Tuesday, October 23, 2012

Ten Nations That Control the World’s Gold


The latest report from the World Gold Council shows it is now more obvious than ever that gold is becoming the new global reserve currency. Continuous and aggressive central bank actions from the United States and Europe are driving the demand for gold. Investors have not yet seen any of the real hyperinflationary pressures that seem likely down the road.

Gold’s substantial rise in price should speak for itself. In dollar terms, gold returned 11.1% in the third quarter and was up by 16% year to date through the end of the quarter. The World Gold Council said that gold has a low stock market correlation through time. That was not the case in the third quarter. Gold still outperformed almost all the major equity markets in the largest gold-holding nations in 2012.
24/7 Wall St. analyzed how the gold rankings compare to each major nation’s gross domestic product (GDP) and how those figures compare to the top 10 holders of gold. What is surprising in some cases is how countries with the largest GDP are not necessarily the largest holders of gold. Two small nations, the Netherlands and Switzerland, are major holders of gold. Under the terms of the Central Bank Gold Agreement among major European states, many countries are supposed to be selling gold but are not.
The United Kingdom’s $2.43 trillion in GDP is the world’s seventh largest, but its gold holdings of 310.3 tonnes rank only 17th in the world and account for only 15.9% of its total foreign reserves. Does the old term “pound sterling” mean that the British banks really care more about silver? Another standout exception is Brazil, which has tiny gold reserves compared to its GDP. Its $2.5 trillion in GDP ranks sixth in the world, yet it holds only 33.6 tonnes of gold, or 0.5% of foreign reserves. Brazil ranks a surprising 52nd in the world among gold holders.
The International Monetary Fund is the third-largest official holder of gold, with more than 2,814 tonnes. The European Central Bank ranks right behind India, with 502.1 tonnes and 32.3% of its total foreign reserves held in gold. Central bank buying of gold was recently undertaken by Russia, Turkey, Ukraine and the Kyrgyz Republic. Turkey went as far as raising the gold reserve requirements for its commercial banks.
The World Gold Council report shows low borrowing costs and the support of financial markets spur gold accumulation. Gold is no longer just an inflation hedge; it is the key protection against a global race to devalue currencies, even if consumer prices are somewhat stable. Bonds pay historically low rates and stock market volatility has spooked many investors, so gold is becoming the true safe haven.
Major central banks are growing their balance sheets by purchasing trillions of dollars in paper assets. The World Gold Council said that research showed that a 1% change in money supply, six months prior, in the United States, Europe, India and Turkey tends to increase the price of gold by 0.9%, 0.5%, 0.7% and 0.05%, respectively. The Council also said that inflation is still several years off and many central banks have been more worried about deflation. Investors would be well advised to heed a warning from bond king Bill Gross, who told global investors to have exposure to hard assets, which will rise in value with inflation.
24/7 Wall St. has listed the 10 nations with the largest gold reserves, along with the percentage of total foreign reserves held in gold, each nation’s 2011 GDP and how it ranks in the world, and the local stock market performance. We have added analysis about how the potential unraveling of the euro could play into the future buying or selling of gold by European nations. For nations outside Europe, we have provided some historical context and predicted the path that their central banks are likely to follow in the years ahead.

10) India
> Gold reserves: 557.7 tonnes
> Pct. of total foreign reserves: 10.0%
> GDP: $1.82 trillion (10th highest)
> Stock performance: Bombay BSE up 7.6% in Q3, up 21% YTD

While India ranks 11th on the World Gold Council list, it is 10th if you remove the International Monetary Fund. India has been a steady buyer of gold over time. That is likely to continue as the government needs to support its currency, even if the economy is volatile. India became an aggressive buyer in 2009, when it spent almost $7 billion to buy 200 tonnes of gold, which the IMF sold to raise capital. For the economy to support 1.2 billion people, the central bank must hold gold and hard assets. The Indian population is a large consumer of gold for jewelry and there is high demand for the precious metal to store wealth. India will thus continue to buy gold in the years ahead.
9) Netherlands
> Gold reserves: 612.5 tonnes
> Pct. of total foreign reserves: 59.8%
> GDP: $838 billion (17th highest)
> Stock performance: AEX up 5.1% in Q3, up 3.4% YTD
It is surprising that the Netherlands has so much gold. But it is also important to recall that the country is a former colonial power and has a long history as a very wealthy nation. Its population of 16.7 million ranks 63rd among all nations, while its GDP is the 17th largest in the world. As with some European nations, the Netherlands did not sell all the gold provided for by the Central Bank Gold Agreement. Now that the Netherlands is under some of the same pressure as many other European nations, it is unlikely to be a big seller of gold. It may need that gold to protect itself if the euro comes unraveled.

