We have previously reported at Goldcoin.org in Chinese queue at malls to beat Bernanke’s inflation with gold that the a Chinese Gold rush is underway from investors who are looking to beat inflation and devaluing currencies by buying and hoarding gold bullion and gold coins.

In January 2010, China recorded an inflation rate of 1.5%. But just 12 months later, the rate of Chinese inflation has climbed to 4.9%.

Rising inflation has sent food and property prices in China skyrocketing.

The price of food in China has increased 10.3% on an annual basis. The price of grain rose 15.1% and fruit prices were up 34.8% since January of last year.

Chinese inflation has been fuelled by an economic stimulus during the financial crisis two years ago of $585 which has resulted in excesses of liquidity in the economy.

The Chinese Government has tried to curb the inflation with measures such as raising interest rates several times and tightening lending requirements but so far this hasn’t worked. Even worse is the fear sweeping through the Chinese economy that inflation could go out of control and even lead to hyperinflation.

This has already prompted Chinese citizens to buy gold and their appetite for the yellow metal is insatiable.

This trend is not only set to increase but possibly explode into action following recent reports that the People’s Bank of China (PBOC) is actively recommending that over 1 Billion Chinese citizens buy gold as a way of preserving and protecting their wealth against inflation, economic crisis and the falling values of major currencies .

This recommendation was given in the Financial Markets Review from the PBOC and its publication coincided with the decline of several major currencies against the value of gold notably, the Swiss Franc fell 2.5%, The Japanese Yen 2%, The Pound Sterling 2% and of course the US Dollar  which fell 1%.

Chinese buy almost half the Gold produced in the world

According to the gold-specialising Swiss Bank UBS the Chinese demand for gold in the first 2 months of 2011 exceeded  7.05 Million ounces.

This unbelievable demand is the equivalent of 47% of all gold produced in the world during the same period. So the Chinese are buying almost half of the world’s gold production.

If this continues then the Chinese are set to buy in excess of 42.3 Million Ounces of Gold this year!

To put this quantity into context it is more gold than China’s Central Bank officially stores in its reserves.

The Financial Times recently quoted a senior executive at the Industrial and Commercial Bank of China ICBC, who spoke of the “voracious” appetite for gold in China…

China’s largest bank started a physically-backed gold savings account in December with the World Gold Council. Account openings have already surpassed 1 million, with more than 12 tonnes of gold already stored on behalf of investors.

Zhou Ming, deputy head of ICBC’s precious metals department, said the nation’s largest bank sold nearly 250,000 ounces of physical gold in January — the equivalent of 50% of all the bullion ICBC sold last year.

Added to this is the continuing diversification out of Forex by the People’s Bank of China into gold and other precious metals. They have around $3 Trillion which they would like to change because the weakening dollar is eroding its real value. How much gold will they need for $3 Trillion?

We know that China has been accumulating gold surreptitiously by buying up its own domestic production.

This suggests that increasing gold production was part of a long-term strategic plan to become a global leader in gold investments among governments.

The World Gold Council even reported:

Some market participants believe that China may also be continuing to buy local mine production, which it has done regularly in the past. There is certainly no shortage of experts, both domestic and from overseas, advising China to do so.

The World Gold Council estimates China’s gold demand could double in 10 years as more investors embrace precious metals.

But even in the short term, the expected demand for gold in China over the coming month will be enough to put significant strain on global supplies.

According to Tom Bulford  “China has spent the last decade buying every ounce of gold it can lay its hands on.

In fact, the Chinese have increased their deposits by 1,054 tonnes since 2001.

That’s 76% more than it was buying just a decade ago!

And it’s not just the Government we’re talking about here.

Ever since private gold ownership was legalised in China…and the Shanghai Gold Exchange opened – regular Chinese citizens have also started buying up gold in a BIG way”.

Quite simply, the Chinese seem to want to buy ANYTHING gold…

…gold coins…gold bullion…even foreign gold miners.

In fact, according to Want China Times…

“Chinese state-owned gold miner China National Gold Group announced… that it will step up overseas mergers and acquisitions in an effort to increase its gold stockpiles by 100 tonnes this year.”

Chinese production figures

China Produced $35 Billion in Gold in 2010

According to China’s Ministry of Industry and Information Technology, gross output from domestic production increased 67% to 230 billion yuan ($35 billion) in 2010.

Of this, China’s gold industry earned 5 billion yuan ($3.8 billion) in profit — 78% more than in the previous year.

China’s gold mines produced 9.9 million ounces of gold in 2010 — an increase of 7% over 2009.

Meanwhile, total domestic gold output grew 9% to 12.0 million ounces. (source WGC)

India is also encouraging Gold acquisition

Traditionally there has always been a strong demand for gold in India  with its specific seasonal demands for weddings and a cultural attachment to jewellery. However, they are also strengthening demand in Asia which is fast becoming the most important Continent for gold investment.  Gold is selling extremely well to the ordinary citizens looking for wealth protection and preservation. There are over 460 Post Offices that sell gold direct to the people. India also has public companies that offer credit to anyone wishing to purchase gold – in other words you can get a loan to buy gold!

This incredible demand throughout Asia is sure to impact the price of gold which may not have been factored in to the so-called expert calculations/ predictions/guesses.

Gold Price set to go skyward with Asian demand and World events

Similarly there are other significant factors that cannot have previously been factored in to annual gold price predictions such as;

• The continuing European Sovereign debt crisis with Portugal the latest Eurozone country in difficulty,
• The on-going Japanese catastrophe following the Earthquake, Tsunami and nuclear crisis,
• The popular uprisings in North Africa and around the Middle East with Syria and Yemen on the brink and the conflict in Libya worsening by the day. This has drawn military (and therefore financial)  resources from France, the UK and the US which have their own deficit problems and now has involved NATO countries.

It is becoming increasingly difficult to see how all of this can be paid for or accommodated in a World Economy already faltering.

It is no wonder that the Chinese are hedging against another crisis and with their ever increasing hoards of gold they are aiming to back the Yuan with gold and ultimately replace the Dollar as the world’s reserve currency.

We are heading for a spot of $1500 within weeks – and then…..$3000+

In view of the colossal demands for gold already discussed, the possible collapse of the dollar and the unknown outcomes of other world events a crisis bigger than 2008 looms large and we cannot predict which event will trigger it but be sure that it will happen. When it does make sure you have copied the Chinese and secured your wealth in the only safe haven for the crisis ahead. Buy Gold and buy now before the price takes off exponentially surpassing $2000 and even £3000 an ounce before the end of the year. The worthless dollar, hyperinflation, extraordinary demand and debt crisis dictate the course of gold to re-establish itself as the only real measure of currency and wealth. When the dust settles and re-evaluations have been made just pray you have gold as it will be worth upwards of $3000 an ounce.

In last nights update resistance was listed at 1422-1428 and the high so far today is 1430. Support was listed at 1406-1413 and the low so far today is 1414.30

London Gold Fix $1419.00 +$5.00 LME

The gold market dipped last night to daily support at 1414 on forecasts from Gold Fields Mineral Services predictions of increased gold production in 2010 but the gold trade hasn’t been overly focused on the supply side of the equation. In fact, the gold trade generally thinks that investment and demand are easily poised to outdistance increases in supply. Gold Fields Mineral Services pegged world gold production in 2010 to have increased by 3%, with China contributing a gain of 6% and Australia contributing a somewhat shocking expansion of 16%.

While today’s gold upmove began shortly before he payroll reports, there is still a bit of caution of upcoming Fed dialogue, which this week has clearly tended toward a hawkish bias. For now, it sounds more like talk than action. Some traders are suggesting that the knock on impact of the Japanese disaster has already tempered prices and will in turn slow upcoming numbers throughout the world and that Fed tightening expectations are premature. With 3 US Fed members scheduled to speak during the trade again today and with unemployment reports due tomorrow, it is possible that metal prices will remain in the 1420-1430 area for the remainder of the day.

