by Michael Fuljenz –
Part of the cause for the metals’ rapid rise in early 2012 is a recent decline in the dollar, pushing up the price of nearly all commodities. Gold reached a new four-month high and silver and platinum have outperformed gold so far. Impala Holdings of South Africa (which produces 25 percent of the world’s platinum) warned its customers that deliveries could be cut in half by April, due to a strike at their largest platinum mine at Rustenberg.
Reason 1: China-India-Asia demand.
China and India are the top two gold consumers in the world. Vietnam buys more gold per person than either China or India. New gold interest is rising in Japan.
Gold buying in China is soaring at a record pace. Hong Kong shipments of gold to mainland China more than tripled in 2011 over the year before. The ravenous Chinese appetite for gold is driven in part by rising personal wealth allowing the Chinese to indulge their cultural passion for gold. A new wrinkle, though, is inflation. Chinese investors have been buying gold as an inflation hedge. And if the inflation rate heats, the gold rush in China could be a game-changer for gold.
Reason 2: European sovereign debt crisis.
All eyes have been on Europe, and Greece in particular, as negotiations dragged on for a deal to keep Greece from defaulting on its debt in March. An 11th-hour deal was hashed out. Some critics say the deal will actually only make things worse for Greece and ensure a default down the road. In the meantime, the debt problems keep simmering in the rest of the PIIGS (Portugal, Italy, Ireland, Greece, Spain) countries. This is a pot full of possible game-changers for gold.
Overshadowed by the preoccupation with Europe’s debt problems, other developed countries have severe debt problems resulting in credit rating downgrades.
Reason 3: Central bank buying.
Central banks, once the bane of gold bugs as they dumped their gold on the markets, now have become major buyers in the gold market. Starting in 2010, central banks became net buyers of gold, and the pace has picked up dramatically since then. Central bank gold buying soared 470 percent in 2011, according to the World Gold Council.
The official sector gold rush has been especially pronounced in emerging markets as shrinking confidence in the U.S. dollar as the world reserve currency prompts governments to seek refuge in gold. Russia has openly and steadily been converting its dollars to gold. China is believed to be working to reduce its huge exposure to U.S. debt, in part by converting to gold.
Reason 4: Growing demand, static supply.
Physical and investment demand for gold in China and India gets huge support from investment demand in the West through ETFs – exchange traded funds.
Malcolm Gissen, co-manager of The Encompass Fund, wrote in a guest piece for Forbes: “ETFs, ETFs, ETFs. During this time of unceasing financial crises, ETFs have made it easier for investors to shield themselves with investments in gold. With gold ETF’s expanding to other parts of the world, the demand for gold as an investment should only increase.”
Even as demand soars, supply remains flat as all the high-yield deposits have been mined out. Lower ore grade means higher cost of production because more ore has to be processed to get the same gold yield as higher grades. “It’s more difficult to find large gold deposits and increasingly challenging to bring remaining stores out of the ground. The process of obtaining mining permits is difficult and time-consuming. The costs of building a mine and getting into production have soared to the point where capital expenditures of $3 and $5 billion are not unheard of. In addition, it can take up to 10 years from the initial discovery of gold to get a gold mine into production,” wrote Gissen.
The game-changer for gold here is a one-two punch of exploding investment demand caused by another financial shockwave (no shortage of possibilities), and a decline in mining production.
Reason 5: Geopolitical crises.
Geopolitical cataclysms generally change the game dramatically for gold, the traditional safe haven for wealth in times of major worry and uncertainty. The world is full of boiling trouble spots.
The most imminent and probable major geopolitical crisis on the front burner at the moment is possible war with Iran. Israel and Iran have both threatened pre-emptive strikes against the other in recent days. U.S. Defense Secretary Leon Panetta said that these strikes could come as early as spring. When it does, it’s game on for gold.
Mike Fuljenz is the editor of the Numismatic Literary Guild (NLG) award winning “Micheal Fuljenz Metals Market Weekly Report,” and the numismatic consultant for First Fidelity Reserve. His award winning radio show can be heard on KLVI News Talk AM 560 from 6 p.m. t 7 p.m. CST on the last Monday of the month.