Morning Gold & Silver Market Report – 2/7/2011

Gold Correction Nearing Comletion

LONDON, Feb 4 (Reuters) - Gold eased in Europe on Friday, giving up some of the last session's gains, as growing optimism over the economic recovery shifted investors' focus to riskier assets, though moves were muted ahead of a key U.S. jobs report.

Spot gold XAU= slipped to $1,349.35 an ounce at 1122 GMT, from $1,353.30 an ounce late in New York on Thursday. U.S. gold futures for April delivery GCJ1 fell $2.80 to $1,350.20.

Gold has retreated from a two-week high at $1,355.80 hit the previous day, when Federal Reserve chair Ben Bernanke said the U.S. recovery still needed Fed support. His comments were taken to indicate that U.S. monetary policy would stay accomodative.

A spate of better-than-expected U.S. data had fuelled expectations for a move towards monetary tightening sooner rather than later, depressing gold. The U.S. payrolls data due at 1330 GMT will be closely watched by financial markets. " The consensus for the payrolls data is for a moderate increase but given U.S. positive data in the last few days, expectations may be skewed to the upside," said analyst Matt Turner of Mitsubishi Corp.

Turner said a positive figure could ignite risk appetite and further dull demand for the safe-haven metal.

The markets were quiet ahead of the numbers, with the euro  EUR=  little changed against the dollar after the previous session's losses, and European shares ticking up slightly in line with world stocks. 

Oil was steady just above $90 a barrel, with ongoing unrest in  Egyptunderpinning prices. This also helped support gold, although the situation has sparked little fresh buying. 

ASIAN BUYERS STAY AWAY

Asian buyers were still largely absent, with market quiet in China, Hong Kong and Singapore during the Lunar New Year holiday there and Indian consumers put off fresh buying by Thursday's price volatility. 

1) United States holds 8,133.5 tonnes.

What the U.S. holdings will be when the next report comes out in another 7 weeks or so  is uncertain.   There will have been more than $600 billion in new commitments for Quantitative Easing by the Federal Reserve in the last few months. The US debt ceiling has been an ongoing issue.  The U.S. could always try unloading some gold to depress rising commodity prices rather than to increase the deficit, but unfortunately that would only last a few months.  If it did sell some of the shiny gold metal, Uncle Sam would have to find huge amounts of gold later. Besides, it is arguable whether countries are any good at price intervention. The lackluster economic recovery may result in little change in the gold holdings of Uncle Sam in 2011.

2) Germany holds 3,401.8 tonnes.

  Germany is the foundation of the European Union and the Euro.  The Germans were sellers of gold for coins under the Central Bank Gold Agreements (The third Central Bank Gold Agreement currently in force covers the gold sales of the Eurosystem central banks, Sweden and Switzerland )  from at least 2003 to 2008, but the sales were not enough to put a serious dent in its supply of gold.  Under the current state of the E.U., it’s hard to see Germany becoming a huge buyer of the shiny metal.    A sale might cause investors to panic and cause the euro to collapse.  Unlikely, but a theory.    The funds to bail out troubled European countries, however, have to come from somewhere.  If Germany does sell gold reserves then it seems unlikely to be substantial enough that its #2 position would be up for challenge.

 

3) Italy holds 2,451.8 tonnes.

Italy was in the Central Bank Gold Agreements .  On the surface, it seems that the Italians are unlikely to sell off their gold reserves even if they are the least discussed nation among the PIIGS.  Releasing gold might address some of Italy ’s budget gaps, but the country faces many serious economic problems.  If we had to guess about reserves, we’d expect to see a slow or small drop but not enough to make much difference.

4) France holds 2,435.4 tonnes.

The French are the French and predicting what will happen with France ’s gold reserves is difficult at best.  Someone has to bail out the PIIGS, and France is the second part of the foundation of the European Union and the Euro currency.  France is part of the Central Bank Gold Agreement that had led to selling, but this was all before the major run-up in gold.  The logic would seem to hold that more light selling would be expected.

 

  China is adding to its gold reserves to the point that few question whether China ’s gold hoard will move higher.  With more than 1.3 billion people and a fast-growing economy, it seems that the only thing that might impede gold buying is its own fight against inflation in 2011.  Some 454 tonnes of gold was bought between 2003 and  2009.  China probably added more than 200 tonnes during 2010 and “The World’s Growth Engine” is likely to keep adding gold to assure the value of the yuan.