Monthly Japanese auto production readings showed a decline of 5.5% last night. Overnight the wires from North Africa suggested that the Libyan forces regained ground against the rebels.

Going to today’s chart — today’s push to 1430 has at least put us back above the 1420’s and currently trading near the 1425 area. End of month and beginning of month usually favors the upside in the metals so the upside is still favored into next week. The next big event will probably be the unemployment data on Friday. The potential for gold to remain in the 1420-1430 area until then has potential. Resistance for the remainder of today is the 1430-1435 area. support is 1419-1422. The next key area’s to wach would be a close above 1436 and 1444 as this would be suggestive that the upside still has the advantage. Trends are favored higher into next week.

by Bill Downey

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In last nights website update resistance was listed at 1432-1438 and the high was 1431.50 — initial support levels at 1417-1425 were broken — and 2nd tier support was listed at 1403-1409 and the low so far is the 1410.50

Last nights website update discussed a break below the 1420 area would be suggestive that this weeks pullback would still be in play and that next support would be the 1398-1412 area.

Gold and other commodity prices were undermined by softer than expected Chinese economic data, increased jobless claims in USA and renewed concerns of Euro debt because of news of a Spanish debt downgrade. News that PIMCO was turning bearish toward US government securities has also provided the potential for higher interest rates.

News that South African gold output in January rose by more than 15% over last year may have added to today’s downdraft from a short term perspective.

Developments in the Middle East should continue to provide some measure of support for gold prices, especially with the day of protest directly ahead in Saudi Arabia and the situation in Libya in a continued state of flux.

While equity markets in Asia and Europe were lower during overnight trading and the US stock market down hard in early trading, there’s a lot of bearishness this morning.

Looking a today’s chart — we can see that once the lower channel line gave way —- a lot of stops were set off and are getting cleared out. We’ve discussed this potential since Tuesday evening on the website.

Support for the remainder of the day is the 1398-1409 area and resistance is the 1418-1425 zone. PRICE IS AT THE LOWS from the first week of March near 1410 and should bounce around that area plus or minus a few dollars. If that area gives way then a test of the dotted trend line at 1398-1405 will be in play.

In summary — the lower than expected weakness in China and USA woke up complacent equity bulls. With commodities overbought in most area’s — it has brought on a lot of weakness.

On the chart, the lower red channel line was finally broken — and now we have to see whether gold holds a few dollars above or below last weeks lows near 1410. If prices can’t hold there — then a test of 1398-1403 will be the next test area. With the Saudi demonstrations on Friday — there should be some support going into the close near these levels but the sell off is very hard in equities — and may keep pressure on all fronts.

Prices need to get back above the 1420-1425 area in gold to neutralize this pullback.

by Bill Downey

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Malls Witnessing Gold Rush as Shoppers Fear Inflation

Jewelers at shopping malls across the capital are witnessing a gold rush as residents spooked by inflation fears look to protect their money.
Statistics from Beijing Caibai, the city’s largest jewelry store, show sales of gold and other jewelry have totaled about 4 billion yuan so far this year, a 70 percent increase year-on-year.

Wang Chunli, general manager, told METRO that hundreds of customers are lining up outside every day to buy gold accessories, such as necklaces and rings. To cope with demand, the store has even introduced a string-weave service, she said, adding: “We’ve also arranged experienced staff to be on duty and increased the number of security guards.”

After seeing the enthusiasm for gold investment, insiders predict prices will continue to rise this year.
Zhou Xiangrui, deputy general manager of Guo Hua, an established gold and jewelry store, even suggested that the surging demand could set a new record, saying: “The price is estimated to increase by 10 percent this year.”

The price has already reached 338 yuan a gram at Caibai and 375 yuan a gram at Beijing branches of Chow Tai Fook and Chow Tai Seng, according to data from cngold.org, a popular gold investment website.

Concern over the volatile conditions in the Middle East and the debt crises in Europe could also impact gold prices, said Ji Zhiguo, an analyst the Beijing Gold Trade Center.
“This year we might see some investors purchasing more than 10 kilograms of gold bars again,”
he said. “A booming gold market coupled with a stable price increase could prompt more individuals to rush in and invest.”

Gold sales in large shopping malls citywide increased by at least 40 percent year-on-year during the first two months of 2011, Legal Mirror reported.

According to China Central Television, about 40 investors are rushing to purchase gold bars every day at the Wang Feng shopping mall in the Xinjiekou area, with most snapping up several kilograms at a time.

Wang Qiming, 34, who lives in Haidian district, said he has purchased both gold bars in malls and paper gold online.
“The capital has limits on house and car purchases, and it might be hard to preserve the value of my assets if I save cash in a bank account. So I’ve started to focus on gold investment,” he said, explaining that he plans to spend 300,000 yuan on 100 grams of gold bars.

“Stock markets change very fast and are not stable,” said Wang. “Gold investment seems much safer.”
A report released by the World Gold Council at the end of 2010 said China is the strongest market for gold investment and gold accessory purchase.

By Xu Fan
China Daily, Beijing

and courtesy of Chris Powell and GATA

Driven by persistent inflation in China and the worry about the appreciation of money, the demand for gold in the Asian continent remains high and in the first month of 2011 this reached a record. In this context, the “new rich” and those in the higher income segments both in China and India are throwing themselves into gold as a sure way of diversifying their investments.

Only last January, the Commercial Bank of China, one of the main financial institutions in the country, sold a total of 7 tonnes of gold ingots, which is the equivalent of around half of all the sale operations recorded by the bank in 2010. However, the attraction for gold is not limited to the buying of ingots: the growing demand for non-physical investments involving gold, through term deposits, could exceed 5,000 million Yuans by the end of the year.

One of the keys to this growing demand for gold in China is connected with high prices, which increased by 4.9% in January, compared to the same month of the previous year. Even though analysts are projecting a higher figure, around 5.3%, worries over inflationary pressures in the Asian giant could trigger an increase in interest rates by the Central Bank.

Faced with this scenario, a recent report by the World Gold Council (WGC) indicates that it is expected that the demand for gold from China will increase during 2011, as will demand from India for jewellery. According to the WGC, the growing interest in gold is shown in the recovery being enjoyed by the jewellery sector which registered an annual global demand which was some 17% higher than that shown in 2009.

Official figures released recently by the World Gold Council confirmed that demand for gold continues to rise. In 2010 the annual demand for gold rose by 9% equating to 3,812.2 Tonnes which is worth around $150 Billion. This is a ten year high and a strong indicator that the current price is not only sustainable but likely to increase further.
This increasing demand can be attributed to several factors.
First, there is an even higher demand for Jewellery.

Secondly, demand strengthened in key Asian markets, notably in China and India.
The Indian market is based on strong cultural references such as the Wedding Season and 2010 saw a revitalisation of the sector as awareness grows regarding the protection of wealth in gold.

The Chinese demand is backed by a strengthening retail investment by private affluent investors who are looking to gold bars and gold coins as a safe refuge for their newly acquired wealth.
The Chinese market saw the greatest increase in investment demand growth. The annual demand showed a 70% increase year on year and was equivalent to 179.9 tonnes.

After 21 years Central Banks are Net Purchasers

Thirdly and even more significant is the fact that after 21 years of being net sellers of gold the Central Banks became net purchasers of gold. This can be seen as a consolidation of their position in troubled times because they feel exposed to Forex fluctuations due to currency dilution and devaluation. It is also proof that they see gold as a safe haven to protect their reserves of wealth when they are aware of instability and potential crisis ahead. The instability in the Middle East, the soaring oil price and the risks of increasing inflation in developed economies is causing anxiety.
Central Banks are all too aware of the possible Eurozone collapse as Sovereign debt issues, austerity measures and bailouts fail to shake off the looming depression that awaits.

What will happen if Greece, Ireland or any other of the Eurozone Members are unable to abide by their debt resolution measures? Chances are there will be more than one if not all of them. Politicians wrangle with the shackles of increasing debt which they are trying to defer to another generation on a daily basis but fact is they can’t run away fast enough and they WILL get caught out. What then?

