Geopolitical Instability Is Positive Gain For GOLD

Geopolitical Instability Is Positive Gain For GOLD - Elizabeth Kraus - Gold Coin Blogger

“We may see gold prices pressured by the upcoming China data, but just for a session or two. The more important factor is still the United States,” said Hou Xinqiang, an analyst at Jinrui Futures.
Physical demand stayed robust, and bargain hunting was seen in the Asian market after prices dropped and spot supply remained tight, dealers said.
“Supply is quite tight, especially in Hong Kong, because there hasn’t been much scrap sold back to the market, as people are still bullish on prices,” said a Hong Kong-based dealer.

Major factors driving the price of gold

Is the high level of national debt in the US as well as the Eurozone! Essentially, these regions are either bankrupt or about to become bankrupt. And, as the levels of debt, in particular that of the US is so high, there is no other way to finance this debt apart from issuing new debt–the QE 1 & 2 paper anchors are pulling the debt further up. Unfortunately, this is nothing more then a Ponzi scheme and the eventual outcome could be a total collapse in the US dollar.

Judging by the recent bond auctions in Europe, perhaps some of the worst skeptics may be convinced that all is being solved, however, just because the recent bond auctions in Portugal, Spain and Italy were successful, it does not mean the sovereign debt crisis in the Eurozone has been resolved. This is merely a temporary reprieve for the euro and these countries, and during the course of this year, I am convinced that we are going to see a further deterioration of the debt crisis which will cause the euro to drop further. And, while this is happening, despite the current exuberance on Wall Street, the US dollar is also headed for further losses this year.

Investors in European bonds should prepare for losses, says Pimco co-CEO Mohammed El-Erian. Nonetheless, it’s an exciting time to be an investor, especially for those who keep a sharp eye for well-placed bond offerings.

The next factor influencing the gold price is the size of the US national debt. Although it is difficult to know how large the national debt of the US really is, most government figures tend to indicate that it currently is around $14 trillion. While the US economy was thriving, and unemployment was low, US Treasuries represented a great and safe investment. But, those times are over and now as the US economy is fragile and the US dollar looks precarious, US Treasuries with their low yields are not such an attractive bet for investors. And, during last year we saw the largest holder of US debt – the Chinese – reduce their exposure to US Treasuries. Now the US Federal Reserve has become the biggest holder of US government debt! Then, probably the second largest holder of US debt consists of a diverse group of government sponsored enterprises, brokers, savings bonds, corporate and personal trusts and estates. The Chinese are now the third largest holders of US debt with Japan taking the fourth slot. According to the Federal Reserve, mutual funds hold the fifth largest amount of US debt, followed by US state and local governments that have more than half a trillion invested in US debt. US Pension funds also hold around $500 billion in US debt.

With the very real possibility of a serious melt down in the US dollar and the euro, investors need to find a safe haven in order to protect their wealth that could be totally wiped out in the event that these currencies should collapse. And, historically, gold has been proven to be one of the best ways to preserve wealth. So, it is no wonder why the demand for gold from individual investors is increasing.

Another factor influencing price of gold is physical demand.

China is the worlds’ largest gold producer. Recently, the Chinese Ministry of Industry and Information Technology said that they expect China’s gold production for last year to be above 340 tons. Actual output for the first 11 months of the year, according to official figures, was 308.39 tons, up 9.2% on the same period in 2009. In 2009, China’s gold output was 319. 98 tons. This is now the 6th successive year in which the country has raised its gold output.

And, of course central bank buying has an influence on the gold market.

It is important to note that central banks have now become net buyers of gold instead of net sellers. During 2010 the central bank of Russia purchased between 500,000 to 700,000 ounces of gold each month bringing the total of gold now held in reserves to around 750 tons. And, no doubt we will see this action continue throughout 2011. And, it is believed that China intends to increase its gold holdings from the current level of around 1054 tons. Even if they doubled this amount, the percent of their reserves held in gold holdings would still be a fraction of their total reserves, now estimated at around 2.85 trillion, and still below the percentage levels currently held by most Western central banks.

While there are other factors such as high inflation and geopolitical instability, with the high levels of debt in the US as well as the Eurozone combined with very robust demand for physical gold from China and India, there is no doubt the price of gold is headed higher, and what we are experiencing at the moment will turn out to be another correction in this huge bull market.

Source: http://goldcoinblogger.com/geopolitical-instability-is-positive-gain-for-gold/#more-2673