Full year:

The rush for money debasement around the world has escaped nobody’s attention, and as a result the one undilutable commodity (unless everyone demands physical delivery at the same time) gold has seen investors around the world scramble to get their hands on the commodity, either in physical form or via ETFs. The World Gold Council has released its Q1 2010 update, according to which “Investors bought 5.6 net tonnes of gold via exchange traded funds (ETFs) in Q1 2010.” This has brought the total amount of gold in monitored ETFs hit a new record of 1,768 tonnes ($63.4 billion worth of the shiny metal). Some more on the unquenchable demand for gold: “GFMS reports that the over-the-counter market saw a moderate increase in net demand during the first quarter. Meanwhile, previously existing long positions have generally continued to be very firmly held. Net long positions on gold futures contracts, a proxy for the more speculative investment, fell from the highs experienced in Q4 2009, but they remain high by historical standards.” Despite the persistently high price of gold, and despite the strength of the dollar over the past quarter, demand for gold is not going away.

More details on the Investment Trends as repoted by the WGC:

Exchange traded funds

Investors bought 5.6 net tonnes of gold via exchange traded funds (ETFs) in Q1 2010, bringing the total amount of gold in the ETFs that we monitor to a new record of 1,768 tonnes, worth US$63.4 billion at the quarter-end gold price. ZKB Gold ETF and Julius Baer Physical Gold ETF, both listed on the Swiss Exchange (SWX), recorded the strongest inflows during the first quarter, adding 10.2 and 8.1 tonnes respectively, as interest in the Swiss-based securities continued. These funds remain small, however, compared to SPDR® Gold Shares, or GLD as it is known, listed on the NYSE Arca and cross-listed in Mexico, Singapore, Tokyo and Hong Kong with 1,130 tonnes (worth US$40.5 billion) in assets. GBS Bullion Securities (listed on the London Stock  exchange) shed 7.8 tonnes in Q1, the largest net outflow of the ETFs we monitor.

GLD options

Trading in GLD options fell in the first quarter of 2010 to a total of 11.5 million contracts from 13.7 million in Q4 2009, but remained high relative to the historical average of 7.5 million contracts (from Q3 2008 to Q1 2010). Volumes sharply decreased from an average high of 283,072 contracts per day in December 2009 to a daily average of 143,168 contracts by March 2010. After retreating for most of January, call and put volumes spiked again on 5 February at 215,324 and 132,922 contracts respectively, the same day the yellow metal fell by more than 4.0% and reached the quarter’s low of US$1,058.00/oz, on the London PM fix. Subsequently, option volumes started to fall coinciding with the downward trend in gold volatility. At-the-money implied volatilities on the 3-month call and put options trended downwards during the quarter; implied volatility reached the high for the quarter on 4 February trading at 25.7%, finally retrenching back to 17.4% by the end of the quarter.

Gold futures

COMEX total non-commercial and non-reportable net long positions, a proxy for the more speculative end of investment demand, gradually fell over the quarter. The net long ultimately shed 7.1 million ounces to 20.8 million ounces by the end of Q1 2010, compared to the end of Q4 2009. On average, net long positions in the first quarter of 2010 decreased by 13.8% from  29.2 million ounces in Q4 2009. The net long fell for most of January and February, to later spike up back to 25.2 million ounces in March, as the trade-weighted dollar lost some ground from its peak in late February. This peak was short-lived, as the trade-weighted dollar gained momentum again (primarily on the back of continuing concerns surrounding fiscal and credit woes in Europe) and the net long position in gold fell back again. Overall, both long-only and short-only positions decreased over the quarter. Long-only positions fell by 13.7% on average during Q1 2010 relative to the previous quarter, more than offsetting a 3.0% reduction in short-only contracts during the same period. Whilst net long positions decreased on average during Q1 2010, the price of gold remained well supported throughout the quarter, as physical demand fl ows for gold appeared not to be driven by speculative trading. Nevertheless, net long positions on gold remain high by historical standards, as these kinds of investors also continue to see value in the gold trade.

