By Nicholas Larkin
April 16, 2013 10:05 AM EDT
The biggest drop in gold prices since 1983 has divided central banks on whether the metal is cheap enough to increase investment.
Sri Lanka’s central bank governor said falling prices are an opportunity for nations to raise gold reserves and that the island will “favorably” examine buying more. The Bank of Korea said the plunge isn’t a “big concern” because holding the metal is part of a long-term strategy for diversifying currency reserves. Reserve Bank of Australia’s assistant governor said bullion has no “intrinsic value.” South Africa’s central bank governor won’t adjust its reserves policy.
Central banks own about 19 percent of all gold ever mined, and last year boosted their holdings by the most since 1964, according to the London-based World Gold Council. The metal, which rallied for the past 12 years in the longest gain in at least nine decades, has lost 28 percent since climbing to a record $1,921.15 an ounce in September 2011.
“The question you have to ask is, is the economy back on track?” Gerald Panneton, president and chief executive officer of Detour Gold Corp. (DGC), a Toronto-based producer, said today at a conference in Zurich. “Actually the situation is the same. In the last few days we saw people jumping off the ship as if it’s sinking. There’s nothing wrong with the ship.”
Gold for immediate delivery fell to $1,321.95 today, the lowest since January 2011, and was up 2.5 percent at $1,381.30 by 3:04 p.m. in London, cutting its slide this year to 18 percent. That would be the biggest annual decline since 1997. Prices slumped 14 percent in the two days through yesterday, the most since February 1983. Since starting to appreciate in 2001, gold has gained 410 percent compared with an increase of 18 percent in the Standard & Poor’s 500 Index of stocks.
The selloff was sparked by mounting concern that Cyprus would be forced to sell gold from its reserves and “potentially reflecting a larger monetization of gold reserves across other European central banks,” Goldman Sachs Group Inc. said in a report today. The island nation owns 13.9 metric tons of bullion, according to World Gold Council data.
The metal’s drop wiped out almost $1 billion of hedge-fund manager John Paulson’s wealth in the past two days. The 57-year- old began the year with about $9.5 billion invested across his hedge funds, of which 85 percent was in gold share classes. He’s sticking with his thesis that gold is the best hedge against inflation and currency debasement, John Reade, a partner and gold strategist at New York-based Paulson & Co., said in an e- mailed statement.
Paulson is the largest investor in the SPDR Gold Trust (GLD), the biggest bullion-backed exchange-traded product. Global holdings in the products declined 9.5 percent this year to 2,382.4 tons, according to data compiled by Bloomberg. Assets reached a record 2,632.5 tons in December.
The cost of protecting gold from losses in the options market increased. Puts protecting against a 10 percent drop in the SPDR Gold Trust cost 4.28 points more than calls betting on a 10 percent gain, the biggest difference on record, according to three-month data compiled by Bloomberg.
The rally which billionaire George Soros called a bubble at the World Economic Forum’s convention in Davos, Switzerland three years ago lasted for 12 years through 2012 as investors bet faster inflation, central bank stimulus and banking and sovereign debt concerns would spur demand for the metal as a protection of wealth.
“Overall, gold prices coming down is giving an opportunity to various central banks across the world to improve on their holdings,” Central Bank of Sri Lanka Governor Ajith Nivard Cabraal said today in an interview with Rishaad Salamat on Bloomberg Television. “An opportunity that provides us with space to purchase a little more quantities and hold in our own reserves would be an interesting one.”
Sri Lanka owns 3.6 tons of gold, according to council data.
Short-term price moves are an “unavoidable risk,” the Bank of Korea, which holds 104.4 tons, said in an e-mailed statement. Bullion’s 100-day historical volatility was at 20.7 percent yesterday, about double last month’s level, according to data compiled by Bloomberg.
“If you think about the intrinsic value of gold, there’s not a lot,” Guy Debelle, assistant governor at Australia’s central bank, which owns 79.9 tons, said at a business lunch in Canberra today. “Gold often has a high price because people believe that other people believe that it’s worth a lot. When you describe other markets like that, the word ‘bubble’ gets thrown about.”
