20/11/2012
There
are tremendous forces at work that will push silver over $100 an ounce.
Very few precious metal analysts understand all the forces that are at
work. Some analysts focus on specific areas such as the gold-silver
ratio and technical analysis, while others write about future investment
and industrial demand. And then of course, we have the more unorthodox
analysts who delve into the ongoing manipulation of gold and silver -- a
realization shared by the author of this article.
However, one of the most important aspects of silver that most
analysts are completely unaware is the availability (or lack of thereof)
of future silver mine supply. I am simply amazed how some analysts can
forecast lower silver prices due to a so-called future supply glut that
is supposedly coming in the next few years.
As I have mentioned before in a previous article, analysts today are
so specialized they have no idea what is going on in another industry.
It is highly doubtful that the metal analysts who make these long term
silver supply forecasts really comprehend the details of the energy
market and industry. The failure of these metal analysts to understand
the complexity of the global liquid supply system will render their
future forecasts completely inaccurate. This will be discussed at the
latter part of the article as it is one of the longer term forces to
impact silver.
Silver Surplus-Deficit Explained Again
There still seems to be a misunderstanding about the so-called
surplus-deficit of silver. Some analysts are pointing to the fact that
increasing annual silver surpluses, without continued strong investment
demand, can make the price of silver fall quite rapidly. I would like to
repost this graph to show the surplus-deficit forces.
According to GFMS (now Thomas Reuters), there was a silver deficit
until 2003. During this time of supposed deficits, the price of silver
remained in the $4-$5 range. However, when the deficits disappeared and
the surpluses began, the price of silver magically began to rise. The
first year silver was no longer in a deficit (2004) it hit an average
price of $6.67 an ounce. Then in 2005 it reached an average of $7.32,
$11.54 in 2007, $13.38 in 2008, $14.98 in 2009 and so on and so forth.
The white line on the graph represents the average annual price of
silver. As you can see the price is heading higher in parallel with the
so-called rise of silver surpluses. These silver surpluses have been
absorbed by institutional and retail investors. The notion that a
structural deficit in the annual silver supply would push the market
price of silver higher, failed to materialize prior to 2003 when actual
deficits took place.
So, here we can see that the rise in the price of silver since 2004
has less to do with industrial demand and more a factor of increased
silver investment.
Silver Investment Demand: Just Getting Started
Precious metal enthusiasts who are concerned about whether or not
silver investment demand will remain strong in the future... shouldn't
be. From the data I am gathering, we are just beginning to see how large
of a force silver investment demand will be in the upcoming years.
One of the more notable gauges of increased silver investment over
the past decade, has been the growing demand of official government
coins. In 2002, total supply of official government coins and
medals were 31.6 million ounces. However, by 2011 this grew to a
staggering 118.2 million ounces, a gain of 274% in just nine years.
The four largest selling official government coins are the U.S.
Silver Eagle, the Canadian Silver Maple, the Austrian Silver
Philharmonic and Australian Silver Koala & Kookaburra. These four
government mints produced 101 million silver ounces of coins &
medals (majority were coins), 85% of the world's total in 2011.
Even though the sales of these official coins dropped off during the
first part of year, strong demand has returned in the second half. For
instance, there was a 32% decline in Silver Eagle sales in the first six
months of 2012 when 17.4 million were sold compared to 22.3 million
during the same period in 2011. However, if we look at the chart below
we can see that 2012 Silver Eagle sales are now only down 18% compared
to the same time last year.
There was also a similar decline of Silver Maples in the first half
of 2012. From January to June, sales of Silver Maples fell 32% compared
to last year. Nevertheless, when the Royal Canadian Mint releases its
third quarter report, we will more than likely see an increase of its
Silver Maple sales in percentage terms compared the first half of 2012.
