Claire Jones

Operation Twist has left gold bugs with little to shout about.

Since expectations of QE3 began to dwindle in early September, gold – long a hedge against currency debasement – has fallen to as low as $1,600, 16 per cent below its high.

Though talk of Operation Twist was the trigger, the plunge was worsened by investors cashing in on their gold in order to make up for shortfalls elsewhere. That is perhaps more disturbing than the fall itself – that gold can no longer be seen as the perfect hedge against volatility.

Both factors will weigh on demand from central banks’ reserve managers, who have helped drive up the price in recent years.

An additional concern for central banks is that gold is a very public investment; big purchases are usually broadcast. A fall in price would make them think twice about buying on the basis of fears that a further fall would prompt a raft of negative PR.

But there are also reasons to think demand will remain steady. It could even rise. Read more

Claire Jones

At a time when the European Central Bank is buying sovereign debt to stifle market panic, reserve managers at the eurozone national central banks are changing tack and buying gold instead.

This from the FT’s Jack Farchy:

European central banks have added about 25,000 ounces, or 0.8 tonnes, of gold to their reserves in the year to date, according to data from the European Central Bank and the International Monetary Fund.

That compares with average sales of almost 400 tonnes a year since 1999, as they swapped their non-yielding and unfashionable bullion for sovereign debt.

As the article notes, the bulk of the buying related to Estonia’s euro adoption, as it purchased gold to add to the ECB’s reserves. Malta also bought 3,000 ounces. That eurozone central banks have now become net buyers of the precious metal for the first time since 1985, then, is a result of the central banks not selling gold, rather than buying the precious metal in the quantities seen in emerging markets such as India.

But, even so, it is hardly a ringing endorsement of governments that eurozone central banks have turned away from their debt. And it does no favours to the ECB either. Read more

Political instability sent the modest troy ounce to $2,344 in January 1980, in today’s dollars: the price shot up to $850 (at the time) and fell almost immediately back down. Today’s situation – so far – is different. The gold price has risen gradually, prompted more by monetary events than by international strife. The falling dollar has a lot to do with it: fixing the dollar at its 2000 euro exchange rate would see a current gold price of $1,020, not $1,420. But if monetary phenomena provide the context for the gold price, what would a spot of political instability do? Record-breaking has become commonplace – and the price could rise to $2,300 per troy ounce without breaking it.

South Korea, holder of the world’s fifth-biggest foreign exchange reserves, is considering expanding its small holdings of gold to diversify its dollar-heavy portfolio.

Such a move could prove significant to the international gold market as Seoul currently only holds about 14 tonnes of the lustrous metal, equal to just 0.2 per cent of its $290bn reserves at current prices. By contrast, Italy and France each hold just under 2,500 tonnes of gold, amounting to more than 65 per cent of their reserves. Read more

Europe’s central banks have all but halted sales of their gold reserves, ending a run of large disposals each year for more than a decade.

The central banks of the eurozone plus Sweden and Switzerland are bound by the Central Bank Gold Agreement, which caps their collective sales. Read more

Alan Beattie

Ben Bernanke failing to blaze like a news comet in front of the House budget committee just now: US recovery steady but unspectacular; limited impact from Europe crisis so far; need to do something about the deficit in the medium term. The usual. One query came up from Paul Ryan (R-WI), the committee’s hawk-in-residence: why is gold hitting an all-time high? Is it a general flight from fiat currencies because investors think central banks are going to inflate the debt away?

Bernanke, predictably, thought (i.e. promised) not, offering the observation that gold was out there on its own “doing something different from the rest of the commodity group” and confessing that he didn’t fully understand movements in gold prices. Looking at long-term yields almost across the board, except for the default risk countries like Greece, it’s hard to argue he’s wrong. There are some anomalies that encourage investors to hold government debt, like the UK pension regulations which created artificial demand for gilts for a long time (one of the reasons the Debt Management Office was able to flog so many long-dated bonds), but not to this level. Gold still looks like the outlier, not the bellwether.

