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Sunday, February 27, 2011

Gold-Stater Gold Market update: Who Owns Gold?

Gold Stater World Gold market update Sunday Feb 27 2011: Who Own Gold?

Gold Market Trends. World Gold Council report.

The World Gold Council recently released its analysis of the 2010 Gold market. It is no secret in the gold market that Central Banks, for the first time in recent history, have turned from net sellers to net purchasers of Gold, led by the banks of emerging markets:

"First, emerging market economies that have been experiencing
rapid economic growth have been substantial buyers of gold.
The primary reason for this has been a desire to move toward
restoring a prior balance between foreign currencies and gold that
has been eroded by the rapid increase in their holdings of foreign
currencies, principally the US dollar. For this group of countries,
gold has also become an increasingly attractive means of
diversifying their external reserves. As a result, emerging market
purchases of gold have made a significant impact in reducing
the quantity of gold the official sector had been supplying to
the market each year. Second, European central banks holding
a significant amount of gold in their external reserves have had
a reduced appetite for sales in the wake of the financial crisis."

We all know that the central banks of China, India, Russia, Brazil, Saudi Arabia, have been avid purchasers of gold.

But what may surprising is that consumer investment demand for gold is following the exact same trend:

Investment demand in China was UP: 29%, India 66%, South Korea 21%, Russia 12%, Viet Nam 11%

While in the United States of America investment demand for gold was DOWN 12% for all of 2010. For Europe, it was down 9%.

This certainly flies in the face of all claiming that gold is in a bubble. How can a bubble form when everybody in the world's largest and most advanced economy is shunning the investment?

Shunning? Really? Okay, perhaps not shunning. But the World Gold Council statistics speak for themselves.

What could be the reason that investors in China and Russia etc are flocking to gold, and investors in the US and Europe are far more recalcitrant?

If you ask your investment advisor here in the US, he'll patiently explain that the US has much deeper and more complex markets that offer a host of far more stable and reliable investments, such as stocks, bonds. And if you check the asset allocation models that your investment advisor is obliged to push, you'll see that commodities as a group comprise, about 5% of the model, and gold is a subset within that group. Many models are comprised of only Stocks and bonds, with a tiny percent allocated (2-3%) in "Alternative Investments" of which gold, again, would be a tiny subset, along with real estate, art, oil, and commodities in general.

It seems amusing that the same Americans who pride themselves on being Self Reliant Mavericks, who love Maverick politicians, who watch TV shows and movies about Maverick Crime Fighters, when it comes to investing, they will meekly follow the orders of Investment Advisors who act as shills for the stock and bond funds they recommend.

So when you hear commentators wondering whether gold is in a bubble, ask yourself exactly what that means.

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