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Gold was supposed to be off to the races after Ben Bernanke announced that the Federal Reserve will unleash a third version of quantitative easing and continue supporting until U.S. unemployment figures improved. CONTINUE READING

After a hiatus that lasted several months, gold bugs are waking up from their hibernation. And now they are calling for the elusive USD2,000 for the precious metal within a year. But that’s about as far as it is going to get. READ MORE HERE

Central banks’ have been major buyers of gold over the past few years, especially after the U.S. dollar and euro wobbled. Here is a list of the countries with the biggest official gold reserves. READ MORE HERE

Given the latest gold trends, emerging market investors and central banks appear to humbly disagree with Warren Buffett’s assertion that the yellow metal has limited uses. READ MORE HERE

Warren Buffett, the Oracle of Omaha, sets out his theory on gold and explains why he is not enamoured by its charms. And why there is no treasure to be found in Treasuries. READ MORE HERE

Gold haters are predicting the end of the gold rally. But pro-gold analysts say central bank bullying, inflation and negative interest rates will continue to propel the yellow metal forward. READ MORE HERE

Renato Ganoza /Foter

Goldman Sachs takes stock of its 10-year BRIC investment model, adding new countries such as Egypt and Iran in the mix. But Societe Generale ridicules the BRIC acronym, calling it a Bloody Ridiculous Investment Concept. READ MORE HERE

2011 was the year of black swans - those highly improbable occurrences that turn the world economy on its head. So what black swans could be in store for 2012? Central banks losing control over inflation, as a result of their policy of monetising sovereign debt to excess; or perhaps European growth in excess of 1.2%, a positive scenario that no economist is forecasting on today.
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hto2008 /Foter

U.S. Global Investors examine the strength, weaknesses, opportunities and threats for the yellow metal:
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The next bubble may be forming in developed sovereign debt

The October 2011 edition of Barclays Wealth Compass, entitled “Perspectives on Markets: Yesterday, Today and Tomorrow,” reflects upon the past two decades of market volatility with an eye toward understanding and positioning for the future. The firm’s chief investment officer and heads of regional Investment Strategy, Behavioural Finance and Quantitative Analytics answer five key questions in the special edition.
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Gold walked up the stairs and came down the elevator. And as chatter of a global recession rises, the ‘safe haven’ may not be the place to be parking your funds, says BarCap.

How the mighty have fallen. From calls of $2,000 to $2,500 before the end of the year, gold pundits are scrambling to scale back their forecast for the yellow metal as talks of recession become more widespread. READ MORE HERE
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Gold walked up the stairs and came down the elevator. And as chatter of a global recession rises, the ‘safe haven’ may not be the place to be parking your funds, says BarCap.

How the mighty have fallen. From calls of $2,000 to $2,500 before the end of the year, gold pundits are scrambling to scale back their forecast for the yellow metal as talks of recession become more widespread. READ MORE HERE

We should dismiss exclamations by gold bugs who think gold prices should be way higher, say $3,000 or $5,000. But when SocGen’s global strategy team thinks gold’s ‘honest price’ is $10,000, one should sit up and take notice.

Dylan Grice, part of SocGen’s global strategy team analyst, says that with global demand for non-debased currency surging, last week’s capitulation by the Swiss demonstrated once again the perverse risk inherent in doing the right thing. It also narrowed the already shrunken universe of sound
currencies. Meanwhile, the price of gold at which the US dollar would be fully backed has reached $10,000 per ounce. READ MORE HERE

Oil and gold are poised to benefit from the dithering policies of Western leaders and the possible launch of the Fed’s Operation Twist. Other commodities are set see a run-up thanks to tight supplies.

The world’s major commodities had a phenomenal run in the past two years, but cooled down in the first six months of 2011.

Within the first six months of the year, only two commodities - silver and coal - saw a double-digit rise and only six of the 14 main commodities were in positive territory. READ MORE HERE

According to the Gold Demand Trends report for Q2 2011, gold demand in the second half of 2011 will remain strong owing to a number of key factors:

Despite a higher gold price, Indian and Chinese demand grew 38% and 25% respectively during Q2 2011 compared to the same period of 2010. This growth is likely to continue, due to increasing levels of economic prosperity, high levels of inflation and forthcoming key gold purchasing festivals.
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What’s in store for oil and gold — the ying and yang of the global economy? At least one analyst thinks gold is a bubble poised to burst.

