Gold's Economics - 20th 

August 2008
How the economics of  Gold work to make it attractive to investors as money...

WHAT FACTORS EXPLAIN the glitter of gold for investors today? asks Sandesh Kirkire, CEO of
Kotak Funds, in Commodity Market, India's leading investment trading magazine.

   If we start with the basic factors, the reasons are simple. Ponder a little history of the human
economy, and you will realize that despite all the prosperity since civilization began, Gold alone still
carries its significance from that time. And, despite all the conjecture during the 1990s that gold was
slowly being relegated to disuse, the fetish and economics behind this metal remain firmly in place. 

   But why? Because 'money' is only as good as the 'exchange' it can bring for you, either now or later.
And this is largely dependent on the willingness of the second and third parties down the line from
your purchase to accept your 'money' as good. This is where gold comes in.

   Gold's 'value' is thus embedded in human history and collective psychology. It derives its economic
value from the basic human urge to possess its rarity and beauty. And it is this natural ability of
drawing human possessiveness that makes gold as the natural currency of the world, and helps gold
display characteristics quite perfect as 'everyday money'. 

   The economics of gold as determined by demand and supply factors reveal some interesting facts,
indicating the underlying momentum – as well as the partial rationale for this decade's bull market.
Gold jewelry demand comprises around 64% of the total global gold consumption. Aggregate
investment in gold comprises 20% of the total global gold consumption (Q1-2008). What
makes Goldan interesting preposition is that fresh gold supply has stood around only 62% of the total
global demand since 2005, with remaining demand being met by old scrap and previous holdings.

   It was, therefore, no surprise that Gold Prices remained continually upbeat during the period.
International gold prices, as depicted by the London bullion market, delivered 19% annual growth in
the 2002-2008 period. But there is more to this bull rally than simply the demand and supply
equation.

   The rally in Gold Prices also stems deeply from the complex relation it shares with the US Dollar and
crude oil, inverse with the former and direct with the latter. Since late 2007, the US Fed has acted to
bolster its decelerating economy by drastically reducing the interest rates. The collateral effect of this
was the weakening of international investor confidence in the Dollar. People consequently scrambled
to acquire value in other commodities, especially oil and Gold.

   To put that in perspective, in just the last year alone, gold has rallied by nearly 36%, while oil has
moved by 86% till date.

   Furthermore, it is expected that as the US economy declines further, the Gold Price may gather
further steam. It is due to this very reason – financial crisis and economic concern – that gold held
by Exchange-Traded Gold Funds risen strongly over the last year.

   Some may rightly argue that this was largely due to the low base effect. Yet it is important not to
overlook the fact that Gold Investment demand – led by Gold ETF trading – has been the only
segment of gold consumption to grow positively and overwhelmingly so far in 2008.

   Thus with crude oil touching $150 per barrel in the short run, and forecast to reach as high as $200-
400 in the medium to long run, the possibility that Gold – which has been highly 'oil co-related' – will
remain dormant is unlikely.

   Even with a historical low on the Gold:Oil Ratio of six barrels per ounce, gold is projected to grow to
$1,000 if oil goes to $150. So in the medium to long run, if the relationship with oil holds good and oil
continues to rise, the possibility of further gains in gold remains stronger than ever.
Commodity Online, 20 Aug '08

A nine-point checklist for secure gold investment...

LOOKING TO buy gold today? Here's a nine-point check-list for secure gold investment presented to
this week's Investor's Chronicle Gold Conference, hosted at the London Stock Exchange...

#1. Don't take it home, except maybe a few coins

History is littered with sad stories of people who bought gold (rightly) because they feared severe
economic contraction in their home country, and then made the mistake of holding their gold at home.
When they needed it they could not release its value because it had become contraband.

Think of Zimbabwe (now), Argentina (2001), Yugoslavia (1990s), Vietnam & Cambodia (1970s), Nazi
Germany (1930s), the USA (1933), Russia (1917). Gold secures your wealth when it is held in a
reliable country. This is unlikely to be your own country if you are wise to be buying gold.

2. Buy 'Good Delivery' fine bullion to save 6-10% over coins & small bars
The world's best gold (assayed at 99.5% or better, and traded 100% 'fine' – i.e. gross bar weight x
assayed purity) has a rock-solid perpetual guarantee of its quality and is, surprisingly, also the
cheapest. Good Delivery gold also sells for the highest prices. That's because Good Delivery bullion is
the spot market standard and is massively more liquid than coin markets.