Paper Gold or Physical Gold?

It is hardly surprising that real demand is focused on physical gold and this can be illustrated by a drop of 45% for the year in demand for ETFs (or paper gold). Investors know that protecting their wealth ahead of a crisis can only be achieved by owning physical tangible assets.

When a crisis hits hard no-one can guarantee the value or indeed honouring of paper transactions as the financial institutions offering such products are themselves vulnerable to the systemic debt that pollutes all economies and that influences everyday life across the globe. Nobody predicted that an institution such as Lehman Brothers would fail or that RBS and Lloyds Banks would be brought to their knees. Similarly no-one can tell you today who will be the next casualty when economies falter. It could be your bank, your pension provider, your employer.

Act now or do nothing?

If you really like a bet then do nothing and take a chance on life not changing for you.

If you prefer to protect what you have and want to be sure that you are left with something for your future survival then get in to gold now. It is the inflation proof investment that is like fire insurance for your personal wealth. Exactly like fire insurance, do you think you should buy it before or after the event?

There are more and more options for physical gold investment and it has become accessible to everyone.
The most difficult step to take is to start, the rest is logical and reassuring.

Remember that investing in bars is good but investing in gold coins is even better. Click here for a guide to gold coin investment and don’t wait to start.

Through a presentation by Sabine Schels, a global commodity strategist from Bank of America – Merrill Lynch, the Bank says it expects that raw material prices will rise next year as a result of a strong growth in emerging countries. She went on to say that they envisaged the price of an ounce of gold would exceed the $1500 threshold during 2011, despite the unfavourable outlook for developed economies during the next few quarters.

According to Schels, some emerging economies such as China or Brazil could implement more rigid monetary policies in order to control inflation and facilitate growth. This could possibly translate into an important brake on the price of raw materials, depending on the sources. However, it would be compensated (and maybe even exceeded) by increasing Government spending on improvements of their infrastructure and housing, for example.

The Bank of America representative announced their view that oil prices could temporarily exceed the $100 a barrel threshold, using as a reference Brent Crude, which currently hovers at around $90 a barrel. Similarly, she added that Copper could easily achieve new historical records in 2011.

“Of course the European debt crisis, as well as the risks of inflation in China, have recently fuelled the States nervousness when the announcement of the second round of Quantitative Easing came from the Fed, especially as we believe there will be a shortage of raw materials in 2011″ explained their analyst.”

In this same context, reported by the newspaper El Economista, Alan Valdes, Director of Investment at Kabrick Capital, stated that gold will certainly reach $1500 an ounce by the end of the year, oil has attained its peak during the last two years, Wheat will exceed its records of the past three years, cotton is more expensive than during the civil war… and as long as the dollar does not rally up, then commodities will continue to climb.”

Bank of America – Merrill Lynch predicts that the price of gold will reach a maximum of $1500 an ounce in 2011 and thus continue its trend of recent years, allowing it to further increase yields of 2010.

For Schels, investors’ fears over the Eurozone sovereign debt crisis have resurfaced with the financial aid granted to the Ireland, which caused the devaluation of the euro at the same time that the dollar was losing its value. The eyes are now firmly on Portugal and the impact that it could have on the deceleration of the Spanish economy.
According to this analyst, all these factors reinforce the idea that gold will continue to be an alternative refuge and safe haven for savers and investors, causing its price to rise still further during 2011.

The weakness of the dollar, the instability of the European economies and the volatility of United States bonds has scared investors. India is the principal consumer of gold. China is the principal global gold producer. Is there any link here? Despite this reality, and with gold prices at historic highs, China and India are continuing to buy major quantities of precious metals. In fact, the quantities are so high that they are becoming the pillars which are supporting the upward trend in the value of the troy ounce for 2011.

The gigantic Chinese economy is driving the bullion market, coins and gold assets upwards. Bloomberg obtained a report from Shanghai Gold Exchange in which it states that China moved from purchasing 45 metric tonnes of gold in 2009 to a projected 230 metric tonnes for 2010.

At the same time, China’s Ministry of Industry and Technology reported last December that the exporting and importing of non-ferrous metals for this country grew year on year in the first eleven months of the year and reached 108,480 million dollars.

Individual Investment pushes up demand

The increased demand comes mainly from individual investors who prefer to hold physical gold as a safe haven for their wealth. Shen Xuangrong, Chairman of the Shanghai Gold Exchange, stated a few days ago that this interest was mainly due to the expectations of an increase in inflation in this Asian country.

Between January and October last year, the amount of precious metal traded on the Shanghai Gold Exchange increased by 43%, according to its Chairman, Shen Xuangrong. Approximately 20% of these transactions were made on behalf of individuals.

In August of 2010, the Central Bank of China reported that it was going to authorise more Banks to be able to buy and sell gold. It also stated that it was going to makes the regulations for the gold market more flexible to enable more firms to be able to operate in this segment.

More than a million Indian Weddings this Spring!

India has already demonstrated that it occupies a prominent place in the purchasing of bullion, coins and gold assets due to jewellery being accumulated in March in readiness for the wedding season. This year it is very probably that the trend will be repeated: there are more than a million weddings planned to take place in April and May in India and this triggers a strong demand for precious metals, especially gold.

The growing demand for gold jewellery, together with an increase in the demand for bullion and gold coins, demonstrates the popularity of the metal in India. Moreover, for many Indians it represents a safe investment compared with the volatility of paper money.

India is responsible for one quarter of the global imports of gold. China has made changes to its regulations for importing precious metals. Everything seems to indicate that it will shortly become the new leader in gold imports. And not only that: “In the medium and long term, China will be a decisive factor in determining the price of gold “, said Yuichi Ikemizu, Chief commodities analyst at Standard Bank in Tokyo.

Gold is linked to the US dollar and in a simple equation strong dollar = weaker gold, weak dollar higher gold price. The future strength of the dollar depends on the economic prospects for America and they are not good, therefore the dollar will weaken and gold strengthen. On top of these there are moves afoot to remover the dollar from its status of reserve currency which to date has been a factor supporting for the dollar.

Earlier I reported that Europe can no longer support its very expensive social welfare programs and the shrinking working population will not be able to support the growing pensioners with there over generous pensions and of course the ugly head of unemployment.

I also indicated that the US viewed the European situation with derision as its old fashioned ideas dictated that its time was over.  “Judge not lest you be judged” as written in Mathew 7.1 is very applicable to the American situation.

The prosperity of the USA after World War II led to an explosion of population  who were labeled the  baby boomers  and they total some 78 million. These now approach retirement and will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars.

The U.S. is bankrupt, tax, retirement benefits and health care are in a mess

Neither spending more nor taxing less will help the country pay its bills.  With a $4 trillion fiscal gap the US have three courses of action or a combination of the three – reduce significantly the benefits of the “baby boomers” – huge tax increases – print more money, which is the current policy.  Realistically printing money needs to be supported by the reduction of benefits and increases in taxes.

Additionally last month the IMF has effectively pronounced the U.S. bankrupt by stating  “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

Rather than be judgemental of Europe the U.S. should look at themselves and realize they are potentially in a worse financial state than Greece

For some time now both Russia and China have been pushing for an alternative to the dollar as the reserve currency. While the West has been forced to sell  off assets to compensate for loss or to pay off debt, cash rich China has been buying assets, in particular gold and using those assets as a form of currency to offset the increasing fragile dollar. This is all part of a long term strategy to boost their own currency the Yuan to become an internationally accepted currency.

If that was not enough in the last few weeks the United Nations report “World Economic and Social Survey 2010: Retooling Global Development” called for the creation of a new global reserve currency to replace the U.S. dollar as the single major reserve currency.
“The dollar has proved not to be a stable store of value, which is a requisite for a stable reserve currency,” it said.
It suggested that the reserve should be based on  the existing  Special Drawing rights  (SDRs) created by the IMF to supplement member countries reserves: but with a new basket to reflect the changing weight of global economies  and include emerging countries currencies ( the Yuan) thus downgrading the importance of the dollar.
“To summarize, reducing dependence on the dollar through increased use of a created currency made up of a basket of currencies such as the SDR could be a significant step towards greater stability in the world economy,” the report concluded.

