Gold Reserves / GDP - Implications

 

One can easily tabulate countries with the largest gold reserves but it is meaningless unless it is expressed as a benchmark against a relevant factor. GDP, or rather nominal GDP is a useful benchmark. It is the value of all goods and services from a country, with no taking into account the differing cost of living in other countries.

The caveat here is that China's gold reserves are actually closer to 4,000 metric tons according to many experts' newsletters. There have been too many big "unknown" transactions over the past 2 years that can only be linked to China, even though officially it was not recorded as so.

If you divide the GDP (in million) by their gold reserves you will get a pretty picture. Naturally the lower the figure the more gold you have covering your GDP. I would put 2.0-4.0 as being in an astute position, a more than adequate coverage should anything resembling a currency crisis comes about. If ever a reversion to some sort of gold standard or linkage to a gold standard following a major currency paradigm shift, those with a good gold stash relative o their economy would be sitting pretty.

Italy 0.85  - the Italian economy is in the doldrums but thankfully their central bank has amassed a sufficient gold arsenal; in the event of a dislocation of the euro, the Italians would swiftly support any kind of SDR (special drawing rights) with links to the gold standard.

Turkey 1.02 - where the economy has been battered by high-interest rates and constant devaluation but fundamentals show that Erdogan has doubled up on gold reserves over the last few years; while economic winds have not been in their favor, they kind of have a last bastion in gold reserves, which may indicate that their currency has been way oversold. The economy has to stop using USD for most of their transactions, the problem being Turkey does not have many friends to do barter trades on major transactions.

Germany 1.28 - solid fundamentals; the central bank here has protected the integrity of their economy no matter how the economic winds blow.

France 1.2 - same here.

Russia 0.89 - a deliberate strategy to buy gold over the last 10 years and more of late, indicates why Russia is championing de-dollarisation. China is definitely an ally in that strategy.

Switzerland 0.835 - is it because the country is the biggest refinery for gold; anyways, the country is a firm believer, and hence their arrogance to keep having their own Swiss franc as a solid currency exposure.

Taiwan 1.86 - for all the gangsterism in politics, the central bank has shrewdly backed itself with more than sufficient gold reserves; a political pawn in the global chess game, it has tried to shield itself from things "they can control".

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You may be able to get away with holding less in gold reserves if you are a commodity-rich country such as Australia, Malaysia, Indonesia the OPEC nations.

Australia 10.0; Malaysia 11.5; Indonesia 17.8; Brazil 16; Mexico 13.8; heck, Canada does not hold any gold reserves even cause its got tons of gold and other commodities in the ground.

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In the comfort zone, 2.0-4.0:

USA 3.3 - for all the talk emanating from the USA in particular, on how gold is a useless thing and the gold standard should never be considered, they are holding a pretty decent amount; of course, their problem is not gold reserves but their unending printing of money and highly excessive debt levels; they do not want others to even consider de-dollarisation as a possibility but their reserves level tells us they are prepared somewhat for it.

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Outside the comfort zone, i.e. more than 4.0 to 8.0:

China 4.8 - just outside the comfort zone but judging from the way China has been buying over the last 5 years, I think they will be headed for 3.0 within a couple of years; the country's disappointment over the US currency's reserves status, exporting of inflation, the exporting of US economic woes to developing countries via their excessive printing and liquidity injections - all points to ganging with Russia to change the status quo.

Japan 5.2 - just outside the comfort zone but I suspect their gold buying will be keener over the coming years once interest rates start to indicate more buoyant activity; the last two years have seen a deliberate strategy to weaken the yen.

India 4.3 - again India ha shored up its buying activity over the last few years and should see a similar strategy for the foreseeable future.

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Danger zone, i.e. more than 8.0:

UK 10.0 - Brown sold UK's gold reserves poorly over the years; neither is it commodity rich; the Brexit as well - I see cloudy days for the British pound over the next few years.

Argentina 11.8 - the peso was devalued 18% a few days ago; more trouble in store (which is why I think Turkish lira is presently way oversold); lacking the gold backing will limit the options you can take to recharge your economy; any printing of money will result in a disastrous and vicious cycle of devaluation.

South Korea 16.0 - This open economy is kind of vulnerable; very export-oriented but has no legs to stand on in the event of a major financial currency crisis; limit your exposure.

