What's Driving Gold Higher?
New investors are set to push Gold Prices upwards in 2008...
AS THE END OF 2007 fades into history – and a time when Gold Prices look poised to move through their record high of Jan. 1980 as global financial volatility and uncertainty have never been higher – it is time to look at what’s driving the Gold Market now and what lies ahead in 2008.
There is no doubt that during 2007 the Gold Market evolved from one suffering persistent undermining by global monetary authorities. Over the last 25 years sales and accelerated supply dented its capacity to rise, but those attacks began to fade noticeably last year, as the credibility of gold's replacement – the US Dollar – began to decay visibly. Now the Gold Market has garnered a new respect, if only amongst both private and fund investors rather than official monetary policy makers.
And by funds, we are not referring to the short-term speculators but to long-term holders, primarily of gold Exchange Traded Fund shares. While they do not actually own any gold when they Buy Gold in this way, it is primarily investor demand that will drive the demand for gold in 2008 because of the enviable position it holds, which we describe below.
Add to the above factors the meteoric rise of the oil price, and we saw gold beginning to act as a counter for dropping confidence in the monetary system attracting more investment demand. Such decay was amply described by and ex-Treasury Official in an essay, in which he pre-ambled as follows.
Gold: More than a Crisis of Confidence!
"Many Dollar holders, including central banks and sovereign wealth funds as well as private investors, clearly want to diversify into other currencies. Since foreign Dollar holdings total at least $20,000 billion, even a modest realization of these desires could produce a free fall of the US currency and huge disruptions to markets and the world economy. Fears of such an outcome have risen sharply in both official circles and the markets.
"However, none of the countries into whose currencies the diversification would take place want to receive these inflows. The Eurozone, the UK, Canada, and Australia among others believe that their exchange rates are already substantially overvalued. But China and most of the other Asian countries continue to intervene heavily to keep their currencies from rising significantly. Hence, further large shifts out of the Dollar could indeed push the floating currencies far above their equilibrium levels, generating new imbalances and a possibly severe slowdown in global growth."
This is the atmosphere that has driven investment demand for gold and in turn the Gold Price. We expect that in the year ahead, this climate will deteriorate substantially driving investment demand to new record levels. But let’s be clear about this, we are not talking of a simple rising of investment demand; we believe we will see a large acceleration in that demand taking it well through four figures in tonnage terms as well as in price terms.
At each stage of its growth it will attract bigger players as the liquidity of these shares gives comfort to the larger players. Indeed, the total holdings of such funds are already equal to the holding of the top echelon of Central Bank holdings, even above that of China having moved into the equivalent of seventh place and likely to move into sixth place next year ahead of Switzerland.
We have said in the past that a level of 3,000 tonnes holdings by the Gold ETF's is possible and will attract the biggest players. At the time many thought it was far fetched, but as total holdings by such funds (including the Canadian equivalent) crosses the 860 tonne level, such forecasts are proving more than credible.
Bear in mind that the huge financial power of the mutual and pension fund industries is now able to invest in gold – albeit indirectly and with little or no property rights – these shares. This buying power, and its resulting pressure on the Gold Price, was simply not present before the creation of the gold ETFs. Each day this demand grows as new gold investors come into this market and there is a massive amount out there still to come in.
Mutual funds before the ETF concept were not permitted to hold gold. The nearest they could come to that was to own gold mining shares, along with all their inherent risks. Now this investing power is unleashed, needing only the education that gold is available. It is this power that is becoming the main driving force behind the rise in the Gold Price.
As you can see in the table below, courtesy of Fortis Bank's twice-annual Yellow Book, investment demand only has to exceed 123 tonnes for the year ending 31 Dec. 2007 for the Gold Market to be in deficit. The last week of 2007 saw 17 tonnes added to the ETF gold funds.
We want you to note well supply less demand and the change in de-hedging expected.
The only threat to the power of the gold ETFs in the next two years is that the demand engendered by gold miner de-hedging will slow down to stop in the next year and more. In 2007 it will be 400 tonnes, but in 2008 it could drop as low as 210 tonnes or thereabouts.
The only counter to this demand, apart from investment demand, is the strong chance that Central Banks gold sales will pull back in the face of the much lower level of announced sales. If no new announcements are made, then these sales – if evened out over the remaining years of the agreement – could drop to 250 tonnes, down from nearly 500 tonnes, in the last year of the agreement.
So what’s driving gold? Primarily, investment demand and dropping supply. Please subscribe to GoldForecaster.com for the entire report...