The gold price decline is “extremely concerning,” South Africa Reserve Bank Governor Gill Marcus told reporters in Cape Town today. The bank, which holds 125.1 tons, won’t adjust its reserve policy following the slump in gold prices, Marcus said.
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New York Times - March 18, 2013
By LIZ ALDERMAN
NICOSIA, Cyprus — Leaders in Cyprus and Brussels scrambled Monday to contain the fallout from an unprecedented effort to force ordinary bank depositors in this crisis-hit nation to pay for part of an international bailout, as stock markets faltered on concerns about the wider implications for Europe’s long-running debt crisis.
President Nicos Anastasiades was trying to compel policy makers in Brussels to soften demands for a tax to be assessed on Cypriot bank deposits, saying European Union leaders used “blackmail” to get him to agree to those conditions early Saturday in order to receive a bailout package worth 10 billion euros, or $13 billion.
Cyprus, whose banking system is verging on collapse, is now the fifth nation in the 17-member euro union to seek financial assistance since the crisis broke out three years ago.
As anger in this country swelled against the measure, Mr. Anastasiades delayed an emergency vote parliamentary vote on the bailout plan until Tuesday, the second step in as many days. Faced with a lack of support from lawmakers, the vote could be delayed until as late as Friday.
The government also said it would keep Cypriot banks shuttered until at least Wednesday, beyond a bank holiday that was supposed to end Monday, a move aimed at staving off a possible bank run.
Cyprus’s banking association issued a statement calling on people to remain “calm,” saying it was ready to implement whatever measures were needed to protect the stability of the banking sector. The association said it would instruct banks to load automated teller machines with cash while banks remained closed.
Financial markets stuttered on the news, with Asian stocks suffering the most, closing down about 2 percent. European market indexes were off about 1 percent by the end of the session, and Wall Street shares were less than 0.2 percent lower in afternoon trading.
For the first time since the onset of the euro zone sovereign debt crisis and the bailouts of Greece, Portugal and Ireland, ordinary depositors — including those with insured accounts — were being called on to bear part of the cost, €5.8 billion.
The previous bailouts have been financed by taxpayers, and the new direction raised fears that depositors in Spain or Italy, two countries that have struggled economically of late, might also take flight.
A crowd of protesters gathered in front of the presidential palace, shouting angrily at Mr. Anastasiades and inveighing against Germany and European leaders as he entered the building to meet with his cabinet. “Merkel, U stole our life savings,” read one banner tied to a bus stop. “EU, who is next, Spain or Italy?” read another.
Miguel Arias Cañete, Spain’s agriculture minister, told journalists in Brussels on the sidelines of a European Union meeting on Monday that he saw no risk of contagion. Spain’s banking system had undergone “a very rigorous clean-up,” the minister said, and were now in a “magnificent situation” following their bailout last year.
The finance ministers from the euro zone countries were to take up the Cyprus issue on a conference call later Monday. Jeroen Dijsselbloem, the president of the group, had declined Saturday to rule out taxes on depositors in countries beyond Cyprus, although he said such a measure was not being actively considered.
A key question for the finance ministers was expected to be whether any revised formula for the tax on deposits could still deliver the 5.8 billion euros agreed to in the bailout deal. The plan, a so-called bail-in, also would wipe out 1.4 billion euros held by junior bondholders in Cypriot banks. Only senior bondholders, who have paid a premium to be first in line for repayment of their investments, would be fully protected.
Joerg Asmussen, a member of the European Central Bank governing council, suggested that creditors may not object to a revision of the bailout terms.
“It is up to the government alone to decide if it wants to change” some elements, he said on the sidelines of a Berlin conference Monday, according to Reuters. “The important thing is that the financial contribution of 5.8 billion euros remains,” he said.
Even though Russia is not a member of the euro currency union, its support of the plan was essential because of the large amount of Russian funds held by Cypriot banks. But President Vladimir Putin on Monday described the bailout plan as “unfair, unprofessional and dangerous,” the Interfax news agency quoted a Kremlin spokesman, Dmitry Peskov, as saying.