Another interesting trend taking place and shown in the chart above
is the amount of Silver Eagles sold compared to Gold Eagles. Compared to
last year, Gold Eagle sales (-36%) are down twice as much in percentage
terms than sales of Silver Eagles (-18%). Furthermore, the U.S. Mint has sold 53 times more Silver Eagles than Gold Eagles in 2012 (the ratio in 2011 was 40-1). Thus, retail investors have been purchasing 33% more Silver Eagles than Gold Eagles compared to the same period last year.
Even though the four countries listed above produce the lion's share
of official government coin sales, there is another country that has big
plans to change their ranking in the future.
China: Big Plans For Future Silver Investment
China has been producing its one ounce Silver Pandas at a stable rate
of 600,000 annually for nearly a decade. However, last year China
decided to increase its mintage of its 2011 Silver Panda from 600,000 to
6 million... and in 2012, they plan on increasing it to 8 million. Why
the sudden 10 fold increase of their Chinese Silver Panda sales in one
year?
Well, according to Jim Orcholski who runs J & T Coins LLC Blog.com:
The main reason the mintage of these coins was increased so much
starting last year is that it became legal in 2011 for Chinese citizens
to own silver coins.
The Chinese government is also eager to make Silver Pandas as
popular as American Silver Eagles. Pandas are obviously very popular
within China, and it's not known how many of the Silver Pandas are
exported and how many are sold within the country.
For the Chinese government to make good on its promise to popularize
its Silver Panda to equal that of the American Silver Eagle, they will
have to increase their annual mintage substantially. In 2011, the U.S.
mint sold nearly 40 million Silver Eagles. If the Chinese plan on
surpassing this record, I would imagine they may set their goal at
producing 50 million annually. This may not be that tough of a challenge
due to the fact that the China has three times the population of the
United States, and their citizens are becoming keen buyers of the
precious metals.
It is plain to see, that the demand for official government silver
coins has gone exponential over the past decade. However, this is only
one part of the overall silver investment picture.
Silver Investment Demand vs. Industrial Applications
One of the more tiresome, boring and overused analysis in determining
the future price of silver, is the forecasted consumption of silver in
industrial applications. There is this notion that if the world's
economies slide into a severe depression, then the demand for silver
will fall as industrial activity declines. Thus, we would have much
lower silver prices... that is, according to these analysts.
Hogwash. We now know from the data provided in both the
surplus-deficit and official government coin charts above, it has been
investment demand rather than industrial demand that has been the
overriding force in determining the market price of silver. Again, if
industrial demand didn't move the price when we had real annual silver
deficits in the past, why on earth would we expect it to affect the
price in the future.
To get a true picture of the massive increase of silver investment during the past decade, take a look at the chart below:
The grey bars in the chart above show how much silver was consumed on
an annual basis by industrial applications while the blue represent
coin & medal demand and the orange denotes implied net investment.
These figures do not include silver consumption in either photography,
jewelry or silverware. Below is the data for the following years (from
the Silver Institute):
By adding the silver demand from official coin-medal and implied net
investment together, we get the total amount for the year which was 31.6
million oz in 2002. Thus, total world silver investment in 2002 was
just a mere 9% of the silver consumed by industrial applications.
However, by 2011 global silver investment jumped to 282.2 million oz
accounting for 58% of silver used by industrial applications.
The World Silver Survey calculates Implied Net Investment by
subtracting total fabrication from the total global silver supply. In
2011, global silver supply (mine & scrap) was 1.04 billion oz and
total fabrication (industrial applications, photograph, jewelry,
silverware and coin & medal) consisted of 876 million oz leaving a
difference of 164 million oz as implied net investment.
According to the 2012 World Silver Survey, physical bar investment
accounted for 98 million oz of the 164 million oz implied net investment
total in 2011. Here again, we can see from the two charts above,
institutional and retail investors have been the predominant force in
pushing silver from an average of $4.60 an ounce in 2002 to averaging
over $35 an ounce last year.
Even though silver has risen nearly 75% per year for the past nine
years... this is just the beginning of the price moves to come. Why? It
looks like something quite fishy is taking place in the precious metal
exchanges.
