View Full Version : Unpresedented physical demand for gold, JP Morgan under "unbearable" stress!

12-17-08, 04:58 AM
No link. While in NYC, as told by trusted source. Watch for news!

12-17-08, 05:08 AM

J.P. Morgan urges investors to buy gold for the holidays

J.P. Morgan analysts John Bridges and Steve Shepard recently advised, Wed be buying some gold for our Christmas stocking and Hanukkah gifts.
Author: Dorothy Kosich
Posted: Monday , 01 Dec 2008


J.P. Morgan metals analysts John Bridges in the U.S. and Steve Shepard in South Africa said that while they realize the difficulties gold miners face, "we feel they have probably underperformed enough for now, and we'd be buying the gold space for the run into the holidays."

In a recently published commentary on gold, Bridges and Shepard advised that "the tighter gold supplies and counterparty risk could give gold (and thus directly the equities) a lift through year end."

Investment Thesis

J.P. Morgan's analysis suggests that "gold has shown two faces to the market: gold equities have underperformed the S&P 500 since the beginning of this financial crisis, but gold bullion has outperformed the general markets handily. We continue to feel this results from the operational challenges the gold miners face as a group but points to upside potential for gold prices as mine supply continues to fall and now central bank sales diminish."

While Bridges and Shepard noted that "our favorite technician feels the dollar could strengthen further," gold should not "be simplified to being the dollar not." They asserted that gold does diverge from its relationship with the dollar "when the supply demand fundamentals for gold overcome the prevailing (price) relationship with the dollar."

"We see mine supply continuing to fall and now, with central banks depleting planned sales quotas, we expect official sector sales to fall quickly," the analysts forecast. "Given the very large above-ground gold stocks, falling supply does not guarantee stronger pricing, but it does, in our opinion, create the right environment for stronger prices."

"We'd be buying some gold for our Christmas stocking and Hanukkah gifts," they advised. "We like the pure play on gold itself and also our Overweight stocks Agnico-Eagle (AEM),Compania de Minas Buenaventura (BVN), Kinross (KGC), Goldcorp (GG) and Newmont (NEM)."

Gold equities disappoint

Nevertheless, Bridges and Shepard expressed misgivings on the recent performance of gold equities, noting, "Far from outperforming in a period of economic weakness, the gold equities have disappointed against gold and the S&P."

"We continue to believe that gold equities trade as a type of gold option," they suggested. "The size of the option is the amount of gold that underpins each share, and the exercise price of the option is the ongoing cost of production, which includes cash costs, maintenance capex and essential G&A. ...Option pricing models show that the exercise price is a key part of the value."

"Option price = Stock price*Probability - (Exercise price times Probability)."

The analysts said that it is reasonable to assume that the option value that gold companies represent will deteriorate "via a rising exercise price (cash costs) and/or falling ounces produced. We have one takeaway from industry's problems, and that is that the gold price must increase."

Central bank sales to collapse

"We believe the price of gold was artificially low starting in the mid-1990s as physical oversupply from the mines, central banks and forward selling pressed down on prices. The lack of new discoveries suggests to us that higher prices are needed to bring on new supplies," they advised.

J.P. Morgan's analysis concurs with that of GFMS, which expects central bank gold sales to collapse. "The banks are now close to ending a second agreement that limits total gold sales to 500 tonnes pa and with Germany, Italy and France unwilling to sell, we expect gold supplies from this source to fall," Bridges and Shepard suggested. "Now, with supplies falling (and a weaker dollar), the bank sales are slowing.

Physical gold, gold leases

The analysts also suggest that "the gold coin and small bar market has seized."

With the interest in gold growing, demand for gold coins and small gold bars has grown. "Tight coin supplies could have added to the panic of some buyers. Yet the gold price has been stable, and larger bars are still readily available," they noted.

J.P. Morgan's research revealed that gold lease rates "have picked up recently in an echo of the tightness in the coin market. ...We also understand investors are switching holdings from unallocated gold (a general liability of bullion banks) to allocated gold (a more secure custodial holding).

Jamie Dimon should have sent them the memo! LOL

12-17-08, 04:51 PM
No link. While in NYC, as told by trusted source. Watch for news!

Sapiens, what does "unbearable stress" consist of?

12-17-08, 05:27 PM
Sapiens, what does "unbearable stress" consist of?

owning gold mining shares.


The Outback Oracle
12-17-08, 05:32 PM
[QUOTE=grapejelly;66914]owning gold mining shares.


I'm past stress. I'm pretending they don't exist...which they almost don't!

12-17-08, 06:04 PM
World Gold Council Q3 demand report with a preview (http://www.research.gold.org/supply_demand/):

Gold demand, in tonnage terms, rebounded strongly in Q3 after several quarters of weakness. Identifiable demand totalled 1,133.4 tonnes, up 170.1 tonnes (18%) on the levels of a year earlier. In US$ value terms, this represented a 51% rise to $31.8 billion, an all-time record high and a 45% leap from the previous record set in Q2...The biggest contributor to the increase in total identifiable demand in Q3 was identifiable investment, up 137.5 tonnes (56%) relative to year-earlier levels.

