With the price of gold reaching levels not seen in 27 years, independent and family jewelry retailers are the first to feel the pinch as the crucial holiday season begins.
Gold, platinum, silver and diamond costs have been rising for a number of years. But over the past three months alone, gold prices surged about $200 to $850 an ounce as a weak dollar, record high oil prices and concerns about the economy have made the precious metal an attractive, stable investment. Volatility has also increased, with swings of up to $20 and $30 a day, causing more headaches for retailers.
Meanwhile, platinum -- a popular wedding- and engagement-band choice -- also is at near-record high prices.
Many smaller retailers have already had to raise prices because of the surge in metal costs.
"Am I worried, yeah absolutely," said Benjamin S. Sorkin, owner of Ben Sorkin Jewelers in Philadelphia. "What I'm in is a luxury business, so when people cut back, the first thing to suffer would be that."
Sorkin plans to push items such as pearls and gemstones. Stainless steel and silver are cheaper alternatives, he added.
New York jeweler Tiffany & Co. and large retailers which sell jewelry such as department stores and Wal-Mart Stores Inc. are insulated from the rising prices near-term because they order products up to a year in advance and keep more in stock than smaller retailers.
"It's one of the longest cycles of production, stores are ordering now for a year in advance for delivery," said Marshal Cohen, chief industry expert at market-research firm NPD Group Inc. "A 10 percent increase in the price of jewelry in some of the department stores won't show up until next fall."
But for smaller retailers the effect is more immediate. Bill Collins, president of Collins Family Jewelers in San Diego, said the price surge directly affects the cost of some jewelry he sells.
"While we don't raise our prices on items in the cases, when items are reordered, they're at a much higher price," he said.
A gold necklace in stock that he sells for $100 could cost shoppers about $130 to $145 after he reorders it, due to the higher price of gold, he said.
Bigger retailers are more likely to feel the effect of higher prices via accounting for their inventory. Analysts say Tiffany will face higher "Last in, First Out," or "LIFO" inventory charges. This accounting method assumes the assets produced or acquired last are the ones that are used, sold or disposed of first.
"LIFO charges have been quite significant," over the past several years, as commodity prices have risen, said Pali Research analyst Stacey Widlitz.
For the six months ended July 31, Tiffany incurred LIFO expenses of $12.4 million, up from $9.5 million a year earlier.
Prices at Tiffany reflect more than the rising cost of metals. Tiffany's vice president of investor relations, Mark Aaron, said the cost of labor and design also are big factors in the pricing of its jewelry.
"Tiffany raises prices if it needs to, as the rest of the industry does," he said. "But at least for Tiffany, labor is a meaningful part of the price. A 20 percent increase in gold does not equal a 20 percent jump in retail prices."
Aaron explained that while retail pricing could be affected by higher metals costs, Tiffany's customers won't see the sharp swings in price that buyers of simpler gold chains or bracelets may encounter.
At Fuenfer Jewelers in upscale Chicago suburb Wilmette, Ill., owner Norman Fuenfer said he expects some people will still buy gold even if it doubles in price. But if it keeps going up, things could get "very interesting" for the industry.
Fuenfer has already raised the price of some items, such as gold chains, and said he has seen sales volume fall over the past several months, although sales are still higher year-over-year.
"I'm concerned, but I'm always going to sell something. If gold prices go up I'll sell silver or palladium," he said. "Business will go on."
Monday, November 19, 2007
Buying power likely to propel gold demand: SBI
Gold demand in India, the world’s biggest consumer, may climb by as much as 10 per cent a year as rising incomes in the Asian powerhouse spur jewellery purchases, State Bank of India Chairman O P Bhatt said.
State Bank of India (SBI), the nation’s biggest lender by assets, plans to raise Rs 200 crore ($51 million) selling securities backed by gold to tap rising demand among individual investors to trade commodities, Bhatt said.
The exchange-traded fund will be launched early next year by SBI Funds Management, a group company, he said.
SBI plans to allow temples and other depositors to exchange their gold for interest-bearing bonds, Bhatt said. Households in India have about 15,000 tonnes of gold worth more than $200 billion locked away in family vaults, according to McKinsey & Co.
“The temples and trusts can deposit gold with us. We will llgive them an incentive and gold can be recycled,’’ Bhatt said at an industry conference organised by the London Bullion Market Association in Mumbai today. Investors can trade gold through exchange-traded funds without having to take delivery of the precious metal.
The gold fall
Gold has climbed 24 percent this year and approached the $850 an ounce peak on Nov. 7 as investors bought the precious metal as an alternative asset to the dollar and as a haven in times of record oil prices and financial turmoil. Gold may decline as low as $770 an ounce next year.
“Gold may decline as low as $770 an ounce next year.” Bhatt said, adding, “The upsurge was because of the crisis in the currency and financial markets. However, prices are stabilising. The upsurge was overdone.”
Bullion gained $7.62, or 1 per cent, to $793.92 an ounce and traded at $789.31 at 12 pm in Mumbai. Gold traded as low as $783.40 an ounce on November 15, having reached a 27-year high of $845.84 on the seventh of the month.
State Bank of India (SBI), the nation’s biggest lender by assets, plans to raise Rs 200 crore ($51 million) selling securities backed by gold to tap rising demand among individual investors to trade commodities, Bhatt said.
The exchange-traded fund will be launched early next year by SBI Funds Management, a group company, he said.
SBI plans to allow temples and other depositors to exchange their gold for interest-bearing bonds, Bhatt said. Households in India have about 15,000 tonnes of gold worth more than $200 billion locked away in family vaults, according to McKinsey & Co.
“The temples and trusts can deposit gold with us. We will llgive them an incentive and gold can be recycled,’’ Bhatt said at an industry conference organised by the London Bullion Market Association in Mumbai today. Investors can trade gold through exchange-traded funds without having to take delivery of the precious metal.
The gold fall
Gold has climbed 24 percent this year and approached the $850 an ounce peak on Nov. 7 as investors bought the precious metal as an alternative asset to the dollar and as a haven in times of record oil prices and financial turmoil. Gold may decline as low as $770 an ounce next year.
“Gold may decline as low as $770 an ounce next year.” Bhatt said, adding, “The upsurge was because of the crisis in the currency and financial markets. However, prices are stabilising. The upsurge was overdone.”
Bullion gained $7.62, or 1 per cent, to $793.92 an ounce and traded at $789.31 at 12 pm in Mumbai. Gold traded as low as $783.40 an ounce on November 15, having reached a 27-year high of $845.84 on the seventh of the month.
Report speculates about $1,500 gold
A report released by the Redburn Partners outlines that the partners are raising their long-term gold price estimate to $1,500 an ounce with the possibility of a $4,000 to $5,000 spike.
The group says it sees inflation as far higher than reported, and the U.S. faces “rapidly rising inflation or deflationary recession,” according to the report.
The group says it sees inflation as far higher than reported, and the U.S. faces “rapidly rising inflation or deflationary recession,” according to the report.
Big selloff on Wall Street
NEW YORK (CNNMoney.com) -- Stocks tanked Monday as Goldman Sachs' dour outlook on the financial sector and a weak report on home builder confidence sparked a broad market selloff.
After the close, Hewlett-Packard reported quarterly sales and revenue that topped expectations. Shares gained 1.4 percent in extended-hours trading.
The Dow Jones industrial average lost 218 points, falling below 13,000 for only the second time since the summer. The S&P 500 index lost nearly 1.8 percent. The Nasdaq composite declined almost 1.7 percent.
Small cap stocks were hit harder with the Russell 2000 falling 2.5 percent.
Treasury prices rose, lowering the corresponding yields. Oil prices rose. Gold prices declined.
Goldman Sachs downgraded Citigroup to "sell" from "neutral" Monday and said the bank will likely have to take $15 billion in writedowns over the next two quarters due to bets on risky debt. Citigroup shares fell 5.9 percent.
Goldman also cut its price target on Merrill Lynch , Morgan Stanley and others in the sector.
The comments sent the overall market lower, as investors were reminded that the breadth of the credit market fallout is not really known and could be a lot worse than has been expected.
Goldman Sachs didn't alert Wall Street to anything it didn't already know, but was nonetheless effective in triggering a selloff, said Art Hogan, chief market analyst at Jefferies & Co.
"Every time the issue is brought up and quantified, the market rolls over," Hogan said. "Today is no different."
Weak results and a disappointing forecast from home-improvement retailer Lowe's added to worries about the consumer's ability to keep spending, ahead of Black Friday, the day after Thanksgiving and the unofficial kickoff to the holiday shopping period.
Also weighing on sentiment: more problems for the dollar.
After the close, Hewlett-Packard reported quarterly sales and revenue that topped expectations. Shares gained 1.4 percent in extended-hours trading.
The Dow Jones industrial average lost 218 points, falling below 13,000 for only the second time since the summer. The S&P 500 index lost nearly 1.8 percent. The Nasdaq composite declined almost 1.7 percent.
Small cap stocks were hit harder with the Russell 2000 falling 2.5 percent.
Treasury prices rose, lowering the corresponding yields. Oil prices rose. Gold prices declined.
Goldman Sachs downgraded Citigroup to "sell" from "neutral" Monday and said the bank will likely have to take $15 billion in writedowns over the next two quarters due to bets on risky debt. Citigroup shares fell 5.9 percent.
Goldman also cut its price target on Merrill Lynch , Morgan Stanley and others in the sector.
