Gold Investment Demand Is Surging

MineWeb reports about surging gold investment demand.

(emphasis mine) [my comment]

GOLD'S BIPOLAR DISORDER
Surging gold investment demand but high price volatility likely
Gold commentator Jeffrey Nichols reckons the yellow metal is suffering from a form of bipolar disorder and he and others look to a significantly higher price, but movements likely to be volatile.
Author: Lawrence Williams
Posted: Thursday , 05 Feb 2009


LONDON -

With totally contrasting factors in play the gold market seems to be in a state where investors don't know whether to buy or sell [answer=buy]. ETF holdings continue to rise with the SPDR Gold Trust - the world's largest gold ETF - again reporting record levels on the positive side, while on the negative side there is a firm, but perhaps vulnerable, dollar and a total collapse in demand from the world's largest gold consumer, India.

U.S. gold commentator, Jeffrey Nichols, describes this as gold's bipolar disorder (see www.nicholsongold.com ). "With the price of gold lurching first one way then the other" says Nichols, "it looks like the market has been suffering from bipolar disorder. I expect this split-personality behavior, characterized by extreme price volatility, to continue for some time to come with big swings up and down -- but, importantly, around a rising trend with support levels moving up step-wise over time."

Overall Nichols feels that gold is heading "much higher, but not without more struggle and occasional disappointment for those looking for a speedy ascent. Further out -- over the next year or two -- I have no doubt that gold will move to new historic highs well above the $1030 level touched a year ago March." he reckons.

Nichols is not the only one who is bullish overall on gold though. Obviously the traditional gold bulls are predicting huge increases in the medium to long term, if not in the near term, but also some of those relatively impartial analysts are looking to significantly higher gold prices. Notably Goldman Sachs has just come up with a forecast that gold could reach $1000 an ounce again within the next three months. This is a huge lift from its earlier forecast of only $700 an ounce. It is unusual for an organization of this type to make such a drastic change in its published market assessment!

According to Reuters Goldman says in its report "The gold price rally has been driven by surging demand for gold in all forms: physical gold, exchange-traded funds, and futures contracts as investors seek 'a safe store of value' amid the financial distress and inflation risks." The report also noted that a strong relationship between the price of gold in U.S. dollars and the exchange rate of the dollar against other currencies has begun to break down.

This latter point would seem to be quite significant in that for the most part a strong dollar means a weak gold price, but recently gold has moved up significantly despite the dollar remaining strong against most other major currencies. Indeed gold has seen recent record highs in terms of many, if not most, other currencies.

In a report out today, RBC Capital Markets is also looking to a strong gold price during the year, but with volatile price movements. Its analysts expect the gold price to remain firm through the first quarter, buoyed by a seasonally strong period for physical demand and continued investment demand due to ongoing financial market concerns. It also expects the gold price to exhibit volatility in 2009, which should result in potentially attractive buying opportunities on pullbacks into periods of weak demand in the second and third quarters, mirroring gold's performance in 2006 and 2007. It suggests that there is risk of a significant June-July period of weakness for gold demand and the potential for rising emerging market scrap sales in an extended global recession. It then expects gold to return to the $1000/oz level later in 2009 or early 2010.

We have just reported here too that Peter Grandich, publisher of the Grandich Letter and a well respected gold analyst who is not always bullish on the metal, feels positive towards gold as an investment. "I believe the best investment right now is gold. Not because I think the world's coming to an end; quite frankly it won't matter if you have gold if there's truly an end-of-the-world scenario." says Grandich. (Gold, oil and Canadian banks plus selected junior miners favored buys - Grandich)

But, with analysts almost falling over themselves to predict a big leap in the gold price we still need to be wary. Gold can be a very contrary animal and investors have often had their fingers burnt quite severely in the past by either going long or short in the precious metal. As Nichols notes in his latest assessment "Despite expectations of much higher gold prices this year and beyond, it would be wise to remember that gold remains volatile and vulnerable. We are in an unprecedented environment with daily evidence of a deteriorating U.S. and global economy, where policy makers are employing powerful, yet untested, tools to repair a broken economy, and politicians cannot be trusted to do all the right things. In this environment, we could still get a quick sell-off that would bring us back to support levels well below recent prices." [Unlikely. For there to be a “quick selloff”, investors would need another safe place to store their money. Where would this be?]