Over-the-counter market

According to research carried out by GFMS on behalf of the World Gold Council, investor activity in the over-the-counter (OTC) market saw a moderate increase in long positions during the first quarter. Anecdotal evidence and preliminary analysis by GFMS suggest that this moderate increase reflects slower than expected commitment to gold from so-called ‘real money’ funds, partly on the back of dynamics between the gold market and global economic developments including the sovereign debt crisis in Europe. Meanwhile, GFMS believes previously existing long positions have generally continued to be very firmly held, with very  little in the way of liquidations in recent months. Moreover, gold’s strong performance in 2009 coupled with other considerations such as its portfolio diversification and inflation hedge characteristics were likely behind the fresh wave of allocations that  occurred at the beginning of 2010. Finally, GFMS finds evidence that most of the OTC activity has been on the form of “plain vanilla” rather than structured products, in particular in the form of allocated gold positions.

Bars and coins

The latest available data on coin and bar sales corresponds to Q4 2009 (comprehensive Q1 2010 data will be released in mid-May). Net retail demand for gold, which includes demand for coins, small bars, medals and imitation coins and other retail  investment, remained strong during the fourth quarter. It rose by 14.0 tonnes to 187.9 tonnes in Q4 2009, an increase of 8.0% on the previous quarter. This largely reflected a recovery in investment demand primarily in the US— which experienced the single biggest infl ow during the quarter from 19.0 tonnes in Q3 to 37.3 tonnes in Q4 2009—followed closely by India, which increased by 15.6 tonnes. Overall, European investment fl ows also enjoyed solid gains during Q4 2009 adding 7.2 tonnes. Whilst bar and coin demand in Q4 2009 was not as strong for China relative to Q3, anecdotal evidence suggests that Q1 2010 experienced strong demand for physical bars which kept suppliers (including importers to SGE) fabricating gold bars till the last day before the Chinese New Year holiday (14 February 2010)—a peak season for both gold bars and jewellery demand. In the US, first quarter data on American Eagle bullion coin sales from the US Mint shows a more modest picture relative to a very strong Q4 2009. Demand for 1-ounce coins in Q1 2010 was 271,000 ounces (8.4 tonnes), compared to 362,000 ounces (11.2 tonnes) in Q4 2009. Overall demand, however, remains high by historical standards. Investors wishing to purchase gold coins or small bars can find a list of retail dealers on our website at: http://www.invest.gold.org/sites/en/where_to_invest/directory.

Lease rates

The implied gold lease rate is the difference between the dollar interest rate and the equivalent duration gold forward rate—the rate at which gold holders are willing to lend gold in exchange for dollars (also known as the swap rate). Of the two components, the 3-month US Libor started to rise to 0.30% by the end of the quarter from around 0.25% in early January. The second component, the 3-month gold swap rate, fell to a low of 0.16% by the end of January from 0.39% in end-December 2009, before rising modestly back to 0.22% by the end of the quarter. Consequently, the implied gold lease rate turned slightly positive in Q1 after being negative for most of Q4 2009.

Commodity Online

In an online poll of a sample size of 21,600 respondents selected from across the globe, 93% or 20,100 of the total sample size had opined that there would be a fall in gold prices due to a recent upbeat mood in the global equity markets, while only 1400 respondents contradicted the stand, while 0.46% did not comment on either side. This showed that most of the respondents believed that there would be a fall in gold prices in near future due to recovery in global equity markets.

However, with regard to the other metals being an investment destination, most of the respondents maintained a view that they (base metals) can potentially become an alternative investment instruments. As many as 64.35% of respondents considered base metals as a potential investment instrument but of them, 53% still chose gold as a preferred investment instrument compare to base metals, while 46.76% preferred base metals to gold.

Similarly, of the total respondents as many as 53.1% believed that US dollar would replace gold from its status of ‘safe haven’. Looking at the recovery of US economy from the nightmarish recession which had started from the US and hit the world economy in 2008, dollar was found gathering steam once again. However, 46.8% of the respondents contradicted the view and maintained their skepticism towards dollar and put gold to their preferred investment mode.

