Gold price set to regain sheen as euro zone crisis stays strong

 Gold is heading for its first monthly gain since October despite initial losses in intraday trade on Thursday on lingering worries about the euro zone crisis just as debt-hit Cyprus reopened banks for the first time in two weeks. Copper hovered around the lowest in a week on Thursday, partly because of sluggish demand from top consumer China while brent crude held steady near $110 a barrel on expectations of a revival in demand in the US after an unexpected fall in product inventories.Gold is on track for a 1.3% rise in March — its first monthly rise in six — as worries flared up about the stability of the euro zone, stoked by the crisis in Cyprus and a political deadlock in Italy after inconclusive elections in February.Gold lost 0.3% at $1,600.01 an ounce by 1200 GMT on Thursday, but would still rise on a monthly basis, thanks to gains earlier in March. US gold futures for April delivery shed 0.2% at $1,602.60 an ounce. Although euro zone leaders said the bailout package with Cyprus averted a national bankruptcy that might have forced the country out of the bloc, analysts have expressed concern that the deal may push the troubled nation deeper into an economic slump.The precious metal also got support from comments of US Federal Reserve officials, reiterating that the central bank would do best to keep buying assets at its current $85-billion-a-month pace until the jobs market is on firmer ground. This means liquidity would remain adequate in the system, likely keeping price pressure within the economy alive and auguring well for gold, which is considered a hedge against inflation.However, gold-backed exchange-traded funds are set for their biggest quarterly outflow since inception, with investors beating a hasty retreat from the market due to a brightened global economic backdrop, according to Reuters. Holdings in the eight gold-backed exchange traded products (ETPs) tracked by Reuters are down by 7.2% to 70.66 million ounces this year. Other gold products such as the Comex Gold Trust also reported a quarterly decline of 241,548 ounces, it said. This means some fund houses are still betting on risky assets, including equities.Crude oil rose in intraday trade on Thursday on hopes a revival in US demand, although debt worries in Europe weighed. Brent crude oil gained 17 cents to $109.86 a barrel by 1030 GMT while US crude oil increased 16 cents to $96.74. US gasoline and distillates stocks dropped sharper than anticipated last week even as refinery runs increased, data from the Energy Information Administration showed, suggesting stronger domestic energy demand.However, copper fell as Chinese buyers adopted caution. Three-month copper on the London Metal Exchange dropped 0.14% to $7,596.25 a tonne intraday, adding to the previous session\'s fall. Prices are set to end the week with losses of almost 1%.BACK TO GLORY?* Gold is on track for a 1.3% rise in March as worries flare up about the stability of the euro zone* It also got support from comments of US Fed officials, who reiterated the bank would do best to keep buying assets at its current $85-bn-a-month pace until the jobs market is on firmer ground

Hedge Funds Most Bearish Ever on Copper, Favor Gold: Commodities

Hedge funds are making the biggest bet against copper on record as global inventories expand to a nine-year high, while concern that Europe’s debt crisis will spread spurred the biggest gain in gold bets since 2008.
Speculators raised net-short positions in U.S. copper futures and options by 53 percent to 25,719 contracts in the week ended March 19, according to Commodity Futures Trading Commission data that begins in 2006. A jump in bullish bets on corn, gold and natural gas boosted overall holdings across 18 raw materials for a second consecutive week.

Hedge Funds Most Bearish Ever on Copper, Favor Gold

Brent Lewin/Bloomberg

Copper tubes sit in a pile at a plant in Wada, Maharashtra, India. Inventories of copper monitored by the London Metal Exchange jumped 76 percent this year to 562,475 tons, the highest since October 2003.

