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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. 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.
[edit] PricesGold futures with a December, 2008 delivery date. US$ per Troy oz. [edit] Companies Who Benefit from Rising Gold Prices[edit] Gold Companies
For a complete list of companies involved in the gold industry, see Gold Industry [edit] Gold Exchange Traded FundsMost 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]
[edit] Other Gold Exchange Traded Funds[edit] High End Jewelry CompaniesHigh 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] [edit] Companies Who are Hurt by Rising Gold Prices[edit] Low to Mid End Jewelry CompaniesLow 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. [edit] Factors that Influence the Price of Gold[edit] ScarcityThere 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. [edit] Falling Gold SupplyIn 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 comparitively 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. [edit] Power SupplyContinuing 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. [edit] Political RiskPolitical 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. [edit] Global InflationSince September 2007, the U.S. Federal Reserve has lowered interest rates nine times, bringing the key Fed Funds rate again to a 50-year low of 1% - chiefly because of a subprime-mortgage mess that grew into a global financial crisis. Many foreign central banks have either reduced interest rates in kind, or opted to stand put. Low worldwide interest rates have contributed to global inflation. 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. [edit] Demand from Emerging MarketsAs 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. [edit] Read More[edit] References |
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