Tag Archives: Gold as an investment

Paper Gold Trading Drops in Q1, Negative Inflow for First Time in 2 Years

The OTC investments in gold papers decreased for the fourth quarter in a row during the three first months of 2011, the latest report from World Gold Council show. Investments in gold EFT’s and similar products fell by 56 tonnes in Q1, equaling a net outflow from the funds of more than USD 2,5 billion.

Notably, EFT’s listed in the US and the UK markets experienced net redemption in the first quarter.

World Gold Council


In spite of a fresh all-time-high for the gold price, the capital flow in the markets for ETF’s, and similar gold related investment products, is negative the first time in two years. The outflow in Q1 is almost as big as the inflow in Q4 2011.

But the gold market works in mysterious ways, so what’s actually going on is kinda hard to say.

One thing is for sure, the central banks are buying gold as never before.

But besides Japan, no one is selling.

In the open market, that is.

Most of the trading is done in the non-transparent OTC market.

By who? you might ask.

Well, your guess is as good as mine. This is what the World Gold Council wrote in their April Gold Investment Digest report:

The majority of gold trading takes place in the global over-the-counter (OTC) wholesale market for physical bullion.

While OTC markets are the deepest and most liquid markets in the world, information about transactions is not always fully accessible to the public as they are conducted outside of regulated exchanges.

However, evidence suggests that trading volumes in the global gold market is quite large; in-line with or larger than trading of other high-quality assets such as sovereign debt.

The London Bullion Market Association (LBMA), through surveys of its members, estimates that the daily net amount of gold that was transferred between accounts in 2010 averaged USD 22 billion (based on the average 2010 gold price).

However, in practice, trading volumes between the bullion banks are significantly higher.

Most banks estimate that actual daily turnover is at least three times that amount and could be up to ten times higher.

This would value global OTC trading volumes anywhere between USD 67 billion and USD 211 billion.

During the first quarter of 2011, figures from the LBMA show that activity in the OTC market mirrored that of ETFs and futures.

Volumes rose during the January consolidation to an 8-month high of US$26.1bn/day before subsiding in February as prices recovered. Assuming a continuation of this pattern, indications from ETF and futures markets are that OTC volumes picked up again in March as gold prices maintained their
steady climb, the WGC wrote in last months report.

Well, here’s today’s update:

The April report seem, in fact, more interesting now, after the release of the May report.

Here’s some more:

Activity in the ETF options market remains robust, which continues to offer alternative strategies for investors. The majority of the volume in these products is still being transacted by way of GLD options. In line with some of the outflows experienced in the ETF market during the quarter, GLD options volumes dropped in Q1 2011 on a quarter-on-quarter basis. However, at an average daily volume of 234,724 contracts during the first quarter, trading volumes remain higher than the daily average of 208,131 contracts during the whole of 2010. In general, call option volumes remained higher than put volumes during the period. Similarly, open interest on call options accounted for the majority of traded contracts, at an average of 2.1 million contracts in Q1, compared to 1.7 million put contracts. However, open interest in call options fell further relative to Q4 2010 than the open interest in puts, as investors likely exercised some of those calls as the price of gold fell in the early part of the year.

And here’s some of the most interesting charts from today’s release, Gold Market Trends, May 2011.

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Exploding Gold Demand In 2010

Demand for the most precious of metals just keep on rising. It’s really not a good sign, as gold traditionally is seen as an insurance against turbulent markets, natural catastrophes and wars. In 2010 the global demand for gold reached the highest in a decade, at 3.112,2 tonnes, worth about 159 billion USD, the World Gold Council reports. The price reached a new all-time-high at 1.421 dollar an ounce.

Emerging country banks are likely to continue purchasing gold as a means of preserving national wealth and promoting greater financial market stability.”

George Milling-Stanley


“As anticipated, 2010 was a great year for gold with demand strong across all sectors. The opening weeks of this year have been characterised by an East/West divide. The dip in the gold price in January resulted in a reduction of ETF tonnage and a decline in the net speculative long position on COMEX. This has been counterbalanced by very substantial physical demand flows in Asian markets,” Marcus Grubb, Managing Director at the World Gold Council says.

The shift in central bank activity was the result of two distinct market forces. Emerging market economies, experiencing rapid growth, have been large buyers of gold to diversify their external reserves.

Meanwhile, European central banks have virtually stopped sales in the wake of the financial and European sovereign debt crises.

The latest Gold Demand Trends report, released Friday, examines the impact of this development on the gold market in more detail.

“Emerging country banks are likely to continue purchasing gold as a means of preserving national wealth and promoting greater financial market stability. Any gold sales from advanced economies are unlikely to be significant as the official sector remains highly risk-averse. Collectively, the official sector is still a significant holder of gold. Central banks remain committed to its importance and relevance in maintaining stability and confidence as they have been for hundreds of years,” George Milling-Stanley, Managing Director, Government Affairs at the World Gold Council, says in a statement.