As noted above, the Indian demand factor - which is also being mirrored in some other key markets like the Middle East - is potentially a very limiting factor on the continuing rise in the gold price. While there is a feeling that the demand fall-off in these areas has perhaps been overdone and as the market gets to accept a rerating of the gold price upwards, demand may well pick up, nevertheless this still leaves a short term increase in supply for the investment sector to pick up without exerting any significant shortages in gold availability. This is likely to limit the immediate upside in gold.

But there are other factors in play too.
Central Bank gold sales have been significantly lower, and evidence suggests they are likely to remain so for the moment. World mine production continues to decline - a decline which will be made even worse by the virtual unavailability of credit at reasonable terms for many small and midsized miners/explorers. Certainly exploration has been decimated by the credit crunch which suggests even bigger production falls in the long term.

Key may be currency movements. Continued upwards movement of the dollar may be a limiting factor for gold, but with virtually every economist predicting that the huge increases in money supply in the US will eventually lead to major inflation, and perhaps a sharp fallback in dollar parities, then this should be extremely positive for the metal. Most observers feel this scenario is inevitable - but when? [in the next few weeks] Markets have been defying logic and may well continue to do so. Investment advance is so dependent on perception and for the moment that is still not as gold oriented as many analysts believe should be the case. But there does seem to be a general consensus that this is changing - borne out by the rising ETF holding scenario.

On the downside though, this massive ETF holding represents a huge market overhang and if the perception moves against gold for any reason, then this could start coming back on the market with a potentially devastating effect on the gold price. [Again, where would the money go? Before a selloff in gold is possible, there would have to be a more attractive investment elsewhere. Right now, there is nothing more attractive than gold] While the global financial situation remains in turmoil, which it looks as if it will for at least another year or more, then gold will probably remain in demand as the ultimate investment insurance policy, but if other markets really start to recover this could be bad news for the gold price. [Wrong, the only way other markets could start to recover would be for inflation to pick up and the dollar to fall. These developments would also be bullish for gold]

So where do we go from here? To a relatively impartial observer gold would seem to have enough going for it to keep building for the next year or so. If the momentum remains sufficiently strong, which would probably require a return to higher demand from the traditional gold-buying areas like India, then we could see a rerating of gold at a much higher level of over $1000 an ounce and this level might be able to be held. However if the gold price just stays at or around current levels then there could be a major fallback if, and when, the world is seen as coming out of financial crisis. [Impossible. Recovery can' t occur without inflation, and inflation would push gold higher.] This may well be some way in the future though.

MineWeb reports that ETFs absorb more than $3 billion of gold so far this year.

RENEWED BELIEF
ETFs absorb more than $3 billion of gold so far this year
With the gold price reaching records in a number of important consuming nations, jewellery demand is stagnant - but ETFs are soaring; are they establishing themselves as the west's answer to small bars?
Author: Rhona O'Connell
Posted: Thursday , 05 Feb 2009


LONDON -

The markets' renewed belief since the start of this year in gold's role as a risk hedge has been made abundantly clear and nowhere more so than in the figures released for the Exchange Traded Funds. These have been breaking records and making headlines on an almost daily basis and it is perfectly possible that this publicity has also aided gold's cause with a degree of self-fulfilling momentum. In the whole of last year the total net dollar inflow into the major ETFs was $16.4 billion, while in the year to date, just 24 trading days, the major ETFs have taken up some $3.1 billion in the absorption of 111 tonnes of gold. There has been only one day of net redemptions since the year began, and since the start of the year the amount of gold in these funds' vaults has increased from 1,121 tonnes to 1,231 tonnes.

It is worth putting this into some perspective. An uptake of 111 tonnes in just over one month compares with 316 tonnes in the whole of 2008, 250 tonnes in 2007 and 257 tonnes in 2006. These funds tend to be dominated by retail investors and pension funds (they are particularly attractive to those pension funds whose charters do not allow them direct exposure to commodities) and these investors tend to be long term holders. There is also an element of exposure from the hedge fund fraternity, and this latter would have been responsible for some, although by no means all, of the redemptions last year, which came in short bursts.