Compare the dollar to the British Empire, once the greatest the world has known, which  has now out lived its usefulness and faded into the memory of once what was. The dollar has not yet fallen that far but it is well on its way and gold will become more important and stronger as a result.

Maurice Hall

I was listening to a programme on BBC Radio which is always an informative station and my ears pricked up on a discussion on the 2009 Bordeaux vintage which is reputed to be the best in 60 years.  I like wine very much but the grand Grands Crus of Bordeaux which have long catered for the discerning tastes of the elite in the western world are beyond my means. However, I thought it would be an interesting to understand why the wines are so great and if I had a rush of blood to the head and splashed out, what would be the best value for money. To my surprise there was little in the way of comparison of the various producers but a great deal on the destination of the very best of French wine

From the baroque tasting room of Chateau Mouton Rothschild, to the grand hall of the Union des Grands Crus, Chinese delegations declared their intent to siphon off huge quantities of first growths, the very best wines.  The price of the first growths are likely to cost £4000 per 12 bottle case and even as high as £1000 per bottle.  According to the Chinese importers money does not seem to be a problem and Lafite-Rothschild is said to be the tipple of choice for the Chinese industrialist.  Private companies are soaring and property values are rising fast so people have a lot of money.

You may wonder why I am writing about wine on a blog whose main interest is gold. Whilst critics were in raptures with the top wines from Haut-Brion, Margaux and Latour it seems to matter little to the Chinese consumer who are reported to glug their wine or dilute even the most expensive bottles with lemonade. The reason is one of economics, no longer do these famous vintages end up in the cellars of the rich in the western world and particularly recession hit America; but they have become prestigious gifts amongst Chinese business people.

Throughout history, all great powers have their day Egyptian, Greek, Roman. More recently countries such as Spain, France, and Great Britain all had periods of unrivalled power. Today, the United States still reigns as the world’s sole superpower but it is on the brink and is being credibly challenged by rising powers in Asia, India and more importantly China who have designs on world financial dominance. It is a process that will have huge implications for investors over the coming years. It is no surprise India is the greatest consumer of gold and China the largest producer.

The balance of power is swinging eastwards. First the West exported industrial plant to Asia leading to investment in technology in the East which coupled with a cheap workforce produced a number of startups. Their cost effectiveness captured markets normally supplied from the West and eventually western domestic markets were flooded by cheaper imports leading to a decline in the manufacturing base and vast trade deficits. Now we find our selves in a situation where we are even being financed by the East. Iconic UK brands MG and Jaguar are Chinese owned and the new Californian bullet train was not only funded by money borrowed from China but built by a Chinese company.

Sovereign debt is threatening the fabric of western society and dragging down our currencies. It reminiscent of the 1930s as austerity measures have been running in Ireland fore some time, problems in Greece and Spain have lead to strikes and a general strike is threatened in Italy. Portugal is in the same mould as Spain and Italy, later additions to the EU from former Eastern Europe are in great difficulty particularly Hungary, France has to tighten its belt and Germany is in a domestic struggle over the Euro. Outside the Euro zone, the UK debt is of a greater GDP of all but Spain and its only because our repayment has a longer time span that we are not in quite the same mess as Greece. If the June budget does not show sufficient promise to bring down our deficit our triple –A rating maybe under threat.

So how does the American superpower stand?. The economy is the country’s top concern, with persistently high unemployment the greatest threat the public sees. Eight of 10 Americans rate joblessness a high risk to the economy in the next two years, outranking the federal budget deficit, which is cited by 7 of 10. An increase in taxes is named as a high risk by almost 6 of 10. Fewer than 1 in 3 Americans think the economy will improve in the next six months….Only 32 percent of poll respondents believe the country is headed in the right direction, down from 40 percent who said so in September.” (Bloomberg).

The U.S. debt will top $13.6 trillion this year and climb to an estimated $19.6 trillion by 2015, according to a Treasury Department report to Congress. ( Reuter 8^th June). Economic contraction will continue with record numbers of foreclosures, personal bankruptcies, the highest rate of unemployment with millions more jobs to be lost as purse strings tighten.

Going back to the origination of this theme if Chinese businessmen can afford to mix lemonade with £1000 bottles of Bordeaux to impress friends and associates then there truly has been a swing to the East and that is where the demand for Gold will be driven. Currently the USD is the reserve currency but as power is being challenged so is the dollar as  both Russia and China are pushing for alternatives where gold may play a part.

Read the china Gold Report on this blog

Maurice Hall

We are well aware of France as the leading gold hoarder in Europe both in the central bank with second highest reserve and by private citizens who are reputed to have over 3000 tonnes in private hands. French gold is mainly in the form of gold Napoleons widely distributed as safe haven for family wealth. Whereas Italy is a consumer of gold whose jewellery industry is the world’s leader a tradition that goes back to Roman times; but they are not lacking in gold reserves either.  It is certainly worth exploring the Italian gold situation.

Central banks

The gold bullion stored beneath Rome’s Palazzo Koch stands at 2,451.8 tonnes, the fourth  largest central bank hoard in the world, just behind France as third in Europe. It has been unchanged at 2,451.8 tonnes for the last 11 years or more making Italy the only Eurozone nation not to sell any of its gold reserves since 1998. It’s also the only signatory to the Central Bank Gold Agreements of 1999 and 2004 not to sell any gold either. Italy’s fellow CBGA signatories, in contrast, have shrunk their gold reserves by more than one quarter on average.

Central Bank Holdings

Country                      Tonnes

USA                            8133.5

Germany                     3412.6

IMF                             3217.3

France                         2487.1

Italy                            2451.8

Gold Jewellery

Italy has a large jewellery industry contributing to a considerable portion of Italy’s economy and is located in the regions of Veneto, Toscana, Lombardia, Lazio and Piedmont. About 45,000 workers engaged in this sector and there are two major clusters located in Vicenza and Arezzo where there are over 2500 companies employing around 22,000 workers.

Fine Italian gold jewellery in both its handmade and mass manufactured designs generally continues to hold the lead in customer appeal for a variety of styles and products. Many Italian gold designs reflect hundreds of years of influence while still appealing to those who value trendy style, romance and quality. The country remains as largest producer of gold jewellery in the world and its exquisite designs date back to the fifth century. Over 400 tons of the precious metal a year is processed and shaped into beautiful bracelets, necklaces, earrings, rings, medallions, broaches and other items that are worn with pride by both men and women in every corner of the globe.

The home of the country’s first goldsmith organization is in Vicenza and dates back to the early 1300’s. From that time until the present, artisans have passed the trade down to subsequent generations. The city is also known to produce the best machinery for producing precious metal chains used in some of the finest pieces world wide. Combining machinery and handcrafted techniques, a goldsmith may produce only approximately 12 inches a day of chain to be later fashioned into necklaces or other finished pieces.

This technique takes years to learn and goldsmiths who achieve success in the art of chain production in Vicenza produce products that are adored by many jewelry connoisseurs.

Italy has faced substantial competition from lower-cost manufacturing centers in China, Turkey and India in recent years and its fabrication has declined. Its domestic market has suffered too as consumers, against the background of a sluggish economy and increased competition.

Despite this, Italy remains the undisputed leader of fashionable and high quality jewellery design and the city of Vicenza hosts the leading trade fair each year. This is not a position of complacency  as Turkey has the skill, a growing market is determined to overtake Italy  While demand for basic products is declining, that for more innovative and high quality pieces is now showing healthy growth.