The question is, how valid is this kind of sentiment poll?

“I just spoke with Eric Sprott, who bid to buy [the IMF's remaining gold on the block] and they refuse to sell it.” As Kitco points out, “the IMF might be holding out for a bigger buyer or a central bank or for higher prices. But Holmes argues the IMF’s rejection of Sprott’s bid means markets are being manipulated.” Back to Holmes: “I think there is a lot of manipulation done by governments around the world in the currency markets which affect the bond markets so to me it’s just normal course.” Holmes concludes “with an election year there may be a gold rally that could be two standard deviations, or $300 dollars, to the upside. So you could see gold run to $1300 to $1500 quite easily.”

This all isoccurring as ever more pundits finally realize that as fiats are discredited across the world, the only safe, non- dilutable resource is gold.

Click Here for ZH’s full post

In a blunt warning issued in a key report, the Bank also said that it is too early to conclude that unemployment has peaked.

It said that although thus far many workers had been willing to accept pay reductions, or reluctantly to work part-time, employees may have failed to realise that the costs of goods and services are likely to rise faster than their wages in coming months.

Stunning realism from the policy makers in the UK.

The topic that generates by far the greatest disagreement in the investment community, just after whether we will have inflation or deflation, is whether gold is cheap or expensive. And as much as gold is a speculative commodity, it does have roots in fundamental supply and demand. A good source in demystifying the fundamentals in the gold industry, The World Gold Council, has released its summary analysis of investment trends, and market and economic influences in the gold market in Q4 of 2009.

Key observations from the report:

Investors bought another 30 tonnes of gold via Exchange Traded Funds (ETFs) in the fourth quarter, bringing total inflows for the year to 573 tonnes. GFMS believes the global over-the-counter market was an important source of new net demand in Q4 2009. They note a strong pick up in OTC activity from September onwards driven by “non-traditional” investors taking out  long-term positions. The more speculative end of investment demand also remained strong, with total non-commercial and non-reportable net long positions on COMEX increasing by 27.0%, on average, to 22.0 million ounces.

Investment flows, dollar-hedging, inflation protection, and central bank buying all played a role in propelling the gold price to new records. Looking into 2010, a growing number of investors are worried about price stability, as the global economy shows increasing signs of recovery. The large sums of money supply that reached the market in 2008 are creating concerns that inflation may be looming. There is a strong, lagged, relationship between changes in global money supply and changes in the gold price.

Preliminary reports on fourth quarter jewellery trends in India suggest a continuation of the cautious recovery from the low demand levels in Q1 2009, helped by seasonal factors. Moreover, levels of jewellery recycling have subsided from the highs experienced at the end of 2008 and beginning of 2009. In China, the outlook remains resilient as the economy recovers, whilst the US market is still being impacted by higher US$ gold prices. Anecdotal evidence suggests global levels of recycling remained subdued despite the rise in the gold price. Separately, the pattern of behaviour among central banks and official sector institutions continued its recently established trend, as sales under the third Central Bank Gold Agreement (CBGA3) slowed to a negligible rate, whilst banks outside of the agreement clocked up another quarter of net purchases, according to our estimates.

The gold price rose for the ninth consecutive year in 2009 to US$1087.50/oz on the London PM fix by December end, from US$869.50/oz at the end of the previous year. This represented a 25.0% increase in the price of the yellow metal during 2009. Similarly, the average price of gold rose 11.5% to US$972.35/oz, from an average of US$871.96/oz during 2008.

