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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: long-gone who wrote (79380)	11/16/2001 6:29:00 AM
From: Secret_Agent_Man	Read Replies (1) \| Respond to of 116752

Private gold holders challenge central banks By: Laura Clancy Posted: 2001/11/16 Fri 10:05 \| © Miningweb 1997-2001 TORONTO – The World Gold Council and Gold Fields Mineral Services have just completed a study that shows where all the gold the central banks have been dishoarding has gone. Mostly to the private sector outside of Europe and the United States is the short answer. Speaking at the Autumn Precious Metal Seminar here, WGC head of retail investment, Albert Cheng, painted a surprisingly optimistic picture of retail investment demand for gold (as opposed to institutional investment demand which is in the sink). Although the volume of net retail gold investment (coin and bar, but not jewellery) is pitiful relative to alternative securities at less than $3 billion per year, there has been an impressive accumulation of private metal holdings in the last two decades. Privateers have been all too happy to mop up the gold central banks have been selling so aggressively in recent years. Commerzbank precious metals representative, Ian McDonald, believes the banks will inevitably be embarrassed for selling their bullion at twenty-year lows. Central banks have access to 965 million ounces while retail investors control 707 million ounces, or 15 per cent of total aboveground stocks of 4.6 billion ounces. Compared with 1950, private holdings have doubled from 350 million ounces (17% of the then total), while central banks have reduced stocks by 96 million ounces from the 1.06 billion ounces they controlled (32%) half a century ago. Intriguingly, GFMS excluded gold lent into the market by central banks when counting their total holdings. That is a quiet, but significant rebuke of IMF accounting guidelines that disguise gold loans and swaps by encouraging central banks to itemize such gold as an asset. The GFMS view is more appropriate because the gold is unlikely to ever be recovered at par with the value of the loan or swap; if at all. Market on a hair trigger Retail investor demand is fractional averaging less than $3 billion a year, or 278 tonnes (7% of global demand), over the last 8 years reflecting gold's diminishing appeal. The value of privately held gold is not more than $200 billion which is just 2 per cent of the $10 trillion valuation of the S&P 500. That provides considerable leverage on both sides of the equation. Shorts have ably demonstrated their price capping power, but they have operated in favourable circumstances against the backdrop of two decades of declining prices. If rising prices stimulate further buying, say a modest doubling in annual retail transactions to $6 billion, then the WGC expects a strong positive gearing impact on the gold price. However, it remains curious that speculators haven't stepped forward to exploit this obvious flaw in the market. Arbitrageurs are making hay in many other markets with far less certainty so the only reasonable conclusion is that poor liquidity has a strong repulsive effect on institutional interest. It seems evident that traders want the additional insurance of volume and volatility before tilting at the gold market's glaringly obvious upside. Powershift Since 1993, GFMS says net retail investment demand saw Europe dishoard 207 tonnes (6.7moz) which was more than balanced by North American uptake of 294 tonnes (9.4moz). East Asia and the Middle East continue to demonstrate a long-standing affinity for gold after buying 2,140 tonnes (68.8moz) over the same period. It is fascinating to note that buyers outside Europe and the U.S. countries appear to be focused on the U.S. dollar price by which measure gold is certainly cheap. That is counterintuitive to the idea that significantly depreciated emerging market currencies are inhibiting gold purchases. Positive as the retail demand seems, it belies ground lost relative to other securities, especially equities and the dollar in the late 1990s. GFMS says the primary reason for the lack of interest is the secular decline in the gold price: "This has been an immense turnoff to investors who have become ever more short-term oriented." There is widespread disbelief that gold can ever reverse its long-term decline, particularly with the dollar ascendant and as attention spans become shorter. Indeed, an entire generation of investors has grown up without any notion of the power that gold exerts in the international political economy. To find new gold investors or recover defected ones GFMS believes the market needs retail-friendly gold products, preferably securitized with paper assets. Securitized gold should raise trading margins for financial institutions and intermediaries while reducing the risk and cost of holding and moving physical product. The gloomy outlook perhaps obscures the reality that gold has not only become the property of citizens rather than governments, but ownership is steadily moving away from the traditional Euro-American money powers to the old world powers in the near and far east. That has fascinating political and economic repercussions. History shows the willingness of the West to undermine South African and Soviet reliance on gold to sustain undesirable regimes, but those were producers. The eastern powers are not dependent on future gold production, but control liquid stocks. That alters the balance of power and reduces the options available to the monetary hegemons. It would be melodramatic to think in a power struggle between the hemispheres (in the sense of the gold war between France and the U.S. in the late 60s), but the inevitable devaluation of the dollar – and consequent revaluation of gold – has important implications for future regional investment trends. And, perhaps, the greatest implication lies in the fact that, per capita, Western private investors are a lot worse off than their Eastern peers when it comes to owning gold. That is irrelevant in the context of the outperformance of competing securities in the last twenty years, but there is every reason to believe that that is not a permanent condition. m1.mny.co.za