Sovereign Risk and Global Demand Bullish for Gold

NEW YORK, April 14 /PRNewswire/ -- Jeffrey Nichols, Senior Economic Advisor to Rosland Capital - (www.roslandcapital.com), had the following commentary based on recent market activity and the week ahead.

New Records for Gold

Last week saw new records for gold as the metal's price -- denominated in Euros and British pounds -- rose to new all-time highs ... and by Monday the U.S. dollar price hit a four-month high of $1169 coming within five percent of its December 2009 historic peak of $1227 an ounce.  

The run-up reflected skepticism about the Eurozone's agreement early last week to provide Greece with a 30 billion euro line of credit ... but today's successful auction of Greek government debt took the wind out of gold's price as profit taking pushed the metal back down below $1150.  

In the near term, gold's day-to-day ups and downs will continue to be driven by institutional traders and speculators as they react to the unfolding sovereign debt crisis. But the long-term uptrend in the metal's price will reflect gold's rock-solid supply and demand fundamentals and the continuing growth in investment demand around the world.  

Despite short-term volatility, we believe gold remains in a strong rising uptrend that will carry the yellow metal back to its all-time high of $1227 by midyear and reach $1500 by year-end.  

Dollar and Gold De-Coupled?

In recent weeks there has been in important shift in the relationship of gold to the dollar and other "old world" currencies. For the past year or longer, gold tended to move up and down inversely with the U.S. dollar as capital flight and speculative money flows out of the euro and into the dollar largely bypassed gold. Oddly, for all of America's own economic woes, for a while the dollar was granted "safe-haven" status, a role historically played by gold.  

It seemed as if the U.S. dollar gold price was hostage to the greenback's performance vis-a-vis the euro, losing ground on days the dollar looked strong ... and gaining on days of dollar weakness. But in the past few weeks, gold has frequently ignored the dollar's advance against the euro -- and, instead, marched to its own tune, reflecting rising investor interest in the yellow metal virtually everywhere.  

Investment Drivers

Several separate forces are now driving gold investment demand and supporting the longer-term uptrend in the yellow metal's price.

1. Sovereign risk:  In the old industrial nations -- the United States, Western Europe, and Japan -- it is sovereign risk ... and fear that the "Greek disease" will soon infect much of the industrial world with rising yields and falling prices for government and private-sector debt.  
2. Asian demand:  In the emerging or newly industrialized nations -- especially China, India, and a number of other Asian tigers -- strong economic recoveries and rising personal incomes in combination with high savings rates are engendering both investment and jewelry demand, which in many of these countries is purchased as much for investment and savings as it is for adornment.
3. Western investment demand:  Gold dealers we speak to report increased interest from investors in both Europe and the United States. In addition, the growing quantity of gold held on behalf of investors in gold exchange-traded funds is another sign of rising interest. Last Thursday, reflecting strong inflows for the day of more than 300,000 ounces, the SPDR gold ETF reported record holdings of 1141.04 tons (36.69 million ounces). This is up one million ounces from the 1106.38 tons (35.6 million ounces) held in early February.  

Central Bank Buying

So far this year, in addition to private investment demand, there have been some official purchases by central banks and sovereign wealth funds.  

• Russia purchased 300,000 ounces (9.3 tons) during the first two months of the year and likely continues its gold buying more or less from month to month.  
• China's central bank, the People's Bank of China (PBOC), has almost certainly continued to buy gold from domestic mine production in the past few months, though it has not reported these purchases in its published statistics. China's sovereign wealth fund, the China Investment Corporation (CIC), however, has reported some purchases earlier this year in the New York Stock Exchange listed SPDR gold exchange-traded fund -- and could ultimately take delivery of this gold on behalf of the PBOC.  
• Motivated by the same concerns that prompt private investors to by gold, we believe that in all likelihood a handful of other central banks and sovereign wealth funds have purchased small quantities of gold but have not yet reported these acquisitions in their published financial accounts.

Encouraging News From China

News reports of the debate taking place among economic policymakers in China suggest that the country may soon announce a shift in both currency and interest rate policies. The central bank and other policymakers want to preempt any acceleration in inflation and keep economic growth on a sustainable long-term path.

A small upward adjustment in interest rates and/or other credit restraints could trigger a brief correction in world gold markets, as did the small increase in bank reserve requirements early this year. Nevertheless, a timely retreat from its aggressive reflationary policies is the best medicine for lasting economic health and, as we have pointed out before, continuing year-to-year growth in both jewelry and investment demand for gold. In our view, what is important for gold -- over the long run -- is a sustainable economic expansion that supports rising personal incomes and continued growth in private savings -- some of which will continue to find its way into private-sector gold accumulation.

On the currency front, China may soon allow some small upward valuation of the yuan, possibly switching from a managed float against the U.S. dollar (a float that has seen the yuan more or less anchored at a fixed rate against the dollar for the past few years) to targeting its exchange rate against a basket of currencies that more accurately reflects China's trade and investment flows ... including (in addition to the U.S. dollar) some of the world's stronger currencies like the India rupee, the Australian dollar, the Brazilian real, and currencies of a number of its Asian neighbors.  

A stronger yuan, is for the Chinese, disinflationary since it makes imports (of oil and other raw materials, for example) less expensive. But a stronger yuan also mitigates the rising price of gold within China and makes the metal more affordable to both jewelry purchasers and investors.  

A stronger yuan implies, as its counterpart, a weaker U.S. dollar and euro -- raising the cost of Chinese manufactured goods imported into the United States and Europe. Hence it will add to inflationary pressures in these countries, further encouraging somewhat higher investment demand for the yellow metal as an inflation hedge.  

To arrange an interview with Jeffrey Nichols, please contact Liz Cheek of Hill & Knowlton at (212) 885-0682 or [email protected]

About Rosland Capital

Rosland Capital LLC is a leading precious metal asset firm based in Santa Monica, California and buys, sells, and trades all the popular forms of gold, silver, platinum, palladium and other precious metals. Founded in 2008, Rosland Capital strives to educate the public on the benefits of investing in gold bullion, numismatic gold coins, silver, platinum, palladium, and other precious metals. For more information please visit www.roslandcapital.com.

About Jeffrey Nichols

Jeffrey Nichols, Managing Director of American Precious Metals Advisors and Senior Economic Advisor to Rosland Capital, has been a leading precious metals economist for over 25 years. His clients have included central banks, mining companies, national mints, investment funds, trading firms, jewelry manufacturers and others with an interest in precious metals markets.

SOURCE Rosland Capital LLC