Whilst market volatility has eased relative to 2008, gold price volatility increased in the fourth quarter to an annualised average of 19.7% from 15.0% in the previous quarter. Gold price volatility reached a peak of 26.0% on 21 December, measured on a 22-day rolling basis, as the price of gold fell from its historic peak of US$1212.50/ oz on 2 December to US$1084/oz on 22 December, at the London PM fix

Investment Trends:

• Exchange Traded Funds

Investors bought another 30 tonnes of gold via Exchange Traded Funds in Q4, bringing total inflows for the year to 573 tonnes. This took the total amount of gold in the ETFs that we monitor to a record 1,762 tonnes, worth US$62 billion at the year-end gold price. SPDR® Gold Shares, or GLD as it is known, listed on the NYSE Arca and cross-listed in Mexico, Singapore, Tokyo and Hong Kong recorded the strongest inflows during the fourth quarter, adding 38.3 tonnes, bringing the total to 1,133.6 tonnes (worth US$40.2 billion) in assets. It was followed by ETFS Physical Swiss Gold Shares—which was launched in September 2009 and is listed in the NYSE—adding 6.4 tonnes during Q4 to a total 9.5 tonnes in assets. iShares Comex Gold Trust, or IAU listed on the NYSE Arca, posted the third strongest gain, adding 4.7 tonnes during the quarter and bringing its total assets to 79.3 tonnes. ETFS Physical Gold (listed on the London Stock Exchange) experienced net outflows of 11.2 tonnes during Q4, although it added 44.2 tonnes overall during 2009. GBS Bullion Securities (listed on the London Stock Exchange) shed 7.8 tonnes during the quarter, although it had a net gain of the same amount during the course of 2009.

• GLD options

Trading in GLD options more than doubled in the fourth quarter of 2009 to a total of 13.7 million contracts from 5.7 million in the third quarter, and it more than tripled from the same period last year as both call and put option transactions increased. Volumes sharply increased from an average 132,277 contracts per day in early October to a daily average of 353,521 contracts in the fi rst half of December, subsequently easing to 212,624 contracts, on average, by the end of the year, much in line with movements in the gold price. Call and put volumes peaked on 4 December at 252,897 and 474,108 contracts respectively. Whilst options volume generally rose as the price of gold increased, the peak coincided with the largest daily drop in the gold price during Q4, when the yellow metal fell by 3.8% to US$1161.4/oz from US$1207.6/oz the previous day. At-the-money implied volatilities traded in a range of 20.0% to 27.0% on the 3-month call and put options; implied volatility reached the low for the quarter on 30 October trading at 20.4%, increasing to 27.3% by 9 December, and fi nally retracing back to 23.0% by the end of the quarter.

• Gold futures

Comex total non-commercial and non-reportable net long positions, a proxy for the more speculative end of investment demand, remained strong. The net long position reached 28 million ounces by the end of Q4 compared to 27.5 million ounces at the end of Q3. On average, net long positions in Q4 increased by 27.0% from 22.9 million ounces on average in Q3. The net long peak of 30.8 million ounces in early December coincided with the historical high in the gold price of US$1212.50/oz on the London PM fix, on 2 December. By the end of the quarter, net long positions fell slightly to 27.9 million ounces, much in line with movements in the price of gold. Overall, netlong positions rose on the back of an increment of 29.0% in long-only positions from Q3, which was partially offset by a 42.0% surge in short-only contracts during the same period. Whilst net long positions increased on average during Q4, the rise was relatively tame compared to the increment in the gold price, as demand fl ows for gold were probably not primarily driven by speculative trading.

• Bars and coins

The latest available data on coin and bar sales corresponds to Q3 2009 (comprehensive Q4 data will be released in mid-February). Net retail demand for gold, which includes demand for coins, small bars, medals and imitation coins, and other retail investment, remained strong during the third quarter. It rose by 17.9 tonnes to 185.9 tonnes in Q3 2009 from 167.9 tonnes in the previous quarter, an increase of 10.7%. This largely reflects a recovery in investment demand in non-western gold markets, partly offset by a reduction in net inflows in western markets. The single biggest infl ow during the quarter  occurred in China, followed closely by India, at 26.8 tonnes and 26.0 tonnes respectively. Whilst the third quarter was not as strong for the US, Q4 data on American Eagle bullion coin sales from the US Mint shows a more rosy picture. Demand for 1-ounce coins increased by more than 27% in the fourth quarter, on a quarter-on-quarter basis, and total demand for coins (including smaller denominations) rose by 66.0% relative to Q3 2009 and by 14.0% relative to Q4 2008, to a record 471,000 ounces (14.6 tonnes) during Q4 2009. Anecdotal evidence suggests a similar pattern in global coin demand.