3. Use allocated storage at a commercial vault – not a bank

Persuading you to hold your gold 'unallocated' lets banks finance their own liquidity reserve with your
gold. It is so attractive to banks that they significantly overcharge for the safer 'allocated' storage
option. So don't use banks to store gold. Instead, use fully allocated and insured commercial vaults;
they don't have a liquidity reserve requirement, and therefore have no motivation to overcharge for
allocated.

The wholesale storage rate (including insurance) is about 0.1% per annum in a commercial vault. It
will usually be many times that much in a bank. BullionVaultcharges 0.12% per annum, with a
minimum of $4 per month.

4. Direct overseas ownership

Don't get caught out by a trust deed or vault in the wrong jurisdiction. Think about exchange controls.
In a world of severe economic contraction, you would almost certainly still be able to travel (if you can
afford to buy the ticket), enabling you to physically collect your gold and realize its value outside
controls in your home jurisdiction. This is why direct overseas ownership often works better than
ownership through a trust. An intermediating trust deed could result in the ownership of gold
effectively being trapped in the country where the trust was set up.

5. Avoid certification. Insist on regular publication of bar lists & reconciliation

There are two big problems with gold certificates. Firstly they convert your gold into a security, i.e.
the certificate becomes the thing you own, not the gold itself, putting the issuer between you and the
gold, which means the problems of trusts apply again. Gold is a tangible good, so it does not need the
complexity of being wrapped as a security. You can own the stuff itself, and involve no-one else in
your title.
The second problem with certificates is that there's no way of knowing how many certificates have
been issued, which is a threat to your unique ownership. Modern technology can help here, by
allowing you internet access to view the register of all owners. BullionVault is the only custody service
in the world which publishes – every day – bar lists reconciled to individual private holdings. You can
see the public evidence of your holding, reconciled to the current bar list; our central register defines
who owns what, and eliminates the possibility of double counting. But however you choose to buy
gold, check your metal is separately identified on the reconciliation.

6. Make sure ownership records are independently audited

You want the auditor, and not the service provider, to vouch for how this thorough study reconciles
your ownership records with the physical property. See that the bullion is checked and reported on
annually by a qualified assayer.

7. Consider your crisis response

Could you effect a rapid location switch and/or international shipment? Currency crises blow up with
alarming speed. Gold stored via a stock-exchange traded instrument (such as a Gold ETF) is not
particularly mobile. There will usually be only one vault in one jurisdiction storing all the gold. The
problem is that trading out of that jurisdiction requires a three-day stock exchange settlement period,
after which your stockbroker will send your money to you, probably incurring another few days' delay.

You may well be safer if you can either instantly sell your gold and buy in another physical location, or
ask for your gold to be shipped. Both of these are simple transactions on BullionVault. The first you
can do on-line. The second takes advantage of the fact that BullionVault's vault operator routinely
transports bullion from one international vault location to another. The shipment can be arranged
without the bullion ever leaving the control of the commercial vault operator, which makes it much
easier and cheaper to set up – fast.

8. Right to withdraw for personal possession

If you choose the cost-savings, liquidity and security of using safe custody, you must also retain the
right to withdraw your property in full. All BullionVaultcustomers have the right to take possession of
their gold. Each gram is physically present in the vault of their choice, available for withdrawal.

9. Liquidity – look for 24/7 trading; don't rely on just one counterparty
Gold is not like a stock-market share. Most stocks only move when their local market is open. Gold
moves all the time. Since price action occurs during Asian, European and American market hours, you
should be able to act when the price moves, too. So you need a marketplace which stays open.

BullionVault is currently the only gold market in the world which is open 24 hours a day, 7 days a
week. On BullionVault, users also quote their own prices. So there are thousands of counterparties
free to quote to you, and to whom you can freely quote your own price.

One-counterparty systems, in contrast, force you to sell your gold back to the system operator. This
eliminates competition and allows the provider to quote wide spreads. Whereas free competition on
price massively reduces the cost of the spread.
Four crucial twists in the case for inflation-friendly, growth-friendly silver...

CASH-in-the-BANK is the nearest thing to "risk-free" that the finance industry offers. But bank
savings now mean "sure-fire loss" thanks to sub-zero real rates of interest.

The longer that interest rates stay below inflation, the more people will be forced to take more risks to
defend what money they've got – and one higher-risk choice is Buying Silver. It's slowly becoming
ever-more popular, at least amongst that handful of savers and investors who see tomorrow's inflation
in today's monetary policy.