U.S. Silver Exports: Putting Out The LMBA Fire?
In the past, investors were happy to fork over hard earned money for
paper promises of gold and silver. However, that trend seems to be
reversing quite rapidly. After the collapse and bankruptcy of several
large commodity brokerage houses along with the supposed ongoing threat
that allocated and unallocated gold and silver accounts have been
rehypothocated (stolen), investors are now demanding delivery of
physical metal instead of paper I.O.U.'s.
Furthermore, a week doesn't go by without an article written about
government gold repatriation or whether or not a central bank actually
holds the very gold (or rights to the gold) that is shown on its balance
sheet. When we add up all these factors, who can blame the investor for
wanting to acquire the real physical asset?
One country that is scarfing up as much of the precious metals as it
can, is China. According to the research done by Jim Willie, massive
amounts of gold (official & unofficial) have been shipped from West
to East (mainly China) in the past several years. One place for an
investor or a sovereign country to take delivery of large quantities of
gold and silver is from the LBMA located in London -- the largest metal
exchange in the world.
Rumors are floating around the precious metal blogosphere that
wholesale physical supplies of gold and silver are extremely tight, even
though so-called "official statistics" may state otherwise.
Nevertheless, there is one "official source" that may help confirm these
rumors.
In 2011, the USGS published that the U.S. exported 19 metric tonnes
of silver bullion to the United Kingdom during the entire year -- a very
miniscule amount indeed. However, something very interesting occurred
in May of this year. In May, the U.S. exported 19.4 metric tonnes of
silver which was more silver than was exported during the twelve months
in 2011... and this is just the tip of the iceberg.
If we look at the chart below, we can see just how much silver is
leaving the shores of the U.S. and being shipped to the United Kingdom
in 2012:
In the upper right hand portion of the chart you will see the
quantity of silver exported each month to the United Kingdom. In
addition to the figure stated above, the United States exported 37.3
metric tonnes of silver in June, 169 metric tonnes in July and 65.3
metric tonnes in August. In just four months, the U.S. has exported 291
metric tonnes of silver to London (LBMA).
There are two significant trends taking place that are represented in
the chart above. First, the United States has exported more silver
bullion in the first seven months of the year than it did in all of
2011. Secondly, silver bullion shipped to the United Kingdom rose from
3% of total U.S. silver exports in 2011, to a staggering 42% of the 700
million oz exported so far this year.
Why has there been such a large increase of silver bullion exports to
the United Kingdom over the past few months? Could it be that the
English have suddenly ramped up solar power manufacturing... or may it
be due to an abrupt increase in foreign demand for their formal
silverware? I highly doubt it.
More likely than not, the large silver bullion exports to the U.K.
have been utilized to help meet the insatiable physical silver bullion
demand taking place on the LBMA. As the old saying goes... where there
is smoke, there's probably a great deal of silver paper on fire.
If we consider the strong investment demand forces described in the
examples above (present & future), I hate to say, investors should
probably brace themselves for much higher silver prices in the next
several years. Yet, investment demand is only one part of the powerful
forces that will push the price of silver over $100 an ounce.
Will Higher Silver Prices Bring On More Future Mine Supply?
There is this economic principle that states increased demand and
higher prices of a commodity or product will eventually bring more
supply to the market. While this has normally been the case during the
history of mankind, the world will soon be hit by a rude awakening.
Gold and silver mining is extremely energy intensive. Back in the
good 'ole days (late 1800's & early 1900's), the majority of energy
used in mining was human and animal labor. This somewhat primitive
method of extracting the precious metals from the ground worked fine as
the ore grades were extremely rich and confined to narrow veins. But, as
the best quality mines were played out and the average ore grades
started to decline across the world, more energy was needed to mine and
process the ore.
