GOLD: Production, Supply and the Demand
by Larry Myles

March, 2008

In response to the many readers who have asked me: When will the gold bubble burst?

I guess the quick and dirty answer is - the gold bubble will burst when gold soars straight up from $2,500 an ounce to $4,000 an ounce and everyone you know �is in�.  Coffee bar chatter, cocktail party natterings, cab drivers, everyone bending your ear � all asking the same question, �when will gold break $5,000!

In other words, as of now there is no gold bubble and there will not be a gold bubble for some time to come. The underlying reason is basic supply and demand. In the housing business, when the market heats up, developers build more houses � usually to the point of overbuilding. In the process, everyone is talking about housing. We read about housing in our newspapers, and watch housing segments on our television sets. Inevitably housing turns into a bubble, and like every bubble bursts.

With gold, most people do not have a clue as to what it is trading at, or where to buy it or how to own it � or how important gold is to the entire economy, as at the end of the day, gold will become recognized as the underpinning of our entire financial system.

I suppose I could make a case for the other massive bubble forming (the US dollar), but will save that for another day, as right now the gold story is far too compelling.


The best place to start might be the basics: production, supply and demand. [more]

Gold's Lustre on The Rise Among German Investors
By Dagmar Krause
 

According to the the World Gold Council investors have bought approximately $21 billion of gold in the second half of 2008. This represents a rise of 150% compared to the same period in the previous year, German newspaper Die Welt reports.

German investors invested mainly in Exchange Traded Commodities (ETC) Xetra-Gold, which reflects the price of one gram of gold in euros, and in Gold Bullion Securities, which reflects the price of a tenth of a troy ounce, according to Die Welt.

Demand for exchanging the assets into physical gold has increased significantly in recent months. Martina Gruber, CEO of Deutsche B�rse Commodities, which launched the Xetra-Gold product in November 2007, said that 120 investors have claimed redemptions in physical gold totalling 480 kilograms in recent months, while there were only two redemptions in physical gold in the first half of 2008.

The gold delivery process lasts around ten days and the costs add up to around �170 per one kilogram gold bar. For the Xetra Gold product, the precious metal is stored at the Neue B�rse in Frankfurt-Hausen. Around 24 tonnes of gold worth around �600 million are located there. For the Gold Bullion Securities fund from ETFs, the deposits are at HSBC in London.

Gold Coin Shortage as Demand Soars
by Javier Blas in New York

The rush by retail investors into bullion coins is creating shortages as mints across the world struggle to meet the surge in demand, dealers and mint officials say.

The scarcity is lifting coin premiums to as much as 5 per cent above the spot gold price, a level reached briefly after the collapse of Lehman Brothers last September, when coin shortages also surfaced.

Spot gold in London on Wednesday traded at $972 an ounce, below last week�s peak of $1,004.5.

�There is demand for double or triple what the US mint is able to produce,� said Michael Kramer, president of MTB in New York, one of the four US gold dealers authorised to purchase bullion coins directly from the government�s mint.

The US Mint has sold 193,500 ounces of its popular American Eagle gold coin in the first seven weeks of this year, the same amount it shipped during the whole of 2007 and about the same as in the first six months of last year.

�The demand is extraordinary. All the coins we got on Monday are gone today [Tuesday] and we will not be able to take any order until the following week,� Mr Kramer said. �It is the same with other mints.�

Bullion coins used to be bought mainly by collectors and gold bugs, but the financial crisis is leading regular retail investors to embrace them, dealers say.

Although the surge in coin demand is a bullish signal for gold prices, the fact that mints cannot match demand means that the potential extra consumption does not push spot prices higher, but just drives premiums above normal levels.

The Rand Refinery in Johannesburg, which mints the world�s most popular gold coin, South Africa�s Krugerrand, said demand was above its maximum capacity, even after doubling last month to 20,000 ounces from 10,000 ounces a week. 

