Sissi -        Perspectives

Investing in Gold
12 October 2009

Years ago, I used to trade with gold bullion coins as many Chinese people in Hong Kong. One could go to any local bank to buy and sell them with no transaction fee. Right now, I no longer trade in real gold because finding a reliable dealer is not easy in North America. Nonetheless, I do keep tracking the movement of gold price as it affects the gold mining sector in the stock market. This page is compiled to study the gold price in the view of the demand and supply equation.

In the current recession, the solid foundation of international financial system is shaken by the credit crisis of the United States. Luckily, other countries with a large foreign reserve still keep the faith in the US dollar and have not yet switched their money to other safer conduits substantially. However in October, rumour has it that the Saudi Arabians are finally abandoning the US dollar and driving the gold price to another peak.

Gobal Movement

In Spring 2009, China made a surprise announcement that it has now a 1,054 metric tons in its gold reserve. Since 2003, the reserve has been quietly built up from 600 tons. This sharp increase of 76% makes China to be ranked fifth in gold holdings.

           Rank   Country           2009-Mar     2007
            1     USA               8,133       8,133
            2     Germany           3,413       3,417
            3     France            2,487       2,622
            4     Italy             2,452       2,453
            5     China*            1,054         600
            6     Switzerland       1,040       1,166
            7     Japan               765         765
            8     Netherlands         613         624 	
           16     Venezuela           364           -		
           17     India               358           -
           18     U.K.                310           -
           European central banks     537         604
           IMF                      3,217           -
            *data disclosed in official publications
          (Source: GFMS; old data in my files)

The gold reserve represents about 1.5% of China's total foreign reserve, which has also been steadily risen over the years.

                       RMB Yuan per             Foreign Exchange
                         SDR              Gold           Reserve
            Month        Yuan       Million troy oz  Million US$
            Jun 2009	10.6047           33.89        2,131,606
            May 2009	10.5769           33.89        2,089,491	 
            Apr 2009	10.2227           33.89        2,008,880
            Mar 2009	10.2201           19.29        1,953,741
            Feb 2009	10.0337           19.29        1,912,066
            Jan 2009	10.2017           19.29        1,913,456
            Dec 2008	10.5271           19.29        1,946,030
            Nov 2008	10.1701           19.29        1,884,717
            Oct 2008	10.1588           19.29        1,879,688
            Sep 2008	10.7100           19.29        1,905,585
            Aug 2008	10.7293           19.29        1,884,153
            Jul 2008	11.2052           19.29        1,808,800     
        (Source: China Economic Information Network,

Thus, China ranks first in foreign reserve (billions US$) in 2009.

             China            2,132 (2/3 in US$ securities)
             Japan            1,019
             Eurozone           531
             Russia             413
             Taiwan             321
             India              281
             South Korea        234
             Hong Kong          233
             Brazil             231
             Germany            184
             Singapore          182
            (Source:  Sept. 2009)          		               

Many Chinese scholars worry about the massive US securities that bring the exposure to the financial systems of both China and the United States. Nevertheless, the Chinese leaders at this moment still seem to maintain a slow approach in diversify China's foreign reserves. A couple of months ago, China revealed that she has sold a very small portion of her US$ bonds in a see-saw manner and has switched the money to Japan, Australia and other currencies. There is no information available about China's dealings in gold, although Mr. Zhang Bingnan, the vice chairman and general secretary of the China Gold Association, said China's gold import was expected to rise this year but he provide no figure in the Shanghai Daily, July 2009.

Personally, I believe China will not rush to accumulate their gold holdings now. China might just keep the focus in oil and mineral resources and the acquisition of overseas resource companies. It is interesting to note that China just entered the second phase of oil reserve program to reach a target goal of 26.6 million cubic metres in 2009.

For other nations of large foreign reserves, most do not intend to increase their gold holdings during this recession. For example, India has cut her gold import to zero and her consumers turned their jewelleries to scrap this year. The IMF is about to sell 403 tonnes of gold in the future years. This summer the ETF and European central banks also announced that they would decrease their gold reserves.

Nonetheless, the Central Banks would cap their gold sale to 500 tonnes annually according to a Gold Agreement to prevent price collapse. The agreement expired in September 2009, but most analysts had an opinion that the banks will renew the agreement.