Copper tubes sit in a pile at a plant in Wada, Maharashtra, India. Inventories of copper monitored by the London Metal Exchange jumped 76 percent this year to 562,475 tons, the highest since October 2003. Photographer: Brent Lewin/Bloomberg

4:49

March 25 (Bloomberg) -- Mark O'Byrne, executive director of Goldcore Ltd., talks about the outlook for gold and the U.S. dollar. He speaks from Dublin with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)

5:30

March 22 (Bloomberg) -- Simon Fludgate, head of operational due diligence at Aksia LLC, a New York-based adviser to hedge-fund investors, talks about Bank of Japan monetary policy and the implications for financial markets. BOJ Governor Haruhiko Kuroda said yesterday he’s confident in achieving a 2 percent inflation target, rebutting doubters who predict his efforts will fail as he prepares to strengthen monetary stimulus. Fludgate speaks from Tokyo with Rishaad Salamat on Bloomberg Television's "On the Move." (Source: Bloomberg)

Audio Download: Balchunas on Reaction in ETF Market to Cyprus

Copper prices are heading for a second consecutive monthly loss in what would be the longest slump since the end of 2011. Stockpiles monitored by exchanges in London, Shanghai and New York stand at about 873,000 metric tons, or almost five months of North American demand, and Barclays Plc is forecasting a second annual surplus. Gold climbed for three weeks, the longest rally in six months, amid turmoil over Cyprus’s efforts to win a bailout to avert its financial collapse.
“We’re sitting on unprecedented stockpiles of copper and other metals,” said Jack Ablin, the chief investment officer of BMO Private Bank in Chicago, which oversees about $66 billion of assets. “Demand has been pretty tepid for industrial metals. In the global economy, we’re seeing improving growth, but it’s still at a slow rate.”
Copper dropped 1.5 percent to $3.466 a pound on the Comex last week, the biggest retreat in a month. The Standard & Poor’s GSCI Spot Index of 24 commodities fell 0.9 percent. The MSCI All-Country World Index of equities declined 1.1 percent and the dollar rose 0.1 percent against a basket of six major trading partners. Treasuries returned 0.4 percent, a Bank of America Corp. index shows.

LME Stockpiles

Inventories of copper monitored by the London Metal Exchange jumped 77 percent this year to 565,350 tons, the highest since October 2003. Supplies tracked by the Shanghai Futures Exchange are at the highest since the data begins in January 2003. Chinese imports of the refined metal declined in February to the lowest in 19 months, while exports rose for a sixth month, government figures showed March 21.
Prices dropped along with most commodities last week as Cyprus neared the brink of financial collapse, reviving concern that Europe’s debt crisis will erode global growth. The continent accounts for 18 percent of copper demand, Barclays estimates. Overnight, Cyprus dodged a disorderly default and unprecedented exit from the euro currency by bowing to demands to shrink its banking system in exchange for a 10 billion-euro ($13 billion) bailout.

Air Conditioners

Sales of air conditioners and orders for electrical equipment suggest improving demand in China, Rachel Zhang, an analyst at Morgan Stanley in Hong Kong, said in a report last week. The nation’s passenger-vehicle market rose 20 percent to 2.84 million units in January and February in the strongest start since 2010. The transportation industry accounts for about 11 percent of the country’s copper use and household appliances 15 percent, according to data compiled by Bloomberg Industries.
“The risk appetite has certainly improved over the last several months,” said Nelson Louie, the global head of commodities at New York-based Credit Suisse Asset Management, who helps manage $11.3 billion. “The overall U.S. economy has shown resilience, and China seems to be improving as well.”
Investors withdrew a net $929 million from commodity funds in the week ended March 20, said Cameron Brandt, the director of research for Cambridge, Massachusetts-based researcher EPFR Global, which tracks money flows. Gold and precious metals had an outflow of $978 million.