 

6) Switzerland holds 1,040.1 tonnes.

Imagining that the Swiss will buy more gold is hard after reports in recent years that it ran out of places to securely store it, even if those reports are debatable.  Then add in that Switzerland sold many tonnes of reserves under the time of the Central Bank Gold Agreement from 2003 to 2008, long before the great gold rush came upon us.    With a population of 7.6 million people, how much gold does the nation  need ?  Switzerland can still lighten its gold reserves and not be challenged over being one of the world’s international banking center and as a benchmark currency.

 

7) Russia holds 784.1 tonnes… and more.

  Russia is gobbling up gold as its economic power grows.  The report from the World Gold Council showed that it had accumulated some 120 tonnes in just the first 10 months of 2010 after adding more than 100 tonnes in 2009 and close to 70 tonnes in 2007.  More gold was purchased in November of 2010 after the data cut-off. The Russians also have huge oil and commodity reserves.  Unless gold suddenly plummets to unexpected lows to the point where it has embarrassing losses, then it is easy to assume that Russia will keep increasing its gold reserves.

 

8 ) Japan holds 765.2 tonnes.

Japanese people are known for keeping cash under their mattresses, but maybe they also stash gold. Japan has an inflated currency and it may decide to unload some gold holdings to be more competitive economically.  The risk is a rather simple one, and that is the same as elsewhere: central banks have historically not been great interventionists when it comes to commodity prices.  Prices for Japanese goods are now too expensive for foreigners due to the strength of the yen.

It was surprising to see that the Dutch were one of the top ten in nations when it comes to gold reserves, even if it used to hold more gold.  You rarely hear of a “Dutch-led bailout for the PIIGS” but anything is possible in theory.  The nation was a seller of gold from at least 2003 to 2008 under the Central Bank Gold Agreement in Europe .    The country’s gold holdings are unlikely to change much.

  India is the second most populous country in the world with nearly 1.2 billion people.  Gold is such a part of the country’s culture that it’s impossible to think of India not accumulating more gold.  In fact, about one-third of the world’s jewelry demand comes from there.

India  acquired 200 tonnes of the IMF gold sales in late-2010 at prevailing market prices.  Some may have considered this a peak of the trend, but India is likely to continue acquiring gold under a normalized scenario for 2011 and perhaps for the years ahead.


 

11) Taiwan holds 423.6 tonnes.

It was rather surprising to see Taiwan as one of the world’s largest gold holders.  Maybe it is for the nation’s vast electronics business, or maybe it is to financially stay relevant in its long ongoing confrontation with China .  The nation is already considered wealthier per capita than many neighboring countries, but with the accumulation of gold made by China it almost seems unlikely to expect much major selling now from what was formerly known as Formosa .

It was also surprising to see Portugal in the top fifteen holders of gold.  This must go back to the days of its empire building ambitions considering that its population is only just under 11 million people.  Or maybe it was that the nation was able to remain neutral in World War II.  If the PIIGS nation is in such dire straights, maybe its benefactors could consider taking pledges of some of its gold assets.  As Portugal has been a part of Central Bank Gold Agreement and a seller in recent years, it would seem likely that the country would unload more of its holdings.

If you ask politicians which nation is the most  least trusted in the Western Hemisphere, the answer is likely Venezuela .  Hugo Chavez has been no friend to America and the wealth coming to the country from its oil sales and from nationalization (some would say seizure) of businesses has only brought more wealth to the nation.  With its population of more than 27 million people, Venezuela is the sole Latin American country in the top fifteen gold holders of the world.

In 2010, Venezuela was listed by the World Gold Council as having been a buyer of 3.1 tonnes after buying 4.1 tonnes locally in 2009.  There is no reason to expect that to change.

 

Quasi Government and ETF Dominance

The International Monetary Fund holds some 2,846.7 tonnes, which would give it the ranking of No.3 in the world if it was a sovereign nation.  The IMF might see continued pressure on its gold reserves ahead, unless more gold is pledged to it by stronger nations to assist in ‘stabilization’ bail-outs.  The IMF’s Executive Board approved the sale of 403.3 tonnes in September 2009, which came to about one-eighth of its total gold holdings at the time. The work ahead for the PIIGS alone requires billions and billions of dollars, and the IMF has been involved there.

