May 8, 2024

Investor Gold Demand Hits All Time Record – China and India Grab 61% Of Total Gold Mine Production

February 16, 2012 by 2 Comments

Investor demand for gold during 2011 hit an all time high, fueled by soaring demand in China and India.  Total gold demand by China and India during 2011 amounted to a staggering 61% of all gold mine production last year.

The 2011 Gold Demand Trends report issued by the World Gold Council show a huge increase in gold demand and a small increase in global gold mine production.  This continues a trend that has been in place since 2001.  Despite an almost 600% increase in the price of gold since 2001, global gold mine production has increased by only 7.7%.

Typically, a large increase in price will bring forth additional supplies as producers rush to take advantage of higher prices.   This has not happened with gold due to the depletion of existing gold reserves and the inability of miners to discover and develop new gold deposits.  The continuing increase in gold demand and the lack of new supply will eventually result in gold prices higher than most people can imagine today.

Highlights of the Gold Demand Trends report are summarized below.

  1. For the first time ever, on a dollar basis, gold demand hit all time record highs at $205.5 billion, representing 4,067.1 tonnes of gold.
  2. Investor demand for gold hit all time record of 1,640.7 tonnes, up 5% from the previous year.
  3. Demand for gold by China soared 20% last year to 769.8 tonnes and demand by India, despite currency weakness, was 933.4 tonnes.  It is expected that China will become the largest gold market in the world during 2012 based on continued record setting demand.
  4. Global gold production increased by only 4% last year to 2,809.5 tonnes.  The combined gold demand of 1,703.2 tonnes by China and India consumed 60.6% of all new gold mine production.  It is projected that the supply of new gold will remained “restrained” for the foreseeable future.
  5. The desire to protect wealth accounted for surging gold demand in Europe as the European Central Bank engages in a massive money printing campaign to prop up the insolvent banking system.
  6. Central banks continued to buy gold during 2011, increasing total purchases to 440 tonnes, up by 77 tonnes from last year.
  7. The amount of gold available to meet demand is being restrained not only by low mine production but also by reduced supplies of gold from recycling.   Despite a 28% increase in gold prices last year, the supply of recycled gold declined by 2% to 1,611.9 tonnes.  According to the Gold Council, this implies that “market supplies are drying up and that consumers may be holding on to their gold in the expectation of higher prices.”
  8. Investors are showing a strong preference for physical gold as seen by the investment flows into bar and coin compared to ETF demand.   Demand for gold bar and coin during 2011 totaled 1,486.7 tonnes compared to ETF demand of only 154.0 tonnes.
  9. Gold demand by ETFs increased in the 2011 fourth quarter over the comparable period last year, but total demand during 2011 of 154.0 tonnes was far below ETF gold demand of 367.7 tonnes during 2010.

The Gold Council bullishly notes that the gold market is unique in that it is driven by a “diverse set of factors” and multiple sources of demand.

Filed Under: Bullion Sales, Featured, Gold Tagged With: , , , , , , , , ,

Have Gold Investors Become Too Bullish? Ask The Same Question At $5,000

February 4, 2012 by 2 Comments

Have too many investors gotten overly bullish on gold?

After a stunning advance of almost $200 per ounce from last year’s closing price, some are asking if gold has gotten ahead of itself.  After advancing almost nonstop since the beginning of the year, gold sold off sharply, dropping by $32.50 to close in New York trading at $1725.90.

Analyst Mark Hulbert, who tracks investor sentiment as reported in the Hulbert Gold Newsletter, reports that bullish sentiment on gold has become extreme.  At the end of 2011, short term gold timers were completely out of the gold market.  The Hulbert Gold Newsletter Sentiment Index (HGNSI) registered 0.3% on December 29th compared to 51% today.  Mr. Hulbert sees the rapid return to bullishness by gold investors as a worrisome signal and notes that the HGNSI never got as high as it is today when gold previously traded at current price levels.

Mr. Hulbert notes that his indicator can be early as was the case last year.  In early December Hulbert noted that bearish sentiment was reaching extreme levels but gold subsequently plunged from $1,752 on December 1st to $1,574.50 on December 30th.

