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Gold the Only Asset Not Being Debased by Central Bank Money Printing

Commodities / Gold & Silver 2009 Mar 27, 2009 - 09:31 AM GMT

By: Adrian_Ash

Commodities Best Financial Markets Analysis ArticleTHE SPOT PRICE of gold dropped Friday morning in London, heading into the weekend at $921 an ounce – some 3% beneath Monday's start – as the US Dollar rose on the currency markets and world stock markets ticked lower.

US crude oil prices slipped back towards $54 per barrel, but remained 5% up on the week.


Government bond prices were meantime bid higher worldwide, knocking 10-year German Bund yields back to 3.07% after new data today showed inflation in the world's fourth-largest economy falling to a 10-year low.

German import prices fell sharply, down 5.4% in Jan. from a year earlier.

Next week's summit of G20 leaders here in London – faced with the worst global economic contraction since at least 1980 – is expected to bring to a head the issue of "competitive devaluation" between major currencies such as the Euro, US Dollar, Japanese Yen and British Pound.

"There is a nice rising trend line [in Gold Prices ] drawn off the November, January and March lows, which comes in at $914," says technical analysis from Scotia Moccatta, the precious metals dealer.

"This trend line broke briefly on Wednesday last week to $884 before staging a strong rally to $966. We suspect the market is comfortable being bullish on gold while the support at $883 holds."

Looking at the fundamental picture, "The only currency not getting debased, essentially, is gold," said Patrick Pittaway of the URAM natural-resources fund boutique at a Citywire conference mid-week in Zurich.

Pointing to the volume of new money being pumped into the world economy by national governments and central banks, "I certainly think gold will get above the $1030 high that it hit last year," he added.

"Gold production fell last year and may fall further in 2009," said Evy Hambro of BlackRock, whose Gold & General Fund has doubled investors' money since 2004, but dropped almost 28% since this time last year.

Falling gold-mine production "is partly due to the lack of exploration success by the Gold Mining industry," Hambro explained, "which discovered 15 million ounces last year, compared with production of 80 million ounces."

Overall, however, barely one-in-three attendees of Citywire's Fund Selectors Forum said gold may break and hold above $1,000 an ounce during the next 3 years. And producer "de-hedging" – where gold miners buy back gold they've sold forward on the futures market to lock in prices and raise cash – fell to a two-year low at the end of 2008, weakening a source of demand that peaked during the strongest gains of the last three years.

"Are we at the end of de-hedging and about to enter into a new era?" asks Raymond Key, global head of metals trading at Deutsche Bank, in the latest edition of Alchemist magazine.

"The lesson in base metals markets is that super-normal profit margins have been destroyed in a matter of months and a large number of producers will not survive if industrial metals remain at current prices."

Profit margins between the cost of production and market price currently stand at 50% on average in the Gold Mining sector, says Deutsche's analysis. Margins on copper, in contrast, have been slashed to 14% by the recession-led plunge in prices, while aluminum mines are 18% under-water.

Nickel prices have fallen to barely half the average cost of production.

"Is this not an opportunistic time for gold miners to lock in margins on a two to three-year basis?" says Key, echoing comments made 12 months ago by gold consultancy GFMS when the Gold Price reached an all-time peak of $1,032 an ounce.

"One certainly hopes that any gold hedging that occurs will be implemented when the profit margins are as healthy as they are now and not [as happened in the 1990s] when it is a matter of survival."

Meantime in India today – where Mumbai's Sensex stock index leapt again to end the week 12% higher – record-high Gold Prices are forcing local jewelers to switch to making imitation jewelry, reports the Business Standard .

"Normally, a single jeweler gets business for two to three kilogram gold per day," the newspaper quotes Balvantrai Badani, head of the Rajkot Gold Dealers Association. But with Indian Gold Prices jumping 27% in the last year – and rising five times over in the last six years – demand "has reduced to just 200-500 grams" per day.

"In order to survive the hard times, many jewellers have shifted from gold to imitation jewelry temporarily," says Badani.

One gold worker in the north-western city of Rajkot puts the "temporary switch" at 30-40% of local production.

The world's hungriest market for physical gold, India will next month celebrate Akshaya Thrithiya, a key gold-buying festival on the Hindu calendar.

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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