QUOTE AND NEWS
Reuters  1 hr ago  Comment 
Gold extended losses on Friday, weighed down by a stronger U.S. dollar and expectations the U.S. Federal Reserve will hike rates next week.
WA Business News  4 hrs ago  Comment 
Gold retreated into the red on Thursday after the dollar rebounded on the back of a decision by the European Central Bank to extend monthly asset purchases until next December albeit at a lower monthly level.
Motley Fool  8 hrs ago  Comment 
These lustrous miners could handily outperform their peers next year.
The Hindu Business Line  10 hrs ago  Comment 
The transition to a cashless society has to be carefully managed, says VP Nandakumar
SeekingAlpha  12 hrs ago  Comment 
newratings.com  Dec 8  Comment 
WASHINGTON (dpa-AFX) - Gold futures were flat Thursday morning as the European Central Bank said it will extend QE but taper asset purchases. ECB bond buying will drop to ¤60 billion a month from April 2017. The ECB held interest rates steady,...
newratings.com  7 hrs ago  Comment 




 
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This article is about investing in the commodity gold. For the article on the company with ticker GOLD, see Randgold Resources (GOLD). For other uses, see Gold (Disambiguation).

Gold is one of the most highly-sought after precious metals in the world. It is used in jewelry, electronics, and coinage. Gold is widely considered to be an effective hedge against inflation, which means that when the dollar depreciates, demand for gold increases. In addition, during times of economic and political uncertainty, the demand for Gold rises due to its high intrinsic value and relative stability. Moreover, the introduction of gold ETFs and the increasing wealth in emerging markets, such as China, India, and Latin America have contributed to rising demand for gold. While demand for gold has been rising, supply has been dropping as many of the top gold producing countries have had decreasing production over the past few years.

Gold has been used as money for more than 3,500 years as it doubles as a currency and a store of value. Gold is one of very few assets that are not the obligation of someone else. It has also proven to be a good hedge as inflation since the experiments with unbacked fiat money began in Europe and the USA in the 18th century.

Prices

Gold futures contracts are traded on the COMEX under ticker symbol GC and are delivered in January, February, April, June, August, October, and December of every year. (For more information on commodity tickers, check out the commodity ticker construction page.)

Gold futures with an April, 2009 delivery date. US$ per Troy oz.

Companies Who Benefit from Rising Gold Prices

Gold Companies

  • DRDGOLD (DROOY) is the fourth largest gold miner in South Africa. South Africa is the world's top gold producer.
  • Harmony Gold Mining (HMY) is the 5th largest gold producer in the world, is the largest gold producer in South Africa and also has mines in Papua New Guinea.
  • Redback Mining (RBI-T) is a midcap unhedged producer with mines in Ghana and Mauritania. Cash costs per ounce range from $400 to $500.

For a complete list of companies involved in the gold industry, see Gold Industry

Gold Exchange Traded Funds

Most gold ETFs buy gold as backing for the fund. As of June 2007, the largest gold ETF, SPDR, was ranked as the 8th largest stockpile of gold in the world. [1]

  • SPDR Gold Trust (GLD) accounts for over 80% of the 665 tons (as of June 2008) of gold owned by Gold ETFs.

Other Gold Exchange Traded Funds

High End Jewelry Companies

High end jewelers actually benefits from rising gold prices because as prices rise, gold jewelry becomes a more valuable and coveted option. In 2007, demand for gold jewelry was up 22%.[6]

Companies Who are Hurt by Rising Gold Prices

Low to Mid End Jewelry Companies

Low to mid end jewelry companies tend to suffer from increasing gold prices because the company's lower income clientel are less flexible to price changes.

Factors that Influence the Price of Gold

Demand for Gold rises during periods of Economic turmoil

Increased uncertainty about the safety of banks and the volatility of the stock market has pushed for an increased demand for gold and other high value commodities. In Novemeber 2008, the US Mint was forced to end the sale of the "American Buffalo" coin due to excess demand. Gold traders and minters across the globe have recorded shortages resulting extremely high demand for their goods in recent months.[7]

Scarcity

There are an estimated 5.5 billion ounces of gold above ground. As gold has played a key role as money for more than 3,000 years without ever losing its value most of this gold is still around. Central banks are officially holding about 30,000 tons of gold.

Falling Gold Supply

In 2006, 8 of the 10 top gold producing countries had decreased production. Mine production has been decreasing and the gold reserves of many countries are dwindling. At some point, these countries that were supplying gold are going to become buyers. The supply/demand discrepancy for gold is not as pronounced as other commodities, such as silver, because the industrial uses of gold are comparatively much lower. However, if mine production continues on a downward path then down the line prices are going to become increasingly influenced by this supply/demand gap.