One indicator of gold sentiment that does not seem to be signaling an imminent sharp correction in gold is the CBOE Gold ETF Volatility Index (Gold VIX) which measures gold volatility based on SPDR Gold Trust (GLD) options trading.  As bearish put positions on the GLD increase, the VIX rises as it did last August prior to a sharp correction in the price of gold.  After peaking at 40 last year, the VIX is currently at 22.

CBOE Gold VIX (GVZ) - courtesy cboe.com

 

Could the price of gold correct in the short term? Yes.  Should long term investors who hold gold as a safe haven against a government that has an official policy of debasing the currency be worried?  No.

A short term correction is nothing more than a buying opportunity for long term investors.  Why would one care if gold corrects to $1,600 on its way to $5,000?  Here are a few items for consideration by those worried about a “correction” in the price of gold.

The U.S. has accumulated debt obligations and promises that are mathematically impossible to repay.  Neither future economic growth nor tax increases will be sufficient for the government to meet its obligations without debasing the value of the dollar.  The government is spending $1.60 for every $1.00 collected in revenues, half of all families receive some type of government payment and half of all wage earners pay no taxes.

The government’s “solution” for too much debt remains the same – more debt.  Here’s what Treasury Secretary Geithner said when he asked Congress to raise the debt limit in August 2009 when government debt totaled “only” $12.1 trillion.

“Congress has never failed to raise the debt limit when necessary. Because members of both parties have long recognized the need to keep politics away from this issue, these actions have traditionally received bipartisan support. This is clearly a moment in our history that calls for continuation of that tradition.”

As the debt burden approaches the day of reckoning, the proportion of the population actually working continues to decline.

Investors late to the party attempting to diversity into gold may find that it’s too late – gold may not be available at any price.

Gregor Macdonald notes that global gold production over the last decade has been below the average of the past 110 years.  Normally, higher prices will  result in higher supplies as producers rush to capitalize on higher prices.  Despite the fact that the price of gold has increased every year for the past decade, gold production has barely increased – there is simply not that much gold left which hasn’t already been mined.

 

Global gold production - courtesy gregor.us

A looming price correction in gold?  Bring it on!

Filed Under: Featured, Gold, US Debt Crisis Tagged With: , , , , , , , , , , ,

Gold Bullion Coin Sales Soar By 94% In January As Confidence In The Dollar Crumbles

January 31, 2012 by Leave a Comment

According to the latest production figures from the U.S. Mint, January sales of American Gold Eagle bullion coins soared by 93.8% over the previous month.

A total of 127,000 ounces were sold in January compared to 65,500 ounces in December 2011.  The surge in demand for gold bullion coins is now at the highest level since January 2011 when 133,500 ounces were sold.

Investors are taking opportunity of the bargain price of gold which remains below last year’s high.  After hitting a London PM Fix price of $1,895 on September 6, 2011, gold sold off by 19.2% to a closing low of $1,531.00 on December 29, 2011.

Since the beginning of the year, the price of gold has steadily advanced.  The closing London PM Fix price of $1,744.00 on January 31st represents a gain of $213 per ounce for the month, up 13.9% from the 2011 year end price.  The price of silver has also advanced strongly in 2012 with a gain of 26.8% from last year’s low amid record breaking demand for the American Silver Eagle bullion coins.

Sales of the American Gold Eagle bullion coins hit an all time record in 2009 when 1,435,000 ounces were sold.  A summary of annual gold bullion sales since 2000 is shown below.

Total yearly gold bullion coin sales from January 1, 2000 to January 31, 2012 are shown below.

Gold Bullion U.S. Mint Sales By Year
Year Total Ounces Sold
2000 164,500
2001 325,000
2002 315,000
2003 484,500
2004 536,000
2005 449,000
2006 261,000
2007 198,500
2008 860,500
2009 1,435,000
2010 1,220,500
2011 1,000,000
2012 127,000
7,376,500
Note: 2012 total through January 31, 2012

The huge demand during 2009 for gold bullion coins came in the wake of the 2008 financial system meltdown as investors sought a safe haven from paper assets.  Here we are four years later and the financial system is more fragile than ever with insolvent banks  and governments being propped up by central banks that are printing money on a scale previously unimaginable.

