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Gold Jumps on Economic Cost of Near $900 per New Ounce Extracted

Commodities / Gold & Silver 2009 Nov 02, 2009 - 07:15 AM GMT

By: Adrian_Ash

Commodities

THE PRICE OF GOLD jumped at the start of London dealing on Monday, reaching one-week highs against the Dollar and Sterling and trading at a near-3 week high in terms of the Euro, rising above €713 an ounce.

Asian stock markets outside Shanghai closed the day lower, with Tokyo's Nikkei index dropping 2.3%.


European shares crept higher from last week's near-6% loss, while government bonds slipped back and crude oil rose above $78 per barrel.

The major currency pairs were little changed on the forex market.

This week brings monetary-policy decision from the central banks of Australia, the United States, Britain and the 16-nation Eurozone.

"Overall the picture for gold remains very healthy," said AngloGold Ashanti's Mark Lynam at the annual conference for members of the London Bullion Market Association today in Edinburgh.

The LBMA's first annual conference to be held in the UK – and attended by almost 300 delegates from the gold world's leading producers, refiners, assayers, storage providers, banks and dealers – day one of the meeting focused on the dramatic shift in gold demand, from jewelry to investment, during the last 12 months of financial crisis.

Pressure from financial regulators for the London gold market to move from its current principal-to-principal "over the counter" model to a more formal, officially recognized set of contracts – with a central clearing point to underpin transactions – was also alluded to by several speakers.

On the gold mining side of the market, AngloGold Ashanti's Lynam cited the ongoing decline in ore grades, rising costs, "endemic" permit difficulties, and a dearth of new discoveries.

"The economic cost of recovering a new ounce of gold [from the ground] is now near to $900."
 
On the demand side, "Quantitative easing, bail outs and cuts to interest rates are undermining paper currencies," he said. "We're seeing central banks actively managing down their currencies."

Reporting "a new Western mindset more like we typically associate with Indian gold buyers," Mehdi Barkhordar of Swiss refiners PAMP said the shift came due to a lack of trust in governments, local currency and the broad financial system, plus fear of inflation.

"It is now investors who define the gold price," agreed Aram Shismanian, CEO of marketing group the World Gold Council.

"We firmly believe we're now entering a new era for gold...There has been a real paradigm shift in how people see gold."

Speaking for the European Central Bank, "I wouldn't be taking a huge risk to imagine that official holdings of gold [globally] will stabilize or increase," said Paul Mercier, the ECB's principal advisor on market operations, noting that gold as a proportion of Chinese, Japanese and Russian currency reserves is still very low.

Eurosystem member banks have sold 3,700 tonnes of gold between them over the last 10 years, Mercier said, but they remain "overweight in gold" since gold as a proportion of their total forex reserves has held around 14%.

"I must stress that gold is still a vital asset for Europe's central banks," Mercier went on, saying that gold offers four unique advantages – security, the capacity to deal with unexpected events, adding confidence to paper currencies, and risk diversification."

"The UK monetary policy decision on quantitative easing this week could be absolutely crucial," writes Steven Barrow at Standard Bank. "Not just for UK markets but for global markets as well.
"If the Bank goes against the consensus, and pauses or, worse still, stops quantitative easing, the markets fears about liquidity withdrawal will rise even more and there could be a bloodbath in stocks.

"This factor alone might make the bank deliver the extra £50bn [$82bn] of asset purchases that the market craves, although clearly it has to be careful about falling into the trap of doing whatever the market wishes."

Over the last month, the gold price in Sterling has risen back towards the all-time record highs set when the Bank of England first announced its "asset purchase" program – now using £175bn of newly-created money – in late Feb.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

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