Greeks grabbing gold

 THE financial storms raging around the heads of the Greeks have recently led to a strong increase in people buying gold in that country. Some have even converted all their savings into gold in one form or another. If dealers ask them why, they almost always reply: survival in the midst of our unstable banking system.

However, it’s not only in Greece that the trend is obvious. Elsewhere – including especially China – nervous investors are strengthening their interests in the “eternal” metal. In fact, it’s not only the public that’s doing so but many central banks worldwide are also building up their gold reserves.

However, China is taking the lead. It’s estimated if its buying continues at current levels it will overtake India this year as the world’s leading buyer of the metal. It’s already the largest gold producer, and informed sources say China’s planning to establish its own Fort Knox, where the United States stores the world’s largest supply of monetary gold. But China isn’t only buying its own production to add to the reserves, it’s allegedly currently buying half the world’s new production.

The strong increase in gold buying in China is partly the result of the instability of the world’s monetary system. Apart from the fact that China’s government wants to increase its gold reserves because it wants to diversify away from, especially, the US dollar, it’s also noticeable Chinese investors are worried about the difficulties in getting inflation under control.

China’s rising inflation rate is largely due to the enormous stimulation package of $585bn its government launched about two years ago to halt a downturn in the economy. A spokesperson for the Industrial and Commercial Bank of China (ICBC) has referred to a “voracious appetite” for gold. Since December, the ICBC has – in conjunction with the World Gold Council – offered a savings account supported by physical gold. More than 1m accounts have been opened already, with more than 12t of gold being stored on behalf of these holders.

An inquiry by Forbes magazine into what’s happening with gold led to it concluding there are six reasons why current business in the yellow metal is so positive.

First, there’s no doubt demand is strong. Private investors are expected to continue collecting gold, especially in countries such as China and India, where they have a long tradition of hoarding gold. Over the past decade the demand in China increased by double digits every year and it’s expected to again climb by 10% to 15% this year.

Second, high inflation is a threat. The US Federal Reserve’s decision to dump “tons” of new money into the financial system is likely to cause an inflation spike and seriously devalue the greenback. If that in fact happens, investors will ‘‘sprint’’ to gold, forcing its price through the roof. Third is the weakening US dollar. Investors have always seen gold as a hedge against the falling dollar and there’s no reason why things should be any different this time.

Fourth is the uncertainty about stock markets. Technically, there are warning signs. And with negative forecasts by world-famous economists such as Nouriel Roubini, the possibility of another financial crisis isn’t far from investors’ thoughts. Fifth, central banks are buying gold to try to limit their dependence on the greenback. Ten years ago the same banks were selling gold. Now they’re buying it back, which should be interpreted as a bullish signal for the metal.

Last, overall indications are that the US dollar gold price will continue to increase. London consultant GFMS forecasts a price of $1,620/oz for 2011 but Deutsche Bank and many investors believe the price could reach $2,000/oz this year.

Whether that happens or not isn’t so important. What is important is the expectation in informed circles that gold will this year achieve further record levels. Because the underlying reasons for people’s fear about the future – such as the enormous debt levels of so many countries – are still far from resolved.

George Soros regards gold as the ultimate bubble and it’s well known he’s closed his positions in exchange-traded funds. Admittedly, Soros invested in gold shares. However, in SA gold shares are still struggling. The general feeling is the JSE’s gold division will only come into its own when the rand weakens.

Other leading world players, such as Warren Buffett, are also everything but pro gold. However, Buffett makes no secret of the fact that he’s negative towards the US dollar. And the greenback falling southward has always been good for gold.

- Finweek