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Global Gold Demand Rises 3.8% in Fourth Quarter

Release Date: 
Friday, February 15, 2013

American Advisor host Joe Battaglia provides a wrap-up of the week's precious metals news along with important commentary every week on the American Advisor Week in Review audio program. Click here to listen.

Gold fell this week on positive statements about the economy by Fed Reserve officials and healthier manufacturing data, although global gold demand was shown to be higher in 4Q 2012. Gold was $57.10 lower this week, settling at $1,611.10 per ounce at 2:15 PM Pacific Time at the New York Spot Market close, while silver was $1.79 lower, closing at $29.90 per ounce.

Federal Reserve Chairman Bernanke said the U.S. economy is recovering, easing pressure for more stimulus measures. Manufacturing activity in the New York region also expanded for the first time in seven months, triggering a drop in gold prices on Friday.

The World Gold Council (WGC) reported that gold demand rose 3.8 percent in the fourth quarter as purchases increased in India, which remains the largest gold consuming nation. Global demand rose to 1,195.9 tons during the final quarter of 2012, the largest gain for this period.

“The real driver was the rise in jewelry, and within that you saw India being key” in the fourth quarter, said Marcus Grubb, managing director of investment research at the World Gold Council. “China’s economy is now re- accelerating quite strongly into January and February. Both Indian and Chinese demand will be higher in 2013.”

Central banks increased purchases of gold by 29 percent to 145 tons in the fourth quarter, an eighth successive quarter of net buying, according to the WGC. Nations purchased 534.6 tons of gold reserves last year, 17 percent more than in 2011 and the most since 1964.

Russia has added 570 tons of gold to its reserves in the past decade, 25% more than the next largest acquisition by China, according to the International Monetary Fund. Russia’s policy of gold reserve accumulation is ongoing, helped along by President Putin. Putin told Bank Rossii, the Central Bank of Russia, not to “shy away” from the metal. “After all, they’re called gold and currency reserves for a reason,” Putin said, according to a Kremlin transcript.

With more than five years left in Putin’s term, Russia plans to keep on buying gold. “The pace will be determined by the market,” Bank Rossi First Deputy Chairman Alexei Ulyukayev said. “Whether to speed that up or slow it down is a market decision.” President Putin believes the U.S. has been abusing its dominant position in global trade through the dollar being the world’s primary reserve currency, debasing its value through its quantitative easing programs for advantageous trading and a boost in exports.

“We think that the current rate of net central bank purchasing, driven by emerging countries, is likely to continue to be very strong,” Mr. Grubb noted. “This is very much due to a desire to diversify away from over-reliance from the dollar and the euro.”

Patrick Armstrong, managing partner at Armstrong Investment said, "we think a currency war will be the biggest story of 2013 when we look back on the year." The Eurozone, along with other nations, including Japan and the U.S., have implemented monetary policies which devalue their currencies to help spur economic growth.

Mr. Armstrong believes that the gold market has yet to price in these currency devaluations. "If the yen remains relatively weak, I think other emerging markets, or Asian central banks, should start to become more proactive in managing their exchange rates," Widmer said. "If that happens their FX reserves should start to increase, and then they should start to diversify their U.S. dollar holdings into gold holdings again, which has happened during the past few years.”

James Steel, analyst at HSBC, said, for now, “gold is likely to benefit from tensions stemming from the ongoing currency war, we believe,” Countries are increasingly weakening their currencies to boost exports and stimulate economic growth. HSBC sees the number of participants engaging in foreign-exchange “activism is rising,” which points to policies from countries including Japan and Switzerland to try to ease the strengthening of their currencies.

At the G7 meeting on Tuesday, member nations stated they would not set target exchange rates. Recently, several industrialized nations have allowed their currencies to depreciate to stimulate their economies. In the statement, the G7 said members agreed “that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability” and said members would continue to “consult closely” on exchange markets and cooperate “as appropriate.”

David Morgan, publisher of the Morgan Report, noted, “no one can rock the boat as all currencies sink together into the ocean void. Gold will endure — it always has and it always will.”

Gold rose on Wednesday following news of nuclear activity in North Korea. Investors acquired the traditional safe haven asset on reports of seismic activity in North Korea indicating a nuclear test, according to Sue Trinh, strategist at RBC Capital Markets. The South Korean Defense Ministry said the tremor appeared to be a nuclear test. Later, the South Korean government stated North Korea had advised the U.S. and China of the test in advance.

Howard Wen, a metals analyst at HSBC, said uncertainty over a series of U.S. automatic spending cuts and resurgent physical demand should support gold prices. “Gold may be supported by concerns over the upcoming automatic spending cuts set to begin” on March 1 in the U.S., agreed HSBC analyst James steel.

Michael Widmer, metals strategist at BofA Merrill Lynch Global Research, sees a potential upside of $250-$300 per ounce for gold in the second half of 2013.

Currently, “the gold market is obsessing with technical levels,” said Ross Norman, CEO of Sharps Pixley. However, his firm sees gold potentially rising in 2013.

James Rickards, senior managing director of Tangent Capital Partners, has a long-term gold price estimate of $7,000 an ounce, more than four times the current price of $1,677. Gold could trade in a range between $3,000 and $10,000, Rickards says. “We’re not going to get there all at once.”

UBS analyst Joni Teves commented, "the relationship between gold and equities has ... eased…This suggests that gold's safe-haven properties are currently considered more dominant.”

(Sources: “Gold futures drop by as much as $29 an ounce,” Marketwatch, February 15, 2013; “PRECIOUS-Gold at six-month lows as chart support crumbles,” Reuters, February 15, 2013; “PRECIOUS-Gold heads for biggest weekly drop since December,” Reuters, February 15, 2013;
“Gold Demand Rose 3.8% in Fourth Quarter, Narrowing Annual Drop,” Bloomberg, February 14, 2013; “Gold Council Sees Central Bank Bullion Buying at 48-Year High,” Bloomberg, February 14, 2013; “Gold falls on dollar strength; market mulls demand,” Marketwatch, February 14, 2013; ; “PRECIOUS-Gold drops to 6-week low on euro recession fears,” Reuters, February 14, 2013; “Gold Prices Wobble Near Unchanged, Look To Euro For Support,” Wall Street Journal, February 13, 2013; “PRECIOUS-Gold drops below $1,650, focus shifts to equities,” Reuters, February 13, 2013; “Gold logs slight gain, but stays below $1,650,” Marketwatch, February 13, 2013; “Gold futures steady near $1,650 an ounce,” Marketwatch, February 12, 2013; “Putin Turns Black Gold to Bullion as Russia Outbuys World,” Bloomberg, February 11, 2013; “Putin banking on gold,” Mineweb, February 11, 2011; “Currency War? Here's How to Hedge It With Gold,” CNBC, February 11, 2013; “Gold Falls as Investor Appetite Wanes,” CNBC, February 11, 2013; “Gold hit on worry of possible G-7 currency salvo,” Marketwatch, February 11, 2013; “James Rickards: Global Monetary System Headed for Collapse,” Moneynews, February 6, 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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