Johan Botha, head of precious metals sales at the Rand Refinery, said there was demand for more from international investors, pointing to strong sales to Switzerland, the UK and Germany. �If we were able to produce 30,000 ounces,the market would absorb it,� he said.

Mr Kramer said MTB had Krugerrand orders equal to three months of refinery supplies to the company.

The New Zealand Mint said it was doing as much business in a day as in a month a year ago, mostly servicing global investors.

Michael O�Kane, head of gold sales at the New Zealand Mint, said: �Most mints and bullion manufacturers are struggling to meet current demand levels.�

Decoding What Gold is Telling Us
by Simit Patel

Well, gold bugs around the world have been having a good chuckle of late, as the market is re-affirming the often eccentric and practically religious views of gold bugs: gold is up over 11% for the year in US dollars, and up over 4% over just the past five trading days. Which begs the question: why? There are a few possible answers to this question:

1. Deflation. This crisis is global, and everyone is flying to safe stores of wealth. Over the big picture of human history, gold has served as the best store of wealth -- and thus gold is rising. In many ways this is the classic "gold is money" argument, one typically championed by Austrian economists. Robert Blumen has offered an excellent explanation of this argument.

2. Inflation. Gold is typically a hedge against inflation concerns, and as the US federal government continues to aggressively "stimulate" the economy, the rally in gold may be a reflection of increased concerns regarding inflation.

So which one is it?

In my opinion, both. With that said, I view inflation as the larger concern, as I have said many times before. If the environment were truly deflationary, Treasury bonds would be the true recipients of flight to quality, as well as dollar holdings in FDIC insured banks. Instead, 20+ year Treasury bonds have fallen by more than 13% thus far (as measured by TLT). Negative correlation between TLT and precious metals suggests inflation, not deflation. The chart below illustrates.

Deflationists will point to the fact that the US dollar may be strengthening relative to other fiat currencies -- although this is not necessarily a reflection of deflation, as it could simply be interpreted as weakness of all global currencies, all of which are falling against gold. More relevant may be the rise in PPI and energy prices in January of 2009. While one month alone does not provide sufficient evidence for a substantive reversal in macroeconomic trends, it is not consistent with deflation, and may suggest that the Fed's inflationary actions in the second half of 2008 may be kicking in.

Conclusions for Trading

The recent activity in the market has led me to make the following revisions:

1. The forex market is increasingly a trader's environment, perhaps even a daytrader's environment.

2. Gold and silver may retrace, perhaps even by several hundred dollars, though I would view it as an opportunity to buy on dips. The global economy is getting worse and conditions are being aggravated by the actions of central bankers. As a result, the fundamental case for gold and silver will get stronger.

3. Counterparty risk is rising -- this strengthens the argument for increasing the physical delivery portion of one's precious metals portfolio.

4. Because of inflation concerns, my bias is against short positions in all asset classes. If I were a trader of stocks or commodities, I might look into shorting positions relative to a broader index (i.e. short a particular stock while going long the sector ETF, under the rationale that the stock will do worse than the entire sector).

5. Oil's behavior has been quite peculiar; I've yet to find a convincing explanation for why it's moving the way it is. As it escapes my fundamental analysis, and as I find it less appealing than currencies from a technical analysis perspective, I'll stay away from oil.

6. As gold becomes too expensive for many, silver will grow in appeal. And as silver fell more than gold during the second half of 2008, it may be set for a larger rally.

Gold Set to Rise Even Higher

by Mark O'Byrne  

After another strong week last week (both gold and silver were up some 3%) despite falling stock markets, gold continues its outperformance of other asset classes due to safe haven demand. It has surged again overnight in Asia and is now at 7 month highs and looks very likely to target its record high of $1,000/oz in the coming days.

Resistance at $950/oz was sailed through very easily overnight and the next level of resistance is $980/oz prior to a likely challenge of $1,000/oz in the coming days.

