by Jan Skoyles - The Real Asset Co
This is our third release from The Real Asset Report. Here we take a look at how, despite calls that the gold bubble is finished, the whole world is still talking about buying gold.
Read any financial paper or website and they’ll tell you that the
‘gold-bubble’ is over. This opinion appears to be based solely on price
and not much else.
When you look at short-term price action on its own then perhaps you
can understand how they’ve reached this conclusion. Gold, across many
countries, is down since the beginning of the year and many are
expecting a weak 2nd quarter.
The recent fall in the gold price seems to have been attributed to
two things – manipulation and investors turning to riskier investments
as they regain optimism over the US and Euro recovery.
Bubbles, central banks and gold
For us though, this isn’t enough to predict the end of the gold
bubble. As you can see from our infographic everywhere has an interest
in gold, whether it’s the central banks who are stocking up on it or it
is citizens who are buying up record amounts. We see little evidence of
gold chatter declining, if anything it’s increasing – particularly when
it comes to central banks.
There are at least 97[1]
countries that don’t seem too bothered about the fall in the gold
price. Instead, they’re looking at its value, which has held over
thousands of years. Whatever continent and country you look to there is
something to be said about gold and a clear respect for its long legacy
as money and a store of value.
Much of the gold chatter we find around the world appears to be over
central bank purchases and their moves away from holding reserve
currencies such as the dollar and the euro. This is an expression of the
falling faith in devalued fiat sovereign currencies, and instead a move
into something of value.
Bring that gold back!
Whilst we all heard about Germany’s gold repatriation[2],
you might have missed the statement from the Ghanaian government
expressing concerns over their own gold held abroad in foreign central
banks. Romania is also looking for their gold back, 93 tonnes which
were sent to Russia during WWII for ‘safe-keeping’[3].
The best kept repatriation secret is in Azerbaijan where they are in
the process of repatriating 330kg per week from London and have plans to
increase gold reserves to 30 tonnes in 2013[4].
In countries where repatriation hasn’t been mentioned politically,
the electorate is certainly pushing for it; Switzerland, Romania,
Australia and Holland to name just a few.
- In Holland, only 10% of gold reserves are held in Amsterdam. The Dutch CDA party has requested that Holland’s gold supply be repatriated.
- Whilst, in a slightly worse situation in Australia, they hold 99.9%[5] of gold reserves in the Bank of England.
- Despite the Queen’s visit to the Bank of England, questions of the existence of Ireland’s gold (96% of reserves are held between there and the US) have recently come to the fore[6].
South America’s buying gold
South America is particularly loud in this gold conversation.
Venezuela of course famously repatriated 160 tonnes of gold last year
and they nationalized all gold mining activities in 2011. Last year
many were surprised to read Paraguay had increased their gold reserves
from a few thousand ounces to over 8 tonnes in one year. And did you
hear that Brazil increased their gold reserves by over 90% last year?
In a similar strand of thought to their neighbours, Bolivia are also
looking to stock up their central bank coffers with gold. In 2012, a law
was passed which will see the central bank buy locally mined gold –
they are estimated to start at 2 tonnes per year[7].
Late last year Ecuador was reported to have demanded the repatriation
of one third of their foreign gold holdings ‘to support national growth’[8].
America’s history comes back to bite?
One central bank story which seemed to surprise many last year was
Iraq’s gold purchases. For the first time in years they bought gold, and
not just in a small way: they quadrupled their reserves[9]. The ultimate insult to the US and their dollar no doubt.
Russia, as most will have heard, are working hard to build up their
gold reserves, official statistics show it was the largest gold buyer in
the last decade, adding 570 tonnes. At investor level jewellery
purchases, the most common form of private gold investment, have
increased by 8.7% per annum since 2002 according to the World Gold
Council. You can read more about our thoughts on Russia’s gold here.
Not far away from Iraq, Lebanon steadfastly refuses to sell its gold
reserves, despite its high debt-to-GDP ratio. The country holds the
largest gold reserve in the Middle East and North Africa. Gold reserve
sales with Cabinet or Parliament’s approval are banned[10].
Where individuals buy gold too
It’s not all about central banks and repatriation though, in some
states of countries the use of gold and silver money is already up and
running, we all know about Utah but what about the Malaysian states of
Kelantan and Perak? Like in India and Vietnam where jewellery is seen as
a store of wealth, these states are recognising the value in using gold
and silver as money. As they use gold and silver coins as a potential
replacement for the federally issued legal tender.