The comments sent the overall market lower, as investors were reminded that the breadth of the credit market fallout is not really known and could be a lot worse than has been expected.
Goldman Sachs didn't alert Wall Street to anything it didn't already know, but was nonetheless effective in triggering a selloff, said Art Hogan, chief market analyst at Jefferies & Co.
"Every time the issue is brought up and quantified, the market rolls over," Hogan said. "Today is no different."
Weak results and a disappointing forecast from home-improvement retailer Lowe's added to worries about the consumer's ability to keep spending, ahead of Black Friday, the day after Thanksgiving and the unofficial kickoff to the holiday shopping period.
Also weighing on sentiment: more problems for the dollar.
Ditching the dollar
NEW YORK (CNNMoney.com) -- Despite calls from Iran and Venezuela - OPEC's steadfast bashers of the U.S. government - experts say there's little chance the cartel will shift from pricing oil in dollars to something like the euro.
At a summit of leaders from Organization of Petroleum Exporting Countries members in Riyadh, Saudi Arabia, over the weekend, Venezuelan head Hugo Chavez and Iranian President Mahmoud Ahmadinejad indicated the historic link between crude oil and the dollar should be severed.
"They get our oil and give us a worthless piece of paper," Ahmadinejad was quoted by the Associated Press. "Some said producing countries should designate a single hard currency aside from the U.S. dollar ... to form the basis of our oil trade."
Chavez echoed this sentiment Sunday on the sidelines of the summit, telling the news agency "the empire of the dollar has to end."
"Don't you see how the dollar has been in free-fall without a parachute?" Chavez said, calling the euro a better option.
The effect that switching from pricing oil in dollars to euros might have on the American currency is hard to say, but it's possible it could further drive down the value of the dollar and hence make oil more expensive for U.S. customers.
"That's the political weapon Iran and Venezuela are trying to leverage," said Peter Tertzakian, chief energy economist at ARC Financial, a Calgary-based private equity firm.
And given that the dollar has declined rapidly over the last few years, there are more people in the euro zone area and the relative stability diversification offers, there are some good reasons for wanting to switch from the dollar to the euro or, even better, a basket of currencies.
But rising oil prices, the close relationship between Saudi Arabia and the U.S., and the fact that oil benchmarks such as West Texas intermediate and England's Brent are priced in dollars make it unlikely OPEC will switch anytime soon.
While the dollar has fallen over 50 percent versus the euro since 2002, oil prices are nearly 5 times higher over the same time period.
"If you're a producer, that's precisely what you'd want it to do," said Paul Horsnell, head of commodities research at Barclays Capital in London.
Horsnell said the fact that oil prices have risen much faster than the dollar has kept most of the OPEC nations happy.
"There was a major lack of agreement in making [switching currencies] an issue," he said.
That could be because oil OPEC heavyweight Saudi Arabia is known for keeping the interests of the United States in mind.
Talk abounds of the tight relationship between the Saudi royal family and the U.S. government. Some say the United States, in an unwritten agreement dating back to the early days of Saudi oil, promised to guarantee the security of the desert kingdom in exchange for the Saudis making sure crude stays priced in U.S. dollars.
Whether that's true or not, analysts said Saudi Arabia's King Abdullah was not moved by the euro arguments.
"He shut down Chavez like a noisy kid in a class," said Fadel Gheit, a senior oil analyst at Oppenheimer. "They know where the power lies, and it's not with Chavez or" the Iranians.
Gheit said Saudi Arabia is the only country whose opinion really matters. That's because the country is the only one with any capacity to pump more oil. So, if it wanted to, it could simply turn the taps some more, watch the price of oil fall, and let the budgets of other OPEC countries dry up.
Pricing oil in a currency besides dollars would also pose a technical challenge. For one, oil-producing countries peg their crude to worldwide benchmarks like the stuff that comes from Texas or England's North Sea.
In order for OPEC to price oil in another currency, it would need to set its own price, as opposed to relying on the benchmark prices that are set in the free market - a practice the cartel has worked 20 years to avoid.
Furthermore, experts say it's simply bad to change a system that been in place for so long.
"The dollar is like the Microsoft Windows of the oil world," said Tertzakian. "It's just hard to switch out of it."
And even if OPEC did switch its oil pricing to another currency, some doubt whether the dollar would really take a hit.
The amount of oil OPEC sells on the world market is somewhere around $1.5 billion per day, said Jeffrey Currie, the head of commodity research at Goldman Sachs in London.
Compare that, he said, to the more than $3 trillion that change hands in currency markets every day.
"You're talking about a value that's just too small to show up on the radar screen," said Currie. "It isn't enough to materially change the currency markets."
At a summit of leaders from Organization of Petroleum Exporting Countries members in Riyadh, Saudi Arabia, over the weekend, Venezuelan head Hugo Chavez and Iranian President Mahmoud Ahmadinejad indicated the historic link between crude oil and the dollar should be severed.
"They get our oil and give us a worthless piece of paper," Ahmadinejad was quoted by the Associated Press. "Some said producing countries should designate a single hard currency aside from the U.S. dollar ... to form the basis of our oil trade."
Chavez echoed this sentiment Sunday on the sidelines of the summit, telling the news agency "the empire of the dollar has to end."
"Don't you see how the dollar has been in free-fall without a parachute?" Chavez said, calling the euro a better option.
The effect that switching from pricing oil in dollars to euros might have on the American currency is hard to say, but it's possible it could further drive down the value of the dollar and hence make oil more expensive for U.S. customers.
"That's the political weapon Iran and Venezuela are trying to leverage," said Peter Tertzakian, chief energy economist at ARC Financial, a Calgary-based private equity firm.
And given that the dollar has declined rapidly over the last few years, there are more people in the euro zone area and the relative stability diversification offers, there are some good reasons for wanting to switch from the dollar to the euro or, even better, a basket of currencies.
But rising oil prices, the close relationship between Saudi Arabia and the U.S., and the fact that oil benchmarks such as West Texas intermediate and England's Brent are priced in dollars make it unlikely OPEC will switch anytime soon.
While the dollar has fallen over 50 percent versus the euro since 2002, oil prices are nearly 5 times higher over the same time period.
"If you're a producer, that's precisely what you'd want it to do," said Paul Horsnell, head of commodities research at Barclays Capital in London.
Horsnell said the fact that oil prices have risen much faster than the dollar has kept most of the OPEC nations happy.
"There was a major lack of agreement in making [switching currencies] an issue," he said.
That could be because oil OPEC heavyweight Saudi Arabia is known for keeping the interests of the United States in mind.
Talk abounds of the tight relationship between the Saudi royal family and the U.S. government. Some say the United States, in an unwritten agreement dating back to the early days of Saudi oil, promised to guarantee the security of the desert kingdom in exchange for the Saudis making sure crude stays priced in U.S. dollars.
Whether that's true or not, analysts said Saudi Arabia's King Abdullah was not moved by the euro arguments.
"He shut down Chavez like a noisy kid in a class," said Fadel Gheit, a senior oil analyst at Oppenheimer. "They know where the power lies, and it's not with Chavez or" the Iranians.
Gheit said Saudi Arabia is the only country whose opinion really matters. That's because the country is the only one with any capacity to pump more oil. So, if it wanted to, it could simply turn the taps some more, watch the price of oil fall, and let the budgets of other OPEC countries dry up.
Pricing oil in a currency besides dollars would also pose a technical challenge. For one, oil-producing countries peg their crude to worldwide benchmarks like the stuff that comes from Texas or England's North Sea.
In order for OPEC to price oil in another currency, it would need to set its own price, as opposed to relying on the benchmark prices that are set in the free market - a practice the cartel has worked 20 years to avoid.
Furthermore, experts say it's simply bad to change a system that been in place for so long.
"The dollar is like the Microsoft Windows of the oil world," said Tertzakian. "It's just hard to switch out of it."
And even if OPEC did switch its oil pricing to another currency, some doubt whether the dollar would really take a hit.
The amount of oil OPEC sells on the world market is somewhere around $1.5 billion per day, said Jeffrey Currie, the head of commodity research at Goldman Sachs in London.
Compare that, he said, to the more than $3 trillion that change hands in currency markets every day.
"You're talking about a value that's just too small to show up on the radar screen," said Currie. "It isn't enough to materially change the currency markets."
Sunday, November 18, 2007
Bullion Report
Gold, the first metal used by humans, has remained as one of the most valued metals since prehistoric times.
Egyptian hieroglyphs from as early as 2600 BCE describe gold, which king Tushratta of the Mitanni claimed was as "common as dust" in Egypt. Egypt and Nubia had the resources to make them major gold-producing areas for much of history. Gold is also mentioned several times in the Old Testament.
The south-east corner of the Black Sea was famed for its gold. Exploitation is said to date from the time of Midas, and this gold was important in the establishment of what is probably the world's earliest coinage in Lydia between 643 and 630 BCE.
The European exploration of the Americas was fueled in no small part by reports of the gold ornaments displayed in great profusion by Native American peoples, especially in Central America, Peru, and Colombia.
Gold has long been considered one of the most precious metals, and its value has been used as the standard for many currencies (known as the gold standard) in history. Gold has been used as a symbol for purity, value, royalty, and particularly roles that combine these properties (see gold album). Gold as a sign of wealth and prestige was made fun of by Thomas More in his treatise Utopia.