Here’s some of the highloghts of the report:

  • Gold demand in 2010 reached a 10 year high of 3,812.2 tonnes. Demand was up 9% year-on-year, and marginally above the previous peak of 2008 despite a 40% increase in the annual average price level between 2008 and 2010. In value terms, total annual gold demand surged 38% to a record of US$150 billion.
  • Jewellery demand was remarkably robust in the face of record prices in the majority of currencies. Annual demand for gold jewellery rose 17% from 1760.3 tonnes in 2009 to 2059.6 tonnes. The rise in annual average prices over the same period was 26%. In value terms, this resulted in record annual jewellery demand of US$81 billion.
  • Investment demand, comprising bar and coin demand, ETFs and similar products, but excluding OTC investment demand, remained stable in 2010, down just 2% from the exceptional levels seen in 2009. This equated to a 23% rise in value terms from US$43 billion in 2009 to US$52 billion in 2010. Physical bar demand was particularly strong during the year, recording an annual gain of 56% at 713.2 tonnes.
  • Demand for gold ETFs and similar products totalled 338.0 tonnes during 2010 or 9% of total demand. Although this was 45% below the 2009 peak of 617.1 tonnes, it was nevertheless the second highest annual figure on record. As at the end of 2010, total gold holdings in ETFs and similar products stood at 2,175 tonnes with a US$ value of $96 billion.
  • Demand for gold used in technology was 419.6 tonnes, 12.4% higher than in 2009 as the electronics segment fuelled recovery in the sector, with demand returning to long-term trend levels. Demand soared by 41% year-on-year in US$ terms to a record US$17 billion.
  • India was the strongest growth market in 2010. Total annual consumer demand of 963.1 tonnes registered growth of 66% relative to 2009, which was largely driven by the jewellery sector. In value terms this was worth US$38 billion.
  • China was the strongest market for investment demand growth. Annual demand for small bars and coins increased by 70% year-on-year, totalling 179.9 tonnes, which is worth approximately US$7 billion.
  • Total supply is estimated to have increased marginally, 2% higher year-on-year for the full year 2010, with a number of new projects across a range of countries and regions contributing to higher levels of mine supply. Within total supply, recycled gold, which accounts for 40%, fell 1% compared with the previous year to 1,653 tonnes.

The Gold Demand Trends report sets out the key factors that drove gold demand in 2010,but also provides an outlook for 2011.

This is the main trends:

  • The jewellery sector enjoyed a strong recovery in 2010, with annual demand 17% higher than in 2009. Asian consumers drove jewellery demand, particularly in China and India. Chinese demand is expected to continue to increase rapidly during 2011 as economic growth in China remains strong, while Indian gold jewellery demand is likely to remain resilient and grow.
  • Asian consumers led demand with the revival of the Indian market and strong momentum in Chinese gold demand, which together constituted 51% of total jewellery and investment demand during the year.
  • A structural shift in central bank policy towards gold meant that in 2010 central banks became net buyers of gold for the first time in 21 years, removing a significant source of supply to the market.
  • Investment demand was down 2% compared with 2009, but was the second highest year on record at 1,333 tonnes, which equated to US$52 billion. Investment demand for gold as a foundation asset in portfolios is likely to remain strong, fuelled by ongoing uncertainty surrounding global economic recovery and fiscal imbalances, as well as fear of impending inflationary pressures and currency tensions.

“As anticipated, 2010 was a great year for gold with demand strong across all sectors. The opening weeks of this year have been characterised by an East/West divide. The dip in the gold price in January resulted in a reduction of ETF tonnage and a decline in the net speculative long position on COMEX. This has been counterbalanced by very substantial physical demand flows in Asian markets,” Managing Director at WGC, Marcus Grubb,  says.

The shift in central bank activity was the result of two distinct market forces.

Emerging market economies, experiencing rapid growth, have been large buyers of gold to diversify their external reserves. Meanwhile, European central banks have virtually stopped sales in the wake of the financial and European sovereign debt crises, the report states.

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Here’s a copy of the full report.

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Gold – The Utimate Bubble?

Jonathan Burton has an interesting piece at MarketWatch Saturday morning. San Fransisco based Burton, the website’s money and investment editor, argue that investors are being lured into a speculative gold bubble comparable with the oil spike of 2008. Mr. Burton points out that gold in reality is an insurance against a total market collapse and other catastrophes, and that an even higher gold prize means that the value of most other assets will crash.

“Gold buyers beware — the karat can be a sharp stick. As with any speculation, gold can lose luster as fast as hedge funds and other traders can unload it.”

Jonathan Burton


Rate hikes are kryptonite for gold; accordingly, concerns that China will move aggressively on rates, and that the US and developed Europe will ultimately follow, have dulled gold’s glimmer over the past week, Jonathan Burton at MarketWatch writes.