The mining industry solved this problem by building bigger machines
that could move larger amounts of ore to compensate for the declining
ore grades. Eventually, animal and human labor was replaced by earth
moving machines. For a while, bigger accomplished the job until the
mining industry demanded... GARGANTUAN.
Caterpillar met this challenge by designing and building the Model
797F Haul Truck -- one of the largest mining haul trucks on the planet:
The 797F is the epitome of massive on all scales. It is nearly 50
feet long and can haul 400 tons of ore (800,000 lbs). The tires
specifically designed for the 797F, are 13 feet tall and cost $42,500 a
piece. The 797F is so large, it takes 12 semi tractor trailers to ship
the truck to the mining site for final assembly. Included in the list of
parts is its tiny 1,000 gallon fuel tank.
Here's the good part. The Caterpillar 797F is so large, it averages
0.3 mpg and consumes roughly 65 gallons of diesel per hour. Because of
its huge cost, the 797F is normally run 24 hours a day, 365 days a year,
stopping only for scheduled maintenance. If we calculate its annual
fuel consumption based on conservative figures, the 797F can burn nearly
a half a million gallons of diesel a year.
Again, the reason why the mining industry transitioned its machines
from bigger to gargantuan was to offset the decline of ore grades that
went from very rich to extremely poor. Before I tie together the future
energy picture and its impact on silver mine supply, let's look at some
actual data on declining ore grades in the top silver miners.
Putting Actual Data Behind The Decline Of Ore Grades At The Top
Silver Miners
In all my research on the Internet, I have yet to come across an
individual or publication that has provided the public with actual data
on the overall decline of the average ore grade (and yields) in the
silver industry... well that is, up until now.
When I gathered the data to produce the chart below, I had no idea of
what the final outcome would be. However, as I tallied the final
figures, I was completely surprised by the results:
For the sake of clarity, an ore grade is the amount of silver
contained in the ore before mining. The average yield is the actual
amount of silver the company produces when it processes a tonne of ore.
Here we can see that in just six years, the top silver miners average
yield has declined 34% or 5.6% per annum. In 2005, the top 6 silver
miners produced on average 13 ounces of silver per tonne of processed
ore, but by 2011 their average yield dropped to only 8.6 oz per tonne.
Moreover, in 2005, the top 6 silver miners produced 123 million oz of
silver by processing 9.4 million tonnes of ore, but just six years
later they had to process 15 million tonnes of ore to generate 129
million oz of silver. Subsequently, the net result was a mere 5%
addition of silver production with a 60% increase of processed ore.
RULE OF THUMB: As ore grades or silver yields decline, it takes more energy to produce the same or less metal.
The mining companies included in the calculation above were
Fresnillo, BHP Billiton's Cannington mine, Pan American Silver,
Hochschild, Polymetal and Hecla. Some of these silver miners were chosen
over other companies who had higher annual silver production due to the
availability of data as well as consistency of its reported annual
silver yields.
I omitted Coeur d'Alene because its annual silver yields were all
over the place due to new mines be added and old mines dropping off
throughout the years in which I collected the data stream. Truth be
told, Couer's average silver yield in 2011 was only 4.2 oz per tonne. In
that regard, the addition of Coeur's silver yield data into the mix
would have made the overall yield even lower.
Furthermore, the companies and the one individual mine (Cannington)
were chosen as they are primary silver mines. The authors of the annual
World Silver Survey did not include Hochschild or Polymetal in their
example of primary silver miners, although I included them due to
several reasons.
According to the Silver Institute-2012 World Silver Survey, Fresnillo
is listed as one of the largest primary silver miners in the world.
However, in its first half 2012 report, Fresnillo received 51% of its
revenue from gold and 45% from silver. Hence, Fresnillo is actually
making more revenue from mining gold rather than silver.
On the other hand, in Hochschild's first half 2012 report, the
company received 70% of its total revenue from silver and only 30% from
gold. In my book, Hochschild is more a primary silver miner than is
Fresnillo.