On that imaginary island, gold is so abundant that it is used to make chains for slaves, tableware and lavatory-seats. When ambassadors from other countries arrive, dressed in ostentatious gold jewels and badges, the Utopians mistake them for menial servants, paying homage instead to the most modestly-dressed of their party.
There is an age-old tradition of biting gold in order to test its authenticity. Although this is certainly not a professional way of examining gold, the bite test should score the gold because gold is considered a soft metal according to the Mohs' scale of mineral hardness. The purer the gold the easier it should be to mark it. Painted lead can cheat this test because lead is softer than gold.
Gold in antiquity was relatively easy to obtain geologically; however, 75% of all gold ever produced has been extracted since 1910.[2] It has been estimated that all the gold in the world that has ever been refined would form a single cube 20 m (66 ft) a side (8000 m³).
During the 19th century, gold rushes occurred whenever large gold deposits were discovered, including the California, Colorado, Otago, Australian, Witwatersrand, Black Hills, and Klondike gold rushes. Because of its historically high value, much of the gold mined throughout history is still in circulation in one form or another.
Like other precious metals, gold is measured by troy weight and by grams. When it is alloyed with other metals the term carat or karat is used to indicate the amount of gold present, with 24 carats being pure gold and lower ratings proportionally less.
The purity of a gold bar can also be expressed as a decimal figure ranging from 0 to 1, known as the millesimal fineness, such as 0.995.
The price of gold is determined on the open market, but a procedure known as the Gold Fixing in London, originating in 1919, provides a twice-daily benchmark figure to the industry.
Historically gold was used to back currency; in an economic system known as the gold standard, a certain weight of gold was given the name of a unit of currency. For a long period, the United States government set the value of the US dollar so that one troy ounce was equal to $20.67 ($664.56/kg), but in 1934 the dollar was revalued to $35.00 per troy ounce ($1125.27/kg). By 1961 it was becoming hard to maintain this price, and a pool of US and European banks agreed to manipulate the market to prevent further currency devaluation against increased gold demand.
On 17 March 1968, economic circumstances caused the collapse of the gold pool, and a two-tiered pricing scheme was established whereby gold was still used to settle international accounts at the old $35.00 per troy ounce ($1.13/g) but the price of gold on the private market was allowed to fluctuate; this two-tiered pricing system was abandoned in 1975 when the price of gold was left to find its free-market level. Central banks still hold historical gold reserves as a store of value although the level has generally been declining. The largest gold depository in the world is that of the U.S. Federal Reserve Bank in New York.
Since 1968 the price of gold on the open market has ranged widely, with a record high of $850/oz ($27,300/kg) on 21 January 1980, to a low of $252.90/oz ($8,131/kg) on 21 June 1999 (London Fixing).[5] On 11 May 2006 the London gold fixing was $715.50/oz.[6]
Over 2005 the World Gold Council estimated total global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes.
Egyptian hieroglyphs from as early as 2600 BCE describe gold, which king Tushratta of the Mitanni claimed was as "common as dust" in Egypt. Egypt and Nubia had the resources to make them major gold-producing areas for much of history. Gold is also mentioned several times in the Old Testament.
The south-east corner of the Black Sea was famed for its gold. Exploitation is said to date from the time of Midas, and this gold was important in the establishment of what is probably the world's earliest coinage in Lydia between 643 and 630 BCE.
The European exploration of the Americas was fueled in no small part by reports of the gold ornaments displayed in great profusion by Native American peoples, especially in Central America, Peru, and Colombia.
Gold has long been considered one of the most precious metals, and its value has been used as the standard for many currencies (known as the gold standard) in history. Gold has been used as a symbol for purity, value, royalty, and particularly roles that combine these properties (see gold album). Gold as a sign of wealth and prestige was made fun of by Thomas More in his treatise Utopia.
On that imaginary island, gold is so abundant that it is used to make chains for slaves, tableware and lavatory-seats. When ambassadors from other countries arrive, dressed in ostentatious gold jewels and badges, the Utopians mistake them for menial servants, paying homage instead to the most modestly-dressed of their party.
There is an age-old tradition of biting gold in order to test its authenticity. Although this is certainly not a professional way of examining gold, the bite test should score the gold because gold is considered a soft metal according to the Mohs' scale of mineral hardness. The purer the gold the easier it should be to mark it. Painted lead can cheat this test because lead is softer than gold.
Gold in antiquity was relatively easy to obtain geologically; however, 75% of all gold ever produced has been extracted since 1910.[2] It has been estimated that all the gold in the world that has ever been refined would form a single cube 20 m (66 ft) a side (8000 m³).
During the 19th century, gold rushes occurred whenever large gold deposits were discovered, including the California, Colorado, Otago, Australian, Witwatersrand, Black Hills, and Klondike gold rushes. Because of its historically high value, much of the gold mined throughout history is still in circulation in one form or another.
Like other precious metals, gold is measured by troy weight and by grams. When it is alloyed with other metals the term carat or karat is used to indicate the amount of gold present, with 24 carats being pure gold and lower ratings proportionally less.
The purity of a gold bar can also be expressed as a decimal figure ranging from 0 to 1, known as the millesimal fineness, such as 0.995.
The price of gold is determined on the open market, but a procedure known as the Gold Fixing in London, originating in 1919, provides a twice-daily benchmark figure to the industry.
Historically gold was used to back currency; in an economic system known as the gold standard, a certain weight of gold was given the name of a unit of currency. For a long period, the United States government set the value of the US dollar so that one troy ounce was equal to $20.67 ($664.56/kg), but in 1934 the dollar was revalued to $35.00 per troy ounce ($1125.27/kg). By 1961 it was becoming hard to maintain this price, and a pool of US and European banks agreed to manipulate the market to prevent further currency devaluation against increased gold demand.
On 17 March 1968, economic circumstances caused the collapse of the gold pool, and a two-tiered pricing scheme was established whereby gold was still used to settle international accounts at the old $35.00 per troy ounce ($1.13/g) but the price of gold on the private market was allowed to fluctuate; this two-tiered pricing system was abandoned in 1975 when the price of gold was left to find its free-market level. Central banks still hold historical gold reserves as a store of value although the level has generally been declining. The largest gold depository in the world is that of the U.S. Federal Reserve Bank in New York.
Since 1968 the price of gold on the open market has ranged widely, with a record high of $850/oz ($27,300/kg) on 21 January 1980, to a low of $252.90/oz ($8,131/kg) on 21 June 1999 (London Fixing).[5] On 11 May 2006 the London gold fixing was $715.50/oz.[6]
Over 2005 the World Gold Council estimated total global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes.
Gold prices going up thanks to weak Dollar
Why you must look beyond the US Dollar to see what's really happening in the Gold Market... It has become a knee-jerk reaction for investors to look at the Gold Price in terms of the US Dollar alone, and for commentators to only follow its moves in that currency.
There is good reason for this, of course, for the US Dollar is the global reserve currency at present – even if it is beginning to look of dubious value today.
Why don’t we measure gold in a strong currency such as the Euro? Although that is an ‘up and coming’ reserve currency, the Euro has not taken a sufficient hold of the world’s monetary system to be accepted as the Dollar's equal. And so, for now, the Gold Price in Euros is less closely followed.
But gauging the Gold Price in the US Dollar alone is misleading, because the Dollar is losing value against its peers in the world of paper money, and so is not measuring the real rise or fall of gold. To see if we really are watching it go too far, too fast in real terms, we need to get a perspective by looking at the Gold Market through the Euro.
We also need to look at the oil price – a firm measure of the Dollar's purchasing power that springs directly from its role as the world's No.1 reserve currency.
So we went back to the beginning of this year, 2007, to compare Gold Prices in the two main global currencies. This would give us a better, more balanced view of what is actually happening in this market – and it is a sobering exercise. It also emphasizes the correctness of the approach we have taken to gold in our publication, the Gold Forecaster, to date.
In our January 5th issue, we recorded the Gold Price at $620 per ounce. By the 9th Nov., it was $840.65 – a rise of +35.59%;
Measuring the Gold Price in Euros, it began the year at €475.29. On 9th Nov. it was €573.04 – a rise of +20.57%;
Oil at the start of January traded at $55 per barrel, rising to $95 by Nov. for a rise of +72.72%;
In Euros, the oil price moved by a still-dramatic 54%, up from €42.01 to €64.76 per barrel.
Many commentators are now concerned by the sharp rise in both Gold Prices and in oil, and they are backing off their positions. Some sold half their positions one to two weeks ago.
However, a look at these moves helps us to keep our balance. Because Gold Priced in Euros, as you can see, has had a healthy rise, but not one to get overly excited about – and certainly not one to prompt an exit for fear of "speculative excess".
What we see in clear perspective is the fall in the value of the Dollar. Its weakness moves to center stage when we view Gold in Euros – and the rise of the Gold Price becomes obvious.
The same applies to pricing oil in the Dollar, since it also looks (somewhat) more bearable in the Euro. Indeed, most of the drama dissipates when we look at oil and Gold Prices in the European single currency. Perhaps the rise in the oil price tempts us to think it has gone too far too fast, until we look at the fundamental picture.
We should be asking, not what is the gold price, but "What is the Price of the Dollar?"
Is it now 1/840.65th of an ounce of gold? The rise in the Gold Price reflects the extent of the damage done to the world's confidence in it. The world’s main reserve currency just should not show a 15% decline in 10 months, if it is to continue to hold its position. So many factors have made the Dollar hemorrhage this year – and they are structural problems confirming that the Dollar may bounce but certainly not recover.