Power Supply

Continuing power woes in South Africa hamper mine production which has decreased in a year-on-year comparison. China has overtaken South Africa as the biggest gold producer in 2007. As recently as the 1970s South Africa's market share was around 70% and has decreased since.

Political Risk

Political risks can erupt anytime in mineral-rich but impoverished African countries, putting investor's capital in local mining ventures at the whim of political change. Costa Rica is reevaluating all mining licenses in 2008. Political change in Congo has led to similar events there, leaving investors in a costly wait-and-see atitude that may not be resolved soon.

Global Inflation

Since June 2006, the U.S. Federal Reserve has lowered interest rates 10 times, bringing the key Fed Funds rate again to a 50-year low of 0-.25% - chiefly because of a subprime-mortgage mess that grew into a global financial crisis.[8] Many foreign central banks have either reduced interest rates in kind, or opted to stand put. Low worldwide interest rates have contributed to global inflationary pressure.

Inflation has a 14-month time lag to gold, a study of McClellan Financial Publications from 2005 shows. Gold and inflation have only diverged in the event of external disturbances, like wars, which drove inflation higher for short-lived periods. Including such exogenous factors the correlation coefficient of gold and inflation still comes in at a very high 0.69 on a scale from -1 to +1.

Since 2007 rising consumer prices have been leading to higher inflation rates in Europe and Asia too. Central banks are in a difficult situation as the medicine of higher interest rates against inflation is at the same time poison for the economy. The European Central Bank ECB has so far not done enough to combat inflation which peaked in July at 4% or double the target rate of the ECB.

Demand from Emerging Markets

As per capita wealth increases in such emerging markets as China, India and Latin America, demand for US goods increases considerably and that is only augmented by a depreciating dollar. Aside from traditional goods, these emerging economies demand jewelry, gold, gems, and other precious metals because growing middle classes in these economies have more money to spend on wares that aren't just necessities.

Indian savers are the single biggest group of gold buyers. Indian demand from the wedding season usually ends the time of seasonal lows during the summer. The buying of gold (and silver) in India is also influenced by important Hindu religious holidays. Total Indian gold consumption is expected to exceed 800 tons in 2008. Their purchases have been effectively subsidized by the Central Bank Sales Agreement that allows Western central banks to sell up to 500 tons per year until 2009.

Seasonality

Like many other commodities, gold also exhibits some seasonality in prices. In addition to the seasonal Indian demand for weddings and festivals mentioned above, gold has also historically shown a mid-March low that sets up a rally through May, and a weak period from June to late July. These trends tend to prevail even in secular bull markets. [9]

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Historical Gold Prices

Whether as the basis for the monetary unit of a country, or in its role in comparison to the currency price of silver, the history of gold price has long been a subject of great interest to both the scholar and the general public.

Below are five series for determining the value of gold price historically:


Top Ten Largest Gold Bullion Reserves[11]

Gold reserves (or gold holdings) are held by central banks as a store of value. The top 10 Central Bank reserves total 26,014.4 tonnes, or in excess of 836,362,960 troy ounces, equal to about 836.4 Billion dollars.

As one metric tonne equals 1,000 kilograms (or 32,150 troy ounces), one tonne of gold equates to a value of US$32.15 million as of March 2008 ($1,000/troy ounces). In 2001, it was estimated that the total amount of gold ever mined equaled only 145,000 tonnes, with a total value at today’s prices of some US$4.66 trillion.

For comparison, the entire global market capitalization for all stock markets was US$43.6 trillion in March 2006.

  1. United States - 8,965.6 tonnes
  2. Germany - 3,767.1 tonnes
  3. Int. Monetary Fund - 3,546.1 tonnes
  4. France - 2,890.6 tonnes
  5. Italy - 2,702.5 tonnes
  6. Switzerland - 1,285.6 tonnes
  7. Japan - 743.5 tonnes
  8. Netherlands - 688.4 tonnes
  9. European Central Bank - 666.5 tonnes
  10. People’s Republic of China - 661.4 tonnes

Read More

References

  1. Have gold ETFs bottomed
  2. Wikipedia:Gold Exchange-Traded Fund
  3. Wikipedia:Gold Exchange-Traded Fund
  4. Wikipedia:Gold Exchange-Traded Fund
  5. Wikipedia:Gold Exchange-Traded Fund
  6. High Prices as Good as Gold in Jewelry Market
  7. US Rare Coin Investments "Market turmoil sends investors scrambling for gold" 1 Oct 2008
  8. [http://www.federalreserve.gov/fomc/fundsrate.htm The Federal Reserve Board "Open Market Operations" 16 Dec 2008
  9. "The Season for Gold? Not Yet" 4 June 2009
  10. Historical Gold Prices
  11. The largest gold holdings in tonnes as reported by the World Gold Council
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