whose method has seen some success recently.

Here’s what they had to say:

1. The first investor was John Paulson, who made his money by anticipating the economic crisis and acting accordingly. His current method of gold investment is to buy shares of large mining and exploration companies. The idea at work here, according to Paulson, is that “if gold prices do well, the miners will do even better . . . the higher gold prices go, the more miners can profit from potential and existing projects.” The downside here is that mining for gold is an expensive proposition, so the miners must make enough money to cover that expense before turning a profit.

2. The next investor discussed was billionaire Thomas Kaplan. He is focusing his investment funds on junior miners rather than the big mining companies that Paulson is currently interested in. His argument? These smaller companies are “sitting on valuable assets . . . providing the greatest leverage to a bull market.” He believes that these junior miners have a greater potential to go along with their greater risk.

3. The third investor, John Burbank prefers a different route. He focuses his attention on gold bar investment. Since the bars are an actual physical investment, he believes that they are more likely to return his investment than shares and contracts. According to Burbank, “If investors become concerned that shares and futures contracts aren’t fully backed by physical gold, or if inflation surges, they may begin to demand delivery of the metal, sending the price of physical gold soaring.”

4. The final investor, David Einhorn is also interested in bars, but in addition, he chooses to invest in exchange trade funds that own gold miners. He has also purchased call options or gold futures, which require a relatively small investment to control a large gold position.

New Partnership at La Bandera

A press release was distributed last week indicating the Aurion Resources Ltd has signed a binding letter of intent with Gammon Gold Inc. This letter of intent will ultimately give Gammon the option to earn up to a 70% interest in Aurion’s 100% owned La Bandera gold project in Durango Mexico.

Aurion acquired La Bandera only a year ago and since then, they have been working through the early exploration phases. By their own admission, they have been working to attract a joint venture partner. Gammon’s proven track record with similar mine building operations in Mexico makes them an attractive option for Aurion.

La Bandera

The La Bandera site contains an epithermal gold vein system that is more than 20 km long, but it has never been truly explored. Only seven drill holes were ever completed by previous workers. Still, there is evidence of widespread gold in quartz veins, breccias, and stockworks occurring over the length of the system.

Aurion aims to remedy that and according to its press release, “has outlined a more than 2300 m long by 300 m wide Au-in-soil geochemical anomaly coincident with a clay alteration zone which hosts widely spaced quartz veinlets. Individual soil samples assayed up to 2.07 g/t Au and individual rock chip samples of the quartz veins assayed up to 73.7 g/t Au.”

The Details of a Letter of Intent

The agreement between the two companies states that “Gammon can a earn an initial 51% interest by making $5 million in exploration expenditures over 36 months, including a firm commitment to spend a minimum $1 million in the first 12 months. Gammon can earn an additional 19% by completing a minimum $7 million in additional expenditures or by completing a positive feasibility study within 5 years of earning 51% and forming a Joint Venture.

In addition, Gammon will make a $250,000 private placement in Aurion, purchasing share units priced at a 30% premium to the 30-day moving average of Aurion’s share price as of the date of signing a Definitive Agreement. Each unit comes with a 1/2 warrant priced at a 50% premium to the 30-day moving average of Aurion share price, as of the date of signing a Definitive Agreement.