It is only a matter of time before this is realized and the future darkens as damage control measures are put in place to protect each individual part of the global money system. When the Chairman of the Fed tells us that we should by American goods and the fall of the Dollar won’t affect you, he is waving the flag only. If the United States were self-sufficient in all goods and resources, he would be right, but the US is not, for two reasons: crude oil and cheap Asian imports.
These imports ensure that the US economy is to some extent dependent on outside supplies for its own well-being. So in the US it is correct to price gold and oil in the Dollar because that is the local price. But outside the US other local currencies reflect the price of gold better.
The lower the price rise, the healthier the economy of that particular country. And looked at in the Euro, we are just beginning to see gold rise, a rise that despite its hitting historic highs has a great deal of distance to go, which is precisely why we follow the Oil:Gold ratio in Peter’s work here at the Gold Forecaster.
A 20% rise is good but far from spectacular. The oil price rise is spectacular, but it is sobering to be told that the oil price is unlikely to fall below $80 – meaning a 45% rise on the year.
Hey! Gold has a lot of catching up to do in comparison to the price of oil! We do believe that gold will break out against oil and take the ratio well into two figures again, so be ready for a real rise in the Gold Price, taking it far closer to oil’s performance than we are seeing yet.
Oil meanwhile is being called ‘toppy’ as it reaches out for $100, then falls to $92 per barrel. But with the Opec oil cartel making it clear that no more increases in oil supply are on the table, three figure oil prices lie ahead. Again, fundamentals kick in with supply problems – and a tipping of the demand/supply balance tells us we should get used to a world of $80 to $100 oil with ‘spikes’ to higher levels.
The key to understanding the Dollar, oil and the Gold Markets is to keep one’s eyes on the future, not on the past. This is a very different world to any we have ever seen before!
Where’s the Demand for Gold Coming From?
As in India until last week, high Gold Prices weighed on Dubai's gold sales in October. In the United Arab Emirates, the capital of Abu Dhabi – with a much smaller market than Dubai – saw gold sale volumes drop by 15% in October, while the sales value rose 10% on high prices. We believe that so far in November, the same is happening as prices went through the roof, depressing the actual value of total sales by 6% from a year earlier. They had expected a 30% rise in Gold Sales value.
The Muslim holy fasting month of Ramadan ended in mid-October with a feast, during which many couples marry. Ramadan helped gold sales at the beginning of October, but then sales dropped sharply with the recent price hikes.
On the developed side of the world, a glance at the Exchange Traded Funds in gold shows that demand has not been that strong in the last couple of weeks. (It fell by more than six tonnes in fact). The Gold ETF Funds have not bought so much that they are driving Gold Prices higher either – so who is actually doing the buying that is driving gold so high?
The biggest part of the latest pullback, in fact, has come from institutional fund selling on the Comex gold futures exchange. So where did the demand come from that took the price of gold to such a high level?
We got a clue from the timing of the price rises. The bulk of strong gains happened before either London or New York opened. This tells us the buying came from the Middle and Far East – or by developed world buyers placing their orders outside their own time zones, perhaps.
If it was not at retail level, then could it have been at Central Bank level? We know that Japanese investors took a signal that the time to Buy Gold was now, according to certain technical data they concocted for themselves. Then we heard that Sovereign Wealth Funds – effectively the pension funds now run on behalf of export-rich national governments –have become and will continue to be buyers of gold. Some of these are so large that just a small portion of their money could swamp the Gold Market.
And demand need not be huge in the gold market at the moment, because there are almost no long-term sellers even after the Gold Price turned down. With gold down below $800 and with Indian gold prices now back down below Rs.10,000 for 10 grams, the market for long-term buyers is looking a lot healthier and attractive than last week.
But if Central Banks such as China or Russia are also buyers – and Russia has confirmed it was a buyer this year – their dealers are fully aware of the impact they will have on the Gold Price. So expect the trend to continue as the market struggles to find more than the small quantities of gold the European banks are selling at the moment.
There is good reason for this, of course, for the US Dollar is the global reserve currency at present – even if it is beginning to look of dubious value today.
Why don’t we measure gold in a strong currency such as the Euro? Although that is an ‘up and coming’ reserve currency, the Euro has not taken a sufficient hold of the world’s monetary system to be accepted as the Dollar's equal. And so, for now, the Gold Price in Euros is less closely followed.
But gauging the Gold Price in the US Dollar alone is misleading, because the Dollar is losing value against its peers in the world of paper money, and so is not measuring the real rise or fall of gold. To see if we really are watching it go too far, too fast in real terms, we need to get a perspective by looking at the Gold Market through the Euro.
We also need to look at the oil price – a firm measure of the Dollar's purchasing power that springs directly from its role as the world's No.1 reserve currency.
So we went back to the beginning of this year, 2007, to compare Gold Prices in the two main global currencies. This would give us a better, more balanced view of what is actually happening in this market – and it is a sobering exercise. It also emphasizes the correctness of the approach we have taken to gold in our publication, the Gold Forecaster, to date.
In our January 5th issue, we recorded the Gold Price at $620 per ounce. By the 9th Nov., it was $840.65 – a rise of +35.59%;
Measuring the Gold Price in Euros, it began the year at €475.29. On 9th Nov. it was €573.04 – a rise of +20.57%;
Oil at the start of January traded at $55 per barrel, rising to $95 by Nov. for a rise of +72.72%;
In Euros, the oil price moved by a still-dramatic 54%, up from €42.01 to €64.76 per barrel.
Many commentators are now concerned by the sharp rise in both Gold Prices and in oil, and they are backing off their positions. Some sold half their positions one to two weeks ago.
However, a look at these moves helps us to keep our balance. Because Gold Priced in Euros, as you can see, has had a healthy rise, but not one to get overly excited about – and certainly not one to prompt an exit for fear of "speculative excess".
What we see in clear perspective is the fall in the value of the Dollar. Its weakness moves to center stage when we view Gold in Euros – and the rise of the Gold Price becomes obvious.
The same applies to pricing oil in the Dollar, since it also looks (somewhat) more bearable in the Euro. Indeed, most of the drama dissipates when we look at oil and Gold Prices in the European single currency. Perhaps the rise in the oil price tempts us to think it has gone too far too fast, until we look at the fundamental picture.
We should be asking, not what is the gold price, but "What is the Price of the Dollar?"
Is it now 1/840.65th of an ounce of gold? The rise in the Gold Price reflects the extent of the damage done to the world's confidence in it. The world’s main reserve currency just should not show a 15% decline in 10 months, if it is to continue to hold its position. So many factors have made the Dollar hemorrhage this year – and they are structural problems confirming that the Dollar may bounce but certainly not recover.
It is only a matter of time before this is realized and the future darkens as damage control measures are put in place to protect each individual part of the global money system. When the Chairman of the Fed tells us that we should by American goods and the fall of the Dollar won’t affect you, he is waving the flag only. If the United States were self-sufficient in all goods and resources, he would be right, but the US is not, for two reasons: crude oil and cheap Asian imports.
These imports ensure that the US economy is to some extent dependent on outside supplies for its own well-being. So in the US it is correct to price gold and oil in the Dollar because that is the local price. But outside the US other local currencies reflect the price of gold better.
The lower the price rise, the healthier the economy of that particular country. And looked at in the Euro, we are just beginning to see gold rise, a rise that despite its hitting historic highs has a great deal of distance to go, which is precisely why we follow the Oil:Gold ratio in Peter’s work here at the Gold Forecaster.
A 20% rise is good but far from spectacular. The oil price rise is spectacular, but it is sobering to be told that the oil price is unlikely to fall below $80 – meaning a 45% rise on the year.
Hey! Gold has a lot of catching up to do in comparison to the price of oil! We do believe that gold will break out against oil and take the ratio well into two figures again, so be ready for a real rise in the Gold Price, taking it far closer to oil’s performance than we are seeing yet.
Oil meanwhile is being called ‘toppy’ as it reaches out for $100, then falls to $92 per barrel. But with the Opec oil cartel making it clear that no more increases in oil supply are on the table, three figure oil prices lie ahead. Again, fundamentals kick in with supply problems – and a tipping of the demand/supply balance tells us we should get used to a world of $80 to $100 oil with ‘spikes’ to higher levels.
The key to understanding the Dollar, oil and the Gold Markets is to keep one’s eyes on the future, not on the past. This is a very different world to any we have ever seen before!
Where’s the Demand for Gold Coming From?
As in India until last week, high Gold Prices weighed on Dubai's gold sales in October. In the United Arab Emirates, the capital of Abu Dhabi – with a much smaller market than Dubai – saw gold sale volumes drop by 15% in October, while the sales value rose 10% on high prices. We believe that so far in November, the same is happening as prices went through the roof, depressing the actual value of total sales by 6% from a year earlier. They had expected a 30% rise in Gold Sales value.
The Muslim holy fasting month of Ramadan ended in mid-October with a feast, during which many couples marry. Ramadan helped gold sales at the beginning of October, but then sales dropped sharply with the recent price hikes.
On the developed side of the world, a glance at the Exchange Traded Funds in gold shows that demand has not been that strong in the last couple of weeks. (It fell by more than six tonnes in fact). The Gold ETF Funds have not bought so much that they are driving Gold Prices higher either – so who is actually doing the buying that is driving gold so high?