Foreign deposits made up 26.8 billion euros out of a total of 64.8 billion euros in deposits as of December, 15.4 billion euros of which were deposits from Russians in Cyprus, according to the Regional Banking Association of Russia. Cypriot banks have been seen as a Russian haven partially because of low taxes.
As financial markets absorbed the implications of the news, finger-pointing quickly ensued. In Berlin, the German finance minister, Wolfgang Schäuble, sought to deflect criticism for the damage to depositors, saying the “levy on deposits below 100,000 euros was not the creation of the German government,” according to Reuters. “If one reached another solution, we would not have the slightest problem.”
But Mr. Anastasiades denied that he refused the proposal to exempt deposits under 100,000 euros from the levy, according to the government spokesman, Christos Stylianides.
“The president struggled to prevent this outrageous development, which was imposed on Cyprus via blackmail from those who are today trying to justify their decisions,” Mr. Stylianides said.
“They said that if the first 100,000 euros weren’t included in the levy, the target wouldn’t be reached,” he said. “Our creditors were asking that Cyprus close down the two big banks, transfer deposits to a healthy bank and liquidate of the rest of the deposits.”
Mr. Stylianides added that the International Monetary Fund, during the negotiations, had even gone so far as to suggest a 40 percent haircut on certain deposits or to freeze deposits for up to five to 10 years.
Analysts said the move to confiscate money from depositors had opened a Pandora’s box.
Moody’s Investors Service warned that the decision to impose losses on depositors was “a significant departure from past instances of support” by European officials. It “signals euro area policymakers’ willingness to risk triggering wider financial market disruptions in pursuit of other policy goals,” Moody’s said in a note.
Analysts at DBS in Singapore wrote that financial markets were worried that the plan to force ordinary depositors to share the cost of the bailout “may send the wrong message on the safety of bank deposits in other E.U. nations, just when light appeared to be emerging at the end of the long tunnel for the peripheral nations.”
More broadly, analysts at Société Générale noted that the approach adopted over the Cyprus bailout also highlighted that there is still “no standard approach of tackling the euro debt crisis.”
Other analysts and economists insisted that Cyprus’s problems were unique and said they expected the fallout from the trauma there to be limited. They noted that the Russian deposits in Cyprus’s banks, whose assets dwarf the island’s gross domestic product, raised fears in other euro zone nations that non-Cypriot taxpayers would be bailing out wealthy Russians, something that has not been a concern with other bailouts.
Goldman Sachs analysts said that, assuming Parliament approved a deal, “the direct ramifications from Cyprus will likely be contained,” thanks partly to the European Central Bank’s commitment to back up euro zone banks.
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Russian President Vladimir Putin criticized a proposed penalty on Cypriot bank deposits, imposed as part of an international bailout, saying it would set a dangerous precedent.
“Such a decision, if it’s adopted, will be unfair, unprofessional and dangerous,” Putin told a government meeting today, according to a statement posted on the Kremlin website.
The levy will probably provoke an outflow of Russian money toward other jurisdictions, according to Moody’s Investors Services and Monument Securities. Russian companies and individuals have $31 billion of deposits in Cyprus, according to Moody’s.
A double-tax avoidance treaty and low tax rates have made Cyprus the conduit of choice for Russians moving money into and out of their country. Including loans to companies registered in Cyprus, Russia’s exposure is about $60 billion, Moody’s estimates.
“We have already been seeing Russian banks shifting money to Switzerland, Luxembourg and the Baltic states,” Eugene Tarzimanov, a senior analyst at Moody’s in Moscow, said by phone today. “That trend will likely accelerate.”
There’s a 50-50 chance the Cypriot bailout will fail because of “massive danger” that large amounts of Russian cash will flee Cyprus due to the plans, Marc Ostwald, strategist at Monument Securities Ltd. in London, said in an interview. Ninety percent of Russian deposits will be free to leave the country if the levy is approved, he added.
Russia may reconsider its role in the Cyprus bailout because it wasn’t consulted over the bank tax, state news service RIA Novosti reported, citing Finance Minister Anton Siluanov. He said last month that Russia was willing to restructure a 2.5 billion-euro ($3.24 billion) loan it provided in 2011 and possibly agree to a lower interest rate.