8) Japan
> Gold reserves: 765.2 tonnes
> Pct. of total foreign reserves: 3.2%
> GDP: $5.86 trillion (3rd highest)
> Stock performance: Nikkei 225 fell 1.5% in Q3, up 4.6% YTD
Japan has to hold large amounts of gold. The Bank of Japan has held interest rates at almost zero for about two decades. It recently sold gold so that it could pump about $200 billion worth of yen into the economy as stimulus after the tsunami and nuclear disaster threatened to send Japan back into recession. At some point in the future, Japan may need to buy that gold back to support its large monetary base. Until then, the yen remains one of the stronger global currencies, which makes exports more expensive. Japan’s population of 127 million is aging rapidly and birth rates are extremely low.
7) Russia
> Gold reserves: 936.7 tonnes
> Pct. of total foreign reserves: 9.6%
> GDP: $1.85 trillion (9th highest)
> Stock performance: MICEX down near 4% in Q3, negative YTD
Russia continues to buy gold as its global economic ambitions grow. A previous 24/7 Wall St. analysis showed that Russia’s reserves were 784 tonnes in early 2011 after it bought 120 tonnes in the first 10 months of 2010, more than 100 tonnes in 2009 and close to 70 tonnes in 2007. The World Gold Council reported that Russia has added more gold, so that reserves likely will rise yet again. Russia is extremely wealthy in natural resources, and president Vladimir Putin and his allies want it to become more of an economic superpower. With a population of 142 million and Russia’s GDP of $1.85 trillion, its holdings of gold are likely to surge.
6) Switzerland
> Gold reserves: 1,040.1 tonnes
> Pct. of total foreign reserves: 11.5%
> GDP: $660 billion (19th highest)
> Stock performance: Swiss Market up 7% in Q3, up 9.4% YTD
Switzerland is the world’s private banker and so must be a top holder of gold. Still, it is amazing to consider that its population is barely 7.9 million and it ranks 95th in the world for population. Also, its dollar-adjusted GDP of $660 billion ranks only 19th. Switzerland sold gold from 2003 to 2008, right before the huge run up in gold prices. If Switzerland needs to devalue its currency to remain competitive, it can always sell more gold. Unless global banking disappears entirely, the Swiss will remain one of the largest holders of gold in the generations ahead.

5) China
> Gold reserves: 1,054.1 tonnes
> Pct. of total foreign reserves: 1.7%
> GDP: $7.3 trillion (2nd largest)
> Stock performance: Shanghai Composite 6.6% lower in Q3, 5.4% lower YTD

China’s economy has stumbled to the point that its official growth rate of 7.4% in the third quarter may feel like a recession. China has the ambition of becoming the largest economy in the world. It already is considered the world’s manufacturer. China must have hard assets along with its U.S. Treasury bond holdings to keep its currency pegged to the U.S. dollar. It has the world’s largest population, with more than 1.3 billion people, yet its GDP of almost $7.3 trillion is still not even half that of the United States. Whenever the yuan truly floats, China will have to have more hard assets and more transparent economic readings to support it. China added some 454 tonnes of gold between 2003 and 2009. When it finally adjusts its official gold holdings in the coming months, they are likely to be higher again.
4) France
> Gold reserves: 2,435.4 tonnes
> Pct. of total foreign reserves: 71.6%
> GDP: $2.77 trillion (5th largest)
> Stock performance: CAC rose 4.9% in Q3, up 6.1% YTD
France finds itself in an interesting position. Socialist president Francois Hollande is on a quest against many of the austerity measures implemented by his predecessor, Nicolas Sarkozy. France does not want to lose its “second-best economy” status in the eurozone, behind Germany. It will have to pay for the new economic measures and this poses a particular problem because the extremely wealthy, who are being targeted for high taxes, may continue to leave the country. France may ultimately need to sell gold. Although it is part of the Central Bank Gold Agreement as a gold seller, it may need a cushion in case the euro faces an outright breakup.