The biggest part of the latest pullback, in fact, has come from institutional fund selling on the Comex gold futures exchange. So where did the demand come from that took the price of gold to such a high level?
We got a clue from the timing of the price rises. The bulk of strong gains happened before either London or New York opened. This tells us the buying came from the Middle and Far East – or by developed world buyers placing their orders outside their own time zones, perhaps.
If it was not at retail level, then could it have been at Central Bank level? We know that Japanese investors took a signal that the time to Buy Gold was now, according to certain technical data they concocted for themselves. Then we heard that Sovereign Wealth Funds – effectively the pension funds now run on behalf of export-rich national governments –have become and will continue to be buyers of gold. Some of these are so large that just a small portion of their money could swamp the Gold Market.
And demand need not be huge in the gold market at the moment, because there are almost no long-term sellers even after the Gold Price turned down. With gold down below $800 and with Indian gold prices now back down below Rs.10,000 for 10 grams, the market for long-term buyers is looking a lot healthier and attractive than last week.
But if Central Banks such as China or Russia are also buyers – and Russia has confirmed it was a buyer this year – their dealers are fully aware of the impact they will have on the Gold Price. So expect the trend to continue as the market struggles to find more than the small quantities of gold the European banks are selling at the moment.
'India will continue as world's top Gold consumer'
James E Burton took over as the Chief Executive Officer of the World Gold Council (WGC) in October 2002. Many consider this as an important step in the ongoing development of the WGC as a commercially-driven gold marketing organization. Burton revitalized the organization, focusing on its mission as the marketing organization for the gold industry. He restructured the senior management team, reduced staff overheads, allotted fund for priority programs.
His leadership helped the organization build demand for gold jewellery, establish a network of distribution partners and create a range of products to attract investors to gold. In addition, the WGC has launched a number of gold-backed, exchange-traded funds, including Gold Bullion Securities on the London Stock Exchange in December 2003, and StreetTracks Gold Shares on the New York Stock Exchange in November 2004.
Burton came to this job after heading California Public Employees Retirement System (Calpers) for eight years from 1994 to September 2002. As largest public pension system in the USA, Calpers has $140 billion in assets and 1.2 million participants. During Burton’s time, the pension system pioneered a more activist approach to institutional investing. Prior to working for Calpers, he was Deputy State Controller for the State of California. In an exclusive email interview with Commodity Market, Burton says how important is India to WGC.
India is world’s largest gold consumer but its per capita consumption of gold is less than 0.17 grams as majority of its people are poor. Yet you see growth prospects for gold. What is the basis for that?
• India remains the largest international consumer of gold, but we believe there is still excellent opportunity for the market to grow. As the Indian urban middle class expands and wealth began to spread more evenly through rural areas, our market will grow. However, we recognize that the Indian consumer will have more and more choices to spend his rupees. We need to continue to communicate the benefits of gold to maintain and grow gold’s share of the market.
What solution would you suggest against high volatility in gold market?
• Price volatility is caused by a number of factors, which are not under the control of the World Gold Council. Gentle rise of prices are a good for gold jewellery demand, as people like to see the value of their purchase increasing. But high volatility can make people nervous about buying until they see the price stabilize. However, while gold may experience periods of volatility, it is less volatile an asset than many people believe, and certainly less volatile than any other commodity.
What roles does your organization play in ensuring that gold is a safe investment?
• It is not WGC’s role to ensure prices or the safety of gold. However we do work to ensure fair and easy access to gold investment. Gold’s safe haven characteristics are inherent in the metal itself, and not artificially supported. In uncertain times, there is typically a ‘flight to quality’ as investors seek to protect their capital by moving it into assets considered to be safer stores of value. Gold is among a handful of financial assets that do not rely on an issuer’s promise to pay, offering refuge from default risk. It provides insurance against extreme movements that often occur in the value of traditional asset classes in unsettled times.
What should India do to have better liquidity in the market as well as make gold more attractive as an investment option?
• One argument would be that India does have a high level of liquidity in the gold market, thanks to the large number of individuals trading gold in the open market. However, from an investment perspective, the development of the exchanges along with the development of more gold-backed investment vehicles such as Gold ETF products would boost the liquidity of the market and add confidence at the retail level. There is also much to be done to better inform the Indian investor on the benefits of investing in gold.
What will be your advice to investors in gold? And what will be India’s role in creating the higher demand for gold?
• Gold has attracted investors throughout the centuries, protecting their wealth and providing a ‘safe haven’ in troubled or uncertain times. This appeal remains compelling for modern investors too. Gold’s investment qualities—its portfolio diversification role, its role as a dollar hedge and an inflation hedge and as a risk management tool— remain unchanged. We will work further to communicate these facts to the Indian investor. India has long had a “love affair” with this unique precious metal. As WGC continues to promote gold among Indians and as new market opportunities open up, we believe India will continue to lead global demand for gold.
What is your take on Gold Exchange Traded Funds? What is the growth potential of ETF in the next five years?
• The World Gold Council was instrumental in launching Gold ETFs. The concept has revolutionized investor access to gold. Exchange traded gold provides retail and institutional investors with an efficient and cost-effective way to invest in gold. It aims to overcome the existing barriers to gold as a practical asset and investment product. For many investors, costs associated with buying and selling the securities are expected to be less than the costs associated with buying, selling, storing and insuring gold bullion in a traditional allocated gold bullion account.
Furthermore, exchange traded gold can be traded as easily as any other security listed on a stock exchange. The gold ETFs have proved remarkably successful since the first one was launched some five years. In 2006, holdings in these products accounted for 38 percent of world investment demand for gold, and as things stand (at the end of September 2007), there was over 790 tonnes of gold in ETFs worldwide, valued at nearly US$19 billion.
Can you briefly explain which applications of gold, which accounts for nearly 500 tonnes a year? How much growth do you here?
• Industrial and dental demand reached a new record of more than 450 tonnes of gold in 2006. It beat the previous record reached in 2000. And in dollar terms this 2006 record was US$8.9 billion. This equates to 13 percent of total gold demand, slightly more than that retail investment demand. A good proportion of this industrial demand comes from the electronics sector, where as you may know gold is used for the bonding wire connections inside microchips and as a coating on contacts and connectors.
Now at World Gold Council, our view is that with manufacturers continuing to look for cheaper alternatives to gold and the dental market likely to slowly decline, the discovery of new industrial uses for gold is important if industrial off take is to remain healthy in the long-term. We’ve a number of programs aimed at developing new industrial uses, including funding of research and technical feasibility studies.There are some very interesting applications in the field of nanotechnology, including emission control technologies and medical applications, including cancer treatment. All of these exciting new applications have been made possible due to the unique properties that gold possesses. You can find more information on www.utilisegold.com
What do you mean when you say you promote responsible, ethical, social and environmental practices in mining?
• As the global advocate for gold, the World Gold Council is committed to playing a key role in the development of a truly sustainable gold mining industry. We provide a forum for education and dialogue that helps to address the range of sustainability issues faced by the gold mining industry, our membership and society at large. By expanding our membership we facilitate a broader participation by the gold mining industry in addressing these issues.
The World Gold Council is an active member of both the International Council on Mining and Metals (ICMM) and the Council for Responsible Jewellery Practices (CRJP). It fully endorses the principles and mission statement of both organizations with regard to sustainability. The ICMM has committed corporate members to implement the ICMM Sustainable Development Framework, including leading global standards, public reporting, independent assurance and sharing good practice.
The CRJP’s objective is to promote responsible, ethical, social and environmental practices throughout the diamond and gold jewellery supply chain, from mine to retail. Both organizations contribute to the Initiative for Responsible Mining Assurance (IRMA), a multi stakeholder group of WGC members, trade partners and NGOs. It aims to develop a process for the identification of responsible mining standards and a governance model for the assurance system. The WGC fully supports the aims of the IRMA. It is important to take into account the broader positive economic and social benefits gold mining brings to many developing countries.
A WGC report issued in 2005, entitled a “Touch of Gold”, demonstrated how gold has become one of the most important exports for heavily indebted poor countries and illustrated the benefits that gold mining brings to developing countries. The World Gold Council is committed to its advocacy of sustainable development throughout the gold industry, and will continue to support improvements and education regarding the social, environmental, human and ethical aspects of our industry.
Should India increase its gold reserves to further fuel the booming economy? This is one question that the apex Reserve Bank of India is debating these days. What is your take on this?
• The Indian Central Bank currently holds 3.4 percent of its reserves in gold, this represents 358 tonnes of gold. The international average is about 10.5 percent at current market prices but, in the EU it is over 40 percent and the USA holds around 70 percent of its reserves in gold. Countries facing particular volatility in their economic and/or political circumstances will want to consider the level of gold in their reserves.
While it is up to each individual central bank to decide the level of its own gold reserves, the reasons for holding gold are constant. These include gold’s good diversification properties in a currency portfolio, which stem from its value being determined by supply and demand in the world gold markets, as opposed to currencies and government securities, which depend on government promises and variations in central banks’ monetary policies. Gold is a unique asset in that it is no one else’s liability.
Its status cannot be undermined by inflation in a reserve currency of a country. Gold has also maintained its value in terms of real purchasing power in the long run and is also comparable to a long term insurance premium, against such events as war, an unexpected surge of inflation, a generalized debt crisis involving, a regression to a world of currency and trading blocs, or the international isolation of a country. The public also takes confidence from knowing that its Government holds gold—an indestructible asset and one not prone to the inflationary worries overhanging paper money.
