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George Soros’s Biggest Buy is Gold - $64 Million in the Last Quarter

Jan. 14, 2011 9:48 AM ETGLD, SLV
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Gold and silver have fallen in most currencies today but are higher in the “commodity currencies” of Canadian, Australian and New Zealand dollars, and flat in Swiss francs. Gold and silver are both slightly higher for the week in US dollar terms but weaker in terms of other currencies.

Gold is currently trading at $1,365.95/oz, €1,023.11/oz and £861.20/oz.

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Baltic Dry Index – 5 Years (Daily)

European equity indices are lower after a mixed night on Asian equity bourses which saw the Nikkei flat and the Chinese CSI300 fall 1.36%. US equity index futures are marginally lower. Bond markets have not seen much movement but UK and Swiss (10 year) bond yields have risen to 3.63% and 1.81% respectively.

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Gold in USD and British Sovereigns – 10 year (Weekly)

The risk of growing inflation was acknowledged by Trichet after European inflation accelerated to the fastest pace in more than two years in December, led by surging food and energy costs. 

Stagflation risk in some periphery euro nations is further complicating the ECB’s efforts to deal with the sovereign debt crisis. Not helping matters is the fact that the ECB looks increasingly like the buyer of last resort of euro government bonds and ‘quantitative easing European style’ will have ramifications for the multi-state currency.

Interest rates must rise internationally in the coming months to protect fiat currencies and contain inflation, but the risk is that this can lead to a sharp decline in economic growth and potentially a severe recession or global depression.

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Gold in USD and British Sovereigns – 60 Day (Daily) – Sovereign Premiums Rise

China’s central bank, responding to surging inflation in China, said that it will raise the reserve requirement ratio for the nation’s banks by 50 basis points. Once the inflation genie is out of the lamp it is very difficult to get it back in as was seen in the 1970s.

The extremely fragile nature of the recent global recovery is seen in the Baltic Dry Index (see chart above) which is back near levels seen during the financial crisis in late 2008. This may be a harbinger of a global recession.

George Soros’s Biggest Buy is Gold - $64 Million in the Last Quarter
Many of those calling gold a bubble have done so simply on the basis of George Soros’s recent comments regarding gold being the ultimate asset bubble or becoming the ultimate asset bubble. Soros’s comments were somewhat cryptic and had some commentators claim that Soros was saying gold is a bubble and others claiming that Soros was simply saying gold would become the ultimate bubble.

George Soros said subsequently “It’s all a question of where are you in that bubble ... The current conditions of actual deflationary pressures and fear of inflation is pretty ideal for gold to rise.” This would suggest that he is bullish on gold, contrary to much of the media headlines and commentary.

As ever with hedge fund managers and large investors it is important to watch what they do rather than what they say. In the last quarter, Soros's biggest buy wasn't actually a stock. His firm spent $64 million on shares of the iShares Gold Trust (IAU).

When George Soros begins liquidating his gold holdings, it may be an indication that the gold bull market has run its course and it is time to reduce allocations. 

Demand for Physical Bullion Sees Silver Eagle Sales Soar and Premiums Rise
This week has seen further confirmation of very robust physical demand internationally and especially in Asia. This was seen in premiums rising to near 2 year highs in Hong Kong and Singapore and reports of shortages of gold kilo bars. The Perth Mint also reported unrelenting demand for gold bullion bars.

The tightness in the bullion market is not confined to Asia. There has been another surge in demand for silver American Eagles as seen in the figures from the US Mint. Zero Hedge reported that Mike Krieger made a disturbing observation on the trend: "In the first 12 days of January 3.4 million silver eagles have been sold. I have never seen anything like this. The amount of physical being taken off the market on this paper sell off is extraordinary. We must be very close to the end."

By “the end” Krieger means the point in time when the physical demand for silver bullion (which is a very small market) is large enough to force some Wall Street banks to close their massive concentrated short positions, thereby creating a short squeeze that propels silver to above its nominal high of 1980 (near $50/oz) to much higher prices.