Although I have been a precious metals investor for many years (more sometimes than I care to think about), many of the people I deal with on a personal  and professional level seemed to be totally confident holding only paper assets, even after the financial system came very close to a total collapse in 2008.

That confidence now seems  to be slowly but persistently eroding and I am seeing many people enter the precious metals market for the first time.  It is not an “all in” seismic shift but rather a thoughtful and fundamental portfolio reallocation based on the growing realization that paper dollars are being constantly debased.

A one time bout of money printing by the Federal Reserve to “save the system” can perhaps be quickly forgotten, but a persistent and deliberate effort to debase the currency is another matter.  The growing realization that the Federal Reserve is deliberately destroying the integrity of the dollar will be the basis for continual future demand for the only real money left – gold.

The growing movement to reallocate wealth into gold is still in its infancy which implies a future gold value many thousands of dollars higher than today’s price.

Filed Under: Bullion Sales, Featured, Gold, Silver, US Mint Tagged With: , , , , , , , ,

Major Buy Signal For Gold And Why Stock Markets Are Ignoring Predictions Of Economic Collapse

January 26, 2012 by 1 Comment

Predictions that the global economic system will collapse have been coming at an accelerated pace lately.  Usually, many of  the most extreme scenarios are from sources more interested in gaining publicity rather than offering a balanced analysis.

What’s unusual is that lately, many of these apocalyptic predictions are coming from some of the most normally sedate institutions in the world such as the IMF and the World Bank.

Central bankers and the heads of world financial organizations usually speak in oblique and obfuscated terms designed to convey confidence.  Either the financial powers are writing a new book of rules or we are all headed for some unimaginably horrific scenario of financial and social chaos.

Here’s a small sample of the latest warnings from the sedate and not so sedate.

IMF Chief Warns Europe Must Fuel Growth

BERLIN—The head of the International Monetary Fund warned that in addition to cutting yawning budget deficits Europe needs to do more to promote growth and stop the crisis from spreading to the world economy.

“It is about avoiding a 1930s moment, in which inaction, insularity, and rigid ideology combine to cause a collapse in global demand,” IMF Managing Director Christine Lagarde said before the German Council on Foreign Relations. “A moment, ultimately, leading to a downward spiral that could engulf the entire world,” she said.

World Bank Projects Global Slowdown

“Developing countries need to evaluate their vulnerabilities and prepare for further shocks, while there is still time,” said Justin Yifu Lin, the World Bank’s Chief Economist and Senior Vice President for Development Economics.

Developing countries have less fiscal and monetary space for remedial measures than they did in 2008/09. As a result, their ability to respond may be constrained if international finance dries up and global conditions deteriorate sharply.

“An escalation of the crisis would spare no-one. Developed- and developing-country growth rates could fall by as much or more than in 2008/09” said Andrew Burns, Manager of Global Macroeconomics and lead author of the report. “The importance of contingency planning cannot be stressed enough.”

Feliz Zulauf Sees More Trouble Ahead

Felix Zulauf: Yes, I believe the peripheral nations have entered recession territory, and I believe it will get worse.

So, the situation in Europe will get worse before it gets better. Moreover, the ECB, which has its roots in the German Bundesbank, will see to it that the ECB does not become the lender of last resort until they are absolutely forced into it by the market. For investors, this is very important to understand. The new leader Mr. Draghi may leave Trichet’s conservative path, however, as since he is in power he has talked one way and acted in another way. This is delicate as the credibility of the ECB could be lost quickly.

Euro Breakup Would Cause Global Meltdown

In his speech at Davos, Soros will say it is “now more likely than now” that Greece will formally default in 2012, Newsweek said. Soros nevertheless thinks the euro will survive, according to Newsweek.