Retail investors, especially in the United States, also have an affinity for coins and some western investors have been expressing a specific preference for coins even over the allocated metal in an ETF because they are concerned about counter party risk. The fact that, as a holder of an ETF the investor has an investment in allocated gold and is therefore effectively a secured creditor of the holding bank is carrying little water with some frightened investors and they have been choosing coins or small bars as their referred means of investment. The US Mint has so far sold Gold Eagles containing 94,500 ounces of gold (2.9 tonnes), of which 92,000 ounces were sold in January. This may seem to be relatively small beer, but sales in January 2008 were just 26,000 ounces or 800 kilos, so US coin sales so far this year are running at 3.5 times as much as twelve months ago.

On the speculative side of the market, the net speculative long position on COMEX, which does not involve physical gold, but which measures speculative sentiment, has increased from 444 tonnes at the end of last year to 493 tonnes in late January, a gain of 49 tonnes. This has comprised net purchases of 88 tonnes of longs, partially offset by 40 tonnes of fresh shorts. [I wonder who these shorts are]

Figures from the World Gold Council (compiled by GFMS Ltd) show that investment bar demand in the first quarter of 2008 was 79 tonnes, and was as much as 232 tonnes in the third quarter of the year (full year figures are not yet available). Jewellery is obviously a much larger market and in the first quarter of last year, world jewellery demand was 444 tonnes, rising to 624 tonnes in the third quarter of the year. The start of this year is a much less encouraging picture, however. With gold at record highs in both rupees and Turkish lira, and with a worrying economic and financial environment, the gold jewellery market in these and other regions is suffering badly, and a lot of the demand this year, such as it is, has so far been furnished by recycled metal.

While it is unlikely, even with jewellery struggling, that ETFs would ever compete with the jewellery market (different sizes, different investment rationale), this year's lively level of ETF demand is clearly competitive in tonnage terms with investment bars. The question that arises is, will these funds reach critical mass or will they continue to attract investment from - inter alia - western individuals in the same way that kilo bars are consistently bought in the Middle East and Asia? If ETFs start to be regarded in the west in the same way that small bars are regarded in Asia then there is every chance of more substantial inflows, quite apart from the activity from the pension funds. This would be grist to the bulls' mill - but there are two sides of every coin and bears would be able to argue that the holdings in these funds might represent an all-too visible overhang once the financial and economic environment changes. [The real overhang is the mountain of cash (dollars) sitting on the sidelines right now]

Reuters reports that Capital Mint sees sharp rise in sales.

Capital Mint sees sharp rise in sales
Fri Jan 30, 2009 3:48pm GMT
By Jan Harvey

LONDON, Jan 28 (Reuters) - Bullion dealer Capital Mint expects sales of its gold bars to rise sharply from February as investors seek out bullion as a safe store of value amid suspicion over the stability of other assets.

The company's founder, Renwick Haddow, told Reuters in an interview he expects sales to grow to around 1,500 ounces a month from February onwards.

The company, which is owned by AIM-listed Capital Ideas (CAPT.L), has sold some 1,000 ounces of gold since its launch on Dec 12 via bars in five sizes of up to 500 grams.

"I can see this market being quite buoyant for the next 12 to 18 months," said Haddow.

Rising volatility in the price of other assets such as property or equities is boosting the appeal of physical gold assets such as coins and bars, he said.

"People prefer (to hold) a real commodity, either in their hands or where they can get hold of it at any time," Haddow said. "They are mainly private investors who have spare cash."

Capital Mint typically sells to individual investors, who spend an average 5,000-10,000 pounds ($7,141-$14,280) per transaction, he said. Its most popular product is the one-ounce gold bar, which currently sells for 849 pounds.

In addition, the company has seen interest from independent financial advisers, Haddow said, who are looking into new products for their clients.

In addition to its perceived safety, Haddow said, falling interest rates on savings are also reducing the opportunity cost of holding gold, a non-interest bearing asset.

"People prefer to have their money safe in gold than sitting in a bank earning less than 1 percent interest," Haddow said.

Gold has been one of the few assets to hold its value over the last three months, even as other commodities, particularly industrial metals, have fallen.

Spot gold was quoted at $886.90/885.50 an ounce at midmorning on Wednesday, up some $150 an ounce from Oct 27 last year. In contrast, copper has fallen 17 percent and aluminium by a third in the same period.

Gold priced in sterling hit an all-time high of 701.55 pounds on Jan 26.

