Balsam für die Seele in solch schwerer Stunde
Gruß
Diogenes ;-)


Gold demand report has intriguing evidence for a rally

NEW YORK -- The World Gold Council, a marketing organization funded by miners, says in its latest report that gold demand has set new records. The increase was achieved despite a steeply declining dollar price for the yellow metal.

Most of the gains came from jewellery consumption that showed strong quarterly sequential growth of 5 per cent with a year-on-year increase of 4 per cent to 2,902 tonnes. Total demand in 2000 was 3,281 tonnes. In the fourth quarter, demand in 27 major markets amounted to 894 tonnes, up an anomalous 11 per cent from a year earlier.

Unfortunately, jewellery demand is not a significant price driver and much needed investment demand remains subdued. Y2K fears spawned considerable private buying in 1999, but that metal, mostly in new coin form, appears to have made its way back to the market at second-hand prices. Notwithstanding the Nasdaq tech-wreck, gold could also not attract investors away from traditional securities leaving demand muted.

The WGC is betting on further demand improvements next year after doubling its membership fees to $2 per ounce of production for a new record budget of $55 million. That money will be spent on promoting gold, mostly via an extensive rebranding exercise that will no doubt bear some affinity with the increasingly successful marketing of platinum and diamonds.

It was a curious year for the gold market, principally because the strong dollar depressed buying in traditional markets. Local currency prices in the major consumer markets have soared which belie the apparent lack of responsiveness to a dollar gold price not much different, in real terms, to Franklin Roosevelt's $35 per ounce edict.

India, the biggest market by some margin, continues to grow and George Milling-Stanley of the WGC confirmed that the earthquake which knocked out some western cities will not adversely affect the market this year. Alternative import routes are already operating, mainly through Delhi and Jaipur. Besides, the primary production and consumption centres are further south."A huge human tragedy, but this will not be a disaster for the Indian industry," Milling-Stanley adds.

Demand stimulus
The improved demand is, in the circumstances, encouraging but points to a continued lack of meaningful stimulus - the absence of a severe erosion of confidence in the US economy and the integrity of its currency. In such an event, demand may still languish because of diminished purchasing power not just in America, but also in all the countries caught in the turbulence of its contraction that will be broadcast worldwide.

The best-case scenario remains a soft-landing in the US where further interest rate cuts will reduce the holding cost of gold whilst at the same time making the dollar less competitive. Unfortunately that will raise the earnings prospects of equities generally leaving gold shares with no brighter prospects than before. A higher gold price, whether by stealthy readjustment or apocalypse remains the key.

In its assessment of the entire year, the WGC report highlights the impact of producer hedging on the gold price, albeit in a subtle and understated manner. The analysis makes it clear that the gold price responds favourably and with vigour every time producers report a reduction of hedging activity. Producer hedging activity has evidently declined substantially and shareholder pressure in the wake of the Ashanti and Cambior meltdowns has resulted in books being restructured with a heavy bias toward puts rather than calls.

Add to the mix shrinking supplies (2,500t) of new gold against increasing demand (3,500t) and you have a market undergoing a slow, steady return to balance. Current deficits are being made up with scrap and official sales, but they do not represent an indefinite supply and it's exacerbated by a virtual cessation of exploration activity. At the current rate of supply reduction the world may become entirely dependent on above-ground stocks as soon as 2010-12.

Central banks have not abandoned gold
Official holding data is perhaps the most interesting of all. Much press has been devoted to sales by central banks, but the WGC figures do not bear out the sentiment of the most cataclysmic headlines.

Central banks still have a cautious affinity for gold if you consider that official holdings are higher than they were three years ago. It is no less instructive that official holdings ebb and flow with the health of the global economy. The Asian meltdowns of 1997 and 1998 sparked buying and after some load lightening in 1999, the holdings have been surprisingly stable. The monetarists appear to be hedging their bets and the WGC report reinforces the fact that no irreparable harm has been done to official reserve allocations vis-à-vis gold. At least not according to the published reports that governments pass on to voters.

The only truly significant sellers have been international financial institutions. Even then it is not nearly as dire as we've been led to believe. After selling gold stocks heavily to help recapitalize Russia and other countries affected by emerging market contagion, institutions wasted no time replenishing stocks and are holding steady at 134 million ounces. Total official holdings have only decreased 2.3 per cent since 1997 leaving a billion ounces on the books. How much of that is actually under lock and key in the form of fine gold rather than IOUs is the vexing question. it will only be answered when edgy politicians begin to ask uncomfortable questions about the ability of banks to present the gold for inspection.

Hedging is not the scourge
Hedging does contribute to oversupply, but reality is probably being overshadowed by deeply entrenched pessimism. In an environment of put options and industry consolidation, hedging is perhaps nothing more or less than a mild seasoning for a chronic condition of oversupply which may itself be exaggerated.

What is not getting much serious attention - outside of conspiracy circles - is the short position, said to exceed 10,000 tonnes (four years of production or one third of all official book holdings) that is irretrievable. The short position has built up as a result of central bank gold loans where the metal remains on the books but which has in reality been consumed and is not readily available to be returned. This has created an effective"double-claim" on every ounce lent. Where speculative derivatives are layered on top of this paper gold, the double claim can multiply logarithmically. This is the heart of the excess supply problem.

The short position has been easy to manufacture and keep puffing up, but cannot be deflate without violence.

The central banks appear, on paper, to be in a position to cover the short position in an emergency, but the fact is a large portion of the holdings are entirely notional and paper committments written over long exited metal probably exceeds liquid supplies many, many times over. Milling Stanley agrees that current gold reporting is a Sword of Damocles."We would like to see [official] gold holdings qualitatively separated." A recent WGC commissioned study by Jessica Cross concluded that the central banks have lent at least 5,000 tonnes which is still reported as"on hand" when it should be accounted for as gold receivables.

In an outstanding commentary on the subject by Douglas Pollitt, of his namesake Toronto broking firm, he says:"An ever-larger supply of lent gold is needed to fill the widening supply-demand gap and to ensure that the market remains depressed and investors remain disinclined to call in existing gold loans."

He highlights three conditions that could turn a"tinderbox" market into a raging gold inferno - a drought of official sector lending; faster reductions of new supply; and US dollar instability. One is sufficient for ignition, three would cause a wildfire that turns 1980 into an amateur stage production.

There's no middle ground in the debate on gold, but Pollitt leaves the sage advice for last."Precious metal companies are...valued like options on the gold price, like portfolio insurance. Be positioned or be left out."

Milling Stanley says it another, more eloquent way:"When it's midnight, do you know where your gold is?"

By: Tim Wood



<center>

<HR>

</center>