Sunday 3 August 2014

Rising Gold Prices - An Overview

It is important to grasp the big picture of why gold is going up and the factors that are fueling its rise.
An Overview Since 1974
In 1971 President Richard Nixon ended US dollar convertibility to gold, bringing to an end the central role of gold in world currency systems. Three years later Congress legalized the ownership of gold by US citizens. Freed from the government-mandated price of $35 per ounce, the dollar and gold floated. In 1979 and 1980, investors' lack of confidence in the government's ability to restrict the expansion of the money supply resulted in panic buying of precious metals as a hedge against inflation. Gold prices soared, and in January 1980 the gold price hit a record of $850 per ounce. During the four-year period from 1976 to 1980, the price of gold had risen by more than 750%.
In the early 1980s the US Federal Reserve raised interest rates to restrict money supply growth. This policy achieved its purpose and by 1982 interest rates were declining and the fear of inflation had subsided. Investment capital responded by moving into financial assets from commodities including gold, and the market soared. After the historic highs of January 1980, the price of gold meandered in the $300-$400 range until hitting a low of $256 in February 2001. Then the bull market for gold returned, and by November 2009 the price had pushed up to $1,140 - a rise of 445%. To some investors, this suggests that history is repeating itself and gold is heading beyond $2,000 per ounce. To return to the 1980 high, when adjusted for inflation, the price would need to be over $2,000 now.
Today's Gold Market
The price of gold is set by the Gold Fixing, which is also known as the Gold Fix or London Gold Fixing. Twice a day by telephone, at 10:30 GMT and 15:00 GMT, five members of the London Gold Pool meet to settle contracts between members of the London bullion market. These settlements brokered by the Gold Fixing are widely recognized as the benchmark used to price gold and gold products throughout the world.
Let's examine some of the factors that influence the price of gold.
Gold Supply
There is an agency that tracks of all the gold in the world. Gold Fields Mineral Services Ltd (GFMS) is an independent, London-based consultancy and research company, dedicated to the study of the international gold and silver markets. GFMS publishes the annual Gold Survey, which features comprehensive analysis and statistics on gold supply and demand for over sixty countries. GFMS estimates that above-ground gold stocks represent a total volume of approximately 160,000 tonnes, of which over 60% has been mined since 1950. GFMS estimates that all the gold ever mined would form a cube measuring 20 yards (19 meters) on each side.
The production of new gold does not generally keep pace with inflation. The aboveground gold stock increases at a fairly constant rate of around 1.7% per year. During the last 50 years the largest annual increase was 2.1% and the smallest increase was 1.4%. This is less than the long-term historic rate of inflation, which is 4%.
The single largest holder of gold in the world is the United States government, with 8,133.5 tonnes. As of November 2009 this gold supply was worth approximately $330 billion. Other top holders of gold include Germany, the International Monetary Fund (IMF), Italy, France, SPDR Gold Shares, China, Switzerland, Japan, and the Netherlands.
The US Dollar
The price of gold is widely understood to inversely track the dollar. When the dollar falls the price of gold tends to rise. But there have been many cases when the price of gold did not keep up with changes in the value of the dollar, or even ran counter to it.
For example, when gold peaked in 1980, it reflected a prevalent fear of inflation in the wake of the 1979 oil shock and a U.S. monetary policy that lacked credibility. The case for gold as a hedge against inflation was persuasive. But today, the price of oil is up significantly in currencies other than the dollar. Even measured in euros, it has returned to the February save-haven peak. The weakness of the US dollar alone cannot explain the rise in price.
In early November, with the goal to support the United States' recovery from recession, the US Federal Reserve decided to maintain the massive stimulus measures and hold down US interest rates for "an extended period." With the Federal Reserve keeping rates low, a record US budget deficit continuing to rise, and central banks all over the world diversifying away from the dollar, gold may continue to be a very attractive choice. After all, the cost of borrowing money to invest in gold is next to nothing.
On the global markets there is a persistent lack of confidence in paper-based currencies. The weakening of the U.S. dollar has had a broad effect that reduces confidence in other currencies. And with central banks and government policymakers still entangled in their unprecedented fiscal and monetary interventions, this could continue for much longer.
The current strength of gold may be a reflection not of a specific response to the value of the US dollar, but rather the expression of the same underlying malaise with the lingering effects of the global financial crisis.
Supply and Demand
In recent years the decline in mine supply has been supplemented by several factors including sustained central bank gold sales. In the 1990s, central bankers were acting as a group to reduce their gold holdings, confident that the fiat currencies were a better store of value. Central bank reserve sales, which during the past decade have played a key role in keeping gold prices in check, have slowed recently. Now gold's attractions are re-emerging and bankers look set to be net buyers, which should help tighten the market.
In addition, scrap sales offset mining declines. In the first quarter, scrap sales rose sharply as gold re-visited its all-time high.
Industrial demand for gold is influenced by fabrication needs, which have dropped sharply since 1997. The global economic downturn, coupled with higher prices, further reduced the demand for jewelry, and supply-demand changes add little in terms of explaining bullion's rise.
Government Bonds
Ten-year U.S. treasury yields have rebounded from their end-of-2008 lows between 2% and 3.3%, but this does not necessarily represent widespread fear of inflation. There is little evidence that gold buying is the result of inflation concerns.
Speculation and ETFs
The 2008 surge in crude oil prices to US$147 per barrel suggests that a similar speculative bubble is forming in gold. However, one obvious difference between then and now is that when oil peaked, the forward market was anticipating a decline in prices. The gold market anticipates a rise, and forecasts a value of US$1,250 per ounce for June 2014. While ETFs were cited as a culprit for the rise in oil and are also playing a role in the gold market, their impact may be limited in the gold market.
Early in 2009 ETFs may have been active buyers, but their activity has leveled off since. There has been a sharp increase in long forward positions in gold at the Commodity Futures Trading Commission (CFTC) and net longs have reached a record.
Despite all the attention being paid to sales of gold by central banks and the fact that world gold holdings have experienced a broad decline, holdings in industrialized economies are on the rise as a share of total foreign reserves. And this trend was renewed in the first quarter.
China and Foreign Markets
China is emerging as an international economic force and its reported gold holdings are not necessarily reliable. This is particularly significant now that Chinese authorities can make their purchases on the domestic market. The People's Bank of China (BOC) holds about 1,054 metric tons of gold, which is about two percent of its $2.3 trillion in foreign currency reserves.
Retailers and jewelers are increasingly reluctant to buy at higher levels. In recent years India has been the world's biggest importer of gold, and in February 2008 imports stood at 23 tonnes. The figure fell to 1.8 tonnes in January 2009 and in February there was no gold imported. But in October 2009 on the back of rising demand India's gold imports surged by over 45% at 48 tonnes. India had imported 33 tonnes in the corresponding period during the previous year.
In September 2009 the International Monetary Fund (IMF) announced that it would sell 403.3 metric tons of gold to strengthen its finances and increase its ability to make loans to developing countries. In November IMF revealed that from Oct. 19 to Oct. 30 it sold 200 metric tons of gold to the Reserve Bank of India (RBI). The RBI paid $6.7 billion for the equivalent of about 8% of the world's annual mine production. As a percentage of foreign reserves, India's gold holdings are now higher than even China's. Many analysts believe India's purchase will spur other countries and investors to ramp up their gold purchases. Indeed, with 203.3 metric tons still on sale at the IMF, China may become the next big purchaser.
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Article Source: http://EzineArticles.com/3558910

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