Gold Gains

Gold prices have risen 1.8 percent in March, heading for the first monthly gain since September. The metal is still down 4.1 percent this year as the U.S. unemployment rate fell and assets in exchange-traded products backed by gold dropped 6.7 percent. Investors increased their bullish bets by 63 percent to 70,193 contracts, the biggest expansion since September 2008.
The precious metal has jumped 81 percent since the end of 2008 as central bank measures intended to stimulate economic growth increased speculation that inflation will accelerate. TheFederal Reserve on March 20 left unchanged plans to hold its target interest rate near zero percent as long as U.S. unemployment remains above 6.5 percent. The jobless rate last month was 7.7 percent.
Money managers increased their bullish bets on natural gas to 46,148 contracts, from 2,995 a week earlier, the CFTC data show. Oil wagers climbed 3.2 percent to 172,268 contracts, and those for gasoline rose 1.4 percent to 77,801 contracts. Natural gas advanced 18 percent this year as production gains slowed and cold weather bolstered heating demand.

Farm Bets

A measure of speculative positions across 11 agricultural products from wheat to coffee to cattle increased 9.1 percent to 265,475 contracts, the highest since Feb. 12.
Wagers on higher corn prices increased 66 percent to 145,535 contracts, the biggest gain since July 2010. Speculators reduced their negative outlook for wheat to 33,457 contracts from a net-short position of 41,519 a week earlier.
Corn stockpiles before the next harvest will fall to 632 million bushels, the lowest since 1996, the U.S. Department of Agriculture said March 8. The agency raised its forecast for use of the grain in animal feed by 2.2 percent to 4.55 million bushels. Soybean inventories may drop to the lowest since 2004.
“Prices are going to be driven by supply-and-demand considerations and technical factors for each commodity,” said Walter ‘Bucky’ Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama. “Crop inventories are creating support in prices for corn. The copper flows show there are still doubts about global growth.”
To contact the reporter on this story: Joe Richter in New York at jrichter1@bloomberg.net
To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

Gold shines in Dubai as trade said to hit record $70bn in 2012

Ben Flanagan, Al Arabiya -

Sunday, 24 March 2013

Dubai’s gold trade is estimated to have exceeded $70 billion in 2012, hitting record highs as more of the precious metal is exchanged and stored in the emirate.

Official figures show the gold trade was worth around $56 billion in 2011, and the figure for last year is estimated to be at least 25 percent higher.

Ahmed Bin Sulayem, executive chairman of the Dubai Multi Commodities Centre (DMCC), attributed the rise to greater confidence in the market and the trading infrastructure in the emirate.

“We expected that the gold-trade value would go down but it went up and reached $50 billion [in 2011]. I’m hearing numbers of $70 billion for last year in gold – or $80 billion,” said Mr Bin Sulayem.

Dubai’s gold trade was worth just $6 billion in 2003, according to the DMCC website, which quotes figures from Dubai Customs. That rose to $56 billion in 2011, made up of $33 billion in imports and $23 billion in exports.

Mr Bin Sulayem said official figures for Dubai’s gold trade in 2012 would be issued soon. But other experts shared his confident early estimates for last year.

Jeff Rhodes, the global head of precious metals and chief executive of INTL Commodities at the DMCC, said that Mr Bin Sulayem’s lower estimate of $70 billion was “credible”.

“$70 billion sounds quite possible,” said Mr Rhodes. “The growth of the gold industry in Dubai has been fantastic, certainly since the DMCC was created.”

Mr Rhodes attributed the rise in Dubai’s gold trade over the last ten years to both increased tonnage of gold traded, and the rising price of the precious metal. “That’s had a multiplier effect. The price of gold has gone up five or six times over that period,” he said.

Mr Rhodes acknowledged however that gold prices over the last six months are “sharply lower”.

The Dubai Gold and Commodities Exchange (DGCX), which is part of the DMCC, said recently it plans to launch the UAE’s first-ever spot gold contracts, which will allow investors in the country to buy and sell physical gold on a domestic exchange.

Mr Bin Sulayem confirmed the plans in an interview with Al Arabiya.

