World Gold Council Q4 Gold Digest

The world gold council has released its quarterly comprehensive investment digest, as usual chock full of actual data, and not just anti-gold speculation based on myth. Probably most relevant are the core facts: "The gold price rose by 29% in 2010. By comparison the S&P Goldman Sachs Commodities Index (S&P GSCI) rose by 20%, the S&P 500 rose by 13%, the MSCI World ex US Index increased by 6% in US dollar terms, and the Barclays US Treasuries Aggregate Index rose only by 6% over the year." The main reason for the jump: excess supply of paper currency alternatives, and surging investor demand. And while the recent pull back has been primarily driven by the flawed assumption that the Fed will not monetize any more debt and pump the "Yucca Mountain" of excess reserves (it will), many forget that the demand is actually still there. The chart below confirm this, and provide some other observations on the gold market.

The report's key findings:

  • Gold price volatility at 16% on an annualised basis in 2010 remained consistent with its long-term trend. By comparison, volatility on the S&P Goldman Sachs Commodity Index was 21% during the year, based on daily returns.
  •  Gold benefited from the continued contagion from European sovereign debt problems as investors’ hedge their currency risk.  This was evidenced by strong gold buying in ETFs, bars, coins and other investment vehicles in Europe and other parts of the world.
  •  Investors bought 361 tonnes of gold in the ETFs the WGC monitors in 2010, bringing total holdings to a new high of 2,167 tonnes, worth US$98 billion. This represents the second largest yearly inflow on record, after the 617 tonnes of net inflows experienced in 2009.
  •  During the first nine months of 2010, global jewellery demand totalled 1,468 tonnes, increasing 18% from the same period during 2009. Gold demand for technological and industrial applications continued to recover during the first nine months of 2010, registering a 19% increase over the same period in 2009. Complete full-year data for gold demand will be available in February when the WGC publishes its Gold Demand Trends report.
  •  Central banks became slight net buyers of gold for the full-year, after two decades as a steady source of supply to the market. The IMF successfully completed its gold sales programme of 403.3 tonnes without disruption to the market. The Fund sold 200 tonnes to the Reserve Bank of India, 10 tonnes to Sri Lanka, 10 tonnes to Bangladesh and 2 tonnes to Mauritius, all in off-market transactions executed at market prices. The remaining sales were conducted through on-market sales within the ceiling set by the third Central Bank Gold Agreement (CBGA3).

And the key charts to track the drivers of gold price moves:

First, Gold ETF holdings:

Next, the relative volatility of gold compared to other asset classes:

Comex net spec positions in gold:

Mint gold bullion sales:

Gold lease rates:

Oddly enough there is still confusion about this topic in the blogosphere. Below is the WGC's succint explanation of this mystery:

The implied gold lease rate is the difference between the US Dollar LIBOR and the equivalent duration Gold Forward Offered Rate (GOFO), the rate at which gold holders are willing to lend gold in exchange for US Dollars (also known as the swap rate). Gold lease rates remained negative throughout 2010, reaching an all-time low of -0.25% in the 3-month maturity on 15 December. Within two days of this landmark, other maturities also reached all-time lows with the exception of the longest maturity 12-month implied rate. Examining the components of the lease rates, both GOFO and LIBOR at 3-month maturity moved in relative tandem until Q4 2010 when GOFO started to marginally rise above LIBOR from about 0.35% to 0.50%. Although a rather insignificant move in magnitude, it nonetheless sent the implied lease rate to its record lows (Chart 8).

However, the significance of the lease rate has declined as the two main market participants – gold producers and  hedge funds – have scaled back their activity over the last decade. Furthermore, –the growth in gold investment vehicles and futures volumes has likely shifted the influence away from OTC forward agreements to exchange-based futures markets.

Nevertheless, negative lease rates do not necessarily suggest that lenders of gold, usually central banks, are paying  lessees, bullion banks. As gold leasing is an opaque, OTC market, it is difficult to ascertain whether or not implied rates are reflective of the actual transacted rates. Furthermore, central banks incur costs associated with storage, so lending  gold at a low lease rate – perhaps even a periodically negative one, could still be advantageous. Such a transaction might not provide a central bank with a gain, but would reduce their carrying costs. Suggestions that this may be  indicative of diminishing global storage capacity and with it, rising costs, are also unfounded. In fact, new vaulting capacity has recently appeared both in Singapore’s Freeport area and in Hong Kong. One conclusion that can be drawn from the data, however, is that lease rates are very low and a profitable leasing environment currently does not exist. As the leasing process will more often than not involve the sale of physical gold in the spot market, to ensure a riskless hedge for bullion banks, the current environment should also be supportive of the gold price.

And lastly: Demand. Yes Demand.

First, Jewerly:

And next Industrial:

Full report:


And for the reading challenged, there is a video: