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Demand for Gold Rising in China

November 20, 2009

You can add gold demand to the list of items being supported by China. China was the sole market to see positive growth in consumer demand for gold, rising 12 percent from a year ago the World Gold Council reports.

Total gold demand in China reached 120 tonnes, nearly double the amount from just four years ago.

Overall, gold demand was off 34 percent from 2008 but that is largely the result of exceptionally high demand increases during the darkest time of the financial crisis. On a year-to-date basis, gold demand is only down 6.3 percent.

China’s improving economy has made consumers less price sensitive than those in India and the Middle East who have not fully adjusted to gold prices at current levels.

Jewelry demand in India fell 42 percent on a year-over-year basis but Indians haven’t abandoned their strong cultural connection to gold. Exchange activity among consumers—where old pieces are swapped for new ones—has spiked.

The WGC says this “suggests a strong desire by consumers to remain attractive in the [gold] market.”

BMO doesn’t believe that the downtick in demand is a symptom of a long-term trend. In a research note, they write that “the combination of a strengthening economy, modest supply growth, central-bank buying and concerns surrounding the U.S. dollar and inflation should continue to support gold demand and prices into 2010.”

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. #09-819

Gold on Your Gift List

November 19, 2009

While the Indian government buys its gold in the hundred of tons, a growing number of people around the world are buying by the ounce.

For years I’ve been saying on TV and elsewhere that one-ounce coins like the American Eagle and the Canadian Maple Leaf make excellent gifts that the recipients will always remember and treasure. The same goes for 24-karat gold jewelry.

The U.S. Mint seems to be thinking the same thing – it plans to restart the sale of half-ounce, quarter-ounce and one-tenth-ounce gold coins on December 3, just in time for Christmas gift-giving. Last year, the Mint ran out.

Coin sales have been impressive this year – the Mint has sold more than 1.1 million of the one-ounce American Eagles and 140,000 American Buffalo coins, also one ounce.

In Britain, the Royal Mint quadrupled its gold-coin output in the third quarter of 2009 to meet demand.

The World Gold Council says gold demand overall was up 10 percent in the third quarter of 2009 compared to the second quarter. The council says jewelry demand was up 17 percent to 473 metric tons, and that 81 tons worth of gold bars were purchased, up 30 percent from the previous quarter.

Even at the current record prices, gold in the form of coins and jewelry may prove to be gifts of good value.

If someone offered to sell you a one-ounce gold coin for $50, would you buy it? It may seem like a silly question, but apparently not everyone would make that deal. Watch this humorous video to see.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. #09-816

Gold ETFs - Big Surprise at Tax Time

November 17, 2009

In TV commercials and across the Internet, managers of exchange-traded funds tout the tax advantages of their products.

But according to a story in the latest issue of Barron’s, many investors in precious-metals ETFs have to deal with an unwelcome surprise come April 15.

The issue is that gold and silver fall under the heading of “collectibles” in the eyes of the Internal Revenue Service, making these metals similar to artworks, antiques, vintage wine and rare baseball cards.

This status means that profits from gold and silver investments do not qualify for the 15 percent maximum on long-term capital gains that pertain to stock and mutual fund investments.

These profits are instead taxed at a 28 percent maximum if held for more than a year, and at ordinary income rates if held for less than a year.

With the rapid appreciation of gold in recent years – the current price is nearly double where it was in early 2007 — many investors who cashed out their gains in gold ETFs may be hit with unexpectedly big tax bills.

The same liability may hold true for investors who didn’t sell a single share of their gold ETF. That’s because when the ETF itself sells physical gold or silver, any gains or losses are passed along to investors, who then face the maximum 28 percent tax liability even if they didn't actually realize the gain.

Not all gold–related ETFs are considered collectibles, but for those that are, investors should be aware of the rules so they can weigh the advantages and disadvantages of their investment options.

Here is a link to the Barron’s story (subscription required):

Gold Is Precious to the IRS, Too

By clicking the link to the Barron’s story, you will be directed to Barrons.com. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Information provided is neither tax nor legal advice and is general in nature. You should consult your tax advisor, financial advisor or local taxing authority for specific information regarding your tax situation as every tax situation is different. The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of 9/30/09: SPDR Gold Trust #09-809

Gold is Strong Money

November 10, 2009

I appeared on CNBC’s “Squawk Box” this morning to discuss gold’s bullish run. One point I tried to stress to host Carl Quintanilla was that countries are intentionally weakening their currencies to benefit their export sectors, and this is one of the key factors driving gold higher.

