Sissi -
Perspectives
Investing in Gold
12 October 2009
Years ago, I used to trade with gold bullion coins as many Chinese people in Hong Kong. One could go to any local bank to buy and sell them with no transaction fee. Right now, I no longer trade in real gold because finding a reliable dealer is not easy in North America. Nonetheless, I do keep tracking the movement of gold price as it affects the gold mining sector in the stock market. This page is compiled to study the gold price in the view of the demand and supply equation.
In the current recession, the solid foundation of international financial system is shaken by the credit crisis of the United States. Luckily, other countries with a large foreign reserve still keep the faith in the US dollar and have not yet switched their money to other safer conduits substantially. However in October, rumour has it that the Saudi Arabians are finally abandoning the US dollar and driving the gold price to another peak.
Rank Country 2009-Mar 2007
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1 USA 8,133 8,133
2 Germany 3,413 3,417
3 France 2,487 2,622
4 Italy 2,452 2,453
5 China* 1,054 600
6 Switzerland 1,040 1,166
7 Japan 765 765
8 Netherlands 613 624
16 Venezuela 364 -
17 India 358 -
18 U.K. 310 -
European central banks 537 604
IMF 3,217 -
------------------------------------------
*data disclosed in official publications
(Source: GFMS; old data in my files)
The gold reserve represents about 1.5% of China's total foreign reserve, which has also been steadily risen over the years.
RMB Yuan per Foreign Exchange
SDR Gold Reserve
Month Yuan Million troy oz Million US$
----------------------------------------------------
Jun 2009 10.6047 33.89 2,131,606
May 2009 10.5769 33.89 2,089,491
Apr 2009 10.2227 33.89 2,008,880
Mar 2009 10.2201 19.29 1,953,741
Feb 2009 10.0337 19.29 1,912,066
Jan 2009 10.2017 19.29 1,913,456
Dec 2008 10.5271 19.29 1,946,030
Nov 2008 10.1701 19.29 1,884,717
Oct 2008 10.1588 19.29 1,879,688
Sep 2008 10.7100 19.29 1,905,585
Aug 2008 10.7293 19.29 1,884,153
Jul 2008 11.2052 19.29 1,808,800
----------------------------------------------------
(Source: China Economic Information Network, www.cei.gov.cn)
Thus, China ranks first in foreign reserve (billions US$) in 2009.
China 2,132 (2/3 in US$ securities)
Japan 1,019
Eurozone 531
Russia 413
Taiwan 321
India 281
South Korea 234
Hong Kong 233
Brazil 231
Germany 184
Singapore 182
(Source: www.wikipedia.org Sept. 2009)
Many Chinese scholars worry about the massive US securities that bring the exposure to the financial systems
of both China and the United States. Nevertheless, the Chinese leaders at this moment still seem to maintain a slow approach in diversify China's foreign reserves. A couple of months ago, China revealed that she has sold a very small portion of her US$ bonds in a see-saw manner and has switched the money to Japan, Australia and other currencies. There is no information available about China's dealings in gold, although Mr. Zhang Bingnan, the vice chairman and general secretary of the China Gold Association, said China's gold import was expected to rise this year but he provide no figure in the Shanghai Daily, July 2009.
Personally, I believe China will not rush to accumulate their gold holdings now. China might just keep the focus in oil and mineral resources and the acquisition of overseas resource companies. It is interesting to note that China just entered the second phase of oil reserve program to reach a target goal of 26.6 million cubic metres in 2009.
For other nations of large foreign reserves, most do not intend to increase their gold holdings during this recession. For example, India has cut her gold import to zero and her consumers turned their jewelleries to scrap this year. The IMF is about to sell 403 tonnes of gold in the future years. This summer the ETF and European central banks also announced that they would decrease their gold reserves.
Nonetheless, the Central Banks would cap their gold sale to 500 tonnes annually according to a Gold Agreement to prevent price collapse. The agreement expired in September 2009, but most analysts had an opinion that the banks will renew the agreement.
According to the statistics of GMFS and US Geological Survey, the world gold production has reached a peak between 2001 and 2003 and has been generally decreasing afterwards.
(5 yr average, 2003-2007) 2008
Recycled Gold (scrap) ...................... 952t (26%) 1,209t
Net Central Bank Sale ....................... 515t (14%) 236t
Mine Production ............................ 2,209t (60%) 2,414t
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TOTAL 3,676t 3,859t
Because of energy requirements, shortage of skilled manpower, labour disputes and environmental concerns, the cost of gold production has increased sharply. In the current recession, gold exploration and mine development have drastically slowed down. Few large mine projects has started in spite of the high gold price that might render new projects more profitable. For example, a new mega project with a proven reserve of 18 million ounces and a cost tab of 3 billion US dollars was planned to start in October 2009 - the Pascula Lama mine development of Barrick Gold in the border of Chile and Argentina; Barrick Gold might use the company's billion coffer or get a financial arrangement from the banks. All in all, the global mine production would be
just stable in the next few years. On the other hand, the surge of recycled gold scrap might offset the decrease of mine production.
(5 yr average 2003-2007) 2008
Industries ....................... 474t (13%) 2,884t
Investments ..................... 703t (19%) 692t
Jewellery ....................... 2,497t (68%) 2,191t
-----------------------------
TOTAL 3,674t 3,859t
(Sources: GMFS and elsewhere)
2007 2008 2009/Qtr 1
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Jewellery 2,404Moz/53,696M$ 2,186Moz/61,074M$ 345Moz/10,079M$
Industries 462Moz/10,307M$ 436Moz/12,276M$ 79Moz/ 2,301M$
Investment 686Moz/15,293M$ 1,183Moz/32,477M$ 600Moz/17,523M$
(coins) 137Moz/ 3,020M$ 191Moz/ 5,280M$ 73Moz/ 2,129M$
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TOTAL 3,551Moz/79,296M$ 3,804Moz/105,826M$ 1,0239Moz/29,903M$
The figures show that jewellery consumption and industrial applications have been decreased in recent years, but the demands of official coin and bar hoards have stepped up. The private investment is probably rising because of US dollar weakness and future inflation concerns.
According to a S&P report on the mining sub-industry, the fundamental outlook or gold is positive in the near future. The production and revenues of the sub-industry are expected to be positive in 2009 and a further rise in gold price into 2010. It is believed that the United States will post a rise in GDP in 2010 in contrast to the GDP decline in 2009. However, the unemployment will remain high in 2010. The inflation and the short-term interest rates will be likely kept as low as possible. Thus, gold investors might see opportunities elsewhere. On the other hand, the gold mine production should be stable or only marginally increased. Gold mine production supplies would not match the rising investment demand. The supply will be only offset by the expected increase from the recycled gold scrap. Thus, gold price are now supported by the private investors, although the weakness of the US dollar might finally push China and other countries with large US dollar reserves to diversify into other conduits - including gold.
At this writing, the gold price had been recently hovering about the $1,000 level from mid September to mid October this year. The US economy might already be entering into recovery phase of the economic cycle now. Based on available information, the gold price should be holding up around US$1,000 for the rest of 2009 and be rising higher at least to the first quarter of 2010. The same positive perspective also holds on the performance of gold mining sub-industry in the next few years.
Caution: This page should be read only as a supplementary comment.
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This page contains statistics or data hand-copied from published documents and Internet articles, wherever applicable the sources are clearly quoted and acknowledged, e.g. World Gold Council and GFMS Ltd. Anyone wants to use the copyrighted information, he/she should contact the source to check the terms of use.
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