Analysts have predicted that gold consumption in India will rise to 900 tonnes this year. Does that sound good to you? How do you plan to capitalize on this boom?
• If the price volatility that dented jewellery demand so badly through large parts of 2006 does not return, we could indeed see record demand in India in 2007. In fact predictions earlier in the year were that demand could even break through the 1,000 tonne mark, although recent price movements have now made this less likely. World Gold Council is instrumental in helping to drive this demand in conjunction with its strategic partners in the Indian market.
His leadership helped the organization build demand for gold jewellery, establish a network of distribution partners and create a range of products to attract investors to gold. In addition, the WGC has launched a number of gold-backed, exchange-traded funds, including Gold Bullion Securities on the London Stock Exchange in December 2003, and StreetTracks Gold Shares on the New York Stock Exchange in November 2004.
Burton came to this job after heading California Public Employees Retirement System (Calpers) for eight years from 1994 to September 2002. As largest public pension system in the USA, Calpers has $140 billion in assets and 1.2 million participants. During Burton’s time, the pension system pioneered a more activist approach to institutional investing. Prior to working for Calpers, he was Deputy State Controller for the State of California. In an exclusive email interview with Commodity Market, Burton says how important is India to WGC.
India is world’s largest gold consumer but its per capita consumption of gold is less than 0.17 grams as majority of its people are poor. Yet you see growth prospects for gold. What is the basis for that?
• India remains the largest international consumer of gold, but we believe there is still excellent opportunity for the market to grow. As the Indian urban middle class expands and wealth began to spread more evenly through rural areas, our market will grow. However, we recognize that the Indian consumer will have more and more choices to spend his rupees. We need to continue to communicate the benefits of gold to maintain and grow gold’s share of the market.
What solution would you suggest against high volatility in gold market?
• Price volatility is caused by a number of factors, which are not under the control of the World Gold Council. Gentle rise of prices are a good for gold jewellery demand, as people like to see the value of their purchase increasing. But high volatility can make people nervous about buying until they see the price stabilize. However, while gold may experience periods of volatility, it is less volatile an asset than many people believe, and certainly less volatile than any other commodity.
What roles does your organization play in ensuring that gold is a safe investment?
• It is not WGC’s role to ensure prices or the safety of gold. However we do work to ensure fair and easy access to gold investment. Gold’s safe haven characteristics are inherent in the metal itself, and not artificially supported. In uncertain times, there is typically a ‘flight to quality’ as investors seek to protect their capital by moving it into assets considered to be safer stores of value. Gold is among a handful of financial assets that do not rely on an issuer’s promise to pay, offering refuge from default risk. It provides insurance against extreme movements that often occur in the value of traditional asset classes in unsettled times.
What should India do to have better liquidity in the market as well as make gold more attractive as an investment option?
• One argument would be that India does have a high level of liquidity in the gold market, thanks to the large number of individuals trading gold in the open market. However, from an investment perspective, the development of the exchanges along with the development of more gold-backed investment vehicles such as Gold ETF products would boost the liquidity of the market and add confidence at the retail level. There is also much to be done to better inform the Indian investor on the benefits of investing in gold.
What will be your advice to investors in gold? And what will be India’s role in creating the higher demand for gold?
• Gold has attracted investors throughout the centuries, protecting their wealth and providing a ‘safe haven’ in troubled or uncertain times. This appeal remains compelling for modern investors too. Gold’s investment qualities—its portfolio diversification role, its role as a dollar hedge and an inflation hedge and as a risk management tool— remain unchanged. We will work further to communicate these facts to the Indian investor. India has long had a “love affair” with this unique precious metal. As WGC continues to promote gold among Indians and as new market opportunities open up, we believe India will continue to lead global demand for gold.
What is your take on Gold Exchange Traded Funds? What is the growth potential of ETF in the next five years?
• The World Gold Council was instrumental in launching Gold ETFs. The concept has revolutionized investor access to gold. Exchange traded gold provides retail and institutional investors with an efficient and cost-effective way to invest in gold. It aims to overcome the existing barriers to gold as a practical asset and investment product. For many investors, costs associated with buying and selling the securities are expected to be less than the costs associated with buying, selling, storing and insuring gold bullion in a traditional allocated gold bullion account.
Furthermore, exchange traded gold can be traded as easily as any other security listed on a stock exchange. The gold ETFs have proved remarkably successful since the first one was launched some five years. In 2006, holdings in these products accounted for 38 percent of world investment demand for gold, and as things stand (at the end of September 2007), there was over 790 tonnes of gold in ETFs worldwide, valued at nearly US$19 billion.
Can you briefly explain which applications of gold, which accounts for nearly 500 tonnes a year? How much growth do you here?
• Industrial and dental demand reached a new record of more than 450 tonnes of gold in 2006. It beat the previous record reached in 2000. And in dollar terms this 2006 record was US$8.9 billion. This equates to 13 percent of total gold demand, slightly more than that retail investment demand. A good proportion of this industrial demand comes from the electronics sector, where as you may know gold is used for the bonding wire connections inside microchips and as a coating on contacts and connectors.
Now at World Gold Council, our view is that with manufacturers continuing to look for cheaper alternatives to gold and the dental market likely to slowly decline, the discovery of new industrial uses for gold is important if industrial off take is to remain healthy in the long-term. We’ve a number of programs aimed at developing new industrial uses, including funding of research and technical feasibility studies.There are some very interesting applications in the field of nanotechnology, including emission control technologies and medical applications, including cancer treatment. All of these exciting new applications have been made possible due to the unique properties that gold possesses. You can find more information on www.utilisegold.com
What do you mean when you say you promote responsible, ethical, social and environmental practices in mining?
• As the global advocate for gold, the World Gold Council is committed to playing a key role in the development of a truly sustainable gold mining industry. We provide a forum for education and dialogue that helps to address the range of sustainability issues faced by the gold mining industry, our membership and society at large. By expanding our membership we facilitate a broader participation by the gold mining industry in addressing these issues.
The World Gold Council is an active member of both the International Council on Mining and Metals (ICMM) and the Council for Responsible Jewellery Practices (CRJP). It fully endorses the principles and mission statement of both organizations with regard to sustainability. The ICMM has committed corporate members to implement the ICMM Sustainable Development Framework, including leading global standards, public reporting, independent assurance and sharing good practice.
The CRJP’s objective is to promote responsible, ethical, social and environmental practices throughout the diamond and gold jewellery supply chain, from mine to retail. Both organizations contribute to the Initiative for Responsible Mining Assurance (IRMA), a multi stakeholder group of WGC members, trade partners and NGOs. It aims to develop a process for the identification of responsible mining standards and a governance model for the assurance system. The WGC fully supports the aims of the IRMA. It is important to take into account the broader positive economic and social benefits gold mining brings to many developing countries.
A WGC report issued in 2005, entitled a “Touch of Gold”, demonstrated how gold has become one of the most important exports for heavily indebted poor countries and illustrated the benefits that gold mining brings to developing countries. The World Gold Council is committed to its advocacy of sustainable development throughout the gold industry, and will continue to support improvements and education regarding the social, environmental, human and ethical aspects of our industry.
Should India increase its gold reserves to further fuel the booming economy? This is one question that the apex Reserve Bank of India is debating these days. What is your take on this?
• The Indian Central Bank currently holds 3.4 percent of its reserves in gold, this represents 358 tonnes of gold. The international average is about 10.5 percent at current market prices but, in the EU it is over 40 percent and the USA holds around 70 percent of its reserves in gold. Countries facing particular volatility in their economic and/or political circumstances will want to consider the level of gold in their reserves.
While it is up to each individual central bank to decide the level of its own gold reserves, the reasons for holding gold are constant. These include gold’s good diversification properties in a currency portfolio, which stem from its value being determined by supply and demand in the world gold markets, as opposed to currencies and government securities, which depend on government promises and variations in central banks’ monetary policies. Gold is a unique asset in that it is no one else’s liability.
Its status cannot be undermined by inflation in a reserve currency of a country. Gold has also maintained its value in terms of real purchasing power in the long run and is also comparable to a long term insurance premium, against such events as war, an unexpected surge of inflation, a generalized debt crisis involving, a regression to a world of currency and trading blocs, or the international isolation of a country. The public also takes confidence from knowing that its Government holds gold—an indestructible asset and one not prone to the inflationary worries overhanging paper money.
Analysts have predicted that gold consumption in India will rise to 900 tonnes this year. Does that sound good to you? How do you plan to capitalize on this boom?
• If the price volatility that dented jewellery demand so badly through large parts of 2006 does not return, we could indeed see record demand in India in 2007. In fact predictions earlier in the year were that demand could even break through the 1,000 tonne mark, although recent price movements have now made this less likely. World Gold Council is instrumental in helping to drive this demand in conjunction with its strategic partners in the Indian market.
Gold Falls Again Friday, Closes Week Down More Than $47
Friday, November 16, 2007 2:48:03 PM - Gold ended the session down slightly on Friday, capping a week of decline. December gold finished at $787.00 an ounce, down 30 cents. This mark's the metal's lowest close in three weeks. Bullion had climbed as high as $798.40 in the early going, but dropped in the late morning.