Here at BullionVault for instance, and over the last 12 months or so, we've had more than 250
customers ask when we'll offer silver alongside our gold-dealing and ownership service. No other
single comment or query from our 16,500 users comes close. So now, our new silver market means
you can trade physical bullion – at live Silver Prices – and store it securely at low cost in specialist,
private vaults outside the banking sector.

You can start with a free ounce of silver today, if you wish. You'll be free of credit-default or bank-
counterparty risk, leaving you exposed solely to the Silver Price.

Before you register though, just why might you want to buy, own and trade physical silver anyway?

The case for gold is increasingly plain, as Société Générale strategist Dylan Grice notes in his much-
quoted Popular Delusions this week.

Sub-zero real rates of interest, plus huge and irreversible government deficits – funded by central
banks printing cash – make this rare, internationally recognized and tightly supplied monetary asset
as highly appealing as a store of wealth as it has ever been through 7,000 years of known history.

Silver, on the other hand, was ousted by gold bullion as the world's monetary anchor in the mid-to-
late 19th century. But it remained a medium of exchange well into the 20th century, and long after
gold had vanished from sight too, buried in central-bank vaults to be represented above-ground by
paper notes only.

Because silver is more than 17 times as plentiful as gold in the earth's crust, its use as money – both
in coin and as a measure of value – is far more common in the historical archives as well. Whereas
today, it holds much the same basic appeal as gold, but with four crucial twists:

#1. Gold/Silver Ratio

Historically (meaning from the dawn of recorded time to around 1900), one ounce of gold typically
bought 15 or 16 ounces of silver, and pretty much everywhere in the world too. Today, that ratio
stands at 65 times in the wholesale Spot Goldand silver bullion markets. (It's very much worse again
if you're trading small bars and coins, thanks to dealer mark-ups and margins.) Many analysts and
investors now expect the ratio to fall back towards its long-term mean, if not quite reach it. Even the
20th century average would see silver doubling in value against gold – which itself, of course, plenty
of people now see going higher against the Dollar, Euro and Pound Sterling anyway.

#2. Consumption
Whereas pretty much all the gold ever mined in history is still available – closely guarded but ready-
at-hand as jewelry, bars and coins – silver is somewhat closer to commodities like crude oil, soybeans
or orange, in that it often vanishes in its use. Consumption rarely affects gold, but silver's lower value
means recycling and recovering it isn't always economical. And because it tends to be a by-product of
other mining operations (mostly gold or copper), rather than dug up for its own sake, analysts don't
see silver's primary supply as responsive as gold or base metals to changes in price.

#3. Industrial Demand

Unlike gold, silver is predominantly used by industry today. So rather than offering deflation
protection (as gold most recently did after the collapse of Lehman Bros.), silver is strictly inflation-
friendly, with a number of fast-growing uses in both developed and emerging economies making it
look very growth-friendly, too. Excluding silver investing demand, London's VM Group analysts now
forecast an additional 350 million ounces of annual silver demand by 2020 thanks to:

 RFID tags for stock control and ID cards are "taking over from bar codes";
 Solar panels – forecast to grow by 20-40 times in 10 years;
 Wood preservatives to replace arsenic;
 Wound care & other medical use, food hygiene, and anti-odor textiles – because silver, a
biocide, inhibits bacteria.

All this growth might soon eat itself, of course, if industrial demand forces silver prices sharply higher.
But VM's forecast compares with total industrial demand of 450 million ounces in 2008, according to
the mining-backed Silver Institute. Meaning the case for silver doesn't rest solely on monetary chaos.

#4. Volatility
On average, and across the last 42 years, a 1% move in gold is matched by a 1.75% move in silver,
both up and down. Anyone expecting strong gains in gold, in other words, should expect exaggerated
gains in silver, but with greater risk. Just check the spike of January 1980 for proof. Gold prices tripled
in the last 6 months of the preceding year, but Silver Prices rose 5.7 times over, peaking at $50 an
ounce. The subsequent drop was just as severe, and much longer-lived.

What makes silver prices more volatile than gold? As US oil tycoons the Hunt brothers found when
they very nearly cornered the world's near-term silver supplies and forced that $50 peak 30 years
ago, silver is a very much smaller market by value. The wholesale bullion market in London – heart of
the world's gold and silver trading – turns over 18 times as much money in gold as it does in silver
each day. Physical demand each year, though nearly 8 times larger than gold by weight, is estimated
to be worth barely 11% of global gold demand at $15.2 billion.

Moreover, within those annual figures, gold's use as a store-of-value (meaning investment bars and
coins, plus jewelry) accounts for 87% of annual demand according to the GFMS consultancy. In the
silver market, only 35% of annual off-take goes to storing wealth (investment, jewelry, silverware).
That makes silver much more dependent on industrial demand, and explains why – very occasionally –
it more closely tracks movements in the price of copper than gold.

