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WIKI ANALYSIS
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This article describes a commodity traded on a commodities exchange. View articles referencing this commodity. |
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.)
Companies Who Benefit from Rising Gold Prices
Gold Companies
- Barrick Gold (ABX) is the largest global producer of gold by ounces produced.
- Newmont Mining Corporation (Holding Company) (NEM) has mines in five different continents and is the world's second-largest gold producers.
- AngloGold Ashanti (AU) is the third largest producer.
- DRDGOLD (DROOY) is the fourth largest gold miner in South Africa. South Africa is the world's top gold producer after India.
- Goldcorp (GG) is a gold mining company based in Canada that has the lowest cash costs of any tier 1 mining company. It is the 5th biggest gold producer at 2.3Moz.
- 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.
- IShares COMEX Gold Trust (IAU) owned over 54 tons of gold as of November 2007. [2]
- ZKB Gold ETF (ZGLD) owned 22 tons of gold as of August 2007.[3]
- Central Fund of Canada (CEF) owned about 28.5 tons of gold and 1423 tons of silver as of March 2008.[4]
- Central Gold Trust (GTU) owned over 5 tons of gold as of March 2008.[5]
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
Gold Demand rises as Governments issue debt and print money
Due to the 2008 Financial Crisis, government's across the globe, particularly in developed countries, have increased government debt in order to stimulate the economy. The G-20 countries increased government debt levels to 14% of GDP, the highest since World War II.[7] In addition, many countries, like the US, have printed money to buy bonds and increase the money supply.[8] The combination of rising government debt and the printing of money both increase inflationary pressure and lower the real returns of other investments. In addition, the high levels of debt the US government has issued and possible inflation has increased fears that US bonds may not be as valuable in the future. The combination of a fear of inflation and a decrease in the real return on US bonds has pushed both governments and investors to buy Gold instead.[9]
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.[10]
China, India, and Others Consider Gold for Reseves
In the past, China and India have purchased US Securities and and held US Dollars in Reserves. For China, this has helped to maintain a devalued currency and keep exports high since they are relatively less expensive.
However, due to large US deficits many countries, China and India in particular, have begun to reconsider diversifying their reserves to protect themselves from a devaluation of the US Dollar. In November 2009, the Indian Central Bank announced that it would purchase $6.7B worth of Gold to diversify its reserves. China, which is the single largest purchaser of US Securities, has similarly increased its reserves of gold by 76% since 2003 and has hinted at further purchases. The decision of these large countries to shift increasingly towards Gold and away from US Dollar denominated assets will further increase the price. As Central Banks and Governments move to purchase Gold for reserves and to store their excess income from trade, Gold Prices will continue to rise.[11]
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
Gold is often purchased to hedge against inflation risk. Because inflation makes the returns on securities such as US Bonds less valuable, Gold is purchased instead. Because Gold is a real good, inflation will only cause the price of Gold to rise. So, while a rise in prices will make investments less profitable, gold maintains its value.Thus, during times of high inflation, Gold prices also rise.[12]
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.[13] 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. [14]
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:
- British Official Price for the years 1257 to 1945
- U.S. Official Price for the years 1786 to 2007
- New York Market Price for the years 1791 to 2007
- Gold/Silver Price Ratio for the years 1687 to 2006
- London Market Price for the years 1718 to 2007
Top Ten Largest Gold Bullion Reserves[16]
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.
The following chart depicts the top ten holdings of Gold in tonnes and the percentage of their total reserves it makes up as of June 2009.
| Country | Holdings in Tonnes | Percent of Reserves[17] |
| United States | 8133.5 | 78.3 |
| Germany | 3412.8 | 69.6 |
| IMF | 3217.3 | N/A |
| Italy | 2451.8 | 66.1 |
| France | 2450.7 | 73 |
| China | 1054 | 1.8 |
| Switzerland | 1040.1 | 37.1 |
| Japan | 765.2 | 2.1 |
| Netherlands | 612.5 | 61.4 |
| Russia | 536.9 | 4 |
Read More
- International Gold Bar Standards
- Gold News - Precious Metal & Commodities News Report
- World Official Gold Holdings Ranking - December 2008
Gold Futures
References
- ↑ Have gold ETFs bottomed
- ↑ Wikipedia:Gold Exchange-Traded Fund
- ↑ Wikipedia:Gold Exchange-Traded Fund
- ↑ Wikipedia:Gold Exchange-Traded Fund
- ↑ Wikipedia:Gold Exchange-Traded Fund
- ↑ High Prices as Good as Gold in Jewelry Market
- ↑ International Monetary Fund "Crisis-Hit Countries To See Sharp Rise in Government Debt" 6 Mar 2009
- ↑ Telegraph "China alarmed by US money printing" 6 Sept 2009
- ↑ Street Directory "Why Invest in Gold and the Many Ways to Invest in Gold"
- ↑ US Rare Coin Investments "Market turmoil sends investors scrambling for gold" 1 Oct 2008
- ↑ Globe Investor "Golden sale heralds economic force" 4 Nov 2009
- ↑ Inflation Data "Using Gold to Hedge against Inflation" 14 Aug 2009
- ↑ The Federal Reserve Board "Open Market Operations" 16 Dec 2008
- ↑ "The Season for Gold? Not Yet" 4 June 2009
- ↑ Historical Gold Prices
- ↑ The largest gold holdings in tonnes as reported by the World Gold Council
- ↑ Wold Gold Council "The World of Gold" June 2009
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