Investment in physical gold products, such as coins and bars, and physically backed exchange-traded funds has been strong as investors seek a haven from risk.

Interest was so strong that dealers reported a shortage of some products such as Krugerrands, or one-ounce bullion coins, late last year as smelters failed to keep up with demand.

My reaction: That was a lot of gold related info! Here is a quick summery of all the notable points mentioned in the articles above:

1) Many gold commentators expect extreme gold price volatility to continue for some time around a rising trend with support levels moving up step-wise over time.

2) The strong relationship between the price of gold in U.S. dollars and the exchange rate of the dollar against other currencies has begun to break down. In the past, a strong dollar has meant a weak gold price, but recently gold has moved up significantly despite the dollar remaining strong against most other major currencies. As a result, gold has seen record highs in terms of many, if not most, other currencies.

3) The Indian demand factor (mirrored in some other key markets like the Middle East) is a potentially limiting factor on gold prices. This fall in demand is due to gold being at record highs around the world and is unlikely to last (once consumers realize gold prices aren' t going to fall, they will start buying again).

4) Central Bank gold sales have been significantly lower.

5) World mine production continues to decline (which will be made even worse by the virtual unavailability of credit at reasonable terms for many small and midsized miners/explorers).

6) Exploration has been decimated by the credit crunch which suggests even bigger production falls in the long term.

7) Virtually every economist is predicting that the huge increases in money supply in the US will eventually lead to major inflation and a sharp fallback in dollar parities. This would be extremely bullish for gold.

8) The figures released for the Exchange Traded Funds
have been breaking records and making headlines on an almost daily basis. In the whole of last year the total net dollar inflow into the major ETFs was $16.4 billion, while in the year to date, just 24 trading days, the major ETFs have taken up some $3.1 billion (an absorption of 111 tonnes of gold). There has been only one day of net redemptions since the year began, and the amount of gold in these funds' vaults has increased from 1,121 tonnes to 1,231 tonnes.

9) An uptake of 111 tonnes in just over one month compares with 316 tonnes in the whole of 2008, 250 tonnes in 2007 and 257 tonnes in 2006.

10) Investors in gold ETFs are mainly retail investors and pension funds, who tend to be long term holders.

11) The net speculative long position on COMEX
increased from 444 tonnes at the end of last year to 493 tonnes in late January, a gain of 49 tonnes. (remember to stay away from gold futures, they are not safe)

12) With gold at record highs in both rupees and Turkish lira, and with a worrying economic and financial environment, the gold jewellery market is suffering (this represents the fall in India demand mentioned above). The fall in demand for gold jewellery will reverse once inflation picks up.

13) A lot of the demand for jewellery this year has been furnished by recycled metal (recycled metal = old gold jewellery melted down).

14) If gold ETFs start to be regarded in the west in the same way that small bars are regarded in Asia, then more substantial inflows are likely.

15) Bullion dealers like Capital Mint expects sales of its gold bars to rise sharply.

16) Bullion dealers' most popular product is the one-ounce gold bar, which currently sells for 849 pounds.

17) Capital Mint has seen interest from independent financial advisers who are looking into new products for their clients.

18) Falling interest rates are reducing the opportunity cost of holding gold, a non-interest bearing asset. Renwick Haddow, Capital Mint' s founder, explains, "People prefer to have their money safe in gold than sitting in a bank earning less than 1 percent interest,"

Conclusion: Gold remains the most attractive long term investment, with food commodities and agriculture stocks being a close second.

This entry was posted in Attractive_Investments, Gold, News_Developments. Bookmark the permalink.

0 Responses to Gold Investment Demand Is Surging

  1. Anonymous says:

    Eric, I agree that gold is going to the moon but what about silver? where do you think the price is going within the next decade (not nominal price but in terms of real value?) I keep hearing that there is currently less silver bullion (999) than there is gold. Is this true? I know that historically the price ratio between gold/silver has been about 12:1, and since a lot of silver has been consumed the last few decades, shouldn't its price also go into the stratosphere once the financial system completely falls apart and the manipulation ends?. I'd really like to hear your thoughts on this!

  2. Numonic says:

    Yeah silver will do better than gold. That's why I'm holding silver.

    I get allot of my info on silver from silverstockreport.com and silver-investor.com

  3. Yohay says:

    Do you have any target for the price of gold?
    It seems like it's going only upwards, but it may reach a peak somewhere...