12-17-08, 09:44 PM

Swiss gold bullion in huge demand as trust in banks dives
Swiss gold refiners are having great difficulty in keeping up with demand for gold bullion leading to long delivery times as investors wary of other stores of wealth.

Author: Arnd Wiegmann and Lisa Jucca
Posted: Wednesday , 17 Dec 2008

MENDRISIO/ZURICH, Switzerland (Reuters) -

Sealed off by grey concrete walls and barbed wire, the workmen in protective glasses and steel-toed boots at this smelter cannot work fast enough to meet demand from the nervous rich for gold.

This refinery near Lake Lugano in the Alps is running day and night as people worried about recession rush to switch their assets into something that may hold its value.

"I have been in the gold business for 30 years and I have never experienced anything like this," said Bernhard Schnellmann, director for precious metal services at the refiner Argor-Heraeus, one of the world's three largest.

"Production has dramatically increased since the middle of the year. We cannot cope with demand," said Schnellman, wearing a gold watch on his wrist.

Spot gold hit a record $1,030.80 an ounce on March 17. It fell below $700 in late October, partly because investors sold their holdings to cover losses in equity and bond markets hit by the credit crisis, and is now around $830 an ounce.

The trigger for the price to rise again could come from a much weaker dollar, making gold cheaper for holders of other currencies, and a renewed aversion to paper assets as governments and central banks pump large amounts of cash into the economy, stoking inflation.

Smoke billows as the molten gold, like glowing butter, is poured. To cool it, the worker drops it into water. It hisses as it hits. Once hardened in moulds, the gold bars are embossed with the refinery's seal. Workers wearing white gloves stack them into boxes like domino pieces.

Though Switzerland is not a gold miner, it is home to some of the world's largest refineries, which process an estimated 40 percent of all newly mined gold.

Argor-Heraeus is part-owned by the Austrian Mint and a subsidiary of Germany's Commerzbank. Commercial and central banks are its chief customers and it says it processes some 350-400 tonnes of gold and 350 tonnes of silver per year.

Customers buying gold bars, which can weigh more than 10 kg each, have to wait roughly a month, taking into account the year-end holiday season.

For those buying coins or ingots, which can fit into the palm of a hand, the delay is six to eight weeks. A year ago, these small products could be had within a couple of days.

Worries about the banking system globally have boosted worldwide demand for physical gold, the Gold Council said.

"Many (people) are afraid of leaving their money in banks," said Sandra Conway, managing director at ATS Bullion in London, which sells bullion and gold coins to institutions and the retail market.

"It's difficult to quantify, but I would say our turnover over the last three months has certainly doubled compared to the previous three months," she said.


Other Swiss gold refiners also say business is booming.

"Since the summer we have experienced a sharp rise in demand for certain gold products. The one-kilo bar has become very popular," said Fiorenzo Arbini, in charge of health and safety at Pamp, another large Swiss refiner.

"People used to buy certificates, now they want physical gold."

Schnellmann said the Argor-Heraeus smelter is operating at full capacity, three eight-hour shifts a day. Conquering the backlog by hiring is difficult, because each candidate has to undergo a security check.

Gold refiners were established in Switzerland to supply the watch industry and, later, jewellery-makers in Italy.

Switzerland's largest banks stepped in to replace a void in gold trading while the London gold market was shut after World War Two and again during a brief closure in 1968.

The former Soviet Union, another top gold producer, chose Zurich banks to handle most of its gold sales in the 1970s and 1980s.

"Gold has an image of being the asset of last resort. This could be viewed as old-fashioned but this is how enough people with enough money to matter think," said Stephen Briggs, a metals strategist at RBS Global Banking & Markets.


India, China and the Middle East remain the biggest gold importers, particularly for jewellery. But demand for physical gold has exploded also in Europe, the Gold Council said.

In Switzerland, home to the world's largest private banking industry, demand for gold bars and coins shot up six-fold to 21 tonnes in the third quarter of 2008, more than in any other European country.

Retail investment in gold rose 121 percent in the third quarter of 2008, an important contributor to the overall increase in global demand, the Gold Council said.

In that period purchases of gold bars by retail investors, who often buy through commercial banks, rose nearly 60 percent, notably in Switzerland, Germany, and the United States.

There was a surge of interest among professional investors shortly after the collapse of Lehman Brothers in September.

Private bank Julius Baer in October launched a fund to invest exclusively in gold bars stored in highly secured vaults in Switzerland.

"The fascination with gold has been there since the beginning of civilisation," said Schnellmann. "It cannot be explained: you can't eat gold, you cannot build anything resistant with it and yet people want to hoard it." (Additional reporting by Pratima Desai in London; Editing by Catherine Bosley and Sara Ledwith)

12-17-08, 10:02 PM
Sapiens, what does "unbearable stress" consist of?

I think we are soon to find out.