With the global economy slowing very sharply, international demand remains very strong as seen in gold coin, bar, certificate and exchange traded fund demand. ETF holdings of the world's largest gold-backed exchange-traded reached a record 985.86 tonnes as of February 13, up 15.29 tonnes or 1.6% from the previous day. The trust's gold holdings are up a very significant 205 tonnes, or 26% in just the first six weeks of the year (see chart below).

Besides increasing retail, pension and institutional demand, many central banks are increasingly favourable to gold. Russia's central bank has increased gold's share in reserves, and plans to continue this trend in 2009, first deputy chairman told Reuters in an interview on Monday. The ECB Eurosystem's reserves of gold and gold receivables increased EUR 1 million to EUR218.320 billion in the week ended Jan. 30.

Gold's strength in recent days is particularly impressive as it comes in conjunction with a stronger dollar. However, this "strength" is more a function of a weakening in most fiat currencies internationally versus the dollar.

Gold has risen above �675/oz and �760/oz reached new record highs in many other currencies such as the South African rand and the Canadian dollar.

This bodes well for gold prices in the coming weeks as when the dollar begins to weaken again in the coming weeks, which seems very likely, then gold should rise even more sharply and target levels above $1,200/oz in the coming months.

Importantly, the commonly quoted COMEX gold price is actually lagging considering the extent of international demand as seen in the charts above.

And this marked rise in demand comes at a time when world gold production is actually falling.

Gold Advance in London on Investors� Demand for a Haven
By Nicholas Larkin

(Bloomberg) -- Gold, little changed today in London, may advance as investors buy the metal to diversify portfolios and preserve their wealth as the global economy sags.

The Group of Seven�s finance ministers said after talks in Rome yesterday that a �severe� economic downturn will persist for most of 2009. Japan�s economy shrank at an annual 12.7 percent pace last quarter, the most since 1974.

Bullion for immediate delivery added $1.35, or 0.1 percent, to $943.05 an ounce at 3:11 p.m. local time. April futures climbed $2.10 to $941.90 in electronic trading on the Comex division of the New York Mercantile Exchange. The U.S. market is closed today for a holiday.

�Gold�s ability to close last week above $930 was encouraging, and given the renewed banking and economic jitters this morning we expect gold to see further inflows,� James Moore, an analyst at TheBullionDesk.com, wrote today in a note.

The metal rose to $943 in the morning �fixing� in London, used by some mining companies to sell production, from $935.50 at the afternoon fixing on Feb. 13. Bullion gained 3.3 percent last week and is up 6.7 percent this year.

Gold may gain for a second straight week as the banking crisis and recession deepen, according to 26 of 32 traders, investors and analysts surveyed from Tokyo to Chicago last week. Five respondents advised selling and one was neutral.

The metal may remain in a �consolidation phase� today because of the U.S. holiday and after last week�s gains, London- based broker Marex Financial Ltd. said in a report.

�Economic stimulus plans by governments around the world are likely to drive inflation, increasing demand for gold as a hedge,� Marex said. �Governments may continue spending until they see inflation.�

Hedge-fund managers and other large speculators increased their net-long position by 5 percent in New York gold futures in the week ended Feb. 10, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumbered short positions by 163,622 contracts on the Comex.

Bullion has climbed 30 percent since October as governments are lowering interest rates and spending trillions of dollars to combat the recession.

�One of the critical factors about gold is that it�s not issued by a central bank,� Charles Kernot, a mining analyst at Evolution Securities in London, said in a Bloomberg television interview. As governments devalue their currencies, �you want to have a completely independent hedge against that happening and gold really is such an independent hedge. There is still plenty of scope for a further uplift in the metal�s price.�

NEW YORK & LONDON--(BUSINESS WIRE)--Sustained investor interest in gold over the course of 2008 against a backdrop of the worst year on record for global stock markets and many other asset classes, helped push dollar demand for the safe haven asset to $102bn, a 29% increase on year earlier levels. According to World Gold Council�s (�WGC�) Gold Demand Trends, identifiable gold demand in tonnage terms rose 4% on previous year levels to 3,659 tonnes.