“Gold spot trading is going to be there, and we’ll have a full cycle of gold trading in Dubai... It will [happen] this year,” he said. “[The DGCX] is a fully-fledged UAE gold and commodities exchange. You have the attraction of no taxes, freedom of trade, ease of business.”

DMCC, which is located in the Jumeirah Lakes Towers district of Dubai, has subterranean vaults used to store gold and other precious items.

Mr Bin Sulayem said an increase in fees to store gold in Switzerland has led to a boost in gold deposits in Dubai.

“These fees that went up shocked [investors] – they never saw this coming. And that is a huge turn-off to investors,” he said. “When they come to DMCC and set up shop, they know that for 50 years there’s no tax hikes and everything is standard. But when Switzerland does that, they get paranoid with all the stories in Europe – the Libor scandal, and the issues that the euro zone is facing, Cyprus… They’ll move to a safer place. And I’m proud to say that DMCC is that place.”

Increased confidence is also seeing a shift in business to Dubai, Mr Bin Sulayem added.

“You’re sitting above one of the largest vaults in the world. In the very short term that vault will be full,” he said.

“You’re going to see more storage coming in Dubai. Because it’s not about just the cost... You have to look at what is causing the investors to bring their valuables and store them in Dubai. And if I was to sum it up in one word, it’s confidence.”

Gold Prices Remain Strong

Gold miner Newcrest Mining Ltd. (ASX:NCM) is optimistic on the gold price in 2013. And like a pilot fish benefitting from following sharks around, mining services provider Ausdrill (ASX:ASL) will likely get its share of the spoils too.

Let’s start with the first question everyone asks a gold mining company executive whenever they meet one: Where is the price of gold heading?

At the Mines and Money Conference in Hong Kong yesterday, Greg Robinson, CEO of Newcrest Mining, gave the answer every gold investor loves to hear: between $1,500 to $2,000 per ounce in 2013, reports Bloomberg.

“If I look at the preconditions for the gold price in the medium term,” Robinson made his case at the conference, “I think about monetary supply, currency devaluation, interest rate, inflation, political economic drivers.” “I’m confident about the gold price. I expect [it] to stay strong for the medium term,” Bloomberg quotes.

Notice that the reasons he and many other gold mining executives repeatedly give to back their expectations for higher gold prices have recently become long-term in duration. They don’t so much cite short seasonal demands that can lift gold prices for a few weeks or months. Today, they cite mostly macro-economic conditions that, once set-in, will exert upward force on the gold price for years—such as inflation and weakening currencies.

This means there is a whole new multi-year phase to the gold price that has only just begun. “There [are] more reasons to own gold today than there have ever been,” Eric Sprott, Chief Executive Officer and Senior Portfolio Manager at Sprott Asset Management, claimed at the conference. “I hardly think the crisis is over. The crisis is in full bloom,” quotes Bloomberg.

Now, if such demand by itself isn’t ample enough cause for a rising gold price, then just factor a shrinking gold supply into the equation, and you will really have a case then.

One major cause for a shrinking gold supply is the recent 18-month stagnating gold price. In fact, gold is currently trading at a discount to its future value. At the conference, Robinson described the effect, as quoted by The Australian newspaper. “Investors and market analysts are forecasting steeper ‘backwardation’ of commodity prices.”

Pause right there. What is ‘backwardation’? “A market is ‘in backwardation’ when the futures price is below the expected future spot price for a particular commodity,” defines Investopedia.

This means that a gold futures contract is currently trading below the price where gold is expected to be at when the futures contract expires. It is cheaper today than it will be at its expiration.

Hence, gold producers are reluctant to sell too much gold just now. Why lock-in a futures delivery obligation at today’s futures contract prices when spot gold at the time of that future delivery will be much higher then?

The consequence of this is lower than optimal revenue for the producers, as Robinson explained, “Recently the combination of lower commodity prices and inflating costs has resulted in lower profits and cashflow for all major companies. The project capital commitments and cost overruns have been aborting the cashflow the industry has been producing,” quoted The Australian.