The Cypriot move casts doubts on the banking system not only in that country but “in the countries of the European Union,” said Russian Deputy Economy Minister Sergei Belyakov.
Cyprus’s President Nicos Anastasiades is trying to persuade lawmakers to back the plan to impose losses on the island nation’s depositors as part of a 10 billion-euro bailout aimed at preventing a financial collapse and a possible departure from the euro area.
The one-time levy, designed to raise 5.8 billion euros, means a smaller bailout for the east Mediterranean country than the 17.5 billion euros envisaged at one point. Under the EU plan, Cyprus will impose a levy of 6.75 percent on deposits of less than 100,000 euros and 9.9 percent for 100,000 euros or more.
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Published on CNBC.com: Thursday, 14 Feb 2013
By: Jeff Cox
CNBC.com Staff Writer
The U.S dollar is shrinking as a percentage of the world's currency supply, raising concerns that the greenback is about to see its long run as the world's premier denomination come to an end.
When compared to its peers, the dollar has drifted to a 15-year low, according to the International Monetary Fund, indicating that more countries are willing to use other currencies to do business.
While the American currency still reigns supreme -- it constitutes $3.72 trillion, or 62 percent, of the $6 trillion in allocated foreign exchange holdings by the world's central banks -- the Japanese yen, Swiss franc and what the IMF classifies as "other currencies" such as the Chinese yuan are gaining.
"Generally speaking, it is not believed by the vast majority that the American dollar will be overthrown," Dick Bove, vice president of equity research at Rafferty Capital Markets, said in a note. "But it will be, and this defrocking may occur in as short a period as five to 10 years."
Bove uses several metrics to make his point, focusing on the dollar as a percentage of total world money supply.That total has plunged from nearly 90 percent in 1952 to closer to 15 percent now. He also notes that the Chinese yuan, the yen and the euro each have a greater share of that total.
"To the degree that China succeeds in increasing its market share of the world's currency market, the United States is the loser," Bove said. "For years, I have been arguing that the move of the Chinese makes perfect sense from their point-of-view but no sense for the Americans.
For a country with a budget deficit in excess of $1 trillion a year, the consequences of losing standing as the world's reserve currency would be dire.
"If the dollar loses status as the world's most reliable currency the United States will lose the right to print money to pay its debt. It will be forced to pay this debt," Bove said. "The ratings agencies are already arguing that the government's debt may be too highly rated. Plus, the United States Congress, in both its houses, as well as the president are demonstrating a total lack of fiscal credibility."
Bove is not the only one sounding the reserve currency alarm, though the issue has fallen off the front pages as hopes for a sustained U.S. recovery have taken hold and the stock market has surged to near-record highs.
But the looming battle over budget sequestration in Washington could revive long-standing fears of fiscal stability.
"If (dollars) no longer offer the safety that investors have come to expect, they will not function as the stable collateral required by bank funding markets," Barry Eichengreen, a professor at the University of California, Berkley, warned in a Financial Times commentary late last year. "They will not be regarded as an attractive form in which to hold international reserves. And they will not be seen as a convenient vehicle for merchandise transactions."
To be sure, the markets at this point are not acting like the dollar is in severe trouble. The greenback has maintained its position as a general safe haven in times of trouble.
"Longer term, of course, countries are going to diversify away from the dollar if they can. There are more favorable investment opportunities out there if you can catch yield," said Christopher Vecchio, currency analyst at DailyFX, a trading firm. "Despite the increase in risk to the U.S. dollar and Treasury, investors still feel safest at home."
But the Federal Reserve's successive quantitative easing programs, which have created $3 trillion in new greenbacks, continue to spur worry over the dollar's status.
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Gold has a certain element of emotional value for all Indians. Taking personal loans against family gold had not been considered a preferable option till late, though the tradition of loan against gold had been in practice for centuries through unorganized money lenders.
The value of gold has been on the rise for the last one century uninterrupted and is currently touching unprecedented heights. Thus, it makes sense to utilize the power of the gold lying in lockers to avail loans instead of paying higher interest rates for pure personal loans. With banks and other financial institutions entering this space of late, there has been a marked increase in personal loans against gold among the Indian middle class.