As shares on stock markets around the world lost an estimated $14 trillion in value, identifiable investment demand for gold, which incorporates exchange traded funds (ETFs), and bars and coins, was 64% higher in 2008 than in 2007, equivalent to an additional inflow of $US15bn. Over the year as a whole, the gold price averaged $872, up 25% from $695 in 2007.

The most striking trend across the year was the reawakening of investor interest in the holding of physical gold. Demand for bars and coins rose 87% over the year with shortages reported across many parts of the globe.

The figures compiled independently for WGC by GFMS Limited, showed jewelry demand up 11% in dollar terms at almost $US60bn for the whole year, but down 11% in tonnage terms at 2,138 tonnes. The adverse economic conditions across the globe paired with a high and volatile price impacted jewelry buying in key markets, but resilient spending on gold jewelry indicated the strength of underlying demand when the market offered attractive price points.

Industrial demand in 2008 was another casualty of the global economic turmoil, down 7% to 430 tonnes from 461 tonnes in 2007. With the electronics sector the main source of industrial demand, reduced consumer spending on items such as laptops and mobile phones had a direct impact on gold demand.

Aram Shishmanian, Chief Executive Officer of World Gold Council, said:

�These figures confirm that investors around the world recognize the benefits of holding gold during this time of unprecedented global financial crisis, recession and concerns regarding future inflation. Gold has again proven its core investment qualities as a store of value, safe haven and portfolio diversifier and this has struck a chord with uneasy investors.

�While current market conditions have impacted consumer spending on jewelry, purchasers in many of the key gold markets understand gold�s intrinsic investment value and continue to buy.

�The economic downturn and uncertainty in the global markets that has affected us all is unlikely to abate in the short term. Consequently, we anticipate that gold, as a unique asset class, will continue to play a vital role in providing stability to both household and professional investors around the world.�

Total demand remained very strong in the fourth quarter of 2008, up 26% on the same period last year at 1036 tonnes or $26.5bn in value terms.

The biggest source of growth in demand for gold in Q4 was investment. Identifiable investment demand reached 399 tonnes, up from 141 tonnes in Q4 2007, a rise of 182%. The main source of this increase was net retail investment, which rose 396% from 61 tonnes in Q4 2007 to 304 tonnes in Q4 2008. The most dramatic surge was in Europe, where bar and coin demand increased from just 9 tonnes in Q4 2007 to 114 tonnes in Q4 2008, a 1,170% increase. ETF holdings broke new records during the quarter. Although the net quarterly inflow was down from the level of the previous quarter, the growth rate on Q4 2007 was a strong 18%.

Total demand in India, the world�s largest gold market, in the fourth quarter was up 84% in tonnage terms, led by a very strong 107% rise in jewelry demand, underpinned by investment attributes of gold. This phenomenon has to be set against a very weak Q4 2007, however. Total gold demand in Greater China in Q4 was resilient to the global turmoil. Total off-take was up 21% on the same period last year, with investment the main contributor to growth but jewelry demand also holding up well.

Investment demand in Thailand soared during the quarter, from a net outflow of 8 tonnes in Q4 2007 to a net inflow of 21 tonnes in Q4 2008. As with many other parts of the region, this turnaround was underpinned by safe haven buying.

Demand in the Middle East in Q4 2008 was up 1% on year earlier levels, with the strong growth in the bar and coin market (up 139%) offset by 7% decline in jewelry demand, which makes up 90% of the market in this region. A combination of gold price volatility, a sharp fall in the local currency, and exchange rate uncertainty led to a 59% fall in overall gold demand in Turkey in the fourth quarter.

In the United States, the deteriorating economic conditions produced a mix result for gold demand. Fourth quarter jewelry demand was down 35% as consumer spending plummeted. In stark contrast demand for gold bars and coins rocketed by 370% in Q4, representing 35 tonnes of gold.