At today’s low spot and futures prices, gold miners will sell only the bare minimum they need to keep them in business. They are saving the bulk of their inventory and un-mined reserves for the bigger payoff down the road.

In turn, the consequence of lower sales revenue means shareholders are not getting very much return on their investment at the present time, as The Australian confirms, “The drop in prices and revenue had meant the resources sector had not been able to reward shareholders with high dividends or capital returns.”

Extend the consequences chain a few links further and you can see that investors will not be readily forthcoming with new investment capital for such dismal returns as the miners are currently delivering. And less investment capital means fewer new mines opening for business, as Robinson summed up:

“The lower revenue drivers coupled to the current high cost of operations leaves new projects in a long taxi queue for approval and funding and that queue will continue to grow in the short term,” quotes The Australian.

Hence, lower commodity prices mean lower sales revenue, means lower returns, mean less available investment capital, means fewer new mines, mean a falling supply that cannot keep up with a rising demand. And this is great for the gold price.

We can expect, then, that since gold producers are expecting higher commodity prices in the near future, they will want to prepare themselves now by increasing their output capacity and profitability. This is precisely what Robinson reported the industry is doing.

http://www.wealthdaily.com/articles/gold-prices-remain-strong/4097

Gold-Stock Valuations 9

Gold-Stock Valuations 9
Adam Hamilton     March 15, 2013     2899 Words

Gold miners have to be the most hated sector in the markets these days.  At best they’ve been forgotten as the hyper-complacent general stock markets continue to inexplicably levitate.  At worst they’re utterly despised.  But the breathtaking bearishness choking them has left gold stocks incredibly cheap relative to their profits.  This is a dream come true for battle-hardened contrarians who really want to buy low.

Valuations are the fundamental heart of stock investing, ultimately driving the vast majority of long-term performance.  Investors buy stocks because they want stakes in companies’ future profits streams.  The less they pay for each dollar of future profits, the better their ultimate returns.  Valuations measure how much profits cost today.  The price of future profits is also a direct function of prevailing stock prices.

The leading valuation metric has always been the classic price-to-earnings ratio, which is simple in both concept and calculation.  Any company’s current stock price is simply divided by its latest annual earnings per share, yielding its P/E ratio.  This expresses how much investors are currently being asked to pay for each dollar of earnings.  Naturally the lower the better, smart investors buy earnings cheap.

A company with a P/E of 30x is said to be trading at “thirty times earnings”.  Investors buying this stock have to pay $30 for each $1 of profits.  But all dollars are fungible, right?  A dollar of earnings in stock XYZ is no better or worse than a dollar in stock ABC.  So why not look for stocks with lower P/E ratios, like 20x or 10x?  Why pay more for profits than you have to?  Paying too much radically lowers future returns.

Thus over time investors naturally gravitate to stocks with higher profits that happen to be languishing at lower prices.  This contrarian strategy yields the most bang for your buck, the highest long-term returns on your invested capital.  And you’d be hard-pressed to find a sector that is a better fundamental bargain today than the gold stocks.  Extreme bearish sentiment has forced them to deep discounts to their profits.

And considering gold stocks’ amazing bull-to-date performance, it is really surprising they are so loathed today.  Between November 2000 and September 2011, the flagship HUI gold-stock index rocketed an astonishing 1664% higher!  Over that same decade-plus span, the general stock markets as measured by the S&P 500 fell 14% and gold itself merely rallied 603%.  Gold stocks are unparalleled proven performers.

Yet since that bull-to-date peak, they’ve been consolidating and correcting.  As of last week, the HUI had fallen 46% over 18 months.  That certainly wasn’t the first consolidation in gold stocks’ secular bull, and wasn’t even close to being the biggest correction.  Yet it was enough to sour investors on this sector in an overwhelming way.  But while sentiment drove stock prices lower, gold miners’ profits continued to grow.