Individuals should also not be ignored in the global conversation on
gold. In Bahrain, a survey has shown that over 80% of people consider
gold to be a safe investment option[11]. In Egypt, where the pound has fallen by 54%, a significant increase in gold jewellery demand was seen in Q4 last year.
Bahrain’s own neighbour, Qatar, has expressed interest in
diversifying foreign assets away from the US dollar. They are rumoured
to be increasing gold reserves at a faster rate than official data
shows.
Often concerns over government controls when it comes to gold
ownership and purchasing are expressed by people looking to buy gold. In
some countries this is a very real worry. In Argentina the purchase of
certified 99.99% pure gold was banned in July 2012. As a result, demand
for 99.96% gold is reported to be high as inflation and currency
controls climb[12].
In India, households are believed to hold 20,000 tonnes of gold, not
counting religious institutions and trusts. Despite government levies on
gold and therefore increased prices, at the moment gold buying remains
strong.
Governments encourage gold ownership
In other countries gold ownership is increasingly becoming easier as
the government find new ways to help citizens invest in gold. In
Mauritius the central bank began selling minted gold bars in 2012 to the
public, in a bid to promote a savings culture in the country.
In Turkey, the government banks have worked hard to encourage gold
savings to come out of homes and into accounts. Many have referred to
this as a form of gold confiscation. The World Gold Council estimates
private gold holdings amount to 5,000 tonnes. Gold is not only used by
citizens, the country has bypassed US sanctions on Iran by exchanging
oil for gold.
Nearby in Syria, all custom duties and storage, insurance and
administrative costs placed on gold imports have been removed in a
desperate bid to get hard money into the country[13].
Gold savings, as encouraged by the government, are no more prevalent
than in China, where official gold imports doubled in 2012. The central
bank’s own gold reserves are suspected to be 2,000-3,000 tonnes higher
than official data. Between 2011-2012 China bought more than 2 tonnes
from North Korea[14].
Buying their own gold
China isn’t the only country who buys up all of their mined gold,
Kazakhstan plans to buy up the country’s entire gold bullion output
until at least 2014-15. But they still can’t get a hold of the yellow
stuff quick enough; they increased reserves for four months running in
January in a bid to reduce their US dollar exposure[15].
Their neighbours, Kyrgyzstan, (officially the Kyrgyz Republic) have
also been replacing US dollars with gold, up until as recently as
February this year. Over to the east, in Mongolia, gold reserves are
currently at their highest levels since 2008.
Whispers in the West
In some countries, mainly in the West, the gold chatter is barely a
whisper thanks to central banks showing little regard for safe havens.
Canada now holds just 3 tonnes compared with 1,023 tons in 1965, its
lowest amount in 79 years[16].
But it’s not all down to central banks; in France (where they really
should be paying attention to their savings) they saw the biggest
percentage drop in gold investment in 2012 of all countries assessed by
the World Gold Council.
Gold and the Eurozone
Speaking of troubled Eurozone countries, 52% of Italians believe the
gold should be used as collateral – telling given the enormous amount of
lending conducted outside of the banks. Given that a majority of the
small loan market in Italy is P2P (individuals, families and groups),
this is telling. Only 4% believe it should be sold completely[17].
Some countries don’t have much choice as to where their gold goes, Cyprus, it was revealed this week[18],
have ‘agreed’ to sell ‘excess gold reserves’ in order to raise around
€400 million to help finance it bailout. Aside from realising the
precedent this will lead for future Eurozone bailouts, our first
question was, ‘who has excess gold?’
In Spain, the central bank has shown little regard for their gold
reserves in the last decade or so, the gold vaults have seen the highest
depletion of gold reserves of any other country between 2005-2010.
Portugal has impressively high reserves given its size of population
and economy, and they’re steadfastly protecting them despite the World
Gold Council’s suggestion the European Parliament push for Portugal to
be allowed to offer gold as collateral for sovereign debt issuance. They
have no doubt learnt some harsh lessons about gold after the central
bank famously never recovered the 17 tonnes of gold lent to Drexel Bank
in 1990[19].
Protection from devaluation
As you can see from our gold bug survey infographic, the majority of
those surveyed believe the Japanese Yen will be the most devalued
currency in 2013. Late last year we saw Japanese pension funds had
similar concerns and are now investing in gold to mitigate risks from
increased QE.
So, is the gold conversation over?
As much as many Western governments would like gold to disappear and
for faith in the US dollar and Euro to be restored, actions by both
governments and their citizenry suggest that this won’t be happening too
soon.
