A must read presentation from UBS' global commodity research analyst Julien Garran and PM trading srategist Edel Tully. Their summary view: "How should we think about gold? This has to be one of the favorite questions of nearly every investor we encounter, and despite our lack of specialized knowledge and our relative focus on the emerging universe we very often get dragged off into speculative discussions on the nature of gold demand and what gold prices are “telling us”. If we had to summarize the conclusions on gold in a single phrase – keeping in mind that this is a bit of an exaggeration, and one to which Julien and Edel might well take exception – we would say “forget about the fundamentals”. When we talk about investment demand, there are two main drivers: inflation and risk. I.e., gold does well when buyers are worried about inflation prospects, debt monetization and the debasement of national currencies, and also does well in an environment of heightened volatility and fear about the global economy."
And some specific questions relating from recent macroeconomic developments:Can eurozone become a net seller in view of their funding needs?
The question on the central bank side is certainly one that has been asked many, many times over the past few months, i.e., whether Greece or Portugal would look to offload some of their gold holdings. But first, we have to remember that the European central banks are confined through the central bank gold agreement as to what gold they can sell each year; currently they are limited to 400 tons per annum for the next five years, so that means 400 tons this year. So far we’ve only seen about 41 tons since September, so clearly there is a good bit of room within this year’s quota should central banks look to sell.
However, I would be quite surprised if we did see selling momentum coming through from the European central banks. If we think about it logically, right now is not exactly a good time for a central bank to start selling gold holdings. Rather, tight now is when the central banks should maintain their gold holdings. If you look for example at the World Gold Council’s website, it lists all the reasons why a central bank should own gold. And looking at it from another angle, if we were to see some selling activity in the west it would not surprise me at all if those Asian central banks who are underweight in gold take on part of this load. So in essence you could see a shift in gold moving from west to east.
And will China announce its ongoing gold buys any time soon?
You may remember that China announced in April last year that it effectively had doubled its gold holdings. This was reflected in the change in the template between 2003 and 2009. So even if China is increasing its gold reserves today, we would have to expect that we wouldn’t find out for a long period of time, just as we saw last year. Typically, China is a self-sufficient market; it’s the largest producer of gold, and last year we didn’t see the Chinese coming onto the international market to a large degree.
This changed in December 2009, when we saw a large amount of Chinese buying of physical gold coming out of the domestic market; this lasted until February of this year. Part of this can be attributed to the Chinese New Year, where typically we would expect a decent gold buy and also a decent platinum buy. Chinese purchases went quiet in the latter half of February, spiked up again briefly in March and have been quiet again since then.
So you have to ask yourself why the Chinese would now be coming onto the international market to source gold; it does perhaps indicate that there’s not enough domestically-produced gold available. You can draw your own conclusions from here, but generally I think it’s fair to say that the market consensus expects China to increase its gold holdings over the coming years.
All this and much more in the full report below