This mounting fundamental disconnect has exploded in recent weeks, leaving gold-stock prices drifting in some dark fantasyland totally divorced from reality.  For contrarian investors who like to buy their profits cheap to maximize their future returns, this anomaly has created an extraordinary buying opportunity.  This is readily apparent in the gold-stock valuations as measured by the elite components of the HUI.

On every month’s final trading day, we compute the market-capitalization-weighted-average P/E ratio of all the HUI’s component stocks.  The resulting valuations charted over time are very valuable in helping us understand when to buy gold stocks low when they are cheap, and later sell them high when they get expensive.  The latest read after February’s brutal 10.1% HUI selloff on the recent gold capitulation is amazing.

This first chart shows the raw HUI itself in red, its MCWA P/E ratio in dark blue, its simple-average P/E ratio in light blue, and its dividend yield (another classic valuation measure) in yellow.  Unfortunately some bad data in early 2012 infiltrated our last iteration of this research, which has since been corrected by our data provider.  So the HUI’s P/E ratios between February and May 2012 have been revised higher.

http://www.zealllc.com/2013/gsvalu9.htm

Sorry, No Gold Today…We Sent It to China

By Addison Wiggin • March 14th, 2013 • Related Articles • Filed Under

'The central banks' gold is likely gone, and the bullion banks that sold it have no realistic chance of getting it back,' Eric Sprott tells us.

He also says that these 'bullion bank' intermediaries are probably turning around and selling their gold to China.

China, by the way, is the mostly likely catalyst to set off the 'zero hour'scenario we told you about yesterday.

We've chronicled China's ongoing gold grab here at Agora Financial - going all the way back to April 24, 2009, when the People's Bank of China announced its gold reserves had grown to 1,054 tonnes - up from 600 in 2003. And that's the last official word.

Then there's private-sector demand in China. The government is equally opaque on this score. But we do get regular figures on Chinese imports via Hong Kong. Last year, they totaled a staggering 834.5 tonnes. And remember, that's in a market that produces only 3,700 tonnes a year!

Couple those imports with Chinese mine production - and the total amount of gold known to be inside China has doubled in a mere three years.

Then there are the voluminous statements by Chinese public officials best taken at face value...

• China's gold reserve is 'too small', says the Department of International Economic Affairs of Ministry
• 'No asset is safe now,' says the head of the People's Bank of China's research bureau. 'The only choice to hedge risks is to hold hard currency - gold.'
• And maybe most telling for our purposes: 'The U.S. and Europe have always suppressed the rising price of gold,' according to a commentary in the Shijie Xinwenbao newspaper, duly noted by U.S. diplomats in cables exposed by WikiLeaks.

Echoing a theme we first wrote about in The Demise of the Dollar (John Wiley & Sons, 2005), 'suppressing the price of gold,' the article went on, 'is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries toward reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the renminbi.'

The plot thickens: 'In 2009,' says Outstanding Investments editor Byron King, 'a high-ranking government adviser let slip that a special government task force recommended increasing China's gold reserves to a staggering 10,000 tonnes.'

What's more, 'word is already starting to leak out in Chinese newspapers that government officials intend to make the renminbi 'fully convertible' by 2015' - that is, able to be freely exchanged for other currencies.

Put it all together and the picture becomes clear: China aims to grow its gold stash tenfold to bolster the renminbi's credibility in only two more years.

We come back to Mr. Sprott's question: 'So where's the gold coming from?'

Germany Has to Wait 7 Years for Its Gold... Make Sure You Have Yours Now

In January, Germany's central bank posed the same question. It made plans to repatriate much of its gold stash - heretofore kept in France and America, the better to keep it out of the Soviets' hands in case the Cold War ever turned hot.

The process of moving 674 tonnes back to Germany is scheduled to take...seven years.