What is personal loan against gold?
This is a simple modification of the age-old practice by money lenders and has been institutionalized by the banks now. In this loan one has to deposit the household gold in the form of jewellery with the bank or financing agency and get a loan of up to 80 per cent of the value of the gold deposited. The process also requires proper documentation such as submission of identity proof, PAN card, address proof, etc. The interest rate in this case is much lower than a pure personal loan as there is a security being provided by the borrower. The processing time for personal loans against gold is quite less as compared to other loans.
Spot gold rose 0.5 percent to $1,662.96 an ounce by 1346 GMT, recovering from Monday's 2-1/2 week low of $1,651.93. U.S. gold futures for February delivery were up 0.6 percent to $1,662.20.
Market players were looking to the Fed decision and statement on Wednesday for any signs that a recent run of positive economic data had encouraged policymakers to consider changing its easing policy.
"After the losses of the past few days, there is some buying interest ... we are likely to keep seeing some buying on the dips but not strong enough to support a decisive push higher," Commerzbank analyst Eugen Weinberg said.
Loose monetary policy helped drive gold to a 12th year of gains in 2012 as investors worried about currency debasement as a result of rampant cash printing by central banks. Most analysts do not expect the Fed to curtail its bond-buying programme any time soon.
"The U.S. Fed meeting may show the central bank continuing with bond purchases to support the nation's recovery," broker SP Angel said in a note.
U.S. non-farm payrolls data on Friday will also be examined for clues on the state of the world's largest economy, and positive numbers could lead to a more dovish Fed stance on monetary easing, analysts said.
THE last time the world as we knew it seemed likely to end, Dan Tapiero thought about buying gold.
He didn’t tell his wife; they didn’t talk about things like that. In fact he didn’t tell anyone for a while. He just tried to figure out how he was going to buy physical gold as the financial markets collapsed at the end of 2008.
Mining stocks were not for him, and neither was buying gold on the futures exchange. That was financial gold, meaning it existed on account statements but was not tangible. He wanted the real thing, gold in the form of bullion that he could hold in his palms, smudge with his thumbs.
But Mr. Tapiero, a portfolio manager at several hedge funds over the last two decades, realized quite quickly that it was harder to fulfill his desire than he had thought. When he called up one bank he patronized in his day job, he learned it had a minimum purchase amount of $20 million worth of physical gold. Even at that amount, he could not have access to it; it would have to stay at the bank.
He didn’t want to buy that much, but he wanted to buy more than a bag of gold coins, or a bar or two. Most of all, he wanted to know that it would be stored someplace safe where he could get to it even if all of the banks suddenly closed for a while. “There was concern at that time that the system was frozen and you didn’t really know whether you were going to be able to have access to your money or to your assets,” Mr. Tapiero said. “And I started thinking, O.K., well, I’d like to own something that isn’t a number on a flashing screen.”
Investing in physical gold has had an image problem of late. After the financial crisis, it was seen by many mainstream advisers as something that crackpots coveted. They would buy it, store in their basements and know that their wealth was secure if the world — or at least the prevailing financial and political systems — ended.
This was easy to mock, and many people did. What, after all, would you buy with your gold if the world came to an end?
Then there was the group that saw gold as a speculative bet, as something that would rise in value as fear about the global economy sunk in. That was less of a crackpot idea: the price of gold went from around $700 an ounce when Mr. Tapiero began buying it in the fall of 2008 to more than $1,900 an ounce last summer. It is now trading around $1,700 an ounce.
Mr. Tapiero did not buy his bullion because he thought the world was ending. “And if it did end,” he said, “I don’t know that gold would be that important — it might be radioactive.”
He also made clear that he does not keep it at his home in Greenwich, Conn. “It might not be safe,” he said, “if someone holds you at gunpoint and they say, ‘Show me your safe’ and you open it up and all your gold is there.”
Instead, his gold — now about 25 percent of his net worth, he said, declining to quantify it further — is kept in various professionally managed vaults. We met at one in Midtown Manhattan.