Gold has become highly prized bling-bling, with the prize per ounce reaching another all-time-high this week at 1.395 dollar per ounce.

Anxious and astute buyers, from hedge-fund players to central bankers, flock around the “currency of fear.”

Gold at around $1,400 an ounce is almost double what it commanded two years ago, and gold’s price is up almost 25% so far this year alone.

“It’s been a great ride. Except gold is a bad investment,” Mr. Burton states.

Adding: “Gold’s feverish run has made a lot of people a lot of money, and though the rally has taken a breather in the last few days, there’s no shortage of flag-waving supporters who claim gold is on a march to $1,600, $1,800, $2,000 and beyond. After all, gold is still well below its 1980 peak, when it was worth around $2,300 an ounce in today’s dollars.”

Pure Speculation

The MarketWatch editor also emphasise that the recent raise in gold prizes is caused by nothing else than pure speculations.

“Certainly there are reasons to own gold in a diversified portfolio. Yet gold isn’t like a stock or a bond. It offers no income, no dividend, no earnings. It is considered a store of value, an alternative currency that’s safe beyond reproach, but it is not cash in the bank, or even the mattress. Gold has no untapped intrinsic value; it is worth only what people are willing to pay for it. And lately, many people have been only too willing,” Jonathan Burton writes, backed up by the following quotes:

“Gold is going up because people are buying it, and people are buying it because it’s going up.” (Leonard Kaplan, president of Prospector Asset Management).

Gold is always a speculation. (James Grant, editor of Grant’s Interest Rate Observer).

“Gold may be a good speculation; even cautionary voices concede that gold is not yet displaying the parabolic hockey-stick pattern that frequently forms an ugly bubble. Low yields on safer assets such as bonds and cash encourage risk-taking and speculation, which favors gold, silver, metals, commodities and many stocks. If the U.S. dollar continues to decline, gold will be a main beneficiary,” Burton continues.

According to the last disclosure in June, the three giant hedge fund managers, George Soros, John Paulson and Eric Mindich, controls 10% of the worlds leading gold ETF, SPDR Gold Trust.

Of course, they staked their claim early, and their view on gold and the dollar may now have changed, as investors will soon discover when these influential funds release Sept. 30 portfolio holdings.

“But gold buyers beware — the karat can be a sharp stick. As with any speculation, gold can lose luster as fast as hedge funds and other traders can unload it,” Burton warns.

The Greater Fool Theory

To Jon Nadler, senior analyst at Kitco Metals Inc. and a veteran gold-market watcher, Wall Street’s buy recommendations remind him of speculation in 2008 that propelled another must-have commodity — oil, the “black gold” — to stratospheric heights.

“I don’t think gold is an opportunity at $1,400 an ounce,” Nadler says. “Just because gold has been above $1,000 for 14 months, everybody thinks it’s a new paradigm. This is very much what we heard about oil a couple of years ago.”

“An investment is something you buy near its value. If gold costs $450 or $500 to produce, at $1,400 you don’t have value, you have momentum.” (Lenord Kaplan at Prospector Asset Management).

Perhaps Leonard Kaplan at Prosoector Asset Management clarifies the issue best: “Gold at $1,400 is not what I would call an investment. An investment is something you buy near its value. If gold costs $450 or $500 to produce, at $1,400 you don’t have value, you have momentum.”

And as any experienced trader should know by now – momentum is just another word for the greater fool theory. (The strategy of buying with no other intent than selling at a higher price – until the rally stops and the greatest fool is not able to find any new buyers).

It is similar in concept to the Keynesian beauty contest principle of stock investing.

An Insurance You Don’t Want To Use

“I called gold the ultimate bubble, which means it may go higher,” Soros told an investor conference in New York in mid-September, repeating a warning he’d made earlier this year. “But it’s certainly not safe and it’s not going to last forever.”

The recommended strategy at the moment is to hold between 5 and 10 percent of a clients’ portfolio in gold.

But this is not a new strategy. In fact, it’s an essential part of the old school investment lesson on long-term planning,  designed to expect the unexpected.

“If it works really well, chances are the other things in the portfolio aren’t going to be looking so good.”  (Karl Mills, president of investment advisory firm Jurika, Mills & Keifer.)

“We actually hope it doesn’t work too well,” Karl Mills, president of investment advisory firm Jurika, Mills & Keifer. says. “If it works really well, chances are the other things in the portfolio aren’t going to be looking so good.”

Jonathan Burton

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“Indeed, that’s how most individual investors should look on gold, as a way to mitigate investment risk — and an insurance policy you hope never to use,” Jonathan Burton at MarketWatch concludes.

Well, that’s actually how it’s always have been, and always will be.

PLease, don’t forget that.

Now, read the full story at www.marketwatch.com.

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