Not the sort of time frame that should make you feel warm and fuzzy about how much of the U.S. and French reserves are actual gold - or 'gold receivables'.

Which brings us back to zero hour in the gold market. On any given day, the amount of physical gold that's traded around the world is dwarfed by 'paper gold' - mostly futures. In the estimation of experts like our friend Egon von Greyerz of Gold Switzerland and Hong Kong-based hedge fund manager William Kaye, the ratio is 100-to-1.

Up until now, the ratio has posed no problem. Most people trading gold futures are in it for a short-term gain. But a few people always want to take delivery of actual metal. At zero hour, 'what happens is someday some guy or country wants to buy gold, and it's not going to be available,' says Eric Sprott.

The Comex can't deliver... and offers up a cash settlement instead.

'When does the last bar disappear and somebody fess up? We trade all this paper gold, but we now know there's nothing behind it, because you can't get delivery.' The timing is impossible to pinpoint... but 'we're living sort of hand to mouth already,' Sprott warns. 'So it could be quite imminent.'

When the day arrives, you don't want to be holding paper gold - and that includes exchange-traded funds like GLD. As we've pointed out before, the ETFs are subject to 'counterparty risk' - the risk that whomever you're doing business with won't, or can't, live up to their promises. Just like futures.

When zero hour comes, GLD's price will do what it's always done - track the Comex price of gold. Meanwhile, real physical gold in your possession will break away from that price... and you'll be glad you have it.

While Mr. Sprott hesitates to put numbers to his forecast, we can perform a little napkin math. If the Comex price is US$1,800, experience from 2008-09 shows that a Gold Eagle on eBay might go for a 30% premium - that's US$2,340! If panic takes over the Comex and the price rises to US$2,000, real metal in your hand will be worth US$2,600.

As the old commercial said, 'Accept no substitutes'. Own physical gold.

Regards,

Addison Wiggin
for The Daily Reckoning Australia

Central Banks Buying More Gold And Alternative Assets (Including Chinese Renminbi), Diversifying Away From US Dollar And Euro: WGC

By Moran Zhang | March 13 2013 7:02 AM

Against a backdrop of continued global economic uncertainty, central banks have begun to reduce reserve portfolio allocations to U.S. dollars and euros while increasing purchases of traditional assets such as gold and new alternatives including Chinese renminbi, a report issued by the World Gold Council said on Wednesday.

Declining credit ratings and economically unsustainable debt-to-GDP levels -- issues shared by many advanced economies -- are “long-term structural issues that are unlikely to go away in a short time frame,” Ashish Bhatia, Manager for Government Affairs at the World Gold Council, said by phone.

“Many central banks are already far along the way of diversifying their reserves, while others are just getting started,” he added.

The official reserves of global central banks have grown from $2 trillion in 2000 to more than $12 trillion in 2012, according to the report. During this same twelve-year period the data revealed significant shifts away from the U.S. dollar -- with dollar-denominated assets as the U.S. dollar’s share of total reserves declining from 62 percent to 54 percent -- while the share of “other” currencies in reserve composition has tripled in absolute terms since 2008.

The report assumes that central banks will reduce their combined allocation to U.S. dollars and euros from the current 74 percent down to 65 percent. In 2000, allocations to U.S. dollars and euros amounted to 78 percent.

The Canadian dollar (CAD), Australian dollar (AUD), Swiss franc (CHF), Danish kroner (DKK) and Chinese renminbi (CNY) are among the currencies in which emerging market central banks are increasingly investing. These assets have produced strong returns in recent years and are supported by healthy economic fundamentals.

China’s rise in the global economy has forced central banks to seriously consider renminbi-denominated assets.

As of now, the global statistics compiled by the IMF, also commonly referred to as the “IMF COFER data,” do not show the breakdown of renminbi. But it is widely understood that the allocation to renminbi is not very large.

Despite the attraction of the Chinese renminbi market, it currently remains difficult to access.