Vincenza Oro’s fair for yellow gold remains a high selling point, and this year’s fair paid tribute to the market with Gold Expressions, a collaboration between the World Gold Council, the Vincenza fair, and sixty-nine premier Italian goldsmiths. The exhibit featured new and creative works (almost all in yellow gold) by the goldsmith artists invited to participate. The works are now scheduled to tour the China, the Middle East, and the United States as part of an international marketing campaign

The sector is coming from a very long and deep recession. The demand for gold and jewellery in 2009 recorded a steep fall of about 18% at world level with very marked downturns in the United States (-17%), in the Arab countries and in Europe. The sole sign of solidity came from the Chinese market where there was a 12% increase in the demand for gold and 8% growth in jewellery.
The forecasts indicate a market recovery for 2010, the scale of which will however be linked to the performance of the economy in the various parts of the world.

Gold Expressions is a collaboration between the World Gold Council, the Vincenza fair, and sixty-nine premier Italian goldsmiths. The  tour of China, India, the Middle East, and the United States as part of an international marketing campaign was successful particularly in the worlds greatest market, India, where the quality has attracted the new rich Indians.

Italian Gold Coins

Italy for a large period of time was in the form of a number of states with different governing bodies, because of which various kinds of coins as currency were used. However, “fiorino d’oro” or the gold coins of the republic of Florence were probably the first European coin to be made and used in larger quantities. The time of the birth of the first Italian gold coin is estimated to around 1252. This gold coin had approximately 3.5 grams of gold content. Apart from fiorino d’oro, many other famous gold coins used as currency were ducat, scudo d’oro and sovranos. Italy began using the currency Lire from 1861 and were in production until 1940. The most readily available of modern Italian gold coins is the 20 lire of Victor Emanuel and Umberto 1

Italian Gold Coins as a safe haven

The Italian gold coins have now attained the status of being a collectors’ item. People buy and sell these coins and investors take them as safe investments because of rising prices of gold. Whilst the economy of Italy is not in such a dangerous state as Greece, it is incorporated in the Southern European euro demise.  An Economy Ministry document trimmed the forecast for 2010 gross domestic product growth to 1.0 percent from 1.1 percent and slashed the 2011 forecast to 1.5 percent from 2.0 percent. As fears grew of contagion from Greece’s debt crisis to other euro zone countries, Rome raised its public debt forecast to 118.4 percent of GDP this year, up from a forecast of 116.9 percent made in January. The 2011 forecast was hiked to 118.7 percent from 116.5 percent and 2012 raised to 117.2 percent from 114.6 percent.

In times of impending crisis families who understand the situation will try and protect their wealth in intangible gold.

Maurice Hall

People are questioning whether the bull  run on gold over the last decade reached its climax with the December 2009 high of $1227 and we are on a downward slope. Let’s compare the conditions in 1980 with today and we will find that they are quite different.

1980

In 1971, the United States suspended the free exchange of U.S. gold for foreign-held dollars, then in 1974 lifted its four-decade ban on the private purchase of gold. At that time, gold bullion was being traded in European markets at highs approaching $200 an ounce. In 1975, the U.S. government began to sell some of its holdings on the open market and in 1978, along with most other nations, officially abandoned the gold standard. After being released from government control, the price of gold soared and touched $850 in January 1980.  In the three years before 1980 gold price grew eightfold  as the result of mainly fear but also greed

In Dec 2009 the gold price soared to $1227 per ounce. So was this the zenith and comparable to the 1980 high? Was this the end of the bull market that was running for almost a decade?.

There are many differences between 1980 and today not least of which the world is not the same following the most significant financial crisis since the great depression of the 1930’s, global warming threatening our existence and the economic balance between East and West swinging to the East. In 1980 the cold war still raged, the Berlin wall separated East and West Germany, and Eastern Europe was in soviet control, the Russian bear was feared. We must also remember that gold in real terms is trading at only half of the high reached in 1980 as the $850 to day equates to approximately $2200 when inflation is applied.

Political Fear – The Soviets had  signed a “bilateral treaty of cooperation” with Afghanistan in 1978, but by the next year relations had deteriorated and  the Soviet Invasion of Afganistan, which began around Christmas 1979, was a terrible global shock., Russian forces seized all major governmental, military and media buildings in Kabul, including their primary target – the Tajbeg Presidential Palace, where they killed President Hafizullah Amin and announced on Radio that Afghanistan had been liberated

It was a slap in the face to a cold war America.

At the same time the Russians were building up their strength  in southern Yemen close to Saudi Arabia and the oil fields. Also in Bulgaria’s border with Yugoslavia, a liberal communist country, whose 87 year old president Tito solely responsible for binding the  Serbs, Croatians and Muslims together since the end of WWII was very ill.

Iranian fundamentalists took over the US embassy in Tehran in November 1979 anther slap for America.  Ayatollah Khomeni became supreme leader in December and relations ships with Sadam Hussein’s Iraq were at an all time low eventually leading to the Iran –Iraq war.

Economic Fear – The 70’s were a period where inflation was spiraling out of control, stagflation unemployment, oil embargoes and subsequent spike in oil prices spread gloom and despair.  In 1979 inflation in the US was at 12% and was in double figures in most western countries  In the UK the winter of 1978-9 was known as the “winter of discontent” and during 1979 nearly 30 million working days were lost due to strikes.  Debt in the USA had risen to almost $1 trillion and the dollar was weak.

Another catalyst that shook the markets was Bunker Hunt’s run on silver. Hunt, an oil billionaire, his brother and friends by October 1979 had bought up all the silver paper propositions to the tune of 192 million ounces.  In early January 1980 , it became evident that COMEX intended to change the rules to only allow 10 million/oz of contracts per trader and that all contracts over that amount must be liquidated before February 18th. Of course, the CFTC promptly backed up the ruling. The escape hatch for the Hunts and some of the other large longs was simply to convert their futures contracts into physicals, On January 17th silver hit $50/oz, Bunker had continued to buy. At that point in time the Hunt’s silver position was worth $4.5 billion dollars. This caused chaos as there was no silver to be had to supply and the Hunts were driven to ruin.

Oil revenue to Gold – The rapid rise in oil price produced a sudden surge of wealth in  Saudi Arabia and the Gulf States  and enormous sums were diverted into gold. This was further accelerated by the fall of the Shah which exposed vulnerability of people in power in the Middle East and led them to protect their positions. It was common for Saudi dealers to bid for 50-100,000 ounce in a morning and one bank was asked to buy 300,000 ounces for a single client.  Speculators also used the opportunity to dupe the market to increase the price of gold by bidding for huge sums  through a Gulf bank giving the impression that Arabs were pouring money into gold, a story carried by media for some time.

Greed – Of course speculation reached the phase of public awareness which is always the last phase close to the peak just before the decent.

The world was in turmoil and inflation was out of control so everyone was scared. When people are scared fiat currency is not enough. They return to traditions going back to the beginning of civilization to secure wealth in physical gold that gives portability and liquidity. During times of crisis and fear gold rises and individual governments can’t stop it; but in peaceful times governments are able to maintain control. The future of the American economy and American power did not feel at all certain. As a safe haven in times of panic and strife, gold simply reflected that fear. As soon as the emotion subdued and rationality returned  the buying panic quickly subsided and turned to selling phase taking down the price.

The Fall – Prices will rise as supply cannot meet demand but in 1980  when the price touched $850 all over the world people began dishoarding their coins and  old jewellery in an unprecedented scale to the extent that dealers were running out of money to pay for the re cycled gold and Refinieries  had more than enough scrap gold. Thus supply quickly out grew demand.

In early 1980, Paul Volcker’s (Fed Chairman) new Fed policy began to bite. U.S. interest rates began to skyrocket. As they rose, the Dollar first slowed its descent, then stopped falling, and then began to rise. Both the public and the investment community which had stampeded into Gold was lured back into paper by this huge rise in interest rates – and by the prospect of a higher U.S. Dollar. The threat of financial meltdown was averted. There was a rush out of Gold and back to Dollars. The Dow was already rising in 1979 and really took off in 1982.