There’s a competitive currency devaluation taking place with many of the Western currencies, and countries like India don’t want to dump the dollar – they just want to diversify (their foreign reserves) and they don’t want to buy the euro…We’re seeing some really fascinating currency devaluations going around and I think that this bodes well for having gold as a component of your portfolio.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The COMEX is a commodity exchange in New York City formed by the merger of four past exchanges. The exchange trades futures in sugar, coffee, petroleum, metals and financial instruments. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar. #09-785

India-IMF Deal: Tipping Point for Gold

November 09, 2009

India’s deal to buy 200 metric tons (6.4 million troy ounces) of gold from the International Monetary Fund (IMF) is a huge deal – not just the fact that the New Delhi government is handing over $6.7 billion for the metal, but what it may mean for gold going forward.

India, the world’s largest gold jewelry market, is making a rational and bullish call on gold. The supply of gold continues to decline - the biggest supply is from governments with socialist policies that are selling their gold to pay for social welfare and bailout programs. The IMF is a classic case of this.

What’s particularly interesting in this case is that the buyer is a developing economy that’s the largest democracy in the world. I see this as another sign of the wealth shift away from the developed markets of North America and Western Europe toward the emerging world.

A decade ago, many of the major emerging markets were in shambles, with contracting economies and huge current account deficits – now many of them have large surpluses to deploy, and they’re thinking beyond Treasuries.

Energy analysts at Merrill Lynch came out with a research note predicting the price of gold will top $1,500 an ounce within the next 18 months. The rationale – a lack of confidence in major currencies will push investors toward gold as a hedge against competitive devaluation by the world’s largest economies.

The chart below lays out this scenario in a succinct way. Annual gold production is on a downward trend while the growth in money supply in both the United States and the Eurozone is bent almost straight up. Economics 101 - more money competing for a declining resource tends to drive up the price of that resource.

The note goes on to say that if gold prices rise, the price of energy and other commodities will rise as well.  The chart below from Merrill Lynch shows the strong capital inflows into emerging markets starting in the second quarter of 2009 have both strengthened their currencies and boosted commodities demand.

You also see that dynamic at work in the relationship between gold and oil over more than a century. Historically there is a strong positive correlation between gold and oil, and with 2009’s global monetary expansion, that correlation is being further strengthened. We’ve been writing about this correlation for many years.

It’s significant that, on an inflation-adjusted basis, all of the natural resources except gold and silver have surpassed their previous all-time highs. Gold is only approaching the halfway mark to $2,300 an ounce, which would be its 1980 high when adjusted for inflation.

Just like in the U.S., money supply is exploding in China, as you can see in the chart above. 

Greg Weldon, who analyzes money supply in the Weldon Money Monitor, had this to say recently: “September’s +29.5 percent year-over-year pace of monetary expansion represents the fastest ever recorded in China… Against a U.S.-focused macro-monetary backdrop that is defined by intensifying risk to reflation, the pressure on the (U.S. dollar) against the Chinese currency, in line with the highly expansionary monetary dynamic dominant in China, makes us more willing to explore the bullish side of global equities and commodities.”

Along with India, China has also been a major gold buyer – its reserves have nearly doubled since the start of 2003, when the price was about $345 an ounce. And, of course, now there’s talk that China may buy the remaining 203 metric tons that the IMF is seeking to sell.

Another thing about India or China is that their governments won’t be criticized for buying gold because as a nation, they have a strong cultural affinity toward it. It’s how they store their wealth, and they can wear it as jewelry.

If the U.S. government went out and spent nearly $7 billion for the IMF’s gold, there would be no end to the howling.

The disconnect amazes me – the U.S. holds virtually all of its foreign reserves in gold. We are the world’s largest gold holder, with more than double the amount as #2 Germany, but as a nation Americans are gold skeptics. Just this week, I was interviewed twice on television by two old-timers who are still clearly anti-gold. It appears they would prefer to live in a state of denial.

But in emerging Asia, the citizens get it. They say it’s a good move because they are buying gold, too - they believe in it.

And with this purchase from the IMF, India has gone from being a price taker as a jewelry consumer to being a price maker as an investor. This is the sort of change in government policy that we watch for in shaping and maintaining our investment models. It is significant that India, the second largest country in the world by population and the largest gold jewelry consumer, may have created a new floor for gold at $1,000 per ounce.

The presence of a big bullish buyer tends to create a big bullish buzz for gold. We’re seeing it now – gold on Friday surpassing $1,100 an ounce – and history suggests it may last a while.

Around this time in 2005, for example, Russia announced that it was doubling its gold holdings from 5 percent to 10 percent of its reserves. At that time, gold was selling for about $490 an ounce. A year later, the price was up 30 percent.

Of course, Russian purchases weren’t the only thing that drove up gold – back then the dollar was dropping, federal deficits were colossal, markets were volatile and investors faced negative real interest rates. 

We have the same conditions now, but on an even greater scale following the credit crisis, steep recession and the massive economic stimulus programs created around the world.

Our consistent suggestions is that investors consider a maximum 10 percent allocation to gold – half of the exposure in bullion and the other half in gold equities. The factors we’ve described above tend to be positive for gold and gold investing – the vote of confidence by a serious buyer like India may make a good situation even better.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. #09-781

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