Foreign investors must be part of the Qualified Foreign Institutional Investor (QFII) program, which currently consists of approximately 13 central banks and sovereign related entities. Participation by individual institutions is limited to $1 billion, which is too small to provide adequate scale for central banks, the report said.

“While the Chinese debt market is $1.5 trillion large, the availability of that asset is quite limited, at around $200 billion,” Bhatia said.

Hence, after taking into account market size and access constraints, the WGC concluded that in an optimized portfolio, gold should receive a prominent 8 percent allocation, surpassing the 4 percent allocation to renminbi and 3 percent to Australian assets.

“We found that as these countries diversify away from the dollar and euro, gold is both a practical and quantitatively sound solution,” Bhatia said.

For one, gold has a deep and liquid market with no credit risk. Due to the large size of the gold market, approximately $3.2 trillion, central banks have sufficient access to gold for large investments.

For another, gold does not move in tandem with other assets and in particular tends to move in opposite directions as the risky assets, which central banks are eager to stay away from.

In line with this trend, central bank gold buying in the fourth quarter of 2012 marked the eighth consecutive quarter of net purchases by the official sector and the highest level since 1964.

They bought 534.6 metric tons of gold last year. Net purchases by central banks accounted for 12 percent of overall demand in 2012, compared with a 10 percent share in 2011. That’s also higher than the average of a four percent share over the past five years, the WGC said.

Until about four years ago, central banks as a whole have been a net seller of gold for 15 years. They became net buyers of gold in the second quarter of 2009, and have added 1,100 tons to global gold reserves since then.

The past year saw a number of new joiners added to the list of institutions building their gold reserves. Brazil and Paraguay were two such countries, and both made significant purchases during the year, according to the WGC.

“One thing that’s important to know is that trends in central bank positions take many years to play out,” Bhatia said.

The SPDR Gold Trust (NYSEARCA: GLD) and iShares Silver Trust (NYSEARCA: SLV) both ended Tuesday’s session in the green. Gold miners (NYSEARCA: GDX) such as Yamana Gold (NYSE:AUY) and Newmont Mining (NYSE:NEM), and Silver names such as First Majestic Silver (NYSE:AG) and Pan American Silver (NASDAQ:PAAS) all closed higher.

Gold Is an Investor’s Paradise

With so much attention being given to the record highs being set in the stock market, not to mention the jitters that accompany that, it only seems fitting that other asset classes might currently be worth a look. In fact, aside from the 30% drubbing that has been unique to Volatility (^VIX) lately, Gold stands almost alone in terms of its conspicuous under-performance, and that suits Bill Baruch, market strategist at iiTrader just perfectly.

"Right now, this is an investor's paradise for gold," the Chicago-based trader says in the attached video. "We haven't seen (gold) below $1500 since 2011, and right now we're pressing the lows on the year and I think it's a great buying opportunity."

To be more precise, this precious metal and previous reserve currency is within 3% of its 52-week low of $1535, which leaves it about 13% below its 52-week high of $1800. While Baruch admits "the slow grind higher for stocks" has diminished a lot of the luster of gold, he also believes that's a trend that can, and will, reverse quickly.

"We may still flush out a bit lower," he says, "but we could go from $1600 to $1700 in such a hurry that if you're not in, you're gonna miss it."

As he sees it, $1800 is a completely doable year-end price target and 20% gain opportunity, as long as the low-end of its price range holds.

"If we hold $1500, we're going to see $1800 by the end of the year," he says, citing short-sellers, frustrated gold bugs and economics skeptics in general, as well the prospects for continued easing by major central banks, including our own.

"A lot of people are speculating that the Fed is going to stop (easing) after 2013," he says, "but they're not. This market is still printing and the green light is still in on gold for the long term."

http://finance.yahoo.com/blogs/breakout/gold-investor-paradise-iitrader-baruch-says-144227139.html