Commodities | Sep 27 2010
By Greg Peel
A fortnight ago I noted in Central Banks Net Gold Buyers that gold consultant GFMS was forecasting net 15 tonnes of gold purchases by European central banks this year (ending September), which would mark the first time since 1988 the central banks haven't been net sellers.
The Washington Agreement gold year ended on Sunday and as it turns out, the net result was actually a sale of 6.2 tonnes. That this year saw a small sale rather than a small purchase is not significant given this year's sales were down 96% on last year and at the 2004-05 peak, 497 tonnes were sold.
Over the past decade European central banks, which have long held significant stores of gold, have preferred to swap their bullion for sovereign debt in order to receive a return on their reserves. Now that sovereign debt is a dicey concept, gold is once again preferred, leading gold enthusiasts to once again predict a return to the gold standard.
That's unlikely to happen any time soon.
But the London Financial Times notes that all of Sweden, Slovakia, Slovenia and Ireland have recently suggested they had no plans to sell gold, and in Ireland's case despite the fact it could seriously use the money right now. Switzerland had begun to sell some of its gold over the past couple of years to rebalance its foreign reserve proportions, but that five-year plan has been pulled. The IMF still has gold on offer, but smaller nations are quietly chipping away at that balance, while bigger Europeans such as Germany have simply not sold for a while and don't intend to.
Central bank selling has in the past acted as a dampener on the price of gold, which is also being positively influenced by ever decreasing new supply. Yet still gold is up some 300% plus. Currently ETF holdings and futures contracts stand at record levels. The one missing link might have been this year's seasonal jewellery buying out of Asia, were the Asians to baulk at prices around US$1300/oz. Occasionally in the past when the gold price has surged, Asian jewellery buyers have backed off.
But apparently, that's not the case in China. The Xinhua News Agency reported on the weekend that enthusiasm for retail gold purchases out of China is very strong. Xinhua quotes one buyer as suggesting, “For us the price is very high. But we need to buy gold now since the gold price continues to increase”.
China has just entered an annual holiday period in which small gifts of gold are the norm. It is also now the beginning of the first wedding season both in China and in India, and gifts of gold are also de rigeur. It is these Asian seasons which drive a significant proportion of global gold purchases each year in a jewellery market which represents some 80% of all gold purchases. Xinhua's interviewee is suggesting that he has to buy now because the price will only get higher.
That smacks of bubble territory. Adding to the bubble is news out of the US that retail gold coin dealers are also suddenly unable to order coins such as South African Krugerrands from wholesalers. Supply ran out late last week, suggesting mints once again cannot keep up with retail demand. The same problem occurred in 2008 at the height of GFC panic, which is not so surprising. Two years later, the world is still worried the reserve currency is just too much of a risk. And worried that other currencies are also “not worth the paper”.
While everything says “bubble” – and wait for your taxi driver to tell you he's buying gold – it is rather difficult to see just what might spark a sell-off. Gold has a history, particularly over the last several years, of running up very quickly before correcting a couple of hundred dollars when enthusiasm, or fear of missing out, run too far. But these corrections usually occur in between Asian buying seasons, not at the beginning of them.
Either way, gold never goes up forever in a straight line. Were the US economy suddenly to look a bit better for example, suggesting the Fed might hold back on QE2, some gold holders might run for the exits and spark a decent sell-off. But just about every analysts on the planet is calling gold higher over the next twelve months, and while this also signals bubble danger the analysts are simply suggesting average prices will trend upward as the value of the US dollar falls.
With global supply declining and central banks refusing to part with their last bastions of non-paper value, gold is under little downward pressure.