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Safe to say this is a crude benchmark but it also should tell us a lot of nuanced economic survival strategies among major nations. In the event of a major currency crisis, those with sufficient gold reserves and other important commodities will have a better seat at the table. I suspect a SDR linked to major currencies/gold and other important commodities will take effect. A de-dollarisation is in effect but not as painful as anticipated in the past for USD.

p/s.   1Q2023 Gold Buying Tally

USD , Gold & Sarah Palin

The media have been making a big fuss on the surge in gold price above $1,000 and on the demise of USD over the past few weeks. Just like my opinion of Sarah Palin, I just shrug my shoulders and ask "so...". Why are we acting as if these developments are a big shock to the system??? Its not, to the general investors, a weaker USD and a higher gold price are what's needed to bring the global economy to an equilibrium. Its only the papers, magazines, business dailies and business networks that have you thinking that these developments were highly surprising and "unanticipated". I guess these people have to sell papers and advertisements, hence they yell through their headlines: "Obama Comes Under Fire As Falling Dollar ...", " "Gold Prices Goes Off The Charts ...", etc...

There is nothing new. If anything, it shows that the global finance paradigm is realigning itself quite well. You cannot have such a huge credit and leveraged implosion in the US and parts of Europe without taking away some of the "wealth" from these countries. You cannot always ride on the fact that you are the reserve currency and everything will be business as usual.

Just look at the printing press at work in the US ever since Greenspan took over, these notes are not backed by anything but the nuclear warheads and flying bombers. Granted we need a superhero to safeguard democracy in the global platform, and its a price we all have to pay, but there comes a time when less and less will want to hold USD papers, and the day is now.

China and some Asian leaders have been warning that the US indebtedness cannot be allowed to go on unchecked. Now the US have been awaken to the fact that those are not hollow warnings at all. While I think the USD will still be the reserve currency, it is well on its way to losing a large part of its "premium".

Unbelievably, CLSA invited Sarah Palin to the big annual conference in HK. Gee... why listen to that woman who has not traveled out of Alaska or the US. What kind of value add commentary does she bring to the table? I am not even going to quote what she said about the USD weakness and gold price (she did say something) as ... seriously folks, I am being nice here, she is nowhere qualified to contribute with any sense or participate in this discussion. I'd be better off talking to my taxi driver who can give me a more nuanced view on these issues.

In fact, what is so bad about a weaker USD??? Most Americans don't really travel overseas anyway. They have almost outsourced everything they can to China, Brazil and India anyway - they don't really make anything anyway. A weaker USD will boost the competitiveness of US companies though and make their stocks a lot more attractive.

The weaker USD is basically a long overdue result of Fed's printing press. Its always the central banks that causes economic bubbles, not the consumers, not the banks... they only behave badly when given too many toys by central bankers.

The USD weakening is good for the majority, it shows that if you messed up your financials, you get punished. We need to push the USD down another 10% over the next 6 months so that we can force them to deal effectively with their indebtedness. You cannot just pump $1,000 bn over the last 12 months and pretend that all is fine.

Gold price is merely reflecting an inflationary hedge that many see is coming over the next year or two. Like it or not, higher gold prices actually is good for stock markets, because commodity prices will be higher as well as most assets. Its a reflationary cycle, much like pumping hot air into a balloon, all assets go up, including stocks. Yes, we are basically remaking a new bubble. Still early days though, maybe another 12 -24 months before we get pricked - key, watch the global interest rates movements.

We need higher gold prices because that means inflationary fears are rising. we need to have inflationary fears because that means that business activity is on the up and/or the reflationary cycle is up and running owing to the fact that the large amounts of liquidity being pumped in by central banks over the past 10 months are now being put to work (i.e. circulating in the system).

We all need a bit of inflation every now and then, you certainly don't want a deflationary or stagflation period (go ask Japan) ... a bit of inflationary fears now is good and needed.


p/s photos: Amigo Feng Yuan Zeng

Central Banks & Their Gold Strategy

We all know that the biggest demand for gold comes from central banks. Just how has their buying or selling strategy been over the last 12 months? Is their strategy influenced by the amount of USD being printed into circulation? Are they afraid of the dollar not being able to uphold its long term value? Will they ever regard holding US Treasuries as an option only? Is any of them seriously hinting of reverting back to the gold standard? By holding more gold and less USD does that mean more flexibility to their monetary policy?