The world is facing a period of “evil,” Soros said, adding that he foresees Europe descending into chaos and conflict, while rioting in the streets of the U.S. will lead to a curtailment of civil liberties and the global economic system possibly collapsing altogether, Newsweek reported.

All of the risks to global prosperity mentioned above have been well known by investors for months now.  The day the IMF Chief warned of a global depression worse than the 1930’s, the Dow Jones yawned and drop by 10 points.

Is there a major disconnect from reality by U.S. investors or has the worst already been discounted after the steep stock market sell off last August?  Ever since an inside out day on October 3 of last year, the Dow Jones has powered higher, ignoring all the bad news and warnings of Armageddon.  Exactly what is going on?

 

Dow Jones - courtesy yahoo.com

The answer is positive for both stocks and gold.  The “collective wisdom” of the markets saw a resolution to the imminent threat of the European debt crisis last fall, and that resolution is known as quantitative easing.  As previously noted in this blog last December, Every Solution To the Euro Crisis Involve Printing Money, which is exactly what happened.  Both the European Central Bank (ECB) and the Federal Reserve stand ready to print whatever quantity of money is required to paper over the European and U.S. debt crisis.

The massive first phase of the ECB’s Long Term Refinancing Operation advanced about $780 billion to Europe’s insolvent banking system, buying time and postponing the day of reckoning.  The ECB will hold a similar operation in February.

Long term this does little to solve Europe’s fundamental problems, but is short term bullish for stocks and extremely long term bullish for gold and silver.

 

 

Filed Under: Featured, Gold, Gold Stocks, Silver, US Debt Crisis Tagged With: , , , , , , ,

The Gold Bubble Myth – Investors Remain Underinvested In Gold

January 26, 2012 by 2 Comments

The chronic myth that gold is in a bubble continues to persist, perhaps driven by the fact that gold has risen for the past 11 years.

The mainstream press has float stories year after year that gold was dangerously overpriced and unsuitable for most investors.  This gold bubble mindset, promulgated by “analysts” who have never owned gold has succeeded in keeping the vast majority of investors out of the best performing asset class of the past decade.

Despite every effort by the Federal Reserve to debase the value of the U.S. dollar, an uninformed and gullible public seems content to hold paper dollars which continue to decline in purchasing power.   Worse yet, in an effort to forestall insolvency and reduce the value of debt obligations that are mathematically impossible to repay, the Fed has explicitly adopted a dollar debasement policy.

While the smart money has been moving into gold, the vast majority of investors are under invested in precious metals.  The relatively low demand for gold can be seen from the third quarter gold demand and supply statistics from the World Gold Council.

Total gold demand has remained relatively stable for the past four years at approximately 4,000 tonnes.  Various categories of gold demand such as bar and coin and ETF rose while jewellery demand actually dropped and technology demand remained relatively unchanged.  Total global gold demand of 4,000 tonnes is valued at only about $230 billion.  By comparison the market value of Apple is $415 billion, the market value of IBM is $222 billion and the market value of Microsoft is $248 billion.

Meanwhile, monetary authorities world wide are printing money to prop up governments that have reached the limits of taxation and borrowing abilities.  This, along with the low level of demand for gold tells us that we are not even close to the ultimate highs that will be seen in the gold market.

More on this topic:

Gold Bull Market Could Last Another 20 Year With $12,000 Price Target

Why There Is No Upside Limit For Gold and Silver Prices

Sources and Demand For Gold

A nifty graphic detailing the sources and demand for gold can be seen below from Trustable Gold, which provides investors with information on gold investment opportunities.

 

Courtesy - trustablegold.com

Filed Under: Bullion Sales, Featured, Gold, US Debt Crisis Tagged With: , , , , , ,

Gold Soars As The Fed Explicitly Promises To Debase The U.S. Dollar

January 26, 2012 by Leave a Comment

Federal Reserve Chairman Bernanke hit the panic button today by announcing a specific inflation target, vowing to keep rates at zero until at least 2014 and pledging to offer additional monetary stimulus. The Fed also noted, as it has in the past, that the economy still faces “significant downside risks”.

