It has been a rough week for precious metals.  On Tuesday, renewed Greek concerns drove gold down $32 to close at $1,672.10 per ounce.  It was gold’s lowest close and first time settling below $1,700 since late January.  Meanwhile, silver fell 91 cents to end the day at $32.78 per ounce.  Although gold prices have pulled back recently, Morgan Stanley and Germany appear to still have plenty of interest in the precious metal.

Morgan Stanley still believes there are four main pillars that gold’s bull market will rely on to climb higher.  The first pillar involves the decline of producer hedging.  A miner seeking to protect itself from a falling gold price may choose to sell anticipated production for delivery at a future date, adding more gold supply into the market.  Although producer hedging increased for the first time in a decade last year, it is not expected to have a material impact.  The World Gold Council explains, “Hedging as a source of supply is expected to stay muted as the practice of wholesale industry-wide hedging activity has proved damaging to the industry in the long run.”

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The inability of gold mining companies to increase gold supplies materially is also a pillar of strength for the gold bull market.  With gold prices reaching a new all-time nominal high last year, gold production also reached an all-time high of 2,810 tonnes.  However, this only represents a 4 percent increase from 2010.  Furthermore, mine production only grew 2 percent in the fourth quarter of 2011, signaling that miners will dial back as gold prices dip.  Labor, energy and infrastructure issues in regions such as South Africa also dampened mine production.

The last two pillars of strength involve gold demand by emerging central banks and investors.  Not only have central banks dramatically scaled back gold sales, but they have turned into net buyers.  In the past two years, central banks have purchased more than 500 tonnes of gold.  “The net buying trend which started in Q2 2009 has proliferated, as emerging market central banks have continued to add gold on increasing concerns about the creditworthiness and low yields of their existing reserve assets.  Both the euro area sovereign crisis and the sovereign debt downgrade in the U.S. during the summer of 2011 have compounded these worries,” states WGC.  Meanwhile, investment demand for gold reached a record of 1,640.7 tonnes in 2011, representing a 5 percent increase from the previous record of 1,567.5 tonnes set in 2010.

As the financial markets remain in turmoil, central banks and investors will turn to gold as a hedge against the wall of worry facing the world.  Earlier this year, Venezuela’s central bank received its last shipment of gold bars in a move that repatriated 160 tonnes of the precious metal held abroad.  Apparently, with Greece and other countries teetering on the edge of the financial cliff, Germany is becoming increasingly concerned with its own gold reserves.  According to German newspaper Bild, German lawmakers are planning to review Bundesbank controls of and management of Germany’s gold reserves.  GoldCore reports, “There is increasing nervousness amongst the German public, German politicians and indeed the Bundesbank itself regarding the gigantic risk on the balance sheet of Germany’s central bank and this is leading some in Germany to voice concerns about the location and exact amount of Germany’s gold reserves.”  According to the latest data from the WGC, Germany holds nearly 3,400 tonnes of gold, representing 71.4 percent of its reserves.  It is believed that more than half of Germany’s gold is held in storage facilities outside of the country, in places such as the Federal Reserve Bank of New York.

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To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com