The whole world is talking about gold

This is our third release from The Real Asset Report. Here we take a look at how, despite calls that the gold bubble is finished, the whole world is still talking about buying gold.

Read any financial paper or website and they’ll tell you that the ‘gold-bubble’ is over. This opinion appears to be based solely on price and not much else.

When you look at short-term price action on its own then perhaps you can understand how they’ve reached this conclusion. Gold, across many countries, is down since the beginning of the year and many are expecting a weak 2^nd quarter.

The recent fall in the gold price seems to have been attributed to two things – manipulation and investors turning to riskier investments as they regain optimism over the US and Euro recovery.

Bubbles, central banks and gold

For us though, this isn’t enough to predict the end of the gold bubble. As you can see from our infographic everywhere has an interest in gold, whether it’s the central banks who are stocking up on it or it is citizens who are buying up record amounts. We see little evidence of gold chatter declining, if anything it’s increasing – particularly when it comes to central banks.

There are at least 97[1] countries that don’t seem too bothered about the fall in the gold price. Instead, they’re looking at its value, which has held over thousands of years. Whatever continent and country you look to there is something to be said about gold and a clear respect for its long legacy as money and a store of value.

Much of the gold chatter we find around the world appears to be over central bank purchases and their moves away from holding reserve currencies such as the dollar and the euro. This is an expression of the falling faith in devalued fiat sovereign currencies, and instead a move into something of value.

Bring that gold back!

Whilst we all heard about Germany’s gold repatriation[2], you might have missed the statement from the Ghanaian government expressing concerns over their own gold held abroad in foreign central banks.  Romania is also looking for their gold back, 93 tonnes which were sent to Russia during WWII for ‘safe-keeping’[3].

The best kept repatriation secret is in Azerbaijan where they are in the process of repatriating 330kg per week from London and have plans to increase gold reserves to 30 tonnes in 2013[4].

In countries where repatriation hasn’t been mentioned politically, the electorate is certainly pushing for it; Switzerland, Romania, Australia and Holland to name just a few.

• In Holland, only 10% of gold reserves are held in Amsterdam. The Dutch CDA party has requested that Holland’s gold supply be repatriated.
• Whilst, in a slightly worse situation in Australia, they hold 99.9%[5] of gold reserves in the Bank of England.
• Despite the Queen’s visit to the Bank of England, questions of the existence of Ireland’s gold (96% of reserves are held between there and the US) have recently come to the fore[6].

South America’s buying gold

South America is particularly loud in this gold conversation.

Venezuela of course famously repatriated 160 tonnes of gold last year and they nationalized all gold mining activities in 2011. Last year many were surprised to read Paraguay had increased their gold reserves from a few thousand ounces to over 8 tonnes in one year. And did you hear that Brazil increased their gold reserves by over 90% last year?

In a similar strand of thought to their neighbours, Bolivia are also looking to stock up their central bank coffers with gold. In 2012, a law was passed which will see the central bank buy locally mined gold – they are estimated to start at 2 tonnes per year[7].  Late last year Ecuador was reported to have demanded the repatriation of one third of their foreign gold holdings ‘to support national growth’[8].

America’s history comes back to bite?

One central bank story which seemed to surprise many last year was Iraq’s gold purchases. For the first time in years they bought gold, and not just in a small way: they quadrupled their reserves[9]. The ultimate insult to the US and their dollar no doubt.

Russia, as most will have heard, are working hard to build up their gold reserves, official statistics show it was the largest gold buyer in the last decade, adding 570 tonnes. At investor level jewellery purchases, the most common form of private gold investment, have increased by 8.7% per annum since 2002 according to the World Gold Council. You can read more about our thoughts on Russia’s gold here.

Not far away from Iraq, Lebanon steadfastly refuses to sell its gold reserves, despite its high debt-to-GDP ratio. The country holds the largest gold reserve in the Middle East and North Africa. Gold reserve sales with Cabinet or Parliament’s approval are banned[10].

Where individuals buy gold too

It’s not all about central banks and repatriation though, in some states of countries the use of gold and silver money is already up and running, we all know about Utah but what about the Malaysian states of Kelantan and Perak? Like in India and Vietnam where jewellery is seen as a store of wealth, these states are recognising the value in using gold and silver as money.  As they use gold and silver coins as a potential replacement for the federally issued legal tender.

Individuals should also not be ignored in the global conversation on gold. In Bahrain, a survey has shown that over 80% of people consider gold to be a safe investment option[11]. In Egypt, where the pound has fallen by 54%, a significant increase in gold jewellery demand was seen in Q4 last year.

