| For many centuries, gold has been the investment of choice. Gold provides a safe haven and hedge against the loss of money (inflation) as well as provides a store of value during tough times (wars, political and economic uncertainty). Krugerrands are the easiest and cheapest way to invest directly in gold bullion. In South Africa, we as residents cannot invest in actual gold bars, and if we could, they would be VAT’able. There are no limits to the amount of Krugerrands you can own and no special knowledge is needed when buying or selling Krugerrands. Since Krugerrands are directly linked to the Rand/Dollar exchange rate and the dollar gold price, which are published daily, you will always know what value your Krugerrand holds. |  |
| The information flow process on gold is very complex. This makes it difficult to accurately assess and explain market
behaviour at any given point in time. However, a glance at the macro factors generally provides a good indication of likely,
longer term trends. At the moment, some of the most important of these macro factors are: 1. Central bank buying: In 2009 central banks became net buyers of gold for the first time since the early 1980s. This is very significant in that not only is the quantum of metal bought large enough to strongly influence prices, but prior to said date, the overhang of bullion reserves held by national banks severely dampened price rallies. The latter makes sense when one considers that these banks hold roughly 20% of all gold stocks in existence. As for the current trend of buying, it is mostly driven by Asian and Emerging Market central banks wishing to diversify their reserves base. Since the 1980s, growth in the money supply worldwide far exceeded gold production. This means that the proportion of gold held as part of foreign currency reserves is historically very low. An attempt at a correction of this should positively influence the price of gold and in a substantial way. 2. Exchange Traded Products (ETP): Currently, exchange traded funds and notes hold the equivalent of approximately 1900 metric tonnes of gold. Seen in the context of central bank holdings this represents the 5th largest hoarding of metal, after the Banque de France’s. Most of this is due to portfolio flows directed away from gold equities since the early 2000s. The advent of ETP holdings represented a structural shift in the gold market in that apart from central bank holdings, another source of ready and volatile supply exists. Attesting to this fact is the profoundly bearish effect the liquidation of 600 metric tonnes odd of gold held in ETPs since February has had on the price. 3. Strong jewellery, coin and small bar demand: Gold demand from Asia has been steadily growing over the last couple of years. After the price decline seen since April, demand has picked up even more - demand for jewellery, small bars and coins was at a record of 856 metric tonnes in Q2 of this year. This trend is likely to continue and to accelerate in China especially, due to a rapidly growing middle class savings pool, a dearth of investment products and increasing risk aversion. Small bar and coin investment demand in the Developed World has also increased sharply over the last year. Recent RBI restrictions on gold imports have impacted negatively on Indian demand. There is a strong likelihood that political pressure will force a review of these soon. Gold demand might at least also be partially satisfied through increased black market activities. As such the impact of the RBI’s actions, although initially very negative for gold demand, will probably lessen over time. The supply side is characterised by: 1. A struggling mining sector: Cash costs for producing an ounce of gold is estimated to be around USD 850 for the mining industry globally. This number excludes capital expenditure. Indications are that USD 1250 represents a conservative “producer floor” for the gold price. Below this level, mine production will be signifi cantly curtailed. 2. Reduced volumes of recycled metal: Metal supply from recycling activities has decreased sharply over the last year. Figures for Q2 2013 show a 21% decline compared to the previous quarter. 3. Net producer de-hedging: The de-hedging trend observed since 2004 is still continuing. The many calls for producers to enter into price risk management structures have so far been disregarded. Of the above mentioned variables, the ones carrying the most uncertainty is further ETP liquidations and even more severe regulatory restrictions on gold imports by India. On the first point, the overhang in these investment vehicles could put a significant dampener on price. But, a strong argument can be made that the “hot money” invested in these have already been withdrawn to a very large extent. Furthermore, liquidations in ETP holdings have been offset by the increased small bar, coin and jewellery demand. The effect of the latter on price is likely to be slower than the former due to manufacturing capacity constraints. As for the changes in the regulatory environment in India and the impact on gold demand - although having the potential to be very negative, a combination of political pressure, black market activity and growth in other Asian demand could compensate for losses in India. On a balance of probabilities, there seems to be a case for strong price support going forward. |
 |
|
|
 |
© Copyright 2013, First National Bank - a division of FirstRand Bank Limited. An Authorised Financial Services and Credit Provider (NCRCP20) | |