  4. Numonic says:

    I got one thing I gotta say about why prices will start rising on everything. I think allot of people are saying that hyperinflation will happen because of massive printing that will cause the credit markets to unfreeze and cause all of that newly printed Fed Notes to circulate. This is how inflation works. I do not believe we will go through this process because I believe we are in hyperinflation. It is different from inflation. There is too much debt in the market and I think it will take a while before it is unfrozen if it ever becomes unfrozen. I do not believe prices will rise because of a return to easy lending, i believe prices will rise through the massivingly increasing credit crunch that will raise borrowing costs as severely as there is debt, and there is massive debt around the world($1 quadrillion worth) and all that debt is deleveraging. Prices are going to rise because companies will need to raise their prices to be able to pay the borrowing costs. Some one once said that the situation we are headed in is one where people will not be able to get dollars and at the same time people will not want dollars. People will not be able to get dollars because of the extremely high borrowing costs and people will not want dollars because of the decrease in value that will be exposed with all the high prices needed by companies to compensate for the high borrowing costs in order to stay in business. This is where we are headed. I'm not even sure printing new money has anything to do with it, infact all printing money is doing is probably just stalling the collapse. But I don't know how much affect printing money is doing, all I know is there is over $1 quadrillion deleveraging around the world right now. This is hyperinflation. It's more this deleveraging than it is the money being printed to stop the deleveraging that will cause prices to rise because companies survive through borrowing and as this massive deleveraging is going on, it makes it hard and damn near impossible for companies to borrow the money they need. This is why unemployment is rising and companies are going out of business and will continue. Even if the companies did raise their prices to compensate for the high borrowing costs, people need to support that business with enough money for that business to pay the debt on the money it borrowed and I don't think that will happen untill there are only a few companies left selling only the neccessities and everyone's money is going to these remaining few companies. This is where I see the economy heading. Massive unemployment(majority of the population unemployed) and only a few companies left and all of them have massively high prices.

    Protect yourself, hold your silver & gold.

  5. Numonic says:

    Oh as far as the rising prices I believe it is happening right now and very soon(within a couple months) we will start seeing the prices rise more massively and exponentially every month from here on. So it's not like it's going to start after all the deleveraging is over. Prices will be rising as the deleveraging is going on and while unemployment is still rising. It will confuse allot of people. But those who understand will know that it is debt that is loosing value and real things that are gaining value.

  6. andypandy says:

    Where is the best place to buy gold?

  7. andypandy says:

    Numonic:

    Not sure where i saw an article about the iceberg of dollars, but i think that's going to be the cause of hyperinflation this time (probably eric). Once the Chinese stop buying our bonds with our dollars they are going to spend the dollars on something. Once the dollar starts that downward trend everyone will sell their bonds. I store a small amount of silver and gold in my house, for some reason i just dont trust goldmoney.com or bullion vault.com.... is there any better way?

  8. Anonymous says:

    When are we going to see the dollar decline? From April 2009?

  9. Anonymous says:

    The problem with gold (silver et al) is that it is being rushed to by default because there is a 'nothing better to buy today' mentality.

    This mentality, based on the ancient history of gold, is understandable. But wrong for the 21st century situation.

    The economic world is unravelling because we have hit the ceiling of resource production. Mainly oil, with food and base metals a half step behind.
    Oil is energy, is (manufacturing) work.
    Food is human energy / work.

    FIAT money depended on perpetual growth.
    Easy oil made growth easy.
    Difficult oil makes growth stagnate.
    (easy/difficult I mean relatively how much energy you get from your extracted barrel of oil OVER AND ABOVE the effort (energy!) needed to get it. I deliberately did not choose to use cheap/expensive.)

    Oil has not run out, nor will it anytime soon.
    Easy oil has run out.
    So world growth has stagnated, and I believe CANNOT be recuscitated.

    Food production is at / approaching the limit - ASSUMING the current, fairly extensive agriculture strategy .
    Food production can be much increased by more intensive agriculture - it will become apparent how once there are masses of long-term unemployed. But namely anyone with time and access to a bit of decent land will grow (at least some of)their own food.

    Back to gold.
    It does nothing but look good.
    Historically it was useful because you could easily carry and trade a lot of wealth, and everyone knew how to value it.

