While securities, stocks, futures and other “non-physical” assets keep losing their value, thus turning into risky assets, more and more investors start seeing gold as a “safe haven” asset.
The US government set the price at $19.3 per ounce of gold in 1792. The current price is almost 100 times as high. Will the trend continue or will the “gold bubble” eventually burst in the near future?
What factors will determine future gold prices?
According to experts, these are the major factors influencing gold prices:
· global production of gold and gold reserves
· global demand
· economic and political situation
· gold purchases by central banks
Gold reserves. Each country has its own gold reserve. As of January 2012, the aggregate amount of gold stored in gold reserves of all the countries around the world is estimated at 28 889,50 tons. The “gold” leaders are:
USA – 8 133,5 tons;
Germany – 3 396,3 tons;
IMF – 2 814 tons;
Italy – 2 451,8 tons;
France – 2 435,4 tons;
China – 1 054,1 tons;
Switzerland – 1 040,1 tons;
Iran – 907 tons;
Russia – 883,3 tons;
Japan – 765,2 tons.
Therefore, Top 10 countries own 82,66% of the total global reserves. If to consider the share of gold in a nation’s gold-and-currency reserves, the picture will look as follows:
Portugal – 90,5%
Greece – 81,5%
USA – 74,5%
Venezuela – 72,4%
Germany – 71,4%
France – 71,1%
Italy– 71,0%
Slovakia – 64,7%
Netherlands – 59,8%
Cyprus - 57,5%.
The total production of gold around the world from pre-history till early 2012 is estimated at 166 600 tons. 50% of the volume was used for making jewelry, 12% - for manufacturing and medical purposes.
The world’s major gold producers are:
China. The country has been expanding its global production over the last 10 years. In 2011 China’s gold production increased by 5,89% up to the record-high amount of over 360 tons. China keeps expanding its production volume despite the overall bearish tendency.
Australia. It is the world’s number 2 in terms of gold production. Back in 2010, it produced 255 tons of gold (+15% against 2009).
USA. The US gold production started declining in1998. It declined by 37% and stabilized around 230 tons in 2005-2006.
South Africa. Its production volume keeps declining. Before 2006 it used to be the world’s leader in terms of gold production. It became the runner-up in 2007 and occupied the 4th place in 2010. Over the last 40 years South Africa’s gold production decreased by 80%.
Russia. Its level of gold production remains stable around 190 tons a year.
Peru. In 2010 it produced 170 tons of gold, which is 38 ton less than its record set in 2005 (208 tons).
What countries are the world’s leading gold consumers?
In 2011 the global demand for gold reached the highest level in history - 4 067 tons. The biggest consumers are:
investors – 44,42%;
jewelers – 44,18%;
manufacturing and medical industries – 11,4%.
Over the last few years investors have increased their appetite for gold by some 33% while jewelers have cut their demand for gold by 10.3%.
China and India are the world’s 2 major consumers of gold. Together they consume 55% of the global supply. India used to be the leader for a long time but in late 2011 China outpaced India because India’s demand for gold had declined by nearly 50% on cheaper national currency and consequently more expensive gold.
Only in Q1 2011 Chinese investors bought over 93 tons of gold, which is 41 tons more than the amount of gold bought in Q1 2010.
Gold as a measure of economical and political stability in the world.
Gold is the world’s most valuable asset and tool in the global financial system because it has some major advantages:
· It is corrosion-proof
· It is used in multiple fields like jewelry and manufacturing production.
· It cannot diminish in volume
· It is recyclable
· It is a precious metal
The drawback is that its reserves are relatively scanty (however, along with other features, it actually makes gold precious).
Gold starts appreciating during times of global economic instability as investors are looking for “safe haven” assets to secure their investment capital.
US economy. The US economic growth is faint while the current economic situation in the country requires preserving low interest rates (close to zero). Therefore, profitable lending is questioned. Economic recovery attempts and low interest rates may encourage investing in risky assets, thus temporarily making gold a less attractive asset.
US Dollar. Another factor to consider is the fact that the Fed Reserve is not planning to expand the money supply, which suggests that the US Dollar will probably be appreciating against other assets (stocks, other currencies, futures etc.). It should be noted that the US Dollar and gold are negatively correlated, i.e. when the American currency gets stronger, gold depreciates against it.
European debt crisis. The eurozone crisis started in 2010 and is the successor of the global economic crisis 2007-2008. The liquidity crisis affected both the USA and Europe. In panic, investors started selling their assets, thus causing major downtrends.
PIIGS countries. A series of “margin calls” affected the real