These actions by the Fed come nearly four years after the financial crisis began in 2008.  During that time, the Fed has ballooned its balance sheet to almost $3 trillion, driven real interest rates to negative 1.2% and encouraged lending by flooding the banking system with reserves.  The Fed’s monetary easing was supplemented by trillions of dollars in U.S. deficit financed spending  aimed at restoring economic growth and gluing back together the shattered real estate bubble.

Despite these unprecedented and controversial actions, the economy refuses to rebound.  Collapsing home prices, declining real incomes and an “official” unemployment rate of 8.5% are deflationary and this is what has panicked Bernanke more than anything else.  Deflation is the mortal enemy of a credit fueled, debt burdened economy.  Today’s actions by the Fed show that Bernanke will do whatever is necessary to prevent a deflationary collapse.  Of course, the markets already knew this.

GOLD 01/25/2012 17:15 1710.80 1711.80 +44.40 +2.66% 1648.20 1714.00
SILVER 01/25/2012 17:15 33.27 33.37 +1.22 +3.81% 31.46 33.53

The real reason behind the explosive move up in gold and silver was the historic change in Fed policy with the announcement of an explicitly targeted inflation rate of 2%.   Although the Federal Reserve has been debasing the value of the currency ever since its creation, for the first time ever, currency debasement and financial repression has now become an officially stated policy goal.

 

Gold Explodes - courtesy kitco.com

 

The concept of explicit inflation targeting is dangerous and reckless, which is why it has never been done before.  If the Fed decides that we need 2% inflation today, does the rate go higher later?  How will the Fed know exactly when and exactly how to stop creating inflation?  This is the same Fed run by the same Ben Bernanke who could not identify the biggest credit fueled real estate bubble in history.

Will debt-deleveraging overpower the Fed’s ability to create inflation?   Bloomberg’s Michael Kinsley persuasively tells us, Please Remain Worried About Rising Inflation.

About two years ago I wrote an article saying that despite the lack of evidence, and despite the near-universal belief among economists that it was not a problem, I was worried about inflation. My reason was that I couldn’t see how the government could pay off the massive debt it was running up except by inflating at least part of it away.

For this, I was widely ridiculed, and I’d like to take this opportunity to claim vindication. That is, I’d like to — but I can’t. Inflation (CPI) has been creeping up the past couple of years – – from less than 2 percent to more than 3 percent — but that’s still pretty low. Nevertheless, I double down: Barring a miracle, there will be a fierce storm of inflation sometime in the next few years and it will wipe out a big chunk of the national debt, along with the debts of individual citizens, and the savings of others.

One reason I say this is that the arguments on the other side have shifted. It used to be, “It’s not gonna happen — so don’t worry about it.” Now it’s, “You know, a moderate dose of inflation would be no bad thing. So don’t worry about it.” Kenneth Rogoff, an economics professor at Harvard University, is the leading spokesman for this view. He wrote in August that he would like “a sustained burst of moderate inflation, say, 4 percent to 6 percent for several years.” Five years of 5 percent inflation would reduce the value of debts by 27 percent —

It has been four years now, and things are starting to look up a bit. Time to raise taxes or cut spending? Time to stop borrowing? No, not yet (says Krugman). So, when? After eight years? Twelve? Soon you’ll be bumping into the next recession. Or do the annual deficit and the national debt simply not matter? If that’s the case, why do we pay taxes at all?

Although Kinsley cites the example of how “moderate”  inflation of 5% for 5 years would reduce the value of debt by 27%, the obvious corollary would be a decline in the value of the dollar by the same amount.  The U.S. dollar can no longer even pretend to be a store of value, given the new Fed policy of targeted inflation.

The old adage “don’t fight the Fed” is true – and the Fed has just given an all out buy signal on gold.

