Ted Butler: Silver is already passing the test of time

Section:

Role of Gold as a Safe Haven
Becomes Stronger by the Day

Gulf News, Dubai
United Arab Emirates
Tuesday, December 13, 2005

http://www.gulfnews.com/business/Comment_and_Analysis/10004416.html

Going by the pronouncements of Governor Sultan Bin Nasser Al
Suwaidi, the UAE Central Bank has been waiting for more than a year
to buy gold at favourable prices to build up its reserves.

The Central Bank approach to gold, according to him, was one of a
shrewd trader: buying low and selling high. While there is nothing
wrong with the approach, it looks increasingly doubtful that the UAE
regulator would get a chance to execute this plan any time in the
near future.

For ever since the Central Bank made know its intention of getting
back into the market, gold prices have been on the upswing. Not
because the UAE plan has made a difference to the market, but
because of gold's own fundamental reasons.

Today gold is hovering about 25-year highs and market watchers say
all conditions have been fulfilled for a further rally toward the
yellow metal's record prices of the 1970s.

And the favourable factors include moves by some Asian central banks
to acquire more gold stocks from the market, not to trade it for the
margins, but to add to their reserves as an insurance against
uncertainties; a role that gold has played eminently throughout
history.

The gold market has been awash with rumours that China may start to
diversify its reserves in a big way by adding more gold. China
already holds 600 tonnes. Similarly, the Russian central bank
recently announced it plans to double its gold reserves. Central
banks in South Africa, Iran, Argentina, and Venezuela have also been
mentioned as probable buyers.

World gold reserves total about 31,000 tonnes, but the share of gold
in the reserves of countries such as China and India is less than 4
percent while some of the European countries have about 50 percent
of their reserves in gold. The biggest holder of gold bullion is of
course the United States, where gold accounts for 64 percent of the
total reserves.

While holding of gold reserves became less fashionable for some
central banks, including that in the UAE in recent times, the role
of gold as a hedge against inflation and insecurity is getting more
and more reinforced.

But even from a trader's point of view, offloading of the gold
reserves by the UAE Central Bank was ill-timed, if nothing else, as
things have turned out. The average price of gold when the central
bank offloaded half of its holdings in 2003 was $315 (Dirham1,157)
per ounce; the remaining lot was sold as the price was approaching
$400 as the metal breached a seven-year high in the wake of
persistent weakness in dollar and other problems with the US
economy. Even at that price, the bank could have gained at least
Dirham 50 million more on its holdings, although it can be pointed
out that such loss is only notional.

But today gold prices are hovering near $530 per ounce, which means
that if the central bank had held on to its gold assets, it would
have been worth almost double its value compared to the income
earned by offloading it. Gold prices have gained more than 25
percent this year itself.

On top of this, gold enthusiasts are betting on the metal going back
to the historic peaks of $800 plus as it happened in the 1970s. They
see a growing institutional disenchantment with financial assets and
a preference to more tangible possessions such as gold and real
estate.

In the backdrop of a global currency devaluation scenario as well as
the move by Gulf countries for a unified currency, total dependence
on the dollar, or any single currency for that matter, is the
subject of keen discussion among economists. They are also drawing
the attention of Gulf authorities to the 15 percent mandatory gold
reserves stipulated by the European Central Bank.

With a gold rush on, such calls sound much more compelling than ever
before.

-----------

The writer is a journalist based in the UAE.

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