The gold price dropped off dramatically after its January 1980 high in short because people lost their fear as inflation the bane of the 1970s was finally coming under control, interest rates and the stock markets rose making other investments more attractive. Supply was greater than demand and the Middle abruptly exited the gold market.

2010

The financial crisis that rose its ugly head in 2008 and continued through 2009 is comparable to the fear generated in 1979-80 and was one of the reasons for the rise in gold as people sought a safe haven. The dollar has been weak, a norm for a corresponding high gold price and this was catalyzed by India buying 200 tonnes from the IMF to drive the price to the December high.

The Future – The difference between 1980 and today is that in 1980 we were exiting a terrible decade and the future looked bright economically. Today the future is far from bright and whilst we have managed the worst financial crisis since the depression and are even complacent; but the truth is we are not out of the crisis. The economy is recovering slowly and is still very volatile and in the UK we have £1.4 trillion in sovereign debt to face. According to the IMF spiralling sovereign debt in Europe, the US, and Japan has emerged as the top threat to the world economy and risks setting off a fresh financial storm. The eurozone is heading for one per cent growth this year, limping out of recession under the threat of a sovereign debt crisis. The main risk is that, if unchecked, market concerns about sovereign liquidity and solvency in Greece could turn into a full-blown sovereign debt crisis, leading to some contagion. The economies of Ireland, Spain and Portugal will shrink. The US’s ratio of total debt to GDP is likely to exceed 90% this year, making it more indebted even than Spain and Portugal. It is similar to Weimar Germany but for different reasons and has printed trillions of dollars of fiat currency which will eventually lead to debasement. The dollar is weak and is likely to get weaker. The Chinese Yuan is undervalued but it is not in China and the worlds interest to drop the dollar just yet but the time will come and dollar will fall. The Chinese are on the unmistakable path towards challenging the dollar and the ultimate aim is financial supremacy The dollar’s status as the worlds reserve currency is under threat and both Russia and China are pushing or an alternative in which gold must surely take a part.

Today we have a world of low interest rates where it is almost impossible to obtain an interest rate that does not lose on the capital invested each year when taking into account inflation and tax. With the right gold product tax on profit can be eliminated.

In 1980 Central banks were auctioning off gold, today central banks are turning to gold as many countries increase their gold reserves. Last year India bought 200 tonnes from the IMF to meet its international commitments. China has increased its reserves to 1054 tonnes and announced its intent to continue buying.

India is currently the largest consumer, China the largest producer and second largest consumer and Russia were not players in 1980 and it is these countries where the demand is currently driven. China is consuming all it can produce and quietly everything it can buy with out upsetting the price.

Public Awareness – In 1980 public awareness led to speculation and to frantic selling of gold, de hoarding which was contributory to the drop in price as the amount of scrap gold created an over supply. Today you can hardly open a newspaper or watch television without seeing an advert to persuade you to sell your old gold. This is the reverse of 1980 as the refineries need the re cycled gold to ease the demand. Also investment has not yet reached the public awareness stage. From the chart below  you will see that there is no slide just a correction which is normal

In conclusion gold is still a safe hedge, the world is uncertain with threats of sovereign debt, inflation and the weakening of the dollar. Gold is finite all the gold ever produced would fit into a 20 metre cube. As mining becomes more difficult production costs are rising to almost $800. The demand from the East cannot be met so demand is greater than supply and there will be more pressure on supply as the gold fields dry up. I have seen an analogy where more gold can be extracted per ton by harvesting old mobile phones than the majority of modern mines. Were are currently in a period of correction fed by a certain amount of complacency but trends indicate that we should see a breakthrough of $1300 by Q4 2011.

Maurice Hall

Over the past few years, China has experienced economic prosperity and rapidly increasing wealth.  During the same period, the Western world faced deep recession and is only now beginning to recover.  Today China has an insatiable appetite for gold which looks likely to continue in an environment where domestic mine supply lags behind demand. According to the latest World Gold Council Analysis, Chinese demand for gold is set to double in tonnage terms within just ten years. Over the past 5 years the demand for gold has risen by and average of 13% per annum and there is significant untapped potential in the Chinese gold market.

The rational behind the belief that a doubling of demand comprises of a number of elements:

1. China’s need to diversify from USD assets without destroying the dollar as it holds 2.4 trillion in reserves
2. China’s intention to increase it’s gold reserves from its current 1.6%
3. Sustained GDP and subsequent wealth creating a higher saving rate
4. China’s gold consumption per capita is very low in comparison with other gold consuming nations
5. The growth in jewellery ownership is expected to take off in relation to the increase in spending power
6. Citizens are encourage to put a proportion of their savings into gold and similarly the Central Bank is looking to diversify
7. Gold demand is increasing as is production but according to WGC research reserves account for only 4% of known global gold mining reserves and could be exhausted in 6 years
8. Its is likely that demand will outpace domestic supply with subsequent impact on the global gold market

1. Diversification

One factor that the Peoples Bank of China (PBoC) will consider is the future performance of the US dollar. Over the last 12 months, the US dollar has depreciated against major currencies and has not fared well as a preserver of capital. China, along with Japan, are the biggest single holders of US Treasuries and will certainly not benefit in precipitating a US dollar crisis since this will further devalue their trillions of US dollars in reserves and adversely impact the purchasing power of the US consumer – their major export customer. PBoC has been purchasing local gold mine production and local refining of recycled gold in local currency. The PBoC prefers not to be seen switching out of the US dollar at this juncture when such a large proportion of China’s foreign exchange reserves are already in dollar-denominated assets. A withdrawal of such significant volumes out of the gold-hungry domestic market would also further increase the domestic supply-demand gap in the Chinese private sector and escalate the “snowball” effect in China. Hence, we would not be surprised to see the PBoC proceed on a gradual strategy ( see article on China’s strategy and dilemma) , if it decides to increase its allocation. The media has stated that China should allow its currency to appreciate against the US dollar this year. This, in turn, would be bearish for the US dollar and positive for real asset prices, such as gold, that are denominated in dollars.

2. Reserves

The State Council advisor Ji Xiaonan believes China should start investing in at least 1,000 tonnes of gold per annum for its official reserves. Mr Ji has been quoted in the Chinese media as suggesting that the nation’s gold reserves should reach 6,000 tonnes in the next three to five years and perhaps 10,000 tonnes in eight to 10 years. The adjustments could be motivated by the following reasons:

• Increasing gold as an essential component of PBoC’s book could help the country meet future requirements in terms of safety and diversification of the portfolio;
• Purchasing gold using reserves would allow PBoC to withdraw billions of Yuan now in circulation, decrease the proportion of its US$2.4tn foreign currency reserves held in US dollar-linked investments and ease pressure on the appreciation of the Yuan. If the PBoC were to rebalance its reserve portfolio back to its recent peak ratio of 2.2%, we estimate that the incremental demand from taking this action would amount to around 400 tonnes at today’s gold price. Even an increase of 10% on its current gold reserve holding would translate to approximately 100 tonnes.

3 GDP

The Chinese economy grew at an unexpectedly high growth rate of 8.7% in 2009, with GDP reaching 10.7% in the last quarter. The country also saw rapid growth in foreign direct investment, fixed asset investment, new loans and rising money supply Continuous improvements in living standards, higher savings rates amongst private individuals and rising income levels are expected to generate robust gold demand in China. The World Bank (WB) recently raised its China GDP growth forecast for 2010 from 9.0% to 9.5%33. WB said that Chinese trade and household consumption should continue to grow strongly as the stimulus is withdrawn. The ongoing structural shift in Chinese gold demand and supply, as well as the structural trends within the world’s second largest gold market potentially creates a brave new world for China’s gold industry.

