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Germany Seeks Return of Gold Held in USandFrance

Release Date: 
Saturday, January 19, 2013

The price of gold rose this week as Germany announced its plan to retrieve gold reserves held abroad, growth in China improved and Federal Reserve Chair Ben Bernanke wants the monetary stimulus to continue. Gold was $31 higher this week, settling at $1688.50 per ounce at 2:15 PM Pacific Time at the New York Spot Market close, while silver was $1.15 higher, closing at $31.82 per ounce.

Germany’s Bundesbank, the world’s second largest holder of gold reserves, will retrieve 674 tons of gold from vaults in France and the U.S. by 2020 to restore public confidence in its reserves.  The German central bank currently holds approximately 300 tons of gold at the Federal Reserve vaults in New York and 374 million tons in Paris’ Banque de France.  The phased relocation of the gold, currently worth approximately $36 billion, will begin this year.  Under the plan, half of Germany’s total reserves will be located in Frankfurt by the end of the decade.

"To hold gold as a central bank creates confidence," said Bundesbank board member Carl-Ludwig Thiele.  “With this new storage plan, the Bundesbank is focusing on the two primary functions of the gold reserves: to build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold trading centers abroad within a short space of time,” the bank said.

“The move to reconsider gold storage and repatriate their gold is a clear indicator that the Bundesbank [is] thinking about Germany’s economic future, away from the euro, and how gold may play a role in it,” said Jan Skoyles, head of research for The Real Asset Company.  “The fact that they are planning to gradually repatriate their gold from the New York Federal Reserve not only raises questions about their trust in the Fed to manage their gold holdings but, importantly, their faith in the U.S.’s management of the U.S. dollar and its future as a reserve currency.”

“The general inference is that if there was a real debt crisis in the U.S., then they (German authorities) would feel a little more confident about having their assets at home," said Ric Spooner, chief market analyst at CMC Markets.

"The reason the Bundesbank is doing this, repatriating the gold back home, is to instill confidence in the German consumer as to the solidity of the Bundesbank," said Societe Generale senior currency strategist Sebastien Galy.  "Right now it is just a sign that the system is breaking down, that confidence is lower across the board and the entire financial system has basically become a domestic financial system, where you have the euro zone, a dollar zone and the yen zone," he added.

Central bank purchases increased 17 percent last year, said Thomson-Reuters GFMS.  The analysts predict new central bank purchases will increase by 1.2 percent this year.  Purchases were “again driven by several central banks’ actions to moderate exposure to the major currencies, particularly in light of ongoing loose monetary policies and last year’s escalating sovereign debt concerns,” said Philip Klapwijk, global head of metals analytics at GFMS and Goldline newsletter contributor.

Gold may climb toward $1,900 per ounce and average a record high in the first half of 2013 as central bank fiscal policies boost investor demand, according to Thomson-Reuters GFMS. “Although there is now growing speculation around the structure and longevity of the Fed’s quantitative-easing program, policies of ultra-low interest rates across the western economies will persist in 2013,” Mr. Klapwijk said. “This will continue to support investor interest in gold in the absence of low-risk investments that can offer acceptable yields.”

In comments late Monday, Federal Reserve Chairman Ben Bernanke said that he wasn't satisfied with the economy's progress despite recent signs of improvement, and the Fed would continue its $85 billion per month bond purchasing program.  Bernanke said the recovery was still fragile and there is still “quite a ways to go…” 

"We still believe the U.S. central bank is set to remain accommodative in the near term," VTB Capital analyst Andrey Kryuchenkov said in a note.  According to Adam Klopfenstein, a senior market strategist at Archer Financial Services Inc. in Chicago, “the market is reading this as a sign that the easing will continue for some time.”

Thorsten Polleit, Frankfurt-based chief economist at Degussa, expects gold may reach $2,070 per ounce this year on the view that governments are printing increasingly greater sums of money.

Saxo Bank vice president Ole Hansen said concerns over the stability of the U.S. financial system ahead of talks on managing debt are helping to burnish gold's appeal.  "The debt ceiling debate should also offer some support as it once again raises the risk that U.S. growth could be hurt,” he added.  “Gold is also being supported by the fact that we have now managed to close above 200 day simple moving average for a third day."  

Positive economic data from China on Friday boosted optimism for the global economy.  China's economy grew at 7.9 percent in the fourth quarter of 2012, faster than the 7.8% GDP rate expected by economists. The fourth quarter data confirm “that the worst is probably over for the economy and that China has avoided a hard landing,” IHS Global Insight senior economist Xianfang Ren said.

"Gold is rallying along with other commodities and other precious metals, with stronger risk appetite luring some speculative investment into the yellow metal's market," Commerzbank analyst Carsten Fritch said.