Filed Under: Featured, Gold, Silver, US Debt Crisis Tagged With: , , , , , ,

A Rush For Gold In Iran – Currency Collapse Sends Gold Prices Soaring

January 24, 2012 by 1 Comment

The already weak economy of Iran faces additional pressure after the European Union banned all oil imports from Iran effective July 1.   The EU actions support a U.S. directed effort to embargo Iranian oil and sanction the Iranian banking system, effectively freezing Iran out of the international financial system.

The moves by the United State and the European Union were taken in an effort to force Iran to abandon its nuclear weapons programs.

Without  foreign currency receipts from the sale of oil, Iran is unable to pay for necessary imports, resulting in soaring inflation and the collapse of the Iranian currency, the rial.  As a result, Iran’s currency tumbles to a new record low and currency holders desperately rush for gold.

The Iranian currency, the rial, tumbled Monday in black market trading to a new record low against the dollar, news agencies said, as the EU moved to impose an oil embargo and fresh sanctions on Tehran.

The unofficial rate in central Tehran was around 20,500 rials to the dollar, the official IRNA news agency reported.

A rush for gold and other non-currency assets has since taken hold, with the price of gold coins in Iran rising by 25 percent since January 18.

As recently as July, it cost only approximately 10,500 rials to buy a dollar, as can be seen in the chart below which depicts the “official” exchange rate.

Courtesy: exchange-rates.org

As the economic collapse in Iran progresses, a desperate population is discovering that ultimately, the only real money is gold.

 

Filed Under: Featured, Gold Tagged With: , , ,

Every “Solution” To The Euro Crisis Involves Printing Money

December 9, 2011 by 4 Comments

Attempts by central banks to blatantly manipulate the price of gold lower should come as no surprise to long time gold investors.  Market News International reported on Thursday that the Bank of England, the Federal Reserve and the Bank for International Settlements mounted coordinated selling in an attempt to drive the price of gold lower. After advancing to $1,757.80, gold reversed course, ending the day in New York trading at $1,706.80, down $51 from the morning high.

The reported attempt to crush the price of gold coincides with the growing perception that every “solution” offered thus far to resolve the potentially catastrophic debt crisis in Europe revolves around the creation of vast amounts of new fiat currency.

European countries that have piled up ruinous levels of indebtedness are quickly discovering that they have run out of options. The limits on imposing new taxes have been reached, bond markets won’t finance additional borrowing, austerity won’t work and debt costs are spiraling out of control as Euro zone economies grind to a halt.

Here’s a rundown of some of the bizarro world “solutions” that have been offered by European rulers to prevent an economic collapse in Europe.  Try to figure out which option does not, at its core, involve the printing of new Euros.

–European Central Bank (ECB) President Mario Draghi insists that the central bank will not finance government deficits by purchasing new government debt with freshly created Euros.  The amount of government bonds already purchased by the ECB exceed €200 billion and the ECB continues to buy billions of additional euro debt each week.  In addition, the ECB is currently lending European banks as much money as they ask for.  Although the ECB’s charter prohibits it from financing governments by buying their debt directly, the ECB has no qualms about buying government debt in the secondary market.

-Financial assistance from the International Monetary Fund is another option being discussed.  Where would the IMF get the money to lend to debt stressed European governments?  The IMF would be funded with money created by Europe’s central banks which the IMF would then re-lend to the same European nations whose central banks created the money in the first place.

-The European Stability Mechanism (ESM) was established to bail out insolvent members of the European Union.   The amount of ESM funding was grossly inadequate to address the debt crisis.  The proposed solution – grant the ESM a banking license (read license to print money) which would allow the ESM (as a bank) to borrow unlimited amounts of money from the European Central Bank.

If you correctly guessed “none of the above”, you probably are already invested in gold although probably not to the extent that you should be.

Printing money is the last desperate attempt of failed governments to keep the lights on.  Allowing the price of gold to soar would expose the extent to which the Euro, in particular, and all paper money in general have been debased by insane monetary policies.  The Central Banks cannot hide this truth anymore.  Nor can they prevent the price of gold money from ultimately reflecting its true value priced in paper currencies.  Any retreat in gold prices should be viewed as a buying opportunity, courtesy of central banks.