Gold supply in Q4 was up 5% relative to year-earlier levels and year-on-year, declined 1%. Slightly lower mine production, higher levels of scrap and lower levels of gold producer de-hedging, were partly offset by lower net central bank sales in Q4 2008, which totaled 71 tonnes, down from 97 tonnes in Q4 2007.

Gold Demand Resurges
By Nicholas Jones

The economic crisis and complete lack of competence from our leaders has resulted in a current financial climate that will result in the most fantastic run the price of gold has ever experienced. The quantitative easing around the globe is definitely the greatest single bullish fundamental that will drive gold going forward. It�s not the only reason gold will rise in price, but it definitely carries the most weight.

The thing is, gold is a sort of hybrid investment vehicle. Essentially it�s part commodity part currency. When I discuss things like monetary inflation and the stimulus package, I�m referring to the aspect of gold that acts as a monetary vehicle. I absolutely don�t want to downplay that importance of this notion, but it�s not the whole story. Gold, like all other assets, is affected by supply and demand fundamentals. Monetary issues may be the driving force behind gold, but looking at supply and demand figures can be very telling, especially in the short run. In this article I am going to dig through the recent 3Q global S&D figures released by the World Gold Council. The numbers are very interesting.

Gold demand in the 3Q of 2008 was very strong after being weak for several quarters. Identifiable demand was 1,133.4 tonnes. That figure was up 170.1 tonnes or 18% year over year. Valued in U.S. dollars gold demand was $31.8 billion and up 51% year over year. That number is a record and marks a 45% increase from the record numbers set in the 2Q.

The sector experiencing the largest increase was identifiable investment which was up 137.5 tonnes or 56% year over year. Breaking down the identifiable investment, the largest increase in that subset was net retail investment. Net retail investment increased 121% to 232.1 tonnes.

Leading the growth in demand was Switzerland, Germany, India, and the U.S. At this point in the report, the authors made a statement that there were noticeable shortages of bars and coins around the world. A result of the dealer shortages has been the divergence between the spot and futures price of gold. Please refer to past issues for a more extensive explanation.

Gold ETFs also had a record net quarterly inflow of 150 tonnes. The report mentions that peak inflows occurred after the collapse of Lehman. In the 5 days following the debacle inflows increased by 111 tonnes ($7 billion). Once the treasury market collapses, gold will revert back to its rightful place as the number one flight to safety asset in the world. I would like to put a precaution on using ETFs. When using ETFs to buy gold, you remove one very important element. Physical gold has no counterparty risk. ETFs do. This will become more important going forward from here, but in the mean time just think of what the Hunt Brothers would have to say about PM ETFs.

Moving back to the WGC report, early demand in the 4Q has picked up where it left off in the 3Q. They also mention that gold shortages are expected to continue, de-hedging will continue to abate, and central bank sales will be weak.

Monetary forces may be the driver in the gold market, but we can use these reports to help with short term expectations. Demand is strong, really strong. There were record figures across the board. On the other side of the story, supplies are tight and will continue to be tight. The players are coming back to the game and this will provide strong underlying support in the gold market going forward. I still hold to my views that gold may test $1000 in the near term, but I believe we're one correction back to $850 away before we make a run up to $1500.

All coming after my latest report:

February 2009: Gold � The Inevitable Triumph



Read more: Gold: The Ultimate Monetary Survivor

Check out this link, and any thoughts of considering the US dollar a �safe haven� asset will be dashed.

http://johnbarrysblog.blogspot.com/2009/02/glenn-beck-slideshow-charts-rise-in-us.html

Thinking about investing in Mexico?  Think Again!

http://www.thetrumpet.com/index.php?q=5887.4259.0.0

Why Gold Is an Excellent Deflationary Hedge
by Ivan Martchev

Deflation is here now -- and it may be with us for a while. Uninformed observers contend that the central bank has an unlimited capacity to print money, hence deflation can be avoided, but as we can see by the collapse in housing prices and the inflation indexes of late, this is easier said than done.