Polymetal was also selected due to the fact that its two primary
silver mines, Dukat and Lunnoye produced 17 million oz of silver at an
average yield of 9.8 oz per tonne in 2011. Furthermore, Polymetal's
first half revenue were split equally at 48% each from gold and silver.
So, in reality, Hochschild and Polymetal are just as much a primary
silver producer as is Fresnillo.
I only included data from primary silver mines in the companies
listed above. Even if a company received additional silver production
from one of its primary gold mines, I elected not to include these
figures as it would have skewed the results in determining the true
decline rate of yields in the primary silver mining industry.
Lastly, there is this practice in the mining industry to process
lower grade ores as the price of the metal increases. Some mines
actually put a mark locating the lower grade ore within the project for
the miners to remove during the year. Furthermore, mines will process
lower grade ores and tailings that they neglected to do in the past when
prices were lower. However, this does not really alter the overall
average annual decline of yields in the silver mining industry shown in
the chart above.
For example, both the Fresnillo and Cannington mines have seen
substantial declines in their average silver yields in the past six
years. This was not due to mining and processing lower grade ore to take
advantage of higher metals prices, rather it was due to the mine being
played out and finally reaching the reserve base ore grade stated in
their production reports.
Silver = Stored Energy
One factor that most precious metal investors fail to comprehend is
the energy nature of silver as a store of value. Of course they
understand that silver and gold are real money, worth a certain amount
of perceived or intrinsic value. Unfortunately, they fail to realize
that the most important value attached to an ounce of silver, is the
stored energy contained in each coin.
A monetary value was attributed to an ounce of silver or gold based
upon the amount of energy and capital it took to mine the metals as well
as its degree of rarity. During the Roman times when silver was mined
by human and animal labor, the monetary value was given based upon the
amount of labor (energy) it took to produce a one ounce coin. Basically,
the free market determined the prices of goods and services in silver
coin to their relative energy value.
For example, if it took on average four hours of labor to produce an
ounce of silver during the Roman Empire, that coin was exchanged for a
good or service of equal energy value. In this example, a city laborer
working a twelve hour work day might receive 3 silver coins as pay. I
realize I am making a basic assumption here, but this is how a monetary
value was given to gold and silver. Of course, the free market would
determine the value of an egg, chicken, horse or say a cow in gold or
silver coin. But, in the end, the more energy that went into producing a
good or service, the more silver or gold coins it took to equal the
energy transaction.
Once an investor realizes this energy value as it pertains to silver
(or gold), you will then understand how important energy plays as a role
in the production of the metal as well as its role in the overall
economy. Thus, as the energy supply of a society increases, so will its
production of gold and silver as money (if the society uses precious
metals as money). On the other hand, as the society experiences a
decline in its energy supply, so will the mine supply of its gold and
silver.
The mining industry has been banking on the continued growth of the
global liquid energy supply to be able to increase the production of
gold and silver. With the knowledge that the peak of conventional oil
production is now upon us, new hope has been placed on the supposed
SHALE ENERGY PARADIGM to be the U.S. and world energy savior.
Quick Wrap Up & Connecting The Dots...
Investment demand has been and will continue to be the driving force
behind the rising price of silver. Analysts who point to the growing
so-called annual surplus of silver as a negative factor, have been
brain-dead since 2004... the year both the surpluses began as well as
the time when the price finally broke above its decade level in the $4-5
range.
One area that denotes increased investment demand is "official coins"
produced by government mints. In just nine years, official coin demand
has increased 274% from 31.6 million oz in 2002 to 118.2 million oz in
2011. Even though China is currently ranked as the fifth country in
official coin production, they plan on making their Silver Panda as
popular as the American Silver Eagle. To do so, they may set a goal to
increase their mintage of their Silver Panda to over 50 million
annually.
According to the data provided by the 2012 World Silver Survey, total
global silver investment demand has risen from only 31.6 million oz in
2002 to a staggering 282.2 million oz in 2011. As world economic fiat
based monetary system continues to deteriorate, investors are taking
delivery of physical silver rather than holding on paper contracts that
may not be backed by any metal whatsoever.