 

Filed Under: Featured, Gold Tagged With: , , , , , , ,

You Know Paper Currencies Are In Trouble When Investors Flock To The “Safety” Of The Yen

September 30, 2011 by 2 Comments

Investors in paper currencies are running out of safe havens.  As Europe totters on the brink of a debt implosion and the Dow routinely plunges 1,000 points every other week, holders of paper wealth are desperately searching for a store of stable value.

Ironically, the two currencies viewed as the least risky are the Japanese yen (issued by the country with the highest debt/GDP ratio in the world) and the U.S. dollar (issued by the country with the largest amount of debt in the world).

Investors in U.S. dollars remain forever at risk to the Fed’s policies of dollar debasement and money printing, but to seek safe haven in the yen seems like an even more foolhardy proposition.  Consider It’s 1987 Without the Bubble In Japan for insights into the fundamental weakness of the economy backing the paper yen.

Japan’s labor force shrank last month to its smallest size since October 1987, when the nation’s stock-market benchmark was 185 percent higher and land prices were 85 percent greater than today.

Employers cut payrolls by 160,000 and a further 200,000 workers retired or abandoned efforts to find a job, leaving the seasonally adjusted number of employed at 59.4 million, the statistics bureau said today in Tokyo. Separate figures showed industrial production rose 0.8 percent from the previous month, less than all but three of 28 forecasts in a Bloomberg survey.

The data deepen concern that Japan’s recovery from the March earthquake will be stunted by manufacturers shifting operations abroad because of gains in the yen, a deterioration in consumer confidence and prospects for higher taxes at home. The challenges add to the burden of an economy already beset by a shrinking and aging population.

The yen traded at 76.59 as of 12:11 p.m. in Tokyo, less than 1 percent from the post-World War II record high of 75.95 on Aug. 19. The Nikkei 225 Stock Average was little changed at 8,723.12, compared with the peak of 38,915.87 when it closed out 1989, capping a four-year run when it soared almost 200 percent.

Japan has been in a contained depression for two decades, propped up by massive deficit spending and BOJ money printing.  A double dip world recession will send Japan’s economy into a nosedive since exports account for 15% of GDP.

In order for Japan to service its crushing debt burden, they need rapid economic growth and and a large expansion of their labor force.  Will this happen?  In a word, no.  The world economy has been in a downward spiral since 2007  and massive stimulus efforts by governments and central banks have failed to contain the ongoing depression.  Making matters even worse for Japan is the fact that the Japanese are slowly exterminating themselves.  The birth rate in Japan has been plunging since the early 1970’s and has now gone negative.  An economy with a dwindling labor force and an aging population has little hope of servicing a massive debt burden.

Japan population growth: Courtesy google.com

 

The appreciation of the yen is forcing Japanese companies to fire domestic employees and move operations overseas in order to remain competitive.   The Japanese government has intervened numerous times in the currency markets, trying to force the yen lower without success.  Despite the weak fundamentals of the Japanese economy and a suffocating level of debt, the yen continues to appreciate, suggesting that investors perceive other currencies to be riskier than the yen.   The yen has gained the dubious distinction of being the cleanest shirt in the dirty laundry.

 

Yen - courtesy stockcharts.com

There is no way of predicting how long the value of the paper yen can defy economic reality.  Markets will eventually price to fundamental values and investors will question the value of all paper currencies.  At this point, gold will rightfully be perceived as the only currency with real value.  What price level gold will soar to during the chaos of collapsing currencies cannot be predicted – what can be predicted is that holders of gold will be the only ones left holding a currency with any value.

 

 

 

 

Filed Under: Featured, Gold, US Debt Crisis Tagged With: , , , , , , , ,

Will Central Banks Continue To Increase Their Gold Holdings?

September 29, 2011 by 3 Comments

FORT KNOX

Central banks continued to add to their gold reserves in August with three countries adding a total of 643,000 troy ounces to their reserves.