• Reduced central bank gold selling and increased investor buying may have been helping to underpin high prices in 2008 at a time of turmoil in financial markets. The renewal of the central bank gold selling agreement with a lower threshold suggests that gold sales by central banks will be lower in the next five years, a move the could support gold prices.
• Gold's share in global foreign exchange reserves is about 10%, the third largest asset by value despite being unevenly distributed across countries. The U.S. and European central banks account for the highest amounts both in absolute terms and as a share of reserve holdings (about 50%). Emerging market central banks have a much smaller share. Gold's share in global reserves declined sharply since the 1950s -1960s.
  

Regulation of Central Bank gold sales


• In August 2009, the central banks party to the central bank gold agreement (CBGA), who collectively have a gold share of just under 60% in their reserves, agreed to renew the treaty but with a lower maximum sales threshold. Analysts suggest that the marginally lower threshold could provide a "mild support" for gold.
• The annual sales by the central banks party to the treaty will be less than 400 tons. The previous agreement had a cap of 500 tons per years. The IMF's planned sales of 403 tons are included in the overall cap of 2000 tons from 2009-2014. With the Swiss National bank suggesting it will not sell, only the European central bank and the Banque de France are likely to take advantage to sell. The Italian and German central banks have been reluctant to sell their gold holdings.
• In H1 2009, estimated net sales by official holders of gold were 39 tonnes, 73% lower than in H1 2008. Net gold official gold sales are expected to be only 140 tons in 2009, the lowest since 1994.
  
• In 2008, European central banks sold the lowest levels of gold in about decade, reversing the practice of recent years whereby official sales helped depress gold prices. Banks bound by the central bank gold agreement (most of the European central banks) sold about 343 tons of gold , the lowest since the first agreement was signed in 1999, and well under the 500 ton annual limit.
• In the fall of 2008, central banks stopped lending out gold to banks as they were afraid they would not get it back. This reluctance contributed to an increase in bullion borrowing costs to 2.649% for one month, the highest since May 2001 and high above recent levels (5yr average 0.12%).
  
• An asset allocation assessment would suggest European central banks still have too much gold. EM central banks have low gold holdings in part because of the rising cost of gold and worries about an inability to sell when forex liquidity is required.
  

Gold holdings of Emerging Market Central banks

• GCC private investors have much higher stocks of gold than its central banks do. However, Qatar increased its gold reserves in 2007.
• China announced early in 2009, that it had increased its total gold holdings by 75%, likely from shifting non-monetary gold to the central bank. Although that increase now makes China one of the top 5 official gold holders, gold makes up less than 2% of China's $2.1 trillion in foreign exchange reserve by value. On the margins, China is likely to keep adding slowly to its holding but it is unlikely to make purchases on the open market given the potential for disrupting prices and reducing the value of USD holdings
• Aside from China with 1054 tons, the emerging market central banks with the largest gold holdings are Russia (540 tons), Taiwan (424 tons), India (358 tons) and Venezuela (356 tons) as of May 2009. Aside from Venezuela and Lebanon, the gold shares of which make up 37.5% and 27.5% respectively of total reserves, most of the other large holders have a gold share of only about 4% of reserves.
  

Gold Sales by the IMF

• The IMF, the third-largest official holder of gold, intends to sell 403 tons (12%) of its 3217 tons of gold, pending approval from 85% of its members which will likely be given in the fall. Any sales are likely be gradual though and may be sold to central banks.
• IMF gold sales are unlikely to be disruptive for the gold market and could be positive if the gold is purchased by other official investors (like central banks).
  
• The IMF is likely to start selling in 2010, selling about 200 tons a year.

p/s photos: Aya Nakata

Gold Investing In 2009

Been rolling over my sole gold futures position as a bet and a hedge. So far, it allows me to sleep well at night. You may choose to trade stocks now or stay on the sidelines, both have solid arguments for doing so. Do consider that as the yen rate is still below 93, it would be wise to only have 1/3 or less of your cash in shares.

The gold position acts as a good bet and good hedge for me. Its a hedge if inflationary pressures come into play, owing to vast sums of liquidity being injected by the many central banks. Its a bet that the risk aversion may favour holding only real assets, if you come to extreme pessimism, all assets classes will be shunned, including stocks, bonds, even Treasuries, thus leaving gold as the sole carrier of value.

The case for gold is this: The US government (and many other governments actually) is pumping trillions of dollars into bailouts and stimulus plans, a purposefully inflationary policy aimed at reversing current deflationary pressures. If inflation results, or if the dollar weakens as the supply of dollars necessarily increases under the stimulus plans, gold is a likely winner because it hedges against inflation and fiat currencies.