In the space of a short few weeks, the world looks less sure of its self. Aggressive forecasts are being toned down, massive plans are being scaled back, growth figures are being revised downwards, and bulls have turned slightly bearish. READ MORE HERE

Central banks are buying gold, says HSBC. That mean that the metal’s stratospheric rise may not be over yet. And with Goldman Sachs spelling doom for the dollar, gold fundamentals look strong
“Gold gets dug out of the ground… we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head,” said Warren Buffett, the legendary chief of Berkshire Hathaway in 1998. He still has not changed his position on gold, but he may find himself these days in the minority, given the yellow metal’s stellar rise.

The price of gold is normally determined by a combination of global real interest rates, the value of the U.S. dollar and risk aversion (so-called ‘safe haven’ demand) plus net supply from new production and changes in stocks held by central banks.

Calculate them and you get a two-year chart of gold which looks like this:

While retail demand from China and India are strong drivers of gold prices, HSBC believes that the arrival of central banks into the fray will mark a new chapter for growth in gold prices.

“The change in central bank demand is an important structural difference in net supply and demand conditions relative to the past and it seems set to continue. Central banks in the emerging world remain keen to diversify away from the US dollar and the attraction of precious metals, including gold is unlikely to fade anytime soon.”

“Changes in central bank stocks of gold can make a bigger difference to net supply than changes in production because of the huge size of stocks relative to annual production. Central banks are the holders of the largest stock piles of gold. For many years they were net sellers of gold. They preferred to own assets that generated a running yield because the focus was on improving the rate of return on their assets,” says HSBC.

Concern about dollar weakness and debasement from ultra loose monetary policy has turned central banks into a source of net demand for gold not net supply. Central banks in India, China, Russia and Mexico have recently been buyers of gold in an effort to diversify their foreign exchange reserves away from excessive dependence on US treasuries and other US dollar-denominated assets.

The figures from World Gold Council confirm that trend.

“Significant purchases by central banks across a number of regions in the first quarter reinforced gold’s vital role as a reserve asset. Purchases by central banks jumped to 129.0 tonnes (US$5.7-billion), more than the total for 2010 as a whole,” says WGC, which believes 2011 will see more central banks turn to gold purchasing programmes as a means of diversifying their reserves.

Central banks of emerging economies remain under weight in their gold hoardings and WGC expects the rebalancing to continue.

The growth will be largely driven by the People’s Bank of China (PBOC), the country’s central bank, which is already the sixth largest official holder of gold. Still, gold is a mere 1.6% of its overall reserves and the statements coming out of the PBOC suggest that it views gold as a strong investment alternative to offset rising inflation and global instability.

Apart from central banks, investors are also piling in. Despite the high prices, demand for gold in the first quarter rose by 100tonnes, to reach 981.3 tonnes, worth $43.7-billion.

“Much of the 100-tonne increase in demand was due to strong growth in the investment sector. We believe that suitable conditions remain in place to ensure that investment demand will maintain its solid growth in the coming quarters.”

GOLD VS DOLLAR
Gold’s strong inverse co-relation to the U.S. dollar has been a key driver of high gold prices. Goldman Sachs thinks the U.S. greenback is about to go down further.

Here are Goldman Sachs’ two reasons why the dollar will sink again:

U.S. trade and investment balances with the rest of the world remain negative. “The U.S. trade deficit is still widening and we expect it to continue to widen,” Goldman analysts said in its note. “Ultimately, it is difficult to envisage a dollar-bullish scenario without a notably stronger U.S tradable goods sector.”

The bank says continued deterioration in the trade balance will pass through into a continued deterioration of the U.S. current account deficit. For the dollar to strengthen in this scenario, foreign appetite for U.S. assets need to pick up substantially to have the deficit financed through foreign direct investment and portfolio inflows, Goldman says. But data shows that is not happening.

The Fed will be the last among major economies to raise interest rates, and the U.S. Federal Reserve will leave interest rates on hold this year and next.

The bank now sees EUR/USD at 1.45, 1.50 and 1.55 in three, six and 12 months vs 1.40, 1.45 and 1.50 previously. It projects $/JPY at 82, 82 and 86 over three, six and 12 months from 86, 86 and 90, previously.

With such structural forces driving gold, the fundamentals for the yellow metal look solid. But fundamentals don’t always drive markets.

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