This has created a run on the LBMA bank... the largest metal exchange
in the world. Evidence of this can be seen by the huge increase of U.S.
silver bullion exports to the United Kingdom. In 2011, the U.S exported
a mere 19 metric tonnes to London. However, in just four months
(May-Aug), the U.S. has exported 291 metric tonnes to the LBMA vaults in
the U.K..
The top 6 silver miners in the world have seen their average yield
decline 34% in six years from 13 oz per tonne in 2005 to only 8.6 oz/t
in 2011. As ore grades and yields decline, it takes more energy to
produce the same or less silver. Metal analysts are forecasting
continued growth of annual silver production for the next decade and
beyond. To be able to grow silver metal production, the world will have
to grow its liquid energy supply.
Once the world 's liquid energy supply starts its inevitable decline
from its current plateau, annual silver metal production will decline as
well (or may follow soon thereafter). Metal analysts who are
forecasting a glut of silver coming onto the market in the following
years are also suffering from the inability to process information
correctly. There will be no silver glut and there will be no silver
available when the world's fiat monetary system finally dries up and
blows away.
Get ready. As the forces for pushing silver over $100 have just begun.
Anomalies in a market come no bigger than the official gold holding of China.
By any measure it is tiny at just 1.7% of the country’s financial reserves – a situation that not only should be corrected, but is, albeit in a suitably inscrutable manner that contains a valuable lesson for Australian investors.
Rather than simply buy more gold to bolster its 1054.1 tonnes, a level which puts China behind France, Italy and Germany, and a country mile behind the US with its 8133.5 tonnes (which represents 75.4% of official US reserves), China has unleashed its corporate sector on a global treasure hunt for gold assets.
China is not the only one, of course. The rush to gold, the ultimate safe haven currency, has been evident for some time – with central banks moving to bolster their physical bullion reserves to offset the effects of currency debasement in Europe and the US.
Investment funds and investors have followed suit – buying a combination of bullion, gold exchange tradeable securities, and interests in listed gold companies, and this demand has triggered a near-term revival in the spot gold price.
Over the past few months, Chinese companies have executed at least six gold deals, either by investing in gold exploration and production companies, or through the outright acquisition of gold in the ground.
Given that no Chinese company invests outside the country’s borders without government approval, it is impossible to imagine that what’s just happened is anything other than part of a national plan. That plan is to re-direct some of the country’s savings into non-financial assets, with a particular eye on lowering exposure to the steadily weakening value of the US dollar and Europe’s common currency, the euro.
Deals done, so far, include:
- The
purchase of the soon-to-be-developed Zara gold deposit in the North
African country of Eritrea from ASX-listed Chalice Gold for $US114
million by China SFECO, a Shanghai-based company normally involved in
civil, industrial and agricultural engineering.
- An investment of $227.5 million to acquire a 51% stake in WA-based goldminer, Focus Minerals, by Shandong Mining.
- An
investment of $85 million to acquire a 42% stake in ASX-listed Noble
Mineral Resources, which owns the Bibiani goldmine in the West African
country of Ghana, by Zhongrun Resources Investment.
- The planned acquisition of London-listed African Barrick Gold for US$3.9 billion by China National Gold Group Corporation.
- An investment of $2.5 million to buy an 8.95% stake in ASX-listed Norseman Gold by Zhaojin Mining Industry.
- The takeover of ASX-listed Norton Gold Fields at a cost of $229 million by Zijin Mining.
On their own, each deal could not be regarded as anything unusual. Chinese companies have been stalking mining assets around the world for some time.But, there are three significant factors in what’s listed above compared with earlier Chinese mining investments.
Firstly, and most obviously, they all involve investment in gold companies and gold in the ground, whereas much of China’s earlier mining-focused investment was in basic industrial commodities such as iron ore and coal used to feed industrial output.