3. Consumption per capita

Chinese consumers are catching up relative to the Western world in terms of gold ownership. This is because market liberalization tends to have a dramatic impact in a local market. In India, for example its gold consumption more than doubled from roughly 300-350 tonnes in the early 1990s to over 700 tonnes at the end of 2008. Chinese gold demand has increased by 106% from 2002 to an estimated 443 tonnes in 2009, or an average of 8% per annum during the same period and 13% pa over the last 5 years. Nevertheless, the country has one of the lowest gold consumption intensity rates compared to Western economies, and to countries with similar gold cultures. In 2009, per capita gold consumption in China was 0.33gm, up from 0.17gm in 2002. WGC estimates that total incremental demand based on 2009 consumption and IMF population forecasts, ranges from 1,000 tonnes at USA and Japanese per capita consumption levels to more, if Chinese consumption per capita were to rise to Taiwanese levels.

4. Jewellery

China’s gold jewellery market is unique; local consumers are well aware of gold’s benefit as a store of value. Gold jewellery (especially 24 carat gold jewellery which accounts for at least 80% of total gold jewellery demand in China) has always been regarded as an investment by the Chinese. However, in recent years, there has been a shift of demand into 18 carat jewellery with Italian inspired design, which has been a success in attracting younger, urban cosmopolitan consumers to gold jewellery. During the last ten years, China’s jewellery off-take has averaged 250 tonnes of gold per annum. In 2009, the country ranked second in the global gold jewellery market, behind India. found per capita consumption of 0.26gm in 2009 to be low. If gold jewellery were consumed in China at the same rate per capita as in India, Hong Kong or Saudi Arabia, annual Chinese demand could increase by at least 100 tonnes to as much as 4,000 tonnes in the jewellery sector alone. There is also a significant potential for growth in Chinese gold jewellery demand,

5. Investment

Net retail gold investment is still developing in China. Investors looking to protect their wealth, and institutional and retail investors looking to manage portfolio risk are increasingly turning to gold. PBoC is also playing an increasingly supportive role on the demand side. We believe the reasons why central banks such as the PBoC would want to own gold are the same as the reasons why investors would want to own gold –namely its diversification properties, insurance against unexpected events and gold’s ability to outperform during crises. If PBoC  decides to rebalance its books back to its recent peak gold holding ratio of 2.2% at Q4 2002, we estimate that the incremental demand would amount to a further 400 tonnes at the current gold price. The ratio is nevertheless a fraction of the other key economies such as the USA (70.4%) and Germany (66.1%).

During China’s Eleventh Five-Year Plan period (2006-2010), gold investment among private individuals in China has been developing rapidly as Chinese investors catch up with their foreign counterparts in terms of gold ownership. There is a growing interest among the Chinese in commodity investment, stimulated by a high savings ratio, but also because there are not enough domestic investment opportunities available to Chinese investors. Chinese consumers are high savers, having accumulated wealth since 1978 when the Chinese government shifted the burden of retirement income to individual households. The Asian currency crisis added additional impetus to this savings culture. One should not forget that less than nine years ago there were regulatory restrictions on gold trading, ownership and investment in China. In 2001, the Chinese central bank announced the abolition of China’s long-term government monopoly of gold. Over the last century, the deregulatory tide in economic governance has helped to reduce the number of barriers to gold ownership around the world. In some cases the results have been spectacular. For example during the 1990s in India, when the liberalisation process was in full swing, Indian gold demand more than doubled from around 300-350 tonnes in 1992-93, to over 700 tonnes at the end of 2008. Chinese net retail investment in gold has increased from 65.9 tonnes in 2008 to 80.5 tonnes in 2009 (up 22% year-on-year). We expect this level to rise further despite recent gold price performance. In the WGC’s Gold Demand Trends Report for the fourth quarter and full year 2009, it was highlighted that Chinese consumers continue to buy gold in a rising gold price environment. Investment in China in the form of gold coins and bar hoarding has shown a strong growth momentum in recent years, although this market still accounted for less than a third of total domestic gold demand in 2009. The amount of Chinese gold coins and bar hoarding holdings in private hands is much less than in countries such as India and Vietnam. Chinese consumers are currently in the process of accumulating them, which may suggest that they are less willing to sell back their holdings as the gold price rises, compared to consumers in other parts of the world.

6. Internal Supply

Chinese mine production has been driven by gold prices. Despite being the largest producer in 2009 at 314 tonnes, the Chinese gold industry is simply not responding fast enough to bring in new supply. During the period from 2006 to 2009, average annual gold mine output grew by 8% per annum in China. This is more than targeted growth rate of 5% set out in its Eleventh Five-Year Plan (2006-2010) and it is more than three years since China moved three of its larger gold mines into production. On a longer term basis, supply issues such as higher mine development costs, rising input costs and potential threats relating to supply disruption, tougher safety regulations and depleting ore bodies could put a much higher floor under the gold price than was previously the case. During the last decade, Chinese gold miners have boosted output by 84 percent, but the nation’s known reserves account for just 4 percent of the total global gold reserves. China may exhaust its domestic supply within 6 years

7. Demand

Demand from China’s two largest sectors (jewellery and investment) reached a combined total of 423 tonnes in 2009 but domestic mine supply contributed only 314 tonnes during the same year. Chinese gold demand has the potential to double from today’s levels within a decade. Assuming that long term gold demand growth is in line with the supply growth target of 5% per annum (as set out in the Eleventh Five Year Plan), China could experience strong demand for decades to come. Demand growth looks set to continue to outpace global and domestic production capacity. The limited range of gold reserves and resources forecasts may restrict new supply, especially if existing domestic production lags behind demand. This shortfall creates a “snowball” effect as China’s gold industry may not be able to catch up with the annual leap in domestic consumption. This would effectively extend the gold cycle in China.

Conclusion

Over the past few years, China has experienced economic prosperity and rapidly increasing wealth. The Chinese economy grew at an unexpectedly high growth rate of 8.7% in 2009, with GDP reaching 10.7% in the last quarter. The country also saw rapid growth in foreign direct investment, fixed asset investment, new loans and rising money supply. During the same period, the Western world faced deep recession and is only now beginning to recover. Continuous improvements in living standards, higher savings rates amongst private individuals and rising income levels are expected to generate robust gold demand in China. The World Bank (WB) recently raised its China GDP growth forecast for 2010 from 9.0% to 9.5%. The ongoing structural shift in Chinese gold demand and supply, as well as the structural trends within the world’s second largest gold market potentially creates a brave new world for China’s gold industry. Today China has an insatiable appetite for gold which looks likely to continue in an environment where domestic mine supply lags behind demand. Looking further ahead, WGC expects Chinese gold demand to double from today’s levels over the next decade. Jewellery and investment growth are expected to be the chief drivers of this demand. The motives that drive demand in those sectors can differ: Jewellery is cyclical, and investment demand has both a cyclical and counter-cyclical element to it. There is a strong growth opportunity in the gold jewellery market given the very low per capita consumption of gold jewellery in China, which has almost doubled since the deregulation of the market. The recent financial crisis has also increased caution in Asia and made Asian investors aware of the need for a hedge against the possibility of further weakening in the US dollar, to which they are heavily exposed. Gold’s dollar hedging properties make it both appropriate and ideal for this purpose.

With ongoing uncertainties surrounding the economic recovery, currency and inflation, the search for alternative international asset choices for both investors and the central bank should clearly involve consideration of gold. The real value of gold for investors lies in the reliable diversification it provides and to consistently  deliver a lower average volatility than most mainstream assets and commodities.

Gold can be seen as an insurance policy, as an effective hedge and gives investors the confidence to manage unknown risk. Its value holds in good times and bad and show resilience during extreme conditions. Gold as an asset class has performed impressively for nearly a decade, both in China and internationally. Today, the combination of a healthy outlook for gold demand and its relatively inelastic supply creates a bright future for gold.

WGC report summarised by Maurice Hall

We need to understand the difference between money and currency as one is real and the other a promise.  Money can be defined as a medium of exchange and a store of value and until fairly recent times was in fact coins made out of precious metal with an intrinsic value or for ease of use, notes backed by precious metal.