Still, investors aren't (or shouldn't be) looking for "diversification" when they add silver to their gold
holdings. Not in the sense of diversification that your financial advisor would use, just before you
remind how much you're losing in the bank and how much you stand to lose on bonds should inflation
take hold. The average daily correlation between gold and silver, right back to March 1968, has been
+0.62 (rolling one-month basis). It would be +1.0 if they moved precisely in lock-step, and –1.0 if
they moved precisely opposite. Gold's correlation with US stocks over both the last 40 and 10 years,
for comparison, is almost exactly zero.Gold's famous correlation with the Euro has been +0.51 since
the start of 2000. Whereas, during the bull market of the last 10 years, the statistical link between
gold and silver has risen to average +0.68, and it's stronger again at +0.77 for the last 5 years.

Silver, in short, tends to follow gold very closely – more closely than pretty much any pair of assets
you can name over the long term – but with bells on. Risk-free it ain't, but neither is cash-in-the-
bank. The appeal of Buying Silver to profit from inflation looks set to gain ground.

You can start with a free ounce of silver here.

The Global Yuan, Dollars & Gold - 10th September 2010

What China's internalized Yuan means for the Dollar and  Gold Investing...

WE HAVE written many times about the need for the Chinese Yuan to be a global currency and
eventually a global reserve currency – one of several, rather than simply replacing the US Dollar as
No.1, writes Julian Phillips of the Gold Forecaster.

We have also talked of how China had to develop its banking system before it could take such a
journey. And we highlighted the experiments that the Chinese were making first in Hong Kong, then in
Guanchow, in using the Yuan in international dealings.

More importantly, we highlighted the consequences to other world currencies, in particular the US
Dollar, of the Yuan becoming a well-used international trade currency. And the day is now here when
the Chinese are starting to propel the Yuan onto the international scene.

These consequences of its arrival will come over time, but they could come overnight. One
consequence is becoming even clearer, as we forecast, that the exchange rate of the Yuan will not rise
much on foreign exchanges. Another is that central banks will insure against currency crises in the
future by holding gold.

Should Chinese exporters and importers turn from a US Dollar price to a Yuan price for their deals,
this would emasculate the US Dollar as quickly as it takes for banks and international traders to re-
price their goods. If they act too quickly, the consequences could be chaotic for global foreign
exchanges. If handled carefully the Dollar's international use will simply fade, producing major internal
problems as these Dollars come home.

A number of the world's biggest banks have launched international road shows promoting the use of
the Yuan to corporate customers instead of the Dollar for trade deals with China. HSBC and Standard
Chartered are offering discounted transaction fees and other financial incentives to companies that
choose to settle trade in the Yuan. Both banks are now capable of doing Yuan settlement in many
parts of the world. All the other major international banks (such as Citigroup and J.P.Morgan) are
rushing to join the fray with their own road shows. Beijing wants this to happen now. Chinese central
bank officials are backing the banks in their efforts. Next year and beyond should see the Yuan
standing next to the Euro and the US Dollar on foreign exchanges.

Cross-border trade in Yuan totaled CNY70.6 billion ($10bn) in the first half of 2010, twenty times the
CNY3.6bn recorded in the second half of 2009. The eventual potential of global Yuan settled trades is
40 times this new level, up at $2,800 billion worth of goods and services currently settled in US
Dollars and Euros.

The development of the Yuan market will be rapid and very dramatic, we believe here at the Gold
Forecaster. But before we begin to discuss the consequences of this change, let's first reflect on some
salient facts:
  For every Yuan transaction in Chinese trade, there will be one less US Dollar or Euro trade;
 As with the US Dollar international market, there will develop an offshore Yuan market. (The
MacDonald's burger chain has already achieved a Yuan cash-raising bond offer.)
 The Yuan will be capable of being used between among countries outside China in trade
between themselves;
 Capital markets will always favor currencies that are based on a strong growing economy;
 Once international, the Yuan will take its place in central bank reserves.

Those are the facts, but what are the consequences for the global economy, the US Dollar's role in
international trade and in capital markets, and – as the globe's sole reserve currency – for the price
of Gold Bullion?

For now, this outlook is reserved for subscribers only. To get the full picture, even as it develops over
time, subscribe to www.GoldForecaster.com now...

Buy gold at the best prices, store it in the securest locations at the very lowest costs – go to  Bullion
Vault for a complimentary gift of Swiss gold now...