Cash for gold
If you've not read the entire "helicopter" speech by Fed Chairman Ben Bernanke, I encourage you to do so. (It's available here.) The speech provides more details on deflation, but Bernanke also compares the U.S. dollar to gold:

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Now, in my view, it is the very collapse of the credit mechanism that has resulted in this deflationary cycle, and printing money will not be able to compensate for it for some time. Money and credit are not the same things. You can give the banks all the money in the world, but if they don't lend it, it will not make much difference.

Why did gold touch $1,000 an ounce this month if we have falling prices? Wasn't gold a classic inflation hedge?

Here's the thing: Gold is an asset, not a liability on anyone else's balance sheet. Remember the Primary Reserve fund? Lehman Brothers' short-term bonds (i.e., liabilities) were the fund's assets. When Lehman blew up, so did the fund. This would never have happened if the fund held gold bars as assets; they are no one's liability.

Bullion vs. stocks
In my opinion, the most egregious error investors make is to use gold stocks as substitutes for gold bullion. They are not the same thing.

Gold stocks are financial assets that have claims on gold bullion, while gold bullion is a real asset that, again, is not a liability on anyone else's balance sheet. In deflationary 2008, gold bullion was up 5.8%, while the larger-cap PHLX Gold and Silver Index (XAU) was down 27.7%. This was driven by fund liquidations because of investor redemptions, resulting in gold stocks' cheapest valuation since the bull market began in 2000 in relation to the price of gold. You can see that by simply dividing the value of the XAU index and the gold price.

Since the central bank has embarked on quantitative easing, much as was outlined in Bernanke's helicopter speech, I expect more dollars to chase a finite supply of gold for some time to come, even in a deflationary environment caused by tight credit conditions. This is likely to put upward pressure on gold prices.

Gold bullion is investable through the SPDR Gold Shares (GLD), which trade at one-tenth the price of gold and will deliver nearly identical performance. For those who can take the risk, there is a new product called the Deutsche Bank Double Long Gold (DGP), which delivers double the monthly performance of gold bullion. But keep in mind that while the GLD is an exchange-traded fund that holds physical bullion, the DGP is an exchange-traded note (ETN) that holds no bullion. Instead, the DGP is a liability of Deutsche to pay double the return of gold to those who buy the ETN. If Deutsche fails -- and it really is too big to fail, as it is the biggest financial institution in Germany -- the ETN is worthless, as was the case with similar ETNs from Lehman Brothers.

Another way to have leverage to the gold price is via the purchase of gold stocks. The Market Vectors Gold Miners ETF (NYSE: GDX) offers a nice broad participation in both large and medium precious-metals producers. Among the ETF's top holdings are AngloGold (NYSE: AU), Barrick Gold (NYSE: ABX), and Gold Fields (NYSE: GFI).

The last time gold was near $1,000 an ounce in March 2008, the GDX was trading near $55. Eleven months later, gold is again near $1,000 an ounce and the GDX is trading near $35, while gold mining costs have declined courtesy of the collapse in the price of oil. Due to the use of heavy diesel-powered mining equipment and many chemicals, the price of oil is a big component of mining costs. In other words, gold stocks look like a great buy on any pullback here.

A great fund that tends to invest in smaller, more leveraged gold stocks is Tocqueville Gold (TGLDX). The fund has about $500 million in assets under management and currently has large stakes in Randgold Resources (Nasdaq: GOLD) and Goldcorp (NYSE: GG). Its expense ratio of 1.44% is right at the category average. The manager, John Hathaway, has been there for 10 years and has done a great job over that period. The bad performance in 2008 is not his fault, so it may be a good time to consider the fund.

Gold tends to do well in financial turmoil -- be it deflationary or inflationary -- and poorly in good times. Since this economic mess is far from over, now's a great time to take a look at getting some.

Larry Myles
Larry Myles Reports
http://www.larrymylesreports.com

604-408-7600
TF: 1-877-405-7600

info@larrymylesreports.com

"So you think that money is the root of all evil.  Have you ever asked what is the root of all money?"