Further confirmation of growing tightness in bullion markets is seen in the growing premium being paid for British Gold Sovereigns. Sovereigns are one of the most widely traded bullion coins in the world and the price of Sovereigns is correlated with the spot price (see chart above). Lately there has been an interesting development which has seen the spot price of gold fall while the premium paid for Sovereigns has risen (see chart above).

Demand for Sovereigns remains strong especially in the US where investors like the liquidity and smaller size (0.2354 troy oz) of the coins, and in the UK where they are Capital Gains Tax (CGT) free with CGT having recently been increased.

It is too early to tell whether this is a trend that will continue but with the continuing robust demand for Sovereigns it is likely to do so and it is worth keeping an eye on it. The trend strongly suggests that the recent weakness is short-term momentum players and that it is short term tech-driven rather than long term technical and fundamental-driven.

GoldNomics - Cash or Gold Bullion?GoldCore

The 'GoldNomics' educational video about gold can be viewed by clicking on the image above or on our YouTube channel: www.youtube.com/goldcorelimited

Silver is currently trading $28.45/oz, €21.31/oz and £17.94/oz.

Platinum Group Metals
Platinum is currently trading at $1,803.25, palladium at $790/oz and rhodium at $2,375/oz. 


(Bloomberg) Gold May Rise on Speculation About Chinese Demand, Survey Shows

Gold may rise on speculation that demand from China, the world’s second-largest consumer after India, will increase, according to a survey. Seven of 12 traders, investors and analysts surveyed by Bloomberg, or 58 percent, said the metal will climb next week. Four predicted lower prices and one was neutral. Gold for February delivery was up 1.1 percent for this week at $1,383.80 an ounce at 11:45 a.m. yesterday on the Comex in New York. Futures were heading for a third weekly gain in four weeks after rallying 30 percent in 2010, the 10th consecutive annual increase. Some investors purchase bullion as a hedge against inflation, which was running at the fastest pace in more than two years in China as of November. The country’s central bank raised interest rates last month. “Fundamentals remain strong, with strong physical demand, especially from China,” said Mark O’Byrne, executive director of brokerage GoldCore Ltd. in Dublin. “From a technical point of view, the trend remains bullish.” The attached chart tracks the results of the Bloomberg survey, with the red bars derived by subtracting bearish forecasts from bullish estimates. Readings below zero signal that most respondents expect a decline. The green line shows the gold price. The data are as of Jan. 7. The weekly gold survey that started six years ago has forecast prices accurately in 196 of 345 weeks, or 57 percent of the time.

(Bloomberg) China Should Boost Gold Reserves, Academic Writes in Newspaper

China should consider increasing its gold reserves given the “record growth” in the nation’s foreign exchange reserves, Jin Baisong, a research scholar with the Chinese Academy of International Trade and Economic Cooperation, which is affiliated with the Ministry of Commerce, wrote in a commentary published in today’s China Daily newspaper. China should keep its foreign exchange reserves at a “reasonable” level of $500 billion to $800 billion, with the remainder of reserve assets entrusted to financial institutions for investment in “profitable ventures,” Jin wrote. The nation also needs to hold U.S. Treasuries as an important economic “safeguard,” Jin wrote. If China sold its U.S. Treasuries, it may cause “panic selling” and trigger a “dollar crisis,” Jin wrote. That would weaken China’s economy and the nation’s security, Jin wrote.

(Bloomberg) European gold coin sales rising from early 2011

European gold coin sales have risen from “very low levels” at the beginning of the year, UBS AG said. Sales over the next few weeks will be “an important barometer of public reaction to any new Eurozone strategy,” UBS analyst Edel Tully wrote in a report e-mailed today. An expansion of European steps to help indebted countries “could drive a disillusioned German public to turn to gold, as they did in the second quarter last year,” she wrote.