    Today we could easily devise a tradable non FIAT 'money' that was based on 'standard unit of work done'.

    I just don't see a situation, after the endgame, where gold silver etc HAVE to necessarily feature. Precious metals will not sustain, clothe or keep you warm.
    On the way to the endgame the prices of precious metal may well spike, but when people see the reality of our plight this bubble will unwind just like so many others before.

    No thank-you.
    With the world at human pop capacity I choose the new gold.

    The new gold is decent agricultural grade land. Especially that within a cycle ride of town, fertile, with water.
    (Not some picturesque mountain)

    Land captures the suns energy, and catching energy is what it is all about.

    An acre of good land costs, in the UK today, about £7000.
    Or about 11 ounces of gold.

    An acre of land will feed a couple of families.
    Every year.
    For a very long time if not 'forever'.

    I believe those who think gold is a long term wealth store are not using the information they should have learned from this and many other excellent similar blogs / websites.

    It is time to think outside the box.

    The above is for debate / thought provocation.

    I am a farmer (biased?)

    Farmer John

  10. Anonymous said...
    I know that historically the price ratio between gold/silver has been about 12:1, and since a lot of silver has been consumed the last few decades, shouldn't its price also go into the stratosphere once the financial system completely falls apart and the manipulation ends?

    once the financial system completely falls apart and the manipulation end, both silver and gold will go into the stratosphere. I myself have bought both silver and gold. As to which one will do better, I am not sure. Like you said, a lot of silver has been consumed in the last few decades, but if there is a return to the gold standard (which is likely following a dollar collapse) demand for gold could also get a large boost. In any case, both gold and silver are very attractive investments.

    ---------

    Numonic said...
    Yeah silver will do better than gold. That's why I'm holding silver.

    It is entirely possible, but not guaranteed. Gold has a lot of advantages over silver:

    A) Easier to identify (it's golden)
    B) It's a lot lighter. You can carry 500,000 dollars of gold around. You can't do that with silver.
    C) Gold has a longer, more established history. It wasn't called the gold standard for nothing.

    That said, a lot of silver has been consumed in the last few decades. So I expect both to do well.

    ---------

    Yohay said...
    Do you have any target for the price of gold?

    In dollar terms? At least 2000 in next six months, and over 10,000 by year end. These are conservative estimates.

    It seems like it's going only upwards, but it may reach a peak somewhere...

    Gold isn't going up, the dollar is going down. There is no limit to how much the dollar can go down.

    ---------

    Numonic said...
    Oh as far as the rising prices I believe it is happening right now and very soon(within a couple months) we will start seeing the prices rise more massively and exponentially every month from here on.

    Agreed. Inflation will begin in food and cheap consumer goods, and then spread from there.

    ---------

    andypandy said...
    Where is the best place to buy gold?

    Tulving.com is where I got my gold. (20 oz minimum and fast shipping)

    Otherwise, ebay is nice because you can use a credit card (and fast shipping)

    (I need to do an entry on where to buy gold one of these days.)

    ---------

    andypandy said...
    Numonic:

    I store a small amount of silver and gold in my house, for some reason i just dont trust goldmoney.com or bullion vault.com.... is there any better way?

    Gold mining stocks

    julius baer starts physical gold fund (a swiss ETF where you can redeem shares for actual gold, unlike GLD)

    ---------

    Anonymous said...
    When are we going to see the dollar decline? From April 2009?

    If not sooner. The treasury bubble has burst.

    Also, once food inflation picks up, nations will start appreciating their currencies against the dollar to keep domestic food prices down.

  11. Hi Farmer John,

    I don't disagree with you, but would like to point out that:

    1) With climate change, once fertile lands are becoming barren because of droughts. This is happening on every continent on Earth right now, so it is a real concern. It also means that there is a higher risks in buying fertile land than there is in buying Gold (gold will never lose 90% of its value).
    2) It is a lot easier to buy and sell gold than it is to buy fertile land.
    3) Unless you are a farmer, it is a lot more complicated to try to profit from fertile than it is gold. You either need to grow something yourself, hire someone to do it for you, or rent out the land. These are not easy tasks for someone unfamiliar with the agriculture business.

    In any case, both fertile land and gold will do very well as the dollar collapses.

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