how high will gold go?, page-5

Nice debate Gents, keep it going. My opinion is largely captured in the following article in the "Gulf Times" yesterday. Hope this adds some further value and depth to the debate.

Cheers and enjoy your evening.
Zackman (bloody hot in Emerald (QLD) today)


Hedge funds betting Asia will boost gold reserves Published: Gulf Times Newspaper, 2005. Wednesday, 30 November, 2005, 12:34 PM Doha Time

By Rajat Bhattacharya

SINGAPORE: Hedge funds, after pushing gold prices to 18-year highs, are looking to China and other Asian central banks as the next big drivers of the metal.

This month Russia, Argentina and South Africa decided to increase the amount of gold in their reserves, reversing a six-year trend of central bank sales, mainly from Europe.

That helped push gold prices above $500 an ounce on Tuesday, the highest price since 1987 and double levels seen in 2001.

Hedge fund manager Juerg Kiener said it was now only a matter of time before Asian central banks follow suit and diversify more of their $2.6tn in foreign reserves holdings into gold to hedge against what he sees as an inevitable decline in the dollar.

Just a hint of Asian central bank buying would set the gold market on fire, said Philip Klapwijk, chairman of London-based consultancy GFMS Ltd. and a director of the Global Precious Metals Fund.

“That’s going to be explosive,” he said.

Diversification would be slow as central banks tried to keep their gold buying under wraps, Klapwijk said, but these authorities have little choice but to hedge their dollar assets by buying more gold.

“Basically it is all about protecting your purchasing power,” Kiener, who heads hedge fund Swiss Asia Capital, said. With record budget deficits in several G7 countries, central banks are “printing money” and devaluing the purchasing power of their currencies.

“Gold is the only monetary asset class which will protect investors,” Singapore-based Kiener said.

For centuries, gold has served as a haven in times of crisis. It is seen as the ultimate hedge against inflation and rose in value during a period of US deflation in the 1930s.

Dollar-denominated gold has historically risen as the US currency fell, making it an ideal hedge against a dollar decline.

Kiener says the world is entering a phase of high inflation and low growth – or “stagflation”.

That makes gold attractive for central banks now, given the uncertainties of high commodity prices, the US-led war on terror and concerns about rising international trade barriers.

“Low bond yields in major currencies and low spreads on developing-country debt suggest that credit risks are not fairly priced,” Klapwijk told a Singapore conference last week.

Supplies of most resources, including crude oil and metals, are increasingly falling short of demand while political uncertainties following the September 2001 attacks on the United States have dampened the global investment climate in the mining sector.

Kiener says the US Federal Reserve and other central banks want to continue to print money and keep inflation-adjusted interest rates low so that consumption continues to boom as long as possible on the feel-good factor of low interest rates.

But high budget deficits and debt levels in the United States, Japan and Europe will eventually force a correction through a surge in real interest rates, Klapwijk said.

That means slowing economic growth, falling stock, bond and property prices and accelerating inflation – an ideal mix to trigger gold buying. Analysts said the case for Asian central banks to buy more gold was compelling, since the metal makes up a significantly smaller share of their foreign reserves compared with central banks of developed countries.

Asian citizens are the world’s biggest gold buyers, but the metal is 1.1% of China’s official reserves, 1.3% of Japan’s reserves and 3.6% of India’s, the World Gold Council said in September.

That compared with a 63.8% share in the United States and more than 50% in Germany, France and Italy.

“Because of all the volatilities in major currencies it may not be proper for Asia to diversify into the euro,” said Thomas Lam, treasury economist at United Overseas Bank in Singapore.

“At the same time they do not want to pile up more dollars. One way is to put some reserves into gold.”

But, Asian central banks will have to co-ordinate such a move, he said, because separate moves to diversify into gold could cause sharp currency fluctuations, damaging their economies. Asia is unlikely to cut its US Treasury holdings in haste as such a move would be suicidal by leading to a dollar slump, said Kiener.

Asian central banks would rather devalue the dollar holdings over several years and meanwhile look for alternative investments which offset the losses on the dollar holdings, he said.

“If am a banker, I’d like my clients to pay as long as possible and as much as possible.

“Asia will write down the assets over a long time with higher interest rates in order to protect the risks. In addition they will diversify into other assets in order to make up for the losses. Gold is the central banks’ and people’s answer.” – Reuters

Link:
http://www.gulf-times.com/site/topics/article.asp?cu_no=2&item_no=62716&version=1&template_id=46&parent_id=26