3) Italy
> Gold reserves: 2,451.8 tonnes
> Pct. of total foreign reserves: 72.0%
> GDP: $2.2 trillion (8th largest)
> Stock performance: Borsa Italiana MIB rose 5.7% in Q3, flat YTD
Italy is a financially troubled nation, and it is truly too big to bail out. By many measures it is the greatest economic risk to the rest of Europe and the balance of the major world economies. Italy’s 61 million population ranks 23rd in the world, but its dollar-adjusted GDP of almost $2.2 trillion ranks it as the 8th largest economy. The Italian government was also part of the Central Bank Gold Agreement, but there is a real conundrum now. Italy could sell gold to raise capital, but then it would lose its cushion if the euro unravels. It is almost impossible to imagine that Italy would be a buyer of gold because it has too many pensioners and benefits to pay for as is.
2) Germany
> Gold reserves: 3,395.5 tonnes
> Pct. of total foreign reserves: 72.4% of foreign reserves
> GDP: $3.6 trillion (4th largest)
> Stock performance: DAX rose 12.4% in Q3, up 22.3% YTD
Despite forced gold sales from ECB nations in the past, Germany likely has to maintain its underlying asset base as it is the anchor of the euro. The euro after all, is a watered-down version of the Deutsche mark. Germany’s population of 81 million ranks 16th in the world, but its $3.6 trillion adjusted GDP ranks fourth. What could happen if Germany started accelerated gold sales to buy up even more paper assets from the PIIGS (Portugal, Italy, Ireland, Greece and Spain) and more paper assets of their banks? The initial reaction might be positive for the eurozone economies. However, Angela Merkel and her successors might be left with high inflation without hard assets as a cushion. Germany is supposed to be a gold seller under the Central Bank Gold Agreement, but it is likely to hold what it can as a buffer in case the euro breaks up or in case it needs to raise quick bailout cash for the PIIGS.
1) United States
> Gold reserves: 8,133.5 tonnes
> Pct. of total foreign reserves: 75.4%
> GDP: $15 trillion in GDP (the largest)
> Stock performance: S&P 500 up 5.7% in Q3, up 14.5% YTD
It should be no surprise that the U.S. is the largest holder of gold as the dollar is the global reserve currency and the U.S. has by far the largest GDP of any nation. The growth of the Federal Reserve’s balance sheet can only be sustained without dire consequences if it is backed by hard assets like gold. Imagine if the conspiracy theorists are right and that Fort Knox and other repositories do not have gold in them. It is this gold, the massive U.S. GDP and America’s underlying wealth of natural resources that keep the dollar as the world’s reserve currency. If the World Gold Council is right in its assessments of inflation and gold, then the U.S. is likely to hold its reserve currency status for quite some time, even if credit rating agencies continue to downgrade the country.

Shariah-compliant assets to reach $1.6 trn

KFH-Research prepared a series of financial reports that discussed the reality of Islamic banking sector and the horizons of its development during the coming period, in order to discuss that during the Global Islamic Financial Forum that will begin today in Malaysia. The four-day event that is organized by the Malaysian government and Malaysia’s Central Bank, will tackle on its first day a study regarding the status of global Islamic banking sector. The total value of Islamic financial assets is expected to reach $1.6 trillion this year, and the financial sector is expected to continue its robust growth in 2013.

In addition, the report mentioned that there are great opportunities to globalize Islamic finance and receive global recognition of Islamic banking services and products. However, the report underlined challenges that face expansion, such as limited instruments.

In the early stages of development, Islamic finance was concentrated in countries with large Muslim populations, such as Egypt, Malaysia and the Gulf countries (particularly Saudi Arabia, Kuwait and the United Arab Emirates).Over the past decade, the Islamic finance industry has evolved to become an increasingly important component of the international financial system. • Increasing recognition of its value propositions has made Islamic finance more widely accepted in many countries, including the UK, Singapore and Germany. Realising its potential, many countries have shown their interest in becoming Islamic finance hubs, including established financial centres such as London, Hong Kong and Singapore. Global Islamic finance assets are expected to reach $1.6 trillion by 2012, underpinned by:

n An increase in the demand for Shariah-compliant assets

n An active role played by some jurisdictions around the world to promote the development of Islamic financial markets in their respective countries

Islamic banks demonstrated great resilience during the global financial crisis, despite the turmoil which unfolded across the world’s financial markets. While the equity, mortgage and insurance markets suffered huge financial losses post-US property market bubble burst, the balance sheets of Islamic banks emerged relatively unscathed as compared to their conventional counterparts due to the following factors:

n Domestic credit portfolios. Credit portfolios were essentially domestic rather than foreign, with limited pressure on asset quality.

n Retail banking focus. High consumer loyalty and deposit stability limited the possibility of massive bank runs.

n High capitalisation and ample liquidity provided relatively higher levels of confidence to counterparts.

Over the years, the range of Islamic finance products and services has grown significantly, with innovation being driven by continuous dialogues and engagements amongst industry players, supported by increased knowledge and awareness of Islamic finance principles. Factors that influencing the supply of Islamic finance products and services are:
n Customer demand: Entices financial institutions to produce supply that meets customer requirements.

n Regulatory support: Whether regulation allows for a diverse range of Shariah-compliant products and services.

n Unique proposition: Market players value the impact of Islamic finance on the industry’s stakeholders.

n Educations and Awareness. Helps produce innovative solutions that can improve efficiency of supply.

n Profitability: Grows funds which can be channelled to output more supply.

n Financing gap: Creates the need for financial intermediation.

n Competition: Spurs product innovation in order to stay ahead of the market.

