RESEARCH AND ANALYSIS

Global demand for gold in 2011 rose to 4,067.1 tonnes (t) worth an estimated US$205.5 billion - the first time that global demand has exceeded US$200 billion and the highest tonnage level since 1997, the World Gold Council said today.

The main driver for this increase was the investment sector where annual demand was 1,640.7t up 5% on the previous record set in 2010 and with a value of US$82.9 billion.

The pre-eminent markets for investment demand in 2011 were India, China and Europe. Central banks continued the trend established in 2010 of being net buyers of gold.

Marcus Grubb, WGC Managing Director, Investment said: “What we can see from these 2011 figures is that there were two main factors driving the results: Asian growth and optimism on the one hand and western desire to protect assets against uncertainty on the other."

Download Gold Demand Trends Full Year 2011 

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PICTURE OF THE DAY

A 10kg Australian Lunar 2012 Year of the Dragon silver bullion coin comes off the press at The Perth Mint today. Hours of hand-finishing will be required before the coin can be released.

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WEBSITE INFORMATION

In his recent post, Bron answered the question How Are Perth Mint Gold And Silver Spot Rates Calculated?

The next logical question for bullion buyers might be “how do I follow every change in The Perth Mint spot rate throughout the trading day?”

For many, the spot price graphs on our homepage are useful for deciding when to buy or sell precious metals.

However, for those that don’t have time to watch the graph all day long, there’s a better option – as many small investors have already discovered.

Automatic Email & SMS Price Alerts

For everyone registered to buy on www.perthmintbullion.com, we offer a free, automated ‘Price Alerts’ service.

Here’s how it works.

You choose the metal(s) you are interested in and set a ‘low’ price at which you want to buy and a ‘high’ price at which you’d consider selling.

As soon as our spot rate hits either of these upper and lower limits, the service triggers an immediate personal alert via e-mail or SMS.

These prompts are designed to ensure you’ll never miss a potential buying or selling opportunity in today’s volatile market.

Thousands of our registered buyers are already relying on Price Alerts, suggesting that this invaluable tool is helping investors in their aim of “buying low and selling high”.

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WEBSITE INFORMATION

We’re pleased to announce the forthcoming availability of a limited supply of Australian Lunar Series II 2012 Year of the Dragon silver bullion coins in 5oz, 2oz and 1/2oz sizes.

Production of these coins was suspended last year at the height of unprecedented demand for the Australian Lunar program, allowing us to focus production on the most popular 1oz releases.

The limited supply of 5oz, 2oz and 1/2oz bullion coin celebrating the Dragon will be available for sale on www.perthmintbullion.com from 1 March 2012.

Please note that we expect this limited run of coins to sell extremely quickly. For further updates, please follow The Perth Mint bullion blog and Twitter.

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WHAT OTHERS ARE THINKING

Surprise surprise, he isn’t in favour of it. In this Fortune article, Buffett says he doesn’t like gold because it “has two significant shortcomings, being neither of much use nor procreative” and “requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further.”

We can’t really disagree with him on that point, nor with his preference for “investment[s] in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment.”

However, we would note that the average person in the street may find it hard to identify assets which “deliver output that will retain its purchasing-power value” AND need minimal “new capital investment”, even at the best of times. We think Buffett forgets that the average investor doesn’t have his skills, which is why many often prefer safer options such as cash, particularly in uncertain economic environments. This is not unreasonable.

However, Buffett himself notes that “Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.” Spin out of control is a euphemistic way of saying hyperinflation – as per Zimbabwe.

As Coutts, a UK private banking and wealth management firm, note: “with both short and long-term interest rates below the inflation rate, the real value of savings in fiat, or paper, currencies are being eroded, reducing their appeal as a store of value”. These negative real interest rates, as they are called, “drive investors to seek assets that are not directly affected by inflation, depreciation, devaluation or default”, which Coutts notes provides support for gold prices.

So when the average person faces:

is it at all surprising that there is currently an “expanding pool of buyers” for gold?

Of course, this will not continue forever, which is the useful message from the Buffett article: when the economy turns around and/or cash interest rates move above the inflation rate (after taxes), then it would be wise to consider reassessing one’s gold holdings, either reducing it over time or exiting completely.

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EDUCATION

We have had several people ask how The Perth Mint sets its US and Australian dollar precious metal spot rates.

Our spot prices are based off Reuters and other feeds we get from information providers as well as quotes direct from bullion banks. We then add a margin, which changes dynamically during the day depending on our view of what the real/executable spot market price is and the flow of buy and sell trades from our clients.

The reason I’ve used the phrases “based off” and “real/executable spot market price” is because precious metal is not traded exclusively on a public and regulated exchange. Precious metal markets operate much like the internet – it is a network of dealers (some large, some small), independently trading with each other, and it is the sum of those individual trades that makes up the “spot market”.

Precious metals are traded on public exchange, such as the COMEX futures market and Exchange Traded Funds on stock exchanges, but these are only a small part of the worldwide 24 hour a day trading that occurs.

Precious metal dealers often use Reuters or Bloomberg. However the spot price displayed on these information services (usually under the code XAU) is just an indicator of where the market. This spot price is updated by the bullion desks of the big banks and is, in effect, a bulletin board or forum where these banks can publish their prices in the hope other dealers will call them up to do a trade. Sort of like an advertisement. Unlike a stock market, it is not a commitment to deal at those prices, but most times you can. However there are many times, especially when the market is moving quickly, when the dealers don’t have time to update their quotes and so when you ring them up, they say “Sorry, Reuters off the market, my current price is $5 below the screen”.

As a result, when you call a dealer for a price, they themselves cannot really know exactly where the market is. As a result they add a margin to cover themselves if the Reuters price was not right. Generally this margin is small because dealers are in constant contact with each other, doing deals, talking and exchanging information on what they are seeing in the market and so have a sense of whether Reuter’s price is accurate.

The dealer also has to consider that by the time they get off the phone with you and then call a wholesale dealer the market may have moved, so they also include an amount into the margin to cover themselves if the market moves against them in between the phone calls. How much they add depends on how volatile the price has been, and this often changes during the day.

Sometimes if your deal is big enough and the market volatile, they’ll get another trader on their desk to call a bank and get a firm price before they quote to you. If you’re lucky enough to have that much money, give the dealer your answer quickly, because the bullion bank dealer on the other end of the phone isn’t going to want to sit on their quote for too long because he/she has got to trade it as well.

Also included in the margin is an amount cover the costs of running a trading desk, for example, the time spent talking to you, to do the other side of the trade with the bank, to wire funds, bank fees etc.

Often when clients ring up to buy and we quote them a price, they say “Well, where can I get what the spot price is?” so they could work out if our price was “fair”. Our answer is usually “It doesn’t exist. You could spend a few thousand getting a live Reuters data feed, but even that is just indicative.” Being used to the comforts of a stock market where everyone knows what the price is, many don’t like that answer and think we are pulling a shifty on them. Hopefully this article explains why that isn’t the case.

If you want to know if you’re getting a fair price, all you can do is what we do, which is to ring around to see who is offering the best price at that time. You’re now part of the precious metal “network” of traders.

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