The current consolidation in gold offers a buying opportunity

During February, the Russian Central Bank bought another 200,000 ounces of gold. This makes the total of their purchases for the year 300,000 which is the best January/February performance on record.

In many of my commentaries I have alluded to the fact that I believe there will be increasing demand from China for gold as well as other precious metals. The way I see it, China is a huge success story, and their rate of economic growth will continue for many years.

The Chinese also seem to have a better understanding of the value of gold than many of their Western counterparts. And, now according to the World Gold Council (WGC) Chinese demand for gold is set to double in tonnage terms within just ten years. Frankly, I think we will see it double in less than ten years. If the demand for gold in China continues as it has for the last five years which has been at a rate of 13% per annum, then the demand is set to double in less than six years.

According to the WGC an increase in demand for gold in China will be the result of increasing demand for jewellery as well as an increase in investor demand. And, currently China is the world’s sixth largest official holder of gold. But, their gold reserves represent less than 2% of their total reserves, and therefore remain low by international standards. Even if they were to increase these reserves by 10% this would translate to an additional gold off-take of around 100 tons.

After a year long delay caused by an investigation into USD15 million, in missing gold, the Royal Canadian Mint released its 2008 annual report. Gold and silver sales exploded past the US$1-billion mark. The mint’s Ottawa operation sold 896,701 ounces of gold in coins, wafers and kilo bars in 2008, a 222% increase from 278,616 ounces in 2007. Sales of silver coins soared, too, to 8.8 million ounces from 3.5 million the previous year.  “Once again, it’s proven to be the asset of choice in times of uncertainty,” said Alex Reeves, a spokesman from the mint. Meanwhile, annual bullion sales and production figures for 2009, to be released next month, are expected to reveal more record breaking figures for the mint.

Recently, Kitco released an exclusive report about Eric Sprott of Sprott Asset Management who attempted to purchase gold from the IMF. According to information provided to Kitco by Frank Holmes, CEO of US Global Investors. “I just spoke with Eric Sprott, who bid to buy [the IMF’s remaining gold on the block] and they refuse to sell it.” Well how about that? I thought the International Monetary Fund (IMF) wanted to sell its gold. This to me is just another example of how governments attempt to manipulate markets. Recently, there has been a lot of talk about the gold and silver markets being manipulated and now as new stories begin to surface, there seems to be more truth in this than what was formerly believed.

In an article published on March 24, in The Telegraph, London, entitled Explain Why You Sold Britain’s Gold, Gordon Brown, writers Holly Watt and Robert Winnett describe how Gordon Brown has been ordered to release information before the general election about his controversial decision to sell Britain’s gold reserves.

Between 1999 and 2002, Mr Brown ordered the sale of almost 400 tons of the gold reserves when the price was at a 20-year low. Since then the price has more than quadrupled, meaning the decision cost taxpayers an estimated £7 billion, according to Mike Warburton of the accountants Grant Thornton.

It is understood that Mr Brown pushed ahead with the sale despite serious misgivings at the Bank of England. It is not thought that senior Bank experts were even consulted about the decision, which was driven through by a small group of senior Treasury aides close to Mr Brown. The link to the full article is here.

The non-farm payrolls released on Friday in the USA showed an increase of 162,000 jobs. However, unemployment remains at 9.7%. Unemployment in the Eurozone hit record highs and inflation also spiked. The jobless rate in the 16-nation Eurozone ticked up to 10.0% in February from 9.9 percent the previous month, reaching a record rate since the European single currency came into being in 1999. The figures published by Eurostat, the statistical office of the European Union, showed that amoung the member states, the lowest unemployment rates were recorded in the Netherlands (4.0%), and Austria (5.0%), and the highest rates were in Latvia (21.7%) and Spain (19.0%).

Eurostat, the EU data agency, also announced an unexpectedly swift rise in the eurozone annual inflation rate, up to 1.5 percent in March, a 15-month high and well above the 0.9 percent recorded in February.

Crude Oil traded above US$ 84 for the first time since October 2008. And, technically the chart on crude looks very positive. It seems to indicate a new trading range for crude which will be between US$80 and US$90.

The combination of weaker currencies, firmer oil, large deficits as well as a large disconnect between the physical market and futures, indicates gold is set to move upwards. Even if this period of consolidation continues for several more weeks or even months this is a buying opportunity.

There are many ways in which an investor can participate in this market, but initially, it is prudent to build a core holding of physical metal. This can be done by buying gold bullion bars and bullion coins. Make a commitment to accumulate some gold as if you were saving money. After you have accumulated some gold bullion then you might want to look at certain gold shares. Gold shares are a leveraged way to play a rising gold price. But, this is not always the case as can be seen in the performance of most South Africa gold shares. However, their poor performance can be attributed to the strong Rand.

TECHNICALS

As can be seen by the above chart, gold has been consolidating since December 2009. Once it breaks above the short-term resistance of US$1140 we may well see a rapid move to $1200.   

About the author

David Levenstein is a leading expert on investing in precious metals .He brings over 30 years experience in futures, equities, forex and bullion. And, although he began trading silver through the LME in 1980, when it comes to gold, he has traded gold bullion, gold coins, gold shares, gold ETF, gold funds and gold futures for his personal account as well as for clients. Over the years, David has been published in dozens of publications and has appeared on SABC 3, CNBC and Summit TV (South Africa), and is a regular guest on JSE Direct, a premier radio business channel in Johannesburg, South Africa. He is also a regular commentator on www.kitco.com,  www.mineweb.com, www.gold-eagle.com, and www.infomine.com David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.

For more information go to: www.lakeshoretrading.co.za

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.