By
Adrian Ash
BullionVault
July
7, 2007
Gold is everything that
complex credit derivatives are not...
THE FUNDAMENTAL rules still apply in the
Western world's over-geared credit markets, it would seem.
Complex mortgage derivatives leveraged to the Nth
degree still need the original home-buyer to meet his monthly
repayments. Otherwise, they're doomed to blow up – triple-A
rated or not.
You may have expected somebody, somewhere at Bear
Stearns...then Queens Walk in London...and now Italease in
Milan, Italy...to have remembered this fact. You might also have
expected gold to shoot higher as the panic leaches out of
synthetic CDOs, too.
After all, gold is everything that a collateralized
debt obligation is not. Simple, tangible and highly liquid, gold
is instantly marked-to-market by bullion traders working to
create a "spot" price 24 hours a day.
Nor is gold anyone's promise or anyone's to create
at will – again, the very opposite of today's high-leverage
credit derivatives. Gold also has a long history of storing
wealth. Once more, that makes it as different from "toxic
waste" as you can get.
So shouldn't Western investment cash now be fleeing
the debt markets for the security of this rare, indestructible,
historically valuable asset? Far from the hedge-fund dealing
desks of London's Mayfair district, that might just be what's
due to happen.
"Physical gold demand is light at the
moment," reports Lokesh Agarwal, a director at Brijwasi
Bullion & Jewelers in Lucknow, India. "It is going to
be like this for the next few days."
Indeed, "the whole of July will be dull,"
says a New Delhi gold dealer. But Indian gold demand – which
accounted for one ounce in every five sold anywhere in the world
last year – always flags mid-year. And looking ahead,
investors who spurned gold below $650 per ounce this week might
just come to wonder why they didn't buy the dips.
"Good rains forebode a good harvest that will
boost agricultural income, helping farmers to buy more gold this
year," reckons James Steel, metals analyst at HSBC. The
monsoon season is forecast to be "normal" according to
the Mumbai Met' Office. That looks set to boost gold demand
amongst Indian farmers, the world's hungriest buyers of the
shiny yellow metal, as August leads to a slew of festivals and
post-harvest weddings.
"Gold
prices still appear to be at attractive enough levels to
merit accelerated purchases from the emerging world," Steel
goes on for HSBC, "and we suspect buying will soon
materialize." With good rains, a good harvest of rice,
corn, lentils, cotton, soybeans and sugar cane is expected.
Paying extra cash to local farmers, that bonanza is likely to
find its way into physical gold, he believes, bought in lieu of
retail bank accounts – still lacking all across rural India.
Physical gold might not only enjoy a hike in demand
from India, either. Last week, Vietnam opened its first gold
bonded warehouses, one in Hanoi and one in Ho Chi Minh City.
These new gold depositories will cut gold-dealing costs to
institutional investors. Insurance costs will also be reduced,
according to Nguyen Huu Thuan at the Sai Gon Jewelry Company.
The World Gold Council now estimates that demand for gold in
Vietnam could reach 70-80 tonnes this year.
Further north, in China – where economic growth
for 2007 was this week pitched at 10.9% by a government report
– the Shanghai Gold Exchange (SGE) will allow individual
investors to begin trading physical gold later this month. The
China Daily says the move will "provide a welcome
alternative at a time of high stock market volatility".
"Trading in physical gold has so far been
limited to professional traders," the paper reports.
"The minimum lot for trading has [now] been set at 100
grams – widely seen as quite a low threshold for individual
investors to participate in the physical gold market." [BullionVault
allows you to trade just 1 gram of gold at a time – click
here to learn more...]
"It should attract many investors,"
reckons Tang Mingrong, an analyst with Ling Rui Gold Investment
Co. "The increasing need of hedging risks by individual
investors will spur the launch of physical
gold trading."
Indeed, "we look at gold as a barometer of
wealth in the world," said Jason Mraz, head trader at
Ospraie Management – the New York hedge fund running $7
billion in commodities and basic industries – at the Commodity
Investment Summit in London last week. "The underpinning of
demand is very strong."
"Most commodities in China still look
extremely bullish, and China's influence looks fairly
positive," adds Adam Rowley, a commodities analyst with
Macquarie Bank in London. "On trend, we would see China as
an unstoppable force in these markets."
"We are extremely bullish on the prices of
gold, silver and diamonds over the next couple of years,"
chips in Scotia Capital as it begins coverage of precious
metals. "We believe that falling gold and silver
production, along with rising investment and jewelry demand,
will drive prices higher."
A lack of new gold-mining discoveries has so far
"kept the speculative money out of the gold sector,"
says Scotia Capital. "Although exploration Dollars have
skyrocketed, few discoveries of any size have been made."
"Cost curves are not allowing prices to go
back to historical norms," continues Mraz of Ospraie
Management. "We don't think the mining industry has the
ability to respond to demand. The compelling story we see in
gold is indicative of other metals, which is a shortage of
mining labor."
In short, Asia's booming income is colliding with
its love of physical gold...even as soaring mining costs and a
lack of big finds continue to cap production. You might agree
that makes a compelling case for buying and holding gold today.
Yet formal investment by Western funds has been slipping ever
since this year's top above $692 per ounce, hit back in early
spring.
Last week alone, net longs on Comex gold contracts
fell by one-fifth to a near six-month low. Open interest has
dropped by 11% since the end of February. On the world's stock
markets, exchange-traded gold funds – led by StreetTracks GLD
– suffered net redemptions of 11.6 tonnes between April and
June. Despite floating on both the German and Italian bourses,
the LyxOr GBS gold fund added just 4.5 tonnes, less than 5%
growth despite adding the two largest European investment
markets outside the United Kingdom.
Of course, the commodity markets have seen
outstanding growth over the last few years. The amount of
pension fund money invested in gold, oil, base metals and soft
commodities is now put at $80 billion. But that's still just a
fraction of total global pension fund assets. London's Financial
Services Authority estimates them to be around $18.6 trillion.
Derivatives trading in the commodity markets has
also risen sharply, growing five times over since 2004 on the
Bank for International Settlement data. But the total market in
all futures and options – including equity, currency and
interest-rate derivatives – is put at more than $415 trillion.
Commodities derivatives account for less than 1% of that sum.
Gold futures & options represent less than one-tenth of that
volume, too.
Very few people, in short, own either physical
gold bullion or a call on gold outside the booming economies
of Asia and India right now. Demand looks set to continue
growing in those fast-emerging markets. But here in London, in
contrast, almost everyone seems to have a stock broking or
spread betting account instead.
If you favor rarity – and you like unstoppable
investment trends – it might pay to note that debt now litters
Western asset markets. The global hankering to buy
gold, on the other hand, has barely even begun.
