Gold – A SWOT Analysis

• Gold is an asset class which was used as an investment vehicle ( a store of value) since ancient times. Gold continues to be an important asset class even in modern times.
• Gold has ready marketability and Liquidity
• Gold is one of the few asset classes which have performed well in the recent times. YTD return on Gold investment has been more than 20% in 2010.
• Investors generally buy gold as a hedge or safe haven against any economic, political, social, or fiat currency crises (including investment market declines, burgeoning national debt, currency failure, inflation, war and social unrest).

• Gold is an idle Asset with no regular return profile.
• Gold storage has costs, including cost of insurance.
• Gold prices have been volatile in recent times. A correction cannot be ruled-out which may involve significant reversal.

• The factors which support bullish sentiments in Gold:
 Inflationary monetary and fiscal policies followed by US and other major economies which have supported price rallies in Gold and other commodities.
 Europe’s simmering sovereign debt crisis, which has not only undermined the euro’s appeal as an official reserve asset . . . but has also pushed the European Central Bank to pursue inflationary monetary policies . . . and has pushed more investors in Europe and around the world to seek the safety of gold.
 Continuing — if not growing — interest by the official sector. In particular, the central banks of a number of newly industrialized emerging nations are seeking to diversify official reserve assets into dollar alternatives. Many believe the official sector continues to be an important net buyer of gold — and could easily add another 150 to 300 tons — or possibly more — this year with sizeable net purchases continuing for years to come. Details of recent Central Bank gold purchases is given in subsequent paragraphs.
 Rising long-term saving, investment, and jewelry demand for gold from China, India, and other gold-friendly nations enjoying healthy growth in business activity and household incomes — growth that is likely to continue at least several years.
 The continuing maturation of what can be called as the “gold-investment infrastructure” — in other words, the development of new gold-investment products and channels of distribution in many important geographic markets.
 The relatively small size of the world gold market compared to other capital markets — such as equities or currencies — so that even small shifts in portfolio preferences away from currencies, or equities, or real estate, for example, may have little price effect on these big markets but will have a relatively large, indeed profound, effect on gold.
 The recent onset of global food and agricultural inflation.
 Stagnant world gold-mine production for the next five years or longer.
• Recent Central Bank Purchases of Gold:
 After two decades of selling, at an average annual rate of some 400 tons per year, Central Banks became a net buyers of gold in 2009, adding more than 400 tons to total official-sector holdings.
 Last year, in April 2009, China’s central bank, the People’s Bank of China (PBOC), announced that it had purchased 454 tons of gold from domestic mine production in the six years beginning in 2003 . . . but it did not include these acquisitions in its official reserve accounts until last April. Since then, official reported reserves have stood steady at 1054 tons making China the sixth largest holder of reported official gold reserves. Only the United States, Germany, the IMF, Italy, and France hold more.
 Russia, Kazakhstan, and the Philippines have bought gold from their own domestic mines.
 Last year, India bought 200 tons “off the market” directly from the International Monetary Fund. This was nearly half the total quantity the IMF was obliged to sell over several years to raise cash for its operating budget as well as to aid some of its poorest member countries.
 Sri Lanka and Mauritius also purchased small amounts last year from the IMF.
 In June 2010, Saudi Arabia announced substantial gold purchases by its central bank. SAMA, the Saudi Arabian Monetary Authority, purchased nearly 180 tons in the first quarter of 2008 but chose not to report this addition to official reserves until this June.
 IMF announced its latest “off-market” sale — this time 10 tons to Bangladesh, a relatively small quantity in the scheme of things but a big purchase for Bangladesh, bringing its total gold reserves up to a still-meager 13.5 tons.
 To recap, this brings total IMF sales under its gold-sales program to 310.3 tons, of which 222 tons went directly to a handful of central banks and another 88.3 tons since February has been sold into the world market.
 Bank for International Settlements : Another sign of gold’s rising importance and rehabilitation as an official reserve asset has been the use of gold swaps early this year by the Bank for International Settlements as a vehicle to facilitate the mobilization of central bank gold without having to sell metal in the open market. Between, last December and April, the BIS took some 378 tons onto its balance sheet from one or more anonymous central bank — possibly Greece, Ireland, Portugal, Spain of another heavily indebted European country. The BIS serves as a sort of central bank for central banks and as counterparty to national central bank financial transactions. In a gold swap, the BIS exchanges currencies — the dollar, the euro, the yen, perhaps even the yuan or other national currencies — for physical gold usually for a fixed maturity.

• The gold market is also subject to speculation as other commodities are, especially through the use of futures contracts and derivatives.
• Today, like most commodities, the price of gold is driven by supply and demand as well as speculation. However unlike most other commodities, hoarding (saving) and disposal plays a larger role in affecting its price than its consumption.
• Gold prices have been volatile in recent times. A correction cannot be ruled-out which may involve significant reversal.

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