A sustained Chinese recovery could help drive stronger gold demand in China, one of the world's largest gold buyers.  "The physical market is off to a good start this year, with many indicators so far pointing to a positive demand story," UBS said.  "We believe that China's growth momentum will rise at a faster pace in the coming two quarters," ANZ analysts said in a report.

China’s industrial output in December rose 10.3% from the year-earlier period, in line with economists’ expectations and higher than the 10.1% rise recorded in November.  December retail sales were up 15.2% compared to a year ago, above the 14.9% forecast in a Reuters survey and an improvement from November’s 14.9% increase.

Analysts and traders surveyed by the London Bullion Market Association for its annual survey expect the price of gold may average $1,753 per ounce this year, a five percent rise from the 2012 average.  Eleven of the 23 participants surveyed believe gold would rise above its record high of nearly $1,920 a troy ounce.

David Lennox, resources analyst at Fat Prophets, forecasted that gold may reach $2,300 to $2,500 per ounce in 2013. “We continue to support a very strong gold price.  You look at the U.S. dollar, and we think through 2013 we can’t see any factors that will be inclined to want to drive [the dollar] higher.  The debt ceiling will come into play there…the watering down of the current fiscal cliff that we’ve just gone through will play into that as well.  Also, we have yet to see what programs are really going to be cut when the U.S. government does finally get to the scissors for its budget.”

“To us, that all points to a weak U.S. dollar, and that should, we think, support gold,” Mr. Lennox continued.  “We also believe that foreign governments will continue to buy gold as a replacement for other types of assets in their reserves.  And we think that investors will continue to probably retain their holdings…So when we add those together, we think that gold has quite a good future.  Hence, our very bullish ranges for 2013.”

Analyst Tom Kendall at Credit Suisse expects gold may average $1,740 this year while Jochen Hitzfeld of UniCredit in Munich predicts $1,700.  According to Bloomberg, the analysts comprise two of the top three most accurate gold price forecasters.  Kendall said gold may average $1,720 per ounce in 2014 while Hitzfeld expects gold may average $1,800 per ounce. 

“The most important factor is negative real interest rates and we see no end in sight there for the next couple of years,” Hitzfeld said. “What is dangerous is if key interest rates rise the above inflation rate, but this isn’t anywhere in sight.”  According to Mr. Kendall, “gold’s still going to have a very solid role as a diversifier in portfolios.”

Money managers also expect gold may move higher.  “While the rise may not be parabolic, we will see higher trading,” said Peter Sorrentino, who helps manage about $14.7 billion of assets at Huntington Asset Advisors in Cincinnati. “The money from all that easing is out there. The depreciation and loss of purchasing power will continue to manifest itself as we go forward.”

“Gold will definitely continue to rise,” said Donald Selkin, the New York-based chief market strategist at National Securities Corp., which manages about $3 billion of assets, including gold.

 

(Sources:  “Gold Higher in Asia; Precious Metals Hold in Ranges,” Wall Street Journal, January 18, 2013; China’s economy grows more than expected,” Marketwatch, January 18, 2013;  “Gold steady after China economic data,” Marketwatch, January 18, 2013; “PRECIOUS-Gold firms as Chinese data lifts stocks, commodities,” Reuters, January 18, 2013; “PRECIOUS-Platinum, palladium prices hit multi-month highs,” Reuters, January 17, 2013; “Bundesbank to Repatriate 674 Tons of Gold to Germany by 2020,” Bloomberg, January 16, 2013; “Germany's Bundesbank brings gold reserves home,” Reuters, January 16, 2013; “GFMS Sees Gold Climbing Toward $1,900 on Central-Bank Stimulus,” Bloomberg, January 16, 2013; “Gold Falls After Rally to Two-Week High Curbs Investor Demand,” Bloomberg, January 16, 2013; “Gold Forecasters Splitting on Peak for Bull Market: Commodities,” Bloomberg, January 15, 2013; “Germany wants its gold back; platinum pops,” Marketwatch, January 15, 2013; “Germany Wants Its Gold Back—Should You Worry?,” CNBC, January 15, 2013; “Platinum tops gold; Germany wants its gold back ,” Marketwatch, January 15, 2013; “Platinum Climbs Above Gold,” Wall Street Journal, January 15, 2013; “PRECIOUS-Platinum rallies to 3-month high after Amplats overhaul,” Reuters, January 15, 2013; “Gold Forecasters Splitting on Peak for Bull Market: Commodities,” Bloomberg, January 15, 2013; “Platinum Advances to Three-Month High on Production Cuts,” Bloomberg, January 15, 2013; “Gold Edges Higher in Asia, Helped by Strong Euro; Precious Metals Mixed,” Wall Street Journal, January 14, 2013; “Comex Gold Gains on Rise in Euro Ahead of Bernanke Speech,” Wall Street Journal, January 14, 2013; “Gold Settles Down 1%,” Wall Street Journal, January 11, 2013; “Bullish on Gold in 2013,” CNBC, January 8, 2013)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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