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The Wikileaks/Financial Times
revelations on significant gold buying interest in the Middle East —
notably Iran’s central bank, Jordan’s central bank and
Qatar’s sovereign wealth fund — brought to mind the story of King Ibn Saud and his sale of oil concessions to the major oil
companies. In payment he received 35,000 British sovereigns — a coin
many of you hold in your own sovereign wealth funds. The good king understood
the difference between the value of gold and the value of a paper promise.
At the time (1933), the British sovereign’s
value stood at $8.24 each, or $288,365 for the lot. The price of oil was about
85¢ a barrel, and a British sovereign could buy about ten barrels.
Today those same sovereigns would bring a little less
than $12 million at melt value ($338.00 each) and a barrel of oil is selling
for about $115. Thus, a British sovereign can buy a little under three barrels
of oil — a statistic which gives you an inkling of gold’s current
undervaluation.
For gold to buy the same amount of oil now that it
did in 1933, the price would have to go to nearly $5000 per ounce — an
interesting calculation for those who think gold is overvalued and in a
bubble.
In the gold market where there’s smoke,
there’s fire. If members within one class of investors — e.g.,
central banks, sovereign wealth funds or hedge funds — you can be
assured that other members of that same group are similarly involved. Recent
activity within the hedge fund industry with respect to gold is exemplary. It
follows then that if Iran, Qatar and Jordan — themselves threatened by
the popular Pan-Arabic uprisings — are acting on their interest in gold,
can Saudi Arabia, the United Arab Emirates and Kuwait be far behind?
If so, they will join several nation states and a
bevy of hedge and sovereign wealth funds in the pursuit. The problem they will
encounter is an old one. There simply is not enough physical gold available at
any given point in time to satisfy the needs of any one of these major
players, let alone all of them. All of this, of course, will resolve itself in
the price for which the metal sells.
I note with interest that Barclays Bank — one
of the five members of the London Gold Fix and an institution well-situated to
experience first-hand the interest in physical metal — has predicted a
top price for 2011 of $1620 per ounce. Predictions by other Fix members are
equally bullish. Scotia-Mocatta predicts a high
range of $1500 to $1600 with a possibility of a spike higher. Deutsche Bank is
predicting $1511 per ounce for 2011 and $2000 per ounce for 2012. Both Societe General and HSBC, the two remaining members, are
calling for a top-end price of $1550 per ounce. These bullion banks are in a
better position than most to ascertain the sources of physical demand, and
they know better than anyone the extent of global interest among key players.
By the way Goldman Sachs, though not a member of the Fix, is still widely
monitored for its opinion on gold. It has set a price objective of $1690 per
ounce for 2011.
Michael J. Kosares
USAGold - Centennial
Precious Metals, Inc.
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