According to the Wall Street Journal, the largest central bank purchaser of gold during August was Thailand which purchased 300,000 troy ounces, bringing their total gold holdings to 4.4 million ounces.  The Bolivian central bank purchased 225,000 ounces increasing their total reserves to 1.36 million ounces and the central bank of Russia purchased 118,000 ounces which increased total reserves to 27.2 million troy ounces.

After selling gold reserves for many years, central banks began purchasing gold around 2000.  Over the past several years central banks have sharply accelerated their purchases of gold to diversify away from the U.S. dollar which is no longer considered to be a safe asset.  China and Russia, large buyers of gold, have been particularly critical of U.S. monetary and fiscal policies and are actively seeking to reduce their reserve holdings of U.S. dollars.

Will central banks continue adding to their gold reserves?  For some insight on this matter, consider the following facts.

In August Russian Prime Minister Putin said that the United States is “not living within its means, shifting the weight of responsibility  on other countries and in a way acting as a parasite.”  Putin also said that a new reserve currency is necessary to protect against a “systemic malfunction” of the U.S.  Putin has reason to worry since Russia has almost half of its reserves in U.S. dollars.  In 1998 Russia had gold reserves of 14.7 million ounces compared to 27.2 million ounces after its latest purchases.  Despite the fact that the Russian central bank has the eight largest official gold holdings in the world, gold amounts to only 8.2% of total reserves.

China, which holds $1.2 trillion of U.S. treasury debt, has the most to lose from the continuous debasement of the U.S. dollar and has become harshly critical of U.S. economic policies.  After the U.S. debt downgrade in August, China said that America must “cure its addiction to debts” and “live within its means.”   China is actively seeking to diversify its reserves and reduce its holdings of  U.S. dollars.  The latest reports show total Chinese gold reserves at 1,054 tonnes compared to 395 tonnes in 1988.   Gold holdings amount to only 1.6% of total Chinese reserves.  China’s 33.9 million ounces of gold is currently valued at only $54.2 billion.  By comparison, the gold holdings of the SPDR Gold Shares ETF (GLD) total 39.9 million ounces valued at $65.6 billion.  Expect China to add dramatically to its gold reserves in the future.

Gold purchases by central banks during 2011 are forecast to be 336 metric tonnes, approximately 13% of total yearly gold mine production.  Central banks during  the second quarter of 2011 purchased four times the amount of gold purchased during the comparable quarter of 2010.  Given the fragile state of the world fiat money system, it is likely that central bank gold purchases could expand dramatically going forward.

Only 7 countries or institutions currently hold more than 1,000 tonnes of gold – the United States, Germany, the IMF, Italy, France, China and Switzerland.

Total official world gold holdings by central banks and the IMF currently total 30,707 tonnes, valued at approximately$1.6 trillion which, coincidentally, is the size of this year’s budget deficit for the United States.  Total gold holdings of the world’s central banks amount to only a fraction of the value of paper currencies that have been exponentially created.

All of the gold mined throughout history totals only 178,000 tonnes or about 6 billion ounces valued at $9.6 trillion.  Central bank holdings amount to only 17% of the total gold supply available.

Despite increasing gold prices, gold mine production has been stagnant.  Most of the easy to mine, high grade ore deposits have already been exploited.  New total yearly gold production adds only 1% per year to the existing supply of gold.  Increasing demand and limited supply result in higher prices.

Only 34 central banks currently hold over 100 tonnes of gold and only 12 central banks or institutions hold more than 500 tonnes of gold.

Ironically, the United States, the most indebted nation in world history has decreased its gold reserves.  In 1962, the United States owned 14,269 tonnes of gold or almost 39% of all gold held by central banks.  By 1972, the United States held only 8,584 metric tonnes of gold.  Currently, U.S. gold reserves allegedly total 8,134 tonnes but the amount remains in question since the government will not allow an independent audit of the actual amount held.

Considering the relatively small amount of gold held by central banks and the exponential increase in the creation of paper money, gold demand by central banks should  increase dramatically in the future.

 

 

Filed Under: Featured, Gold, Statistics, US Debt Crisis Tagged With: , , , , ,