THE BUSINESS OF GOLD IN REVIEW

◄$$$ GOLD INDUSTRY IS TOPSY TURVY, WITH HUGE DERIVATIVES OVERHEAD, DECLINING PRODUCTION & YIELDS, BUT NO RECENT DECLINES IN CENTRAL BANK HOLDINGS. THE PROSPECT OF RISING ASIAN GOLD RESERVE HOLDINGS IS BOTH PROMISING AND CLEAR. $$$ Since early 2008, the divergence between the physical gold market and paper gold market has widened. Coins routinely were priced 20% to 30% above the corrupted paper market that improperly claims true price discovery. Coin sales worldwide grew sharply, up almost 125% in the US but up over 20% in Austria, where favorable laws enabled such sales. Due to tax differences, German citizens are induced in great volume to purchase Austrian coins, such as the beautiful Philharmonic gold coin. South African, Australian, and United States official mints could not keep up with demand, as growing demand overwhelmed short supply. In silver, where shortages are much more acute, coin prices were often at 100% above spot prices. At a recent calculation, under 3% of COMEX gold positions were backed by real physical gold. At the end of 2008, the nominal value of all open derivative positions was an incredible $605 billion.

Global mine output for gold has been in steady decline. If 2009 continues on course, it will make for the seventh decline in global gold output in nine years. The peak of 2650 tonnes produced in 2001 will not be easily exceeded anytime soon. Demand has been satisfied often by central bank gold dumping and recycled meltdown (see India). The new trend of note is that production has shifted to the emerging markets. While China, Peru, Russia, and Indonesia were responsible for 19% of world production a decade ago, their share in global output has now almost doubled to 34%. The considerable decline in production among the largest mining nations was compensated by growing output by smaller nations regarded as less stable. Neither Russia nor China in the last few years has contributed toward global gold output, since kept internally. They either consume it industrially or store it in their own central banks.

In the meantime, the gold content from gold mine ore has been gradually declining, as deposits become more challenging. They are also deeper in locations, thus costlier. The average gold yield in year 2000 was slightly above 2.0 grams per tonne of ore, but the ratio had fallen to 1.2 grams in 2008. Two explanations account for the lower yield. High grade deposits have largely vanished from the earth, or at least visibly so. But also, higher gold price in the last few years has rendered lower grade deposits more profitable to exploit.

Collectively, central banks around the world have shed much of their gold, with private hands taking the delivery. They have vigorously and destructively defended their currency values. In the 1940 and 1950 decades, gold comprised up to 70% of central bank reserves worldwide. Early in the 1980 decade, the figure fell below the 50% level. Since 1997, the proportion of reserves held in gold bullion has stabilized, but at a very low level at 10% or slightly above that level. What colossal irresponsibility of central banks, which have chosen the assured debauchery of paper currencies. The blame is equally on shedding gold bullion in small to medium quantities, as it is on growth and expansion of foreign exchange reserves. The variation is alarming, as only ten central banks hold almost 80% of worldwide gold reserves. According to the IMF, an alarming 51 nations hold no gold reserves at all. Among those nations with very large foreign exchange positions held in gold are China, South Korea, Japan, Brazil, and Singapore, in contrast to the usual suspects. See the central bank allocation of reserves, according to the Financial Times and World Gold Council.

China clearly has signaled an intention to markedly increase its gold held in reserves. Due to their rapidly growing total reserves, the share of gold among reserves has actually fallen. A stunning fact is that China has the greatest quantity of foreign exchange reserves, yet the lowest gold proportion. China's gold coverage ratio remains at 1.6% only. Even more stunning is the fact that if China were to acquire the entire 3200 tonnes of gold claimed by the Intl Monetary Fund immediately, their gold ratio would be around 5.0% still, below the international average for larger nations. Asian accumulation is on the march, as they command the trade surpluses, and their distrust of the USDollar grows by the day. Their gold share of reserves all uniformly low. Both the Chinese and Russians are pushing for a supra-national currency, like the IMF basket, as a temporary alternative to the US$ standard.