Secondly, the deals occurred in a burst of buying that appears to indicate the work of an invisible government hand somewhere in the approvals process.
Thirdly, they have all occurred at a time when the western world’s leading economies have accelerated their paper-money printing process.
That final point is critical to what appears to be happening because China is in the firing line to be the biggest victim of the global currency devaluation process underway, with anyone having a high exposure to the US dollar and the euro likely to incur heavy losses as they fall under the pressure of huge debts.
In the case of China, the (paper) foreign currency exposure is massive. Holdings of US dollars alone (mainly in Treasury bonds) is estimated to be around US$1.7 trillion.
Reducing such a high level of exposure to a weakening currency has been a priority for China’s central bankers since the outbreak of the global financial crisis in 2008, with some success.
Recent estimates put the US dollar position at 54% of China’s total reserve holdings, down from 65% in 2010, and 75% in 2002.
But one of the steps that China took in lowering its exposure to the US dollar was to buy euros, a currency with an even worse track record over the past few years, and any holdings in Australian dollars now seems to be headed in the same direction – south.
Gold, as ever, is now playing its traditional role of the world’s ultimate safe house for storing wealth – only in China’s case it has a found itself playing a game of catch-up from a long way behind.
That’s why the 1.7% of China’s reserves being held in gold is such an important number for all investors, because it is an irregularity in the country’s financial structure and it looks like a correction process has started.
Wading into the bullion market and buying 1400 tonnes of gold, which would lift China to an equal footing with France (2435.4 tonnes, or 71.7% of official French reserves according to data from the World Gold Council) is not an option. It would send the gold price through the ceiling.
As for catching up with Germany (3395.5 tonnes, or 72.3% of official reserves) or the US and its 8133.5 tonnes, that is even less likely.
Stealth is how China is building its gold exposure. Rather than disturb the global bullion trade, it is buying gold in the ground, using the companies that are all ultimately controlled by its government to scour the world for gold investment opportunities. That’s because, what’s good for a Chinese company is for good for China.
Australian investors not exposed to gold should not ignore the latest piece of evidence about who’s buying gold, what that means to the price, and what currency changes really mean to investment portfolios.
More than three years ago (The Bullish Bullionaire) Australia’s “Mr Gold”, Mark Creasy, explained why central bank activity in the gold market is critical to the price of gold.
When central banks are buying, the gold price rises. When they sell, it falls.
His most instructive answer was in this exchange – in May 2009:
Eureka Report: “And recently we’ve seen the Chinese central bank buying gold?”
Mark Creasy: “Correct. The best way to look at gold is not on the peripheral, say the scrap market or even mine supply; it’s to ask what are the big shareholders doing. In the past we’ve seen big holders such as the Bank of England and the Swiss National Bank selling, and people think we’re out of this. When they see a big new buyer, people want in.”
As a final point, it’s worth looking at what’s happened to gold since early August (and on several prior occasions) that it was time to sell iron ore stocks and go for gold.
Today, the gold price is around US$1779/oz (a rise of US$157/oz, or 9.7%, in just over two months) while the Australian dollar gold price has risen to A$1774/oz, an increase of A$230/oz, or 14.9%. It’s a fair bet that not many investments can match that performance since August 1.
Impressive as the performance of gold has been, the central message remains that investors should not treat gold as an item for speculation.
Gold must be treated as a currency with commodity uses that should occupy a key place in all investment portfolios.
China’s latest burst of gold market activity is just the last clue in what looks like being a long game as major western economies try to inflate their way out of the debt traps into which they have fallen.
A few more numbers to consider. If, as seems possible, the Australian dollar slides back to an exchange rate of US90 cents, the Australian gold price rises to A$1976/oz, using today’s US$1779/oz price as a marker. At an exchange rate of US88c, the Australian gold price would be comfortably above A$2000/oz (A$2012/oz to be precise).