Venezuela is an unlikely taker for the IMF’s planned bullion sale.

The country plans to invest about $300m importing equipment to mine 36 tonnes per year. Tailings at a number of old mines show reserves of around 170 tonnes in the southern state of Bolivar. Read more

Traders are reporting interest from Asian banks in gold on sale from the IMF, says ReutersRead more

More diversification, more lending, decent growth, but no capital taxes. That’s the message from Alexei Ulyukayev, first deputy chairman of Russia’s central bank. (Confusingly, there seem to be three first deputies.)

Mr Ulyukayev has been busy talking to reporters today. He has announced: Read more

The Russian central bank will spend $1bn next week, buying 30 metric tons of gold from Gokhran, the state repository. Gokhran had planned to sell 20-50 MT on the open market, but cancelled after news of the sale leaked. The sale would have helped plug Russia’s budget deficit, and, apparently, purchase some diamonds from state-run miner Alrosa. Read more

This is a summary of part of Goldman Sachs’ 2010 commodity outlook

Gold will rise to $1,450 / toz by 2011 if the US government maintains its near-zero interest rate policy. However, as inflation is expected to remain subdued, gold prices are likely to come under significant downward pressure once the recovery strengthens and the Fed starts to raise rates.

Goldman Sachs’ gold forecasts now stand at $1,200/toz, $1,260/toz, and $1,350/toz on a 3-, 6-, and 12- month horizon respectively, with an average price forecast of $1,450/toz in 2011.

 Read more

“Investors view this as shockingly bad news”: one assessment of Dubai’s request for a freeze on all financing to Dubai World, the government’s heavily indebted flagship holding company. The requested freeze would last till May 30, and would cover DW’s troubled property unit Nakheel, which is due to pay back $4bn on an Islamic bond on December 14. Dubai sovereign CDS spreads rose 130bps from an overnight level of 318 and LSE shares fell – the exchange has a 20 per cent stake in Borse Dubai.

Meanwhile the “gold up, dollar down” trends continue. Sri Lanka has bought 10 tonnes of gold from the IMF Read more

Capital control, anyone? Emerging markets are taking action to curb currency appreciation. Brazil – whose economy is recovering well – introduced a 2% tax on foreign capital inflows last month, and has just announced a further measure, effective today: there will be a tax on American depositary receipts, which allow foreigners to invest easily in Brazilian stocks. Meanwhile Indonesia has announced possible capital controls, sending its currency sharply lower.

The flight to gold continues, Read more

This might seem like a currency special edition. The dollar fell after China hinted at renminbi appreciation. The People’s Bank of China said foreign exchange policy would take into account “capital flows and major currency movements”, a pointed reference to US dollar weakness and the large speculative inflows of capital that China is receiving. Those speculative inflows are a growing concern for many emerging markets, whose currencies are rising quickly: Taiwan, Russia, Brazil, Thailand and Chile are all planning how best to slow the influx of capital.

Dollar reserves have been going out of fashion over the past few months, and now two IMF economists have called for diversification away from the greenback. This will make Geithner’s (widely mocked) ‘commitment’ to a strong dollar even harder to achieve. Read more

More good news for China, Russia and India and more warnings for the US, UK and EU. George Soros asks if the new communist/capitalist divide has been replaced by a polarisation between international capitalism and state capitalism. Read more

Too-big-to-fail policies are giving banks the wrong incentive, namely to grow very big, very quickly. Clearing houses can collapse as well as banks, and Sri Lanka joins the rush for gold. Read more

The Fed has accused banks of ignoring the risks of debt backed by commercial real estate, with some worrying numbers about bank reserves. Gold climbs higher, but is it being pushed up by new type of buyer, interested in speculating rather than hedging?  Read more

Swedish finance minister prepares Swedish banks for Latvian collapse. Gold may be heading to $1,500 a troy ounce, with many investors confused why; and has the G20 already broken its pledge to transparency and a rebalancing of power? Read more