Bahrain’s own neighbour, Qatar, has expressed interest in diversifying foreign assets away from the US dollar. They are rumoured to be increasing gold reserves at a faster rate than official data shows.

Often concerns over government controls when it comes to gold ownership and purchasing are expressed by people looking to buy gold. In some countries this is a very real worry. In Argentina the purchase of certified 99.99% pure gold was banned in July 2012. As a result, demand for 99.96% gold is reported to be high as inflation and currency controls climb[12].

In India, households are believed to hold 20,000 tonnes of gold, not counting religious institutions and trusts. Despite government levies on gold and therefore increased prices, at the moment gold buying remains strong.

Governments encourage gold ownership

In other countries gold ownership is increasingly becoming easier as the government find new ways to help citizens invest in gold. In Mauritius the central bank began selling minted gold bars in 2012 to the public, in a bid to promote a savings culture in the country.

In Turkey, the government banks have worked hard to encourage gold savings to come out of homes and into accounts. Many have referred to this as a form of gold confiscation. The World Gold Council estimates private gold holdings amount to 5,000 tonnes. Gold is not only used by citizens, the country has bypassed US sanctions on Iran by exchanging oil for gold.

Nearby in Syria, all custom duties and storage, insurance and administrative costs placed on gold imports have been removed in a desperate bid to get hard money into the country[13].

Gold savings, as encouraged by the government, are no more prevalent than in China, where official gold imports doubled in 2012. The central bank’s own gold reserves are suspected to be 2,000-3,000 tonnes higher than official data. Between 2011-2012 China bought more than 2 tonnes from North Korea[14].

Buying their own gold

China isn’t the only country who buys up all of their mined gold, Kazakhstan plans to buy up the country’s entire gold bullion output until at least 2014-15. But they still can’t get a hold of the yellow stuff quick enough; they increased reserves for four months running in January in a bid to reduce their US dollar exposure[15]. Their neighbours, Kyrgyzstan, (officially the Kyrgyz Republic) have also been replacing US dollars with gold, up until as recently as February this year. Over to the east, in Mongolia, gold reserves are currently at their highest levels since 2008.

Whispers in the West

In some countries, mainly in the West, the gold chatter is barely a whisper thanks to central banks showing little regard for safe havens. Canada now holds just 3 tonnes compared with 1,023 tons in 1965, its lowest amount in 79 years[16]. But it’s not all down to central banks; in France (where they really should be paying attention to their savings) they saw the biggest percentage drop in gold investment in 2012 of all countries assessed by the World Gold Council.

Gold and the Eurozone

Speaking of troubled Eurozone countries, 52% of Italians believe the gold should be used as collateral – telling given the enormous amount of lending conducted outside of the banks. Given that a majority of the small loan market in Italy is P2P (individuals, families and groups), this is telling. Only 4% believe it should be sold completely[17].

Some countries don’t have much choice as to where their gold goes, Cyprus, it was revealed this week[18], have ‘agreed’ to sell ‘excess gold reserves’ in order to raise around €400 million to help finance it bailout. Aside from realising the precedent this will lead for future Eurozone bailouts, our first question was, ‘who has excess gold?’

In Spain, the central bank has shown little regard for their gold reserves in the last decade or so, the gold vaults have seen the highest depletion of gold reserves of any other country between 2005-2010.

Portugal has impressively high reserves given its size of population and economy, and they’re steadfastly protecting them despite the World Gold Council’s suggestion the European Parliament push for Portugal to be allowed to offer gold as collateral for sovereign debt issuance. They have no doubt learnt some harsh lessons about gold after the central bank famously never recovered the 17 tonnes of gold lent to Drexel Bank in 1990[19].

Protection from devaluation

As you can see from our gold bug survey infographic, the majority of those surveyed believe the Japanese Yen will be the most devalued currency in 2013. Late last year we saw Japanese pension funds had similar concerns and are now investing in gold to mitigate risks from increased QE.

So, is the gold conversation over?

As much as many Western governments would like gold to disappear and for faith in the US dollar and Euro to be restored, actions by both governments and their citizenry suggest that this won’t be happening too soon.

As the central banks in the West, with the support of international financial institutions, fight their flawed hands in the currency wars, the rest of the world is preparing for the aftermath and for better money.
Want to see more on global gold investment trends? Visit our gold infographics section?

Please Note: Information published here is provided to aid your thinking and investment decisions, not lead them. You should independently decide the best place for your money, and any investment decision you make is done so at your own risk. Data included here within may already be out of date.