(Bloomberg) Gold May Rise to $1,600 on Low Rates, Debts, GFMS Says

Gold may rise to $1,600 an ounce in 2011, 16 percent more than today, as low interest rates and the possibility of sovereign debt defaults spur demand for the precious metal, according to London-based researcher GFMS Ltd. Gold may attract a “major expansion in investment before the gold bubble inevitably bursts,” London-based GFMS said today in a report. Gold investment, including in bars and coins, will jump 15 percent in the first six months of this year from the same period last year, the researcher estimates. “We are looking at more of the price strength to occur later into the year,” said Neil Meader, head of research at GFMS in London. In the first half, “I certainly don’t think we could rule out a correction of substance. That could easily mean the low $1,300s” an ounce,” he said. Gold climbed 30 percent last year, rising to a record $1,432.50 an ounce in New York, as governments became net buyers of the metal for the first time since 1988, led by Russia’s purchase of 135 metric tons, according to GFMS. Jewelry demand rose 16 percent and bar hoarding more than doubled, the researcher estimates. “For prices to stay firm, the market is clearly dependent on investment,” GFMS said. “Investors and some official sector institutions will be very concerned at the growing risks of currency debasement, be that via inflation or depreciation, and of sovereign debt default.” Gold futures for February delivery fell $2.80, or 0.2 percent, to $1,383 an ounce by 11:58 a.m. on the Comex in New York.

(Bloomberg) Gold ‘Overdue’ for Drop, Rice Will Gain, Rogers Says

Gold is “overdue for a rest” and probably will fall after a decade of gains that sent prices to a record, said Jim Rogers, the chairman of Rogers Holdings who predicted the start of the global commodities rally in 1999. While gold “may go down for awhile,” the metal is “going to go over $2,000 in this decade,” Rogers, who owns gold, silver and rice, said today during a presentation to business executives in Chicago. Gold touched a record $1,432.50 an ounce in New York on Dec. 7. The price closed today at $1,387. “I’d rather own rice,” Rogers said. “I’d rather own something that’s more depressed than gold.” Agricultural commodities are “going to boom” as demand increases in developing markets, primarily in Asia, he said. All commodities will be supported by the weakening dollar, which is losing value because Federal Reserve Chairman Ben S. Bernanke is “printing money” by buying Treasuries in an effort to shore up the U.S. economy, Rogers said. “Paper money is made of cotton, and I’m long cotton, by the way,” Rogers said. “One reason I’m long cotton is because Dr. Bernanke is out there running the printing presses as fast as he can.” Rogers said he doesn’t own shares in U.S. companies and is short U.S. long-term treasury bonds. The Chinese renminbi may provide “almost sure profits over the next five to 10 years,” he said. “In the future, it’s the stock broker who’s going to be driving the cabs,” Rogers said. “The smart stock brokers will learn to drive tractors, and drive them for the farmers, because the farmers will have the money.”

(Financial Times) Gold price bubble a “high probability” says Deutsche Bank

The formation of a gold price bubble is a “high probability event”, warns Michael Lewis, commodity strategist at Deutsche Bank.

Mr Lewis says that the price of gold would need to rise above the $2,000 an ounce mark to represent a bubble but he notes that the factors that have driven the market higher in recent years are likely to continue in 2011.

... Mr Lewis also warns that a collapse of the dollar “cannot be dismissed out of hand” given the significant fiscal consolidation required in the US.

... He also expects central banks, particularly in Asia, to diversify their foreign exchange reserves further by increasing their holdings of gold and he says inflows into gold exchange traded funds will continue to increase, reflecting investors’ desire to find protection against the twin threats of deflation or rising inflation.

... Suki Cooper, precious metals analyst at Barclays Capital, says that investment demand for gold is likely to slow towards the end of 2011 but it will still be strong enough to push the price to a fresh record high.

Barclays is forecasting that gold will trade this year between a low of $1,300 and a high of $1,620, helped by the growing interest in physically backed ETFs and buying by central banks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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