The vault was in an unassuming, brick office building with a completely plain, even dingy lobby. The offices of the vaulting company, which asked not to be named as a condition for granting me entry, had rows of nondescript cubicles that gave no sign beyond the company logo of what might be going on there.
As for the vault itself, it looked secure from the outside. But once past the thick door, it felt completely utilitarian, even a bit grim, particularly for what it held for its undisclosed number of clients.
Mr. Tapiero eyed the rows of 100-ounce bars — each about the size of an iPhone and worth about $170,000 — and estimated there was $4 billion worth of gold at current prices stacked on metal shelves that looked as if they were built in the 1970s. That amount of gold would fit in the back of any sport utility vehicle.
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November 19th, 2012
Gold came under pressure again yesterday, as new figures from the World Gold Council showed demand for gold fell 11% in Q3 in comparison with the same period in 2011. Comex November gold fell 0.9% to settle at $1,713.30 per troy ounce. December silver was down 1.16% to $32.30, while platinum was down 1.30% and palladium off by 0.97%.
However, at 1,804.6 tonnes, demand was still above five-year quarterly average of 984.7 tonnes. It should also be pointed out that Q3 2011 demand was an all-time record at 1,223.5 tonnes – with demand for the metal surging amid eurozone uncertainty, the US government’s debt-ceiling negotiations, and S&P’s decision to downgrade the USA’s sovereign credit rating. So it’s not that surprising that measuring from this peak, demand has slipped slightly.
Experienced market hands are continuing to accumulate precious metals. Quantum Fund pioneers Jim Rogers and George Soros are among those who remain bullish. Soros Fund Management LLC increased its stake in the ETF GLD from 884,400 to 1.3 million shares during Q3, and also doubled its holdings of the gold miners ETF GDX. Meanwhile Rogers told CNBC recently that he expects an Obama second term to be extremely friendly towards precious metals, with federal debt increasing along with money printing and rising prices. He plans to add to his gold and silver holdings and sell US Treasuries.
The smart guys aren’t always right, but Soros and Rogers have pretty good track records. Paying attention to what these guys do in the markets can be profitable.
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CIBC World Markets is turning more bullish on gold and silver and suggests it’s nearly time for investors to pounce on the sector to capture a seasonal bounce.
CIBC analysts, including Barry Cooper and Alec Kodatsky, believe that the further quantitative easing measures from the U.S. Federal Reserve is setting the stage for a continuation in the gold rally that subsided in mid-September.
“QE1 and QE2 were the drivers for gold price increases in the order of $20 to $30 (U.S.) per month,” the analysts wrote in a research note. “We expect that QE3 will offer something between these figures, although on a percentage basis the moves will not be as significant due to the higher
QE3, or the third round of quantitative easing, will consist of $40-billion per month of bond purchasing related to mortgage-backed securities. The Fed has not set an expiry date for the program, committed to seeing tangible signs of improvement first in the U.S. economy.
For 2013, CIBC kept its forecasts unchanged, expecting gold will average $2,000 an ounce and silver $35 an ounce.
But it now sees gold rising to an average of $2,200 for 2014 and silver to $38.
“The figures represent our view that prices are underpinned by the rising cost of supply, plus strong demand coming from both investor interest and Central Bank buying,” they said.
Gold has so far averaged $1,656 an ounce this year and silver $31.
That’s below CIBC’s average price forecast of $1,700 and $32.50 for this year, but the analysts believe its forecasts are obtainable considering seasonality trends. November and December represent the first and third strongest months, respectively, for bullion performance, driven by
increased jewelry demand ahead of Christmas. It also expects other factors to benefit gold and silver late this year, such as continued bailout concerns surrounding Spain and Greece, and a bounce back in Indian demand after a weak first half of this year.
“We are about to head into the strongest month for gold performance, and indeed in looking at the next four months, investors could capture 56 per cent of the annual gold gains and a whopping 66 per cent of the annual silver gains by holding the metals over the period November to
February,” they said.
“In contrast to the common belief that September is the strongest month for gold bullion, it is actually November that shapes up better, with December being the third best month for gold price responses over the past 10 years.”