• Lease rates

The implied gold lease rate is the difference between the dollar interest rate and the equivalent duration gold forward rate—the rate at which gold holders are willing to lend gold in exchange for dollars, also known as the swap rate. On the one hand, the 3-month US Libor rate remained very low at 0.25% during the quarter. On the other hand, the 3-month gold swap rate fell to a low of 0.27% by the end of October to later rise to 0.42% by mid-December as the gold price fell from its record highs in early December, and then back to 0.32% by the end of the quarter, as the gold price rose slightly again. Consequently, the implied gold lease rate remained modestly negative.

Market Influences and Outlook

The recovery in the global economy, especially in the countries like India and China, is likely to play a positive role in jewellery demand. However, jewellery was not a primary source of support for the price of gold in 2009. Investment flows, dollar-hedging, infl ation protection, and central bank buying all played a role in propelling the yellow metal to successive new highs.
Looking forward to 2010, a growing number of investors are worried about price stability. The large sums of money supply that reached the market in 2008 are creating concerns that inflationary pressures loom. Investors who do not believe higher inflation will materialize may still worry about the dollar outlook.

During our meetings and in surveys we conducted at conferences throughout the second half of 2009, we found that investors who hold gold, on average, have allocations of 5-7% in their portfolio. Yet, overall assets under management in gold remain  low. As of Q3 2009, we estimate that only about 1.1% of global assets are invested in gold, compared to other alternative investments which correspond to about 4.4% of assets. There is, therefore, ample scope for growth.

For example, of those investors surveyed, almost half (45%) were planning to increase their gold exposure, and only 1 respondent was planning to reduce it. More than two-thirds of investors cited gold being an infl ation and dollar hedge as their primary reasons for holding the yellow metal, and about half used it for portfolio diversification. Less than a quarter of those investors were using gold as a vehicle to express a tactical view, in line with other signs that many of the investment fl ows into gold have tended to be more strategic in nature.

Supply

The fourth quarter of 2009 was an interesting one for the official sector. Separately, the pattern of behaviour among central banks continued its recently established trend, as sales under the third Central Bank Gold Agreement (CBGA3) slowed to a negligible rate, whilst banks and official sector institutions outside of the agreement clocked up another quarter of net purchases, according to our estimates

The most significant development of the quarter was the announcement by the Reserve Bank of India (RBI) that it had bought 200 tonnes of the IMF’s 403 tonnes of planned gold sales. The move boosted the RBI’s gold reserves to 558 tonnes and lifted the proportion of gold in total reserves to 6.4% from 4.0% prior to the sale. The RBI announcement was followed swiftly by the news that Sri Lanka’s central bank purchased 10 tonnes of gold from the IMF in a transaction that tripled its holdings of gold, which now stand at 15.3 tonnes and account for over 22% of total reserves. Finally, the Bank of Mauritius announced that it had purchased a further 2 tonnes, doubling the bank’s holdings to 3.9 tonnes.

The CME group announced that margins for metals futures contracts on the NYMEX and COMEX will rise beginning February 12 by approximately 25% across various classes.  The initial margin for 100-ounce COMEX gold futures will increase to $6,747 from $5,403, while the maintenance margin will rise to $4,998 from $4,002. For 5000-ounce COMEX silver futures, initial margins will increase slightly less: from $6,075 to $6,750 while the maintenance margin increases by $500 from $4,500 to $5,000. Margin increases will be largest for palladium, where initial margins will rise from $2,363 to $3,713, coupled with a maintenance margin increase of $1,000 from $1,750 to $2,750. Additionally, as the full advisory indicates, the CME increase margins by various percentage for virtually all of its product groups.

Read the full piece here @ MineWeb

China reduced the number of gold producers but its total production continued to grow at a time when global gold production is in decline. Production grew by 11.3%. China’s gold production led the world for the third straight year (2007,2008,2009).