Gold Supplies

According to the statistics of GMFS and US Geological Survey, the world gold production has reached a peak between 2001 and 2003 and has been generally decreasing afterwards.

                                        (5 yr average, 2003-2007)       2008 
       Recycled Gold (scrap)  ......................  952t (26%)      1,209t
       Net Central Bank Sale .......................  515t (14%)        236t
       Mine Production ............................ 2,209t (60%)      2,414t
                                           TOTAL    3,676t            3,859t

Because of energy requirements, shortage of skilled manpower, labour disputes and environmental concerns, the cost of gold production has increased sharply. In the current recession, gold exploration and mine development have drastically slowed down. Few large mine projects has started in spite of the high gold price that might render new projects more profitable. For example, a new mega project with a proven reserve of 18 million ounces and a cost tab of 3 billion US dollars was planned to start in October 2009 - the Pascula Lama mine development of Barrick Gold in the border of Chile and Argentina; Barrick Gold might use the company's billion coffer or get a financial arrangement from the banks. All in all, the global mine production would be just stable in the next few years. On the other hand, the surge of recycled gold scrap might offset the decrease of mine production.

Gold Demands

The following table summarizes the global gold demands:

                                     (5 yr average 2003-2007)           2008
            Industries .......................   474t (13%)           2,884t
            Investments  .....................   703t (19%)             692t
            Jewellery  ....................... 2,497t (68%)           2,191t
                                      TOTAL    3,674t                 3,859t
           (Sources: GMFS and elsewhere)

The trend of demands is presented below:

                              2007              2008                 2009/Qtr 1
        Jewellery   2,404Moz/53,696M$   2,186Moz/61,074M$       345Moz/10,079M$
        Industries    462Moz/10,307M$     436Moz/12,276M$        79Moz/ 2,301M$
        Investment    686Moz/15,293M$   1,183Moz/32,477M$       600Moz/17,523M$
           (coins)    137Moz/ 3,020M$     191Moz/ 5,280M$        73Moz/ 2,129M$
        TOTAL       3,551Moz/79,296M$  3,804Moz/105,826M$    1,0239Moz/29,903M$

The figures show that jewellery consumption and industrial applications have been decreased in recent years, but the demands of official coin and bar hoards have stepped up. The private investment is probably rising because of US dollar weakness and future inflation concerns.


Some investor advisors think gold will maintain the high $900 levels in 2009 and might go over $2000 in a couple of years. However, this bullish view is not shared universally. According to the forcast of Jim Steel, chief commodities analyst at HSBC Securities, an average price of US$925 in 2009 and US$750 in the lng term are foreseen.

According to a S&P report on the mining sub-industry, the fundamental outlook or gold is positive in the near future. The production and revenues of the sub-industry are expected to be positive in 2009 and a further rise in gold price into 2010. It is believed that the United States will post a rise in GDP in 2010 in contrast to the GDP decline in 2009. However, the unemployment will remain high in 2010. The inflation and the short-term interest rates will be likely kept as low as possible. Thus, gold investors might see opportunities elsewhere. On the other hand, the gold mine production should be stable or only marginally increased. Gold mine production supplies would not match the rising investment demand. The supply will be only offset by the expected increase from the recycled gold scrap. Thus, gold price are now supported by the private investors, although the weakness of the US dollar might finally push China and other countries with large US dollar reserves to diversify into other conduits - including gold.

At this writing, the gold price had been recently hovering about the $1,000 level from mid September to mid October this year. The US economy might already be entering into recovery phase of the economic cycle now. Based on available information, the gold price should be holding up around US$1,000 for the rest of 2009 and be rising higher at least to the first quarter of 2010. The same positive perspective also holds on the performance of gold mining sub-industry in the next few years.

Caution: This page should be read only as a supplementary comment. Click [Disclaimer].
Copyright: This page contains statistics or data hand-copied from published documents and Internet articles, wherever applicable the sources are clearly quoted and acknowledged, e.g. World Gold Council and GFMS Ltd. Anyone wants to use the copyrighted information, he/she should contact the source to check the terms of use.


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