Central Bank Gold Grab

Written By Brian Hicks

Posted March 8, 2013

Due to central banks in emerging markets around the world buying up gold, as well as the oncoming production crunch, gold prices are likely to go up for quite some time. At least, that’s what Randgold Resources Ltd.’s (NASDAQ: GOLD) CEO Mark Bristow believes.

Bloomberg reports:

“I still believe there’s more upside than downside in the gold price, particularly if the industry is going to be driven to make those hard decisions,” Bristow said in an interview. “I don’t think there’s much room to go below $1,500 this year and I still believe there’s every potential for it to go $200 above that.”

Gold futures for April were up to $1,577.50/oz, a rise of 0.2 percent, at 4:17PM in New York yesterday. Thus far, gold has fallen 5.9 percent coming after 12 years of straight gains.

Last year, central banks bought up 534.6 tons of gold, the most since 1964, according to Bloomberg. It’s quite likely that gold buying by central banks will make a strong showing this year, too.

South Korea’s central bank recently stated that it has added 20 metric tons of gold to the bank’s holdings at a cost of $1.03 billion. That’s the fifth major gold purchase by that bank within two years, reports CNBC.

Despite gold being a reliable safe haven (and that’s what has accounted for its consistent run over the past few years), investors are becoming wary about it due to the present “risk-on” trading environment.

Coincidentally, sentiment in markets around the world is resurgent, and there are widespread stock market surges, indicating that investors may finally be gaining confidence that the economic turmoil is—for the most part—behind us. The fact that central banks worldwide continue to push their stimulus actions, thus holding down interest rates and making monetary policy overall rather easy, can only enhance this effect.

All of this means gold ETFs are not doing well at all, and indeed they are expected to come up with their lowest month so far. CNBC quotes Philip Silverman of Kingsview Management:

“As far as ETFs go, a lot of hedge funds have been burnt by holding gold in an environment where equities are going through the roof. At the same time a lot of commodity trading advisors were getting out of gold and then going short,” he [Silverman] said. “The selling is much more of a reaction to what’s going on with gold right now. If you take a long-term horizon, it’s a good time to add gold.”

However, Silverman does suggest that the continued money printing would lead to a devaluation of currency, which inevitably would result in people turning back to gold. Again, it’s the ultimate safe haven.

What’s a bit more worrisome is the response of gold miners to this recent anemic price performance of the metal. They have decided to focus ever more closely on the very highest quality of deposits, all but abandoning more marginal reserves. That, naturally, means that there will be a very noticeable drop in the actual amount of gold produced worldwide.

The Telegraph quotes Junior Gold’s Angelos Damaskos:

“A shift in gold market dynamics in the near future could result in a supply crunch,” he said.

“Investors have recently been disappointed by the gold miners’ inability to control costs. With miners’ profitability naturally at risk if there is a decline in the gold price, the sector has experienced a sell-off.

“The response of management is to prioritise cost-control. An effective and immediate way of reducing costs is called ‘high-grading’; essentially all mining teams are now focusing on the highest-grade, most profitable operations at the expense of production volume.”

Well, then. Add to that the fact that the Eurozone crisis is very definitely not over yet, and it all adds up to a complex picture. Even though gold’s price has been falling and there is likely a production crunch coming on, it’s wrong to assume gold is no longer a safe bet. Certainly, it reached some sort of peak in past months due to an incredible amount of market instability, but the larger economic issues are still around.

The Eurozone is still caught in uncertainties, and the recovery in the U.S. market proceeds slowly. Continued stimulus would lead to devaluation, and all that means gold will, very likely, return as the safe haven it already is.

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