As the central banks in the West, with the support of international
financial institutions, fight their flawed hands in the currency wars,
the rest of the world is preparing for the aftermath and for better
money.
Want to see more on global gold investment trends? Visit our gold infographics section?
Please Note: Information published here is provided to aid
your thinking and investment decisions, not lead them. You should
independently decide the best place for your money, and any investment
decision you make is done so at your own risk. Data included here within
may already be out of date.
[1] All Central bank data, private holdings and major developments in gold investment have been taken from the World Gold Council.
[2] Repatriation information taken from gata.org.
[3] Bullion Street (2012) “Romania wants Gold treasure back from Russia” http://www.bullionstreet.com/news/romania-wants-gold-treasure-back-from-russia/3047
[4] Apa (2013) “Azerbaijan to increase gold reserves by 2 times in 2013” http://en.apa.az/news_azerbaijan_to_increase_gold_reserves_by__186124.html
[5] Hudson, Greg (2012), “Reserve Bank of Australia Admits 99.9% of Australia’s Gold Reserves are held at the Bank of England” http://ausbullion.blogspot.com.au/2012/12/reserve-bank-of-australia-admits-999-of.html
[6] Independent.ie (2013) “UK bank sits on a pot of €235m in Irish gold” http://www.independent.ie/irish-news/uk-bank-sits-on-a-pot-of-235m-in-irish-gold-28957757.html#disqus_thread
[7] Bullionstreet.com (2012), “New gold law to boost Bolivia gold reserves” http://www.bullionstreet.com/news/new-gold-law-to-boost-bolivia-gold-reserves/113
[8] Zerohedge (2012) “It Begins: Ecuador Demands Repatriation Of One Third Of Its Gold Holdings” http://www.zerohedge.com/news/2012-10-31/it-begins-ecuador-demands-repatriation-one-third-its-gold-holdings
[9] Goldcore (20120, “Iraq Quadruples Gold Reserves In Two Months – First Time In Years” http://www.zerohedge.com/news/2012-12-21/iraq-quadruples-gold-reserves-two-months-first-time-years
[10] The Daily Star Lebanon (2010) “Lebanese gold reserves largest in MENA region, 15th worldwide”
http://www.dailystar.com.lb/Business/Lebanon/Feb/23/Lebanese-gold-reserves-largest-in-MENA-region-15th-worldwide.ashx#ixzz2Q3CpjobD
[11] 24×7 News (20122), “Over 80% in Bahrain see Gold as safe investment” http://www.twentyfoursevennews.com/bahrain-news/over-80-in-bahrain-see-gold-as-safe-investment/
http://www.dailystar.com.lb/Business/Lebanon/Feb/23/Lebanese-gold-reserves-largest-in-MENA-region-15th-worldwide.ashx#ixzz2Q3CpjobD
[11] 24×7 News (20122), “Over 80% in Bahrain see Gold as safe investment” http://www.twentyfoursevennews.com/bahrain-news/over-80-in-bahrain-see-gold-as-safe-investment/
[12] Economic Policy Journal (2013), “Dissing Krugman: Argentina Turns To Gold As Inflation Tops 26%” http://www.economicpolicyjournal.com/2013/03/dissing-krugman-argentina-turns-to-gold.html
[13] Wealth Wire (2012) “Mad Gold Grab Begins in Syria” http://www.wealthwire.com/news/metals/3683
[14] IB Times Gold (2012) “North Korea Sells Gold Reserves to China” http://au.ibtimes.com/articles/388493/20120927/china-korea-gold.htm#.UWUiYpM3uHM
[15] Bullion Street (2013) “Kazakhstan to keep buying gold” http://www.bullionstreet.com/news/kazakhstan-to-keep-buying-gold-till-2014-15/1243
[16] French Douglas (2013), “The Bank of Canada’s Gold Hoards” http://mises.ca/posts/articles/the-bank-of-canadas-gold-hoards/
[17] World Gold Council (2013) “Italy looks to gold as an alternative to austerity” http://www.gold.org/media/press_releases/archive/2013/03/italy_looks_to_gold_as_an_alternative_to_austerity/
[18] Reuters (2013) “Cyprus to sell around 400 mln euros worth of gold” http://www.reuters.com/article/2013/04/10/cyprus-bailout-gold-idUSB5N0CP00G20130410
[19] Wealth Daily (2013) “Portugal’s Lost Gold” http://www.wealthdaily.com/articles/gold-repatriation-portugal-currency-wars-portfolio/3949
> 24hgold.com/english/news
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