For the past 30 years, Islamic finance has been largely domestic driven, though in recent years it has gradually become the fastest growing segment of the international financial system. The sukuk market in particular has evolved as a major contributing factor driving the internationalisation of Islamic finance, becoming an important avenue for international fund raising and investment activities, generating significant cross-border flows. The internationalisation of Islamic finance has been facilitated by further developments of the international Islamic financial infrastructure, prompting Islamic financial institutions to venture beyond their domestic borders. Today, there are more than 600 Islamic financial institutions operating in more than 75 countries, offering a wide range of products and services. With the internationalisation of the industry, Islamic finance is expected to contribute to the more efficient mobilisation and allocation of funds across regions. This trend will strengthen the international financial and economic linkages between jurisdictions, bringing mutual benefits to all stakeholders.

A look at the Islamic banking industry worldwide, this sector has grown at a strong rate of 15.0%-20.0% annually over the past decade, from approximately $150.0 billion in the mid-1990s to an estimated $1.1 trillion in 2011. Based on a compound annual growth rate (CAGR) of 21.1% between 2007 and 2011, the Islamic banking assets are expected to grow to $1.3 trillion in 2012, accounting for more than 80.0% of global Islamic finance assets market share. The Islamic banking industry is not only confined to Muslim majority countries in the GCC and South East Asia regions, but also into new territories within Central Asia and Europe, many of which are currently in the midst of implementing appropriate regulatory and legal reforms that would facilitate the provision of Islamic financial products. At the end-2011,there are 363 full-fledged Islamic financial institutions and a further 108 conventional financial institutions operating an Islamic window. Although the Islamic banking industry currently constitutes only 1.6% of the total assets of the top 50 largest banks in the world (totaling $66.2 trillion at the end-2011), it remains one of the fastest growing segments in the global financial services sector.

The Islamic banking industry is expected to witness further developments in the future, particularly in terms of the development of new products and services as well as the opening up of new markets or jurisdictions, in light of the industry’s resilience during the global financial crisis. The growth of Islamic banking has had many positive spillover effects to the real economy. Given that the industry is tied to financing real assets through the buying and selling of goods ensures that funds are intermediated towards and utilized for real economic activities. This asset-based feature of Islamic banking also ensures that speculative lending is restricted and the financial sector remains in balance with economic growth. The rapid growth of Islamic banking across the globe gives weight to the commercial viability of the industry in providing business returns as well as positively impacting its stakeholders. The viability of Islamic finance has been derived from its ability to meet the changing demands of the economy and from its cost competitiveness. Its development has also been supported by a well-developed legal, regulatory and supervisory framework that has been important in ensuring its soundness and stability..

In 2011, the Islamic banking industry witnessed robust growth. Whilst approximately 80.0% of Islamic banking assets are in the Middle East, Asia represents a significant market with Malaysia having the largest market share of 9.6%. In terms of growth rate, Indonesia witnessed the strongest growth of 48.6% y-o-y, followed by Pakistan (34.4% y-o-y). The GCC is home to some of the world’s largest Islamic banks such as Al-Rajhi Bank in Saudi Arabia and Kuwait Finance House in Kuwait. The increase of Islamic banking activities in the GCC attributed to a number of factors which include an increasing domestic demand for Islamic financial products and, above all, the considerable growth of savings in the Gulf linked to oil price trends. It is expected that the Islamic banking industry in the GCC will continue to grow underpinned by their strong economic fundamentals, economic stimulant via government sponsored infrastructure projects, consolidation of Islamic banks in certain jurisdictions (Bahrain), growing numbers of Islamic banks (Saudi Arabia and Oman) and changes in regulation(Qatar) which will benefit the industry as a whole.

Moving forward, the Islamic banking industry is expected to witness encouraging developments as emerging economies such as Turkey, Indonesia, India and China promote the alternative form of financial intermediation, underpinned by the increasing demand for alternative banking products and services. The setting up of the Islamic banking in a number of countries is expected to encourage and accelerate the introduction of the sukuk market to meet liquidity requirements. Despite the positive developments, moving forward the deteriorating global economic environment, a shortage of education and product awareness in some jurisdictions as well as legal and tax issues are some of the challenges that will be faced by the Islamic banking industry.

Nevertheless, the industry is expected to continue to chart strong growth underpinned by the following factors:

n Steady economic growth in 2013 across emerging markets, supported by global stimulus packages.

n Abundant liquidity flows on the back of high oil prices.

n Active role played by some jurisdiction around the world to promote the development of Islamic financial markets in their respective countries.

n Encouraging demographics and greater awareness which contributed towards an increase in the demand for Shariah-compliant and ethical products. The world’s Muslim population currently stands at 1.6 billion and around 62.0% of them are located in Asia

Growth of the global halal food industry is expected to have positive implications for the Islamic banking and finance industry as the source of financing for the halal food industry should be from Shariah-based sources.