Tuesday, January 3, 2012

>Gold price may rise after the fall in 2012 – China’s Precious Metals Industry Report in 2012 (PHILLIP CAPITAL)

Precious Metals prices have spiraled up in 2011

Looking back to 2011, international gold price has kept spiraling up with three stages. First, gold price increased 5.5% in 1H11 from US$1421.55/Oz at the end of 2010 to about US$1500/Oz in late June, which is mainly attributable to the USD depreciated for the QE2 and worsening European sovereign debt crisis. Second, as we expected in 2H11 report, gold price had speeded up since July and recorded a new high of US$1920.38/Oz, because the rating for the U.S. was downgraded and European sovereign debt crisis spread to core economies. Last, gold price has plumped since September and the trend has gone down to the end of this year, when the price has fallen down US$1600. In sum, gold price has advanced around 8% in the whole year.

In our view, recent decline has been mainly caused by the tightening liquidity for the Sovereign debt crisis. According to LBMA, the gold lease rate stands at the low level compared to that in past ten years. While the US dollar is in shortage, banks may borrow the dollar but lend their gold, then the gold lease volume ramped temporarily, so the gold supply becomes bigger, which let the lease rate hit maintain low. Therefore, the hedging attribute of the gold is ignored temporarily.

Gold price may rise after the fall in 2012

■ Tightening or loosening monetary policies?
Flooded liquidity has been the main reason for the bullish gold since 2000. Within ten years, major economies like the US and China has printed money as much as or more than that printed in previous decades or hundreds of years. When economic growth slows down or even falls into depression because of the European sovereign debt crisis, major economies have begun loosening their monetary policies. For example, Brazil, Australia and the ECB have adjusted downwards the benchmark interest rate, other smaller economies like Indonesia have even cut down the rate more often. Moreover, because of the high inflation, many economies have fallen into negative real interest, so the opportunity cost for gold is very low. Historically, easing monetary policies normally benefited the gold price. 

■ Investment demand keeps growing
The world has suffered consecutive economic and financial crisis in past years and faced more aggravated social turmoil, the investment demand for gold becomes a main cause for its bullish trend. From 2000 to 2010, the proportion of the demand has risen from 5% to nearly 40%. In 3Q11, global total demand for gold reached 1053.9 tons, with the increase of 6%, among which the investment demand even rose 33% to 468.1 tons and accounted for nearly 50%. Apparently, the demand structure of gold has changed materially and the investment demand has become the important or even the major factor.

■ Reserve demand is enlarging
It is well known that international central banks’ transferring from net seller to net buyer is also the main reason of higher gold price in past two years. Nowadays international monetary system is virtually the dollar standard system, meanwhile the euro, the pound sterling, Japanese Yen and others also help building up the structure. The foundation of the system lies in the firm and long-term trust on main international currencies by countries with non-international currency. Once significant change turns out in major countries, other economies maybe adjust their financial assets. Especially when the basis for the whole system is vacillated like the breakdown of the Bretton Woods System and the dollar crisis, the hedging tools including the gold may become the main choice of assets adjustment.

To read the full report: GOLD