Investors
in gold saw prices plunge below the cost of production in November. For producers in the United States this averages $1200 USD (United States Dollar) per ounce from extraction, to the metal sold at the exchanges. Prices are now back above this benchmark. This was the result from a series of news events, as well as the market forces that will increasingly come into play beginning in 2015. The charade of paper gold is nearing the end of its viability. Consumers of gold from individual investors all the way to central bankers, are no longer content to believe that holdings are safe somewhere else. The big international movement in 2015, will be the decision to go from holding paper gold to physical possession. Globally,central banks have been net purchasers of gold since 2010.
Gold has dropped precipitously over the last few months only because the United States dollar is at a 5 year high when compared to the top ten world currencies. Demand especially from China, India and Russia will prevent gold from going below $1100 USD. This is because the lower price will spike demand even higher in these countries and elsewhere.
Shuttered Gold Mine
However, there are many analysts that continue to insist that gold will drop to below $1000 USD and keep dropping to perhaps $800 to $700 USD. They base this on the belief that oil prices will keep dropping, the American economy will keep growing, and the US dollar will keep surging. One factor they seem to neglect to consider is production. At those depressed prices a number of gold companies will either cease production or shutter the least productive mines. Already 7 out of the leading 19 gold companies were operating below the cost of production in early November, when prices were as low as $1,100 USD. Two additional companies were within $50 USD of their break even point. Obviously, as the international supply of gold dwindles, it will naturally provide a floor to further drops in price.
It is true that investors in gold backed exchange products (paper gold), have cut back investments by 38% in the last 2 years.
Although the referendum held in Switzerland to force the central bank to keep a portion of their foreign exchange reserves (20%) in gold failed, that it took place at all shows the lack of confidence in the way gold is bought and sold. The central bank of Switzerland will now be under pressure to cease further sales of national gold reserves.
In India the country that was the largest buyer of gold in 2013, the government has announced the lifting of one of the restrictions placed on gold imports. The regulation being waived is the 20:80 rule. That is that importers of gold had to re-export 20% of the gold purchased from abroad. This particular construct was designed to help deal with the deficit in the current accounts that India is experiencing. That the ordinance was suspended, shows the influence gold traders are having on the Indian government. It also indicates that there are sufficient numbers of people within the government who may now reason, that having more gold within the boundaries of the country is a good thing.
Where Gold Reserves Are Being Held
Last month the Central Bank of the Netherlands, without fanfare moved 20% of their total holdings of 612.5 metric tons from the Federal Reserve Bank in New York back to their own country. When it became public, the central bank simply stated that they were following what other countries were doing. That is starting a repatriation of their own gold reserves. Why not bring all the gold back home? Well as this writer explained in a previous article, it is no longer all there. Out of a stated inventory of some 7,000 metric tons that was supposedly being held at the Federal Reserve Bank of New York, there was less than 500 tons on site, when an audit was finally conducted.
France is soon likely to join the ranks of those countries that want to bring gold home. As Germany has pulled all of its gold reserves from French control, it will be replaced with the repatriation of their own gold. The National Front, the largest opposition party in the country is not only calling for a return of all French gold being held overseas, but insists an audit of those reserves has now become necessary.
They are not alone in Europe. As mentioned in several previous articles, Germany as the country with the second largest official gold reserves in the world at 3,000 tons, has begun the process of bringing their reserves home. It is not yet fully possible as the Federal Reserve Bank in New York no longer has as part of its inventory all the gold owed to the Germans.
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The ECB (European Central Bank) has begun public discussions of future purchases of gold. This would not only help support the value of the Euro, but would provide an increase in tangible assets held by the bank. This action indicates the declining confidence, that the bank has for paper currency reserves alone.
Russia in 2014, is rapidly becoming the largest international purchaser of gold. In October alone, the Russia Central Bank bought nearly 20 metric tons. This was close to 8% of the entire monthly world mining production of gold. From the period of July through September, Russia accounted for 59% of total gold purchases made by central banks worldwide. Despite the economic downturn and the 40% decline in the ruble caused by declining oil prices as well as Western sanctions, the country still possesses in excess of $428 billion USD in foreign currency reserves. The gold purchases this year put the total foreign exchange reserves invested in gold at 10.5%, up from 8.5% a year ago. Therefore, Russia if it is inclined to do so, will be able to continue to purchase large quantities of gold. As to be expected, the government there is not totally forthcoming, about the amount being purchased or accumulated by central authorities.
Gold Prices In The United States
In the United States, state recognition of using gold as being legally tender is gaining impetus. Louisiana, Oklahoma, Texas and Utah all passed legislation to make this a reality. They have also removed state taxes on transactions made with gold and silver coins.
China is still the largest purchaser of gold if you consider that they buy all the domestic gold produced in addition to rather large imports. China remains the largest producer of gold (428 tons in 2013), and often the largest importer as well, at an estimated (1,158 tons). Chinese demand is expected to grow another 20% over the next 3 years. Chinese consumers alone purchased a record of 1,066 tons of gold in 2013. What helps keep international gold prices lower is that China continues to be secretive about many of the government purchases made and the amount that is being accumulated.
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There is at least 500 tons of gold that is unaccounted for in the international market. They may well be the largest holder of gold in the world already. Although China officially, still claims that their Central Bank only holds somewhere in excess of 1000 tons the same as reported in 2009. This would account for less than 1% of their total foreign exchange reserves. If you would believe the Chinese government that would place China in 7th place in total gold holdings. This would be after in numerical order the United States (8,134 tons) Germany (3,387) the IMF (International Monetary Fund) (2,814), Italy (2,452), France (2,435) and Russia (1,104) . That is totally nonsensical at this point. This writer estimates that total Chinese government holdings are nearing 10,000 tons of gold, putting the country in 1st place with the United States in the supposedly 2nd place position.
As stated previously in a number of other articles, this writer does not believe that the United States government still has the amount of gold that is being claimed. There has been no audit or accountability of gold reserves in the United States for years. The inventory supposedly being held at Fort Knox could well be a myth, much like what ended up being the case at the New York Federal Reserve Bank. Once an official audit was conducted there, it was discovered that more than 90% of the inventory had disappeared. Thousands of tons of gold owned by central banks around the world were gone. Events like these do not inspire confidence in the financial and banking institutions of the world.
Any disturbance in the international economy of a major proportion will send gold prices surging. A disruption in oil supplies, a number of government debt defaults, or a plunge in global stock markets, will send investors rushing to gold, as a safe haven of value. A Black Swan Event that is something that will happen unexpectedly, will become far more likely in 2015 and 2016.