The opposing view: The inflation argument hasn't been seen yet in government data, and once the economy catches gear, the [Federal Reserve] will pull the money back out of the economy, negating any inflationary pressures. That to me is a weak argument because if the economy starts a strong run up, there will be substantial inflationary pressure on that alone, and having dug back from the abyss of financial ruin, it is very unlikely that the governments would suck back the liquidity too quickly.

The better opposing argument would be that the weak economic data in trade and employment may bring about a dis-inflation period rather than a re-inflation era. That is also easily dismissed because if the weak data continue for another 6-12 months, we would be well into a deep recession, which will make stocks and commodities fall even more. Though gold would also weaken, but in that situation I do not see gold prices weakening by that much as jittery conditions would result in fear which favours gold... those jittery conditions would result in more liquidity and bailouts, not less, thus priming the global economy for a reflationary period, not dis-inflation.

Most stocks have fallen by 40% on average from their highs while gold as only eased by 18% from its highs. The supply of gold is being tightened - Africa’s production of gold sank 14% in 2008 which was the lowest levels since 1899. Even U.S. gold production fell 2% last year. Governments are not selling any gold, any smart government would be hoarding or even diversifying some of their currency holdings away from USD and Euro into gold. The financial health of many countries are on the edge, we may see the British pound collapsing further and/or a selldown in Euro and USD as well. In these trying conditions, many smaller governments would want to hold more gold, not less.

We must remember that the USD and Euro are not backed by anything - must revisit my economic thesis on the wonders of linking currency to the gold standard. If one major currency totally collapses, the best way to recover is to announce that the currency would be backed by a certain amount in gold. In good times, or for most of the last 5 years, central banks worldwide have been net sellers of their gold holdings because they see it being more prudent to hold a wider array of currencies in strong economies. For 2008, as a reflection of the fear within governments, gold selling by central banks dropped by 42%.

Gold is a must for your portfolio. It should equate the amount of fund you are dabbling in stocks. If you are throwing in only 20% of your cash into stocks, you should have a similar sum in gold. Even if you have zero equity exposure, you should still have some gold positions.

http://malaysiafinance.blogspot.com/2008/09/rebalancing-twins.html

p/s photos: Ivy Chen

The Men With The Golden Gun

Readers of this blog will know that I have a long position still in gold as I expect real assets to come to the fore in the wake of excessive liquidity injection and the upcoming decimation of value in major currencies. There have been two parties who have just come out with bullish calls on gold, namely Citigroup and Marc Faber. While I am certainly not as bullish as Citigroup, which said that $2,000 for gold is possible, I do think $1,250 is probable by end 2009.

The bank [Citigroup] said the damage caused by the financial excesses of the last quarter century was forcing the world’s authorities to take steps that had never been tried before. This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

“They are throwing the kitchen sink at this,” said Tom Fitzpatrick, the bank’s chief technical strategist. "The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock. Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don’t think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes,” he said.

“This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised.”

“What happens if there is a meltdown in a country like Pakistan, which is a nuclear power. People react when they have their backs to the wall. We’re already seeing doubts emerge about the sovereign debts of developed AAA-rated countries, which is not something you can ignore,” he said.

Gold traders are playing close attention to reports from Beijing that the China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. “If true, this is a very material change,” he said.

Celebrated contrarian investment advisor Dr. Marc Faber told Bloomberg television last weekend that he was buying gold exploration stocks as well as gold producers because prices were ridiculously cheap.

Dr. Faber wrote the book Tomorrow’s Gold earlier in this decade and has long been a holder of physical gold as a hedge against inflation and a meltdown in the global financial system. But he has previously not recommended buying exploration stocks, arguing that they could fall in price and that many companies could go out of business.

Given the huge slump in the values of gold exploration stocks over the summer he has, once again, been proven correct. However, the investment guru is now preaching with all the enthusiasm of a convert to the cause. Gold exploration stocks are leveraged to the gold price. Last week Citigroup - which Dr. Faber says should have been left to go bankrupt and not bailed out by the US government in a $306 billion deal last week - said gold may go to $2,000 an ounce in 2009.

Granted the link between the gold price and exploration stocks - remember the latter own the rights to potential future gold field development rights or claims - then such a price hike would mean an even bigger increase in the value of exploration stocks. That these stocks have been beaten down to almost nothing in the recent stock market crash just makes them a better buy. Dr. Faber is the first major commentator to make this call - and it comes against the worst performance in this sector in 40 years.

p/s photos: Kae Chollada