Gold dropped $47.70 throughout the week, posting declines four times in five sessions. The decline came as the U.S. dollar started to rebound against the euro, Canadian dollar and other major currencies after weeks of drops. The weekly plunge easily erased the gains from last week when gold added $26.20 last week and closed at record highs twice. Gold reached as high as $848.00 last week, a fresh 27-year high. The record high for gold is $875, reached on Jan. 21, 1980. Gold has been on the rise since mid-August as a struggling U.S. economy has weakened the U.S. dollar.
Friday morning, the Federal Reserve released its report on industrial production and capacity utilization in the month of October, showing that industrial production unexpectedly fell while capacity utilization fell more than expected. The report showed that industrial production fell 0.5 percent in October following an upwardly revised 0.2 percent increase in September. The decrease came as a surprise to economists, who had expected production to edge up 0.1 percent. The Federal Reserve added that the capacity utilization rate fell to 81.7 percent in October from an upwardly revised 82.2 percent in the previous month. Economists had been expecting a more modest decline to an 82.0 percent rate.
Gold dropped $47.70 throughout the week, posting declines four times in five sessions. The decline came as the U.S. dollar started to rebound against the euro, Canadian dollar and other major currencies after weeks of drops. The weekly plunge easily erased the gains from last week when gold added $26.20 last week and closed at record highs twice. Gold reached as high as $848.00 last week, a fresh 27-year high. The record high for gold is $875, reached on Jan. 21, 1980. Gold has been on the rise since mid-August as a struggling U.S. economy has weakened the U.S. dollar.
Friday morning, the Federal Reserve released its report on industrial production and capacity utilization in the month of October, showing that industrial production unexpectedly fell while capacity utilization fell more than expected. The report showed that industrial production fell 0.5 percent in October following an upwardly revised 0.2 percent increase in September. The decrease came as a surprise to economists, who had expected production to edge up 0.1 percent. The Federal Reserve added that the capacity utilization rate fell to 81.7 percent in October from an upwardly revised 82.2 percent in the previous month. Economists had been expecting a more modest decline to an 82.0 percent rate.
GCC countries should revalue currencies
Dubai: The six oil-rich Gulf countries should carry out a one-time big revaluation to adjust their currencies, Steve Forbes, US entrepreneur, told Leaders in Dubai conference.
Gulf consumers have lost between 25 to 35 per cent in purchasing power during the last two years as the falling value of dollars coupled with the strong economic growth has added inflationary pressures on the economy that has reflected in higher cost of living.
Forbes, however, is a strong advocate of the currency peg.
"The Gulf countries should carry out a one-time big revaluation by 10 to 15 per cent of their currencies to the dollar," he said. "Don't let your currency float, keep the peg, but revalue it and revisit the peg from time to time," he said.
According to the International Monetary Fund, inflation in the UAE has reached 9.3 per cent last year on higher economic growth and partly due to the weakening value of the dirham pegged to the US dollar.
He blamed the US Federal Reserve for inflating the global economy.
"The US Federal Reserve has been printing too many dollars, causing global inflation," he said.
"The major currencies, the euro, pound and others are in a way adding to the global inflation, with the Federal Reserve being the biggest sinner. The UAE and other Gulf countries should revalue their currencies to adjust."
In an exclusing interview with the Gulf News, Forbes said, the Gulf states should tell the US Federal Reserve chairman to "put its act together".
Gulf consumers have lost between 25 to 35 per cent in purchasing power during the last two years as the falling value of dollars coupled with the strong economic growth has added inflationary pressures on the economy that has reflected in higher cost of living.
Forbes, however, is a strong advocate of the currency peg.
"The Gulf countries should carry out a one-time big revaluation by 10 to 15 per cent of their currencies to the dollar," he said. "Don't let your currency float, keep the peg, but revalue it and revisit the peg from time to time," he said.
According to the International Monetary Fund, inflation in the UAE has reached 9.3 per cent last year on higher economic growth and partly due to the weakening value of the dirham pegged to the US dollar.
He blamed the US Federal Reserve for inflating the global economy.
"The US Federal Reserve has been printing too many dollars, causing global inflation," he said.
"The major currencies, the euro, pound and others are in a way adding to the global inflation, with the Federal Reserve being the biggest sinner. The UAE and other Gulf countries should revalue their currencies to adjust."
In an exclusing interview with the Gulf News, Forbes said, the Gulf states should tell the US Federal Reserve chairman to "put its act together".
Predictions of several BoE rate cuts seem over the top
London: Rate cut fever has taken hold of British markets but predictions of as many as three cuts in borrowing costs next year look overdone.
The Bank of England's (BoE) Inflation Report last week sent the pound tumbling to a four-year low against the euro as the central bank forecast a sharp slowdown in economic growth even if borrowing costs were chopped twice over the next year.
Interest rate futures are now fully pricing in two interest rate cuts and possibly a third in 2008. A Reuters poll after the BoE forecasts also showed most analysts looking for two rate cuts next year.
A number of economists are now even predicting the first cut in borrowing costs by next month and newspaper front pages last week screamed that mortgage costs for property-mad Britons are about to fall sharply.
But Governor Mervyn King was much more circumspect when he gave his usual news conference after the publication of the BoE's new forecasts. Everything would depend on the data, he said.
"Disagreements within the Committee are sizeable, both over the central outcome and the distribution of risks around that outcome," said Mark Miller, an economist at Bank of Scotland.
Clearly, King and a majority of his colleagues are not so convinced the economy is about to come off the rails so much that they needed to cut interest rates.
Asked why the central bank had chosen to leave borrowing costs at 5.75 per cent when the outlook was so gloomy, King explained the BoE had in August wanted things to slow down a bit and it still was not sure the current cooling was anything more.
Nor had businesses been complaining that their ability to invest had been affected, he said.
And, most importantly, inflation pressures have not gone away. The short-term price outlook is, in fact, stronger on rising oil prices and the pound's weakness against the euro.
The Bank of England's (BoE) Inflation Report last week sent the pound tumbling to a four-year low against the euro as the central bank forecast a sharp slowdown in economic growth even if borrowing costs were chopped twice over the next year.
Interest rate futures are now fully pricing in two interest rate cuts and possibly a third in 2008. A Reuters poll after the BoE forecasts also showed most analysts looking for two rate cuts next year.
A number of economists are now even predicting the first cut in borrowing costs by next month and newspaper front pages last week screamed that mortgage costs for property-mad Britons are about to fall sharply.
But Governor Mervyn King was much more circumspect when he gave his usual news conference after the publication of the BoE's new forecasts. Everything would depend on the data, he said.
"Disagreements within the Committee are sizeable, both over the central outcome and the distribution of risks around that outcome," said Mark Miller, an economist at Bank of Scotland.
Clearly, King and a majority of his colleagues are not so convinced the economy is about to come off the rails so much that they needed to cut interest rates.
Asked why the central bank had chosen to leave borrowing costs at 5.75 per cent when the outlook was so gloomy, King explained the BoE had in August wanted things to slow down a bit and it still was not sure the current cooling was anything more.
Nor had businesses been complaining that their ability to invest had been affected, he said.
And, most importantly, inflation pressures have not gone away. The short-term price outlook is, in fact, stronger on rising oil prices and the pound's weakness against the euro.
Bank study finds wider trade deal best for Asia
SINGAPORE: A free-trade zone in ASEAN's 10 states plus Australia, China, India, Japan, New Zealand and South Korea would bring more benefits than any of the region's smaller trade pacts, new study said.
The creation of such a massive zone is not likely to inflict big losses on those outside the region like the United States or the European Union, the Asian Development Bank (ADB) said in its study.
Analysis carried out by the ADB Institute, the bank's research arm, showed that a 16-nation FTA, if realised from 2017, would bring the nations annual gains totalling $285 billion.
This compares with an estimated $228 billion in gains under an East Asia-wide FTA covering only 13 countries - excluding Australia, India and New Zealand.
"The ASEAN Plus 6 scenario turns out in our study to bring the most gains," ADB senior trade economist Ganesh Wignaraja said, referring to the 10-nation Association of Southeast Asian Nations (ASEAN).
"But the ASEAN Plus 3 scenario is a good halfway house to get some consolidation," said Wignaraja, one of the paper's authors.
Leaders of the 16 East Asian states including Chinese Premier Wen Jiabao and Indian Prime Minister Manmohan Singh will meet in Singapore on Wednesday after the ASEAN summit, with market-opening issues atop the agenda.
The ADB said the so-called ASEAN Plus 6 deal would easily generate more benefits than the 102 bilateral and regional free trade agreements (FTAs) in East Asia that have either been concluded, are in negotiations or proposed.
The creation of such a massive zone is not likely to inflict big losses on those outside the region like the United States or the European Union, the Asian Development Bank (ADB) said in its study.
Analysis carried out by the ADB Institute, the bank's research arm, showed that a 16-nation FTA, if realised from 2017, would bring the nations annual gains totalling $285 billion.
This compares with an estimated $228 billion in gains under an East Asia-wide FTA covering only 13 countries - excluding Australia, India and New Zealand.
"The ASEAN Plus 6 scenario turns out in our study to bring the most gains," ADB senior trade economist Ganesh Wignaraja said, referring to the 10-nation Association of Southeast Asian Nations (ASEAN).
"But the ASEAN Plus 3 scenario is a good halfway house to get some consolidation," said Wignaraja, one of the paper's authors.
Leaders of the 16 East Asian states including Chinese Premier Wen Jiabao and Indian Prime Minister Manmohan Singh will meet in Singapore on Wednesday after the ASEAN summit, with market-opening issues atop the agenda.