Money, when considered as the fruit of many years’ industry, as the reward of labor, sweat and toil, as the widow’s dowry and children’s portion, and as the means of procuring the necessaries and alleviating the afflictions of life, and making old age a scene of rest, has something in it sacred that is not to be sported with, or trusted to the airy bubble of paper currency. Thomas Paine (1737 – 1809)

Currency is still a medium of exchange but is not a store of value as it only derives its value by government degree or “fiat”. It’s value is based on the issuing the authority’s guarantee to pay the stated (face) amount on demand, and not on any intrinsic worth or extrinsic backing. All national currencies in circulation, issued and managed by the respective central banks, are fiat currencies.

The problem is that fiat currency runs the risk of central bankers printing too much and causing large inflation or worse. The more that is printed the more the currency is debased just as the Fed is doing now with the dollar. This has been going on for decades with central banks indiscriminately creating money to cover expenditure and ever increasing debt.  There are examples throughout history and in the 20^th Century most of us are aware that in Germany in 1923 it would take a barrow load of Deutschmarks to buy a loaf of bread but an ounce of gold could buy a reasonable house and one dollar was worth 4 trillion marks

This irresponsible printing of money has eaten away at the value of the world’s reserve currency the USD dollar and dollar based assets, to such an extent that they have lost 82% of value since 1971, the year the US cut links with the gold standard. The GBP has fared even worse that the USD losing around 85% of value since 1971.   There are many illustrations of then and now and how owning gold with intrinsic value would have more purchasing pro rata than currency. E.g the latest model Cadillac Eldorado would have taken 180 ounces of gold at $42.02 to pay the showroom price of $7,546. This same 180 ounces is now worth over $200k and would buy two Cadillac convertibles with enough left over to fuel to first service. In the UK an average family car cost £1000 around 60 oz of gold and now the same would cost £17000 around 23 oz of gold. The 60 ounces would have bought the same family car for you a sports car for your wife and a hatchback for your son or daughter. Gold retains its purchasing power year after year.

Not long ago the gold standard imposed monetary discipline on countries as they had to hold enough gold to cover the money in circulation but this all changed with the Jamaica agreement in 1971 when the decision was taken by President Nixon on the 15th August 1971 to suspend the direct convertibility of dollars into gold, the keystone of the financial system created in July 1944 (the Bretton Woods Agreement).  On the 1st October 1971 the general assembly of the IMF asked the board of trustees to study and propose a comprehensive reform.  This would be adopted by member States during a meeting held in Kingston (Jamaica) on the 7th and 8th January 1976, and included a set of provisions which put an end to the reign of gold.  The US money supply in 1971 was $776 billion and quickly became an upward curve which rose dramatically over the last decade where the US money supply doubled from below $7 trillion to $14.3 trillion indicating that spending is out of control.

What is the effect as the US and other governments including the UK go on this spending spree. It means that the risk of sovereign debt default becomes very high indeed. We have already seen Iceland’s debt rise to 7 times GDP and then go into financial melt down and economic depression. This is a warning and recently Greece has been the sick man of the Euro world  with its debt forecast to reach 130% of GDP, its credit rating cut, the country in turmoil and it has placed pressure on the Euro itself.  The UK has not reached that level yet, but we are heading that way with debt estimated to be 65% of GDP this year and a forecast for 78% by 2015.  Japan the world’s second largest economy has debt of twice its GDP but continues to spend. In the Euro zone Spain, Italy, Portugal former Eastern European countries all face serious financial issues.

Most worrying is that the US, whose dollar is still the world’s reserve currency, has debts of 100% of GDP and budget deficits over the next few years will send that figure soaring. Their solution instead of cutting expenditures is create more fiat currency which will inevitably lead to devaluation of the dollar.  There are already moves afoot to seek alternatives lead by Russia and China and gold has featured in their strategies. China’s long term goal is to dominate financially and replace the US and they are currently playing a political game as they have up to 2 trillion in dollar assets that they do not want to destroy but off load at the best value.

It comes as no surprise that both China and Russia are increasing their gold reserves along with India who recently bough 200 tonnes from the IMF to back its financial commitments. China is now the worlds largest producer of gold and has recently surpassed India as the worlds greatest consumer and actively encourage their citizens to put part of their savings into gold.  China has a predicament in that it wants its central bank to diversify into gold without increasing the gold price and to shed dollar assets without devaluing the dollar so they are building reserves from internal sources and buying small quantities during price dips.  The UK made a very bad move when Gordon Brown sold off 395 tonnes of gold a decade ago when gold was at less than 25% of todays value. In light of the of the world economic situation this was doubly bad as gold reserves are more important than ever.

In summary:

• Currency is not money and its value can be changed by monetary policy makers
• Currency can be created and printed at will with no substance to support it
• Currency depreciation in value is accelerating with subsequent loss of purchasing power
• National debt is increasing to disastrous levels with threat of sovereign debt default
• Confidence in the  USD is waning and its use as a reserve currency is under threat
• Countries and investors are shedding their dollar assets
• Central Banks are diversifying into gold and out of dollar assets
• Smart investors are diversifying their portfolios with a proportion of gold
• The value of gold has been consistent in retaining its purchasing power
• Gold is insurance for your wealth
• Gold is the only real money

The price of gold rose to its all time high in December 2009 to $1212 an ounce and since then it dropped to a low of $1048 but now is in a period of consolidation of just above $1100 which follows a pattern that has been consistent over the last decade. It is likely that we will face another financial crisis due  irresponsible printing of currency, the risk of sovereign debt and political pressure. Of the millions of investors throughout the world only a tiny proportion see gold other than as a commodity. Central banks have seen the need to diversify into gold. The discerning investor understands that apart from ROI gold is a protection for wealth and the person who holds gold will see out a crisis and that has been proved time and again throughout history.  Once a greater proportion of investors become educated in the need to diversify, as they inevitably will, the price of gold will rocket.  Now is the time to protect your wealth in the safest investment – GOLD and I would recommend that you invest in the form of gold coins and in the UK gold sovereigns.

For details of the worlds most popular investment coins http://goldcoin.org/investment-coins/

Maurice Hall

In March 1999, gold is almost as low as $250 an ounce.  In December 2009 it cost more than $1200 an ounce.  In ten years, the price of gold has exploded and despite the recovery of the financial markets you will have seen that the price of gold has not dropped.  Why?  Because one central bank has announced that it secretly accumulated gold reserves, multiplying its gold reserves by three – that Bank is the Chinese Central Bank.

The Chinese Central Bank announced that it now holds the fifth largest stock of gold of any central bank.  Central banks hold gold, they always have.  Since they were first created, gold has been used for stabilisation in times when only the gold standard determined trade values and currency values.

Since most currencies became free to convert, gold has lost its importance and in early 1999 most central banks decided to sell gold because gold wasn’t making them any profits. The Bank of England started to sell its gold stock leading to a drop in the price of gold.  France, Spain and Portugal followed suit.  Almost all countries decided to sell gold except the United States, Italy and Germany.

On one side there are all these vendors, the Bank of England being one the Swiss National Bank another  On the other side there is one central bank that is accumulating gold reserves, China.  All central banks have gold to protect themselves against possible crises and against possible chaos we have talked about. We talk less about a kind of end of the world where currencies are worth nothing and there remains only one way of trading, with gold.  We are reminded that gold earns you nothing and yet the price of gold continues to rise.
Today, there are three different camps emerging within central banks holding gold:

- Those that want to get rid of their gold stocks in the belief that it is not strategic.  The Bank of France is one of these central banks.

- Those who want to retain their gold stocks, but who do not want to engage in battle by buying or selling gold, for example Germany and Italy.

- And then there are two countries that are going head to head in confrontation with each other.  On the one side there is the United States which has 8000 tons of gold in its reserves but which has decided not to touch it and could increase its stocks if China appeared to want to challenge them on this front.  On the other side, the Chinese Central Bank has passed the milestone of 1000 tons of gold to 1054 and has openly announced that it will continue to buy gold.
Central banks’ gold will probably become a new episode in the gold war which will last for centuries.  The Central Banks’ gold is a theme that must be closely followed.

Marc Fiorentino – CFO of Euroland Finance