The European Central Bank holds 501.4 tonnes of gold and would rank No. 12 if it was ranked as a nation rather than a governing body over nations in a region.  What this amount will be when the IMF and data statistics unit reports at the next update is anyone’s guess.  The European Union bailout funds have to come from somewhere other than IOU letters, but the source is up for debate.  E.U. member nations transferred in gold reserves and transferred in foreign reserve assets and the initial target for members was 15% of the total.  As at September 2010, the ECB held 26% of its reserves in gold.

The huge growth mechanism in the gold universe has been from the SDPR Gold Shares (NYSE: GLD) with its 1,260.84 tonnes as of this week, which is more fresh data.  You will see more of a “full gold ETF picture” later to make this more of an apples-to-gold comparison.  The “GLD,” as it is called by investors  would be ranked above China and behind Italy in gold reserves if it were a central bank.  The value of its holdings is roughly $54.4 billion  .

Most investors do not need an introduction to this exchange-traded product any longer other than the   reminder of just how large and just how dominant this is.   The most recent 2010-end data from the World Gold Council noted that the gold ETFs monitored in sum had net inflows of 361 tonnes during 2010 versus some 617 tonnes of net inflows in 2009.   The total holdings of ETF gold now hit a new high of 2,167.4 tonnes with a value of some $98 billion.   The “GLD” accounted for more than half of all tracked ETF products.   All in all, this is a staggering figure because this is the easiest of all gold holdings to track almost daily.

 

Elsewhere on the globe….

If you tally up the top fifteen central banks of the world (including ECB and IMF), the total is more than 25,500 tonnes. If you add the value of the exchange-traded products with more than 2,100 tonnes, then the total value of the top 15 central banks and quasi-governmental agencies comes to more than $1.15 trillion before personal gold holdings, industry holdings, jewelry holdings and more. The top 15 nations and entities still dominate the world of gold. Of the 113 countries and equivalents, the world’s gold reserves come to 30,546.1 tonnes at the central bank level.

Perhaps the largest surprise was to see that the United Kingdom ranked #17 on the list of central banks by assets, preceded by Saudi Arabia and followed by Lebanon . To get a clear picture of the world’s gold use and supply, we wanted to see other annual data as well.

We wanted to look at the industry and private holdings that are making an impact in gold as well.   What about markets and exchanges?   COMEX has shown that “the total non-commercial and non-reportable net long positions” that shows more speculative investment demand was high again in 2010.   The 2010-end data from the World Gold Council showed that the net-long position was roughly 26.3 million ounces or some 818.1 tonnes of gold.   The over-the-counter derivative market is of course very difficult to track, but it is believed to have positively added to the price of gold in 2010.

There has been a huge market for gold bars and gold coins, which is not shocking if you have watched any financial televsion promotional commercials in recent times.   The World Gold Council noted that physical delivery at the Shanghai Gold Exchange alone was 836.7 tonnes in 2010 and that 236.6 tonnes were delivered during the fourth quarter.   Investors in India are said to remain strong as well as elsewhere in Asia .   The figure from the U.S. Mint is that Americans bought roughly 1.2 million ounces, about 38 tonnes, worth of American Eagle bullion coins in 2010 after the 2009 figure of 1.4 million ounces or some 44.3 tonnes.

What about the world of jewelry, what “the rest of us” think of as the main use of gold?   The World Gold Council’s recent year-end data is not complete for jewelry, but it showed that global jewelry demand was up 18% for the first nine-months of 2010 at some 1,468.2 tonnes at roughly $55.5 billion.   To show just how much India loves gold jewelry, its portion of 2010′ s first nine months total was some 513.5 tonnes and that is more than one-third of the demand.

What about technology demand for gold?   The most recent data is also only for the first nine months of 2010, but that was said to be up 19% from 2009 to 221.8 tonnes.   That is close to the same level of 238.4 tonnes in 2008′ s equivalent period.

And mine production and recycling?   The total gold supply from mine production, recycling, and from official sector transactions came to 2,993.3 tonnes in the first nine months of 2010.   Despite a gain in the first quarter of 2010, the World Gold Council said that this figure represented a drop lower by 3.1% versus the same period during 2009.   The belief is that gold from mining and recycling will have risen for 2010 and will reach levels seen at the start of the decade.

Calculating the real value of “above gound gold stocks” will vary from source and to source and it is almost impossible to value the hidden sums of gold that is unreported or that has been in family hands.   The World Council did put out a rough estimate of the total value as being some $7.277 trillion based on 2009 volume and the fourth quarter of 2010 average gold prices.

JON C. OGG