The ADB said the so-called ASEAN Plus 6 deal would easily generate more benefits than the 102 bilateral and regional free trade agreements (FTAs) in East Asia that have either been concluded, are in negotiations or proposed.
Can anything slow the dollar's fall?
Dollar denial,” that state of willful blindness in which bankers and central bankers claim not to be worried about America’s falling currency, seems to be ending. Now even European Central Bank governor Jean Claude Trichet has joined the chorus of concern.
When the euro was launched, the US dollar-euro ($:e) exchange rate stood at $1.16/e1. At that price, the dollar was undervalued by roughly 10% relative to its purchasing power parity (PPP). Initially, the dollar’s price rose, but since 2002, it has, for the most part, fallen steadily. Every day seems to bring a new low against the euro.
In the face of the dollar’s ongoing fall, policymakers have seemed paralysed. The reasons for inaction are many, but it is difficult to avoid the impression that they are related to the current state of academic theorising about exchange rates.
Simply put, economists believe either that nothing should be done or that nothing can be done. Their so-called “rational expectations models” predict that exchange rates should not deviate from parity in any lasting way.
Believing that they have found a way to model how currency traders think, they see no need for intervention because, save for temporary deviations, markets always get currency values right.
“Behavioural economists,” by contrast, acknowledge that currencies can depart from parity for a long period. But they attribute this to market psychology and irrational trading, not to the attempts of currency traders to interpret changing macroeconomic fundamentals.
This implies that intervention is not only unnecessary; it is ineffective: faced with wide swings and trading volumes of $2 trillion per day, central banks are helpless to counteract traders’ irrational zeal.
But both the “rational expectations” and the “behavioural” models are flawed, because they seek to generate exact predictions of human behaviour. Both disregard the fact that rationality depends as much on individuals’ imperfect understandings of history and society as on their motivation.
If we place “imperfect knowledge” at the heart of economic analysis, the implications of our limited ability to predict market outcomes becomes clear.
When it comes to currency markets, parity levels based on international trade are merely one of many factors that traders consider. In attempting to cope with imperfect knowledge, they are not irrational when they pay attention to other macroeconomic fundamentals and thereby bid an exchange rate away from its parity level.
In the euro’s rise against the dollar, euro bulls supposedly have been reacting to America’s current account deficit, the strong euro-zone economy, and rising euro interest rates. What is irrational about factoring in such fundamentals when trading a currency? Of course, persistent swings from parity do not last forever.
While movements in macroeconomic fundamentals may lead bulls to bid the value of a currency further from parity, doing so simultaneously fuels concern about a counter-movement back to parity — and thus capital losses — which moderates the desire to increase long positions.
Relating the riskiness of holding an open position in a currency market to the exchange rate’s divergence from parity levels suggests a novel way to think about how central banks can influence the market to limit departures from parity.
Although the exchange rate ultimately reverts back to its PPP benchmark, in a world of imperfect knowledge market participants might ignore this possibility in the near term. But if central banks regularly announced their concern about significant departures from PPP, as they do now about inflation prospects, they would heighten traders’ concern that other traders will consider it increasingly risky to hold open positions that imply further movement away from parity levels.
This should moderate bulls’ willingness to increase their long positions, thereby limiting the magnitude of the swing.
To implement this “limit-the-swings” proposal, a central bank would announce its estimate of parity values every month, together with a comprehensive explanation of its estimates. It would also make known to currency traders its concern about excessive departures from its estimated parity values and its readiness to intervene at unpredictable moments to impede further departures from PPP.
This policy would be even more effective if it were known that more than one central bank — say, the Fed and the ECB — were prepared to intervene.
This strategy does not imply a pre-specified target zone for exchange rates. Given the size of currency markets, such targets almost always fail. Instead, our limit-the-swings strategy implies that, as the exchange rate moves further away from parity, central banks should intervene.
The possibility of unpredictable interventions would reinforce the effect of the bank’s regular announcements of the parity values on traders’ perception of increased risk.
While this proposal shares some features with inflation targeting, it may actually achieve its goals more effectively. Both involve announcing benchmark levels. In both cases, central banks attempt to affect macroeconomic outcomes directly as well as by influencing market participants’ expectations.
As Milton Friedman emphasised, however, the links between monetary policy and inflation are “long and variable.” By contrast, the link between official intervention and exchange rate movements is much more direct and potent. Given massive trading volumes, direct intervention can alter supply and demand for currencies only on the margin. But the limit-the-swings policy may amplify intervention’s effects by diminishing market participants’ desire to push the exchange rate away from PPP.
Our proposal to reduce — but not eliminate — swings from parity recognises that price fluctuations may be crucial for markets to ascertain the price of assets with an uncertain payoff. But currency swings, if too wide and protracted, can hurt competitiveness and require costly resource allocation.
These effects often lead to calls for protectionist measures, which may reduce the benefits from international trade and real economic activity. Only by acknowledging the limits to knowledge can monetary and exchange rate policies have a better chance of succeeding.
When the euro was launched, the US dollar-euro ($:e) exchange rate stood at $1.16/e1. At that price, the dollar was undervalued by roughly 10% relative to its purchasing power parity (PPP). Initially, the dollar’s price rose, but since 2002, it has, for the most part, fallen steadily. Every day seems to bring a new low against the euro.
In the face of the dollar’s ongoing fall, policymakers have seemed paralysed. The reasons for inaction are many, but it is difficult to avoid the impression that they are related to the current state of academic theorising about exchange rates.
Simply put, economists believe either that nothing should be done or that nothing can be done. Their so-called “rational expectations models” predict that exchange rates should not deviate from parity in any lasting way.
Believing that they have found a way to model how currency traders think, they see no need for intervention because, save for temporary deviations, markets always get currency values right.
“Behavioural economists,” by contrast, acknowledge that currencies can depart from parity for a long period. But they attribute this to market psychology and irrational trading, not to the attempts of currency traders to interpret changing macroeconomic fundamentals.
This implies that intervention is not only unnecessary; it is ineffective: faced with wide swings and trading volumes of $2 trillion per day, central banks are helpless to counteract traders’ irrational zeal.
But both the “rational expectations” and the “behavioural” models are flawed, because they seek to generate exact predictions of human behaviour. Both disregard the fact that rationality depends as much on individuals’ imperfect understandings of history and society as on their motivation.
If we place “imperfect knowledge” at the heart of economic analysis, the implications of our limited ability to predict market outcomes becomes clear.
When it comes to currency markets, parity levels based on international trade are merely one of many factors that traders consider. In attempting to cope with imperfect knowledge, they are not irrational when they pay attention to other macroeconomic fundamentals and thereby bid an exchange rate away from its parity level.
In the euro’s rise against the dollar, euro bulls supposedly have been reacting to America’s current account deficit, the strong euro-zone economy, and rising euro interest rates. What is irrational about factoring in such fundamentals when trading a currency? Of course, persistent swings from parity do not last forever.
While movements in macroeconomic fundamentals may lead bulls to bid the value of a currency further from parity, doing so simultaneously fuels concern about a counter-movement back to parity — and thus capital losses — which moderates the desire to increase long positions.
Relating the riskiness of holding an open position in a currency market to the exchange rate’s divergence from parity levels suggests a novel way to think about how central banks can influence the market to limit departures from parity.
Although the exchange rate ultimately reverts back to its PPP benchmark, in a world of imperfect knowledge market participants might ignore this possibility in the near term. But if central banks regularly announced their concern about significant departures from PPP, as they do now about inflation prospects, they would heighten traders’ concern that other traders will consider it increasingly risky to hold open positions that imply further movement away from parity levels.
This should moderate bulls’ willingness to increase their long positions, thereby limiting the magnitude of the swing.
To implement this “limit-the-swings” proposal, a central bank would announce its estimate of parity values every month, together with a comprehensive explanation of its estimates. It would also make known to currency traders its concern about excessive departures from its estimated parity values and its readiness to intervene at unpredictable moments to impede further departures from PPP.
This policy would be even more effective if it were known that more than one central bank — say, the Fed and the ECB — were prepared to intervene.
This strategy does not imply a pre-specified target zone for exchange rates. Given the size of currency markets, such targets almost always fail. Instead, our limit-the-swings strategy implies that, as the exchange rate moves further away from parity, central banks should intervene.
The possibility of unpredictable interventions would reinforce the effect of the bank’s regular announcements of the parity values on traders’ perception of increased risk.
While this proposal shares some features with inflation targeting, it may actually achieve its goals more effectively. Both involve announcing benchmark levels. In both cases, central banks attempt to affect macroeconomic outcomes directly as well as by influencing market participants’ expectations.
As Milton Friedman emphasised, however, the links between monetary policy and inflation are “long and variable.” By contrast, the link between official intervention and exchange rate movements is much more direct and potent. Given massive trading volumes, direct intervention can alter supply and demand for currencies only on the margin. But the limit-the-swings policy may amplify intervention’s effects by diminishing market participants’ desire to push the exchange rate away from PPP.
Our proposal to reduce — but not eliminate — swings from parity recognises that price fluctuations may be crucial for markets to ascertain the price of assets with an uncertain payoff. But currency swings, if too wide and protracted, can hurt competitiveness and require costly resource allocation.
These effects often lead to calls for protectionist measures, which may reduce the benefits from international trade and real economic activity. Only by acknowledging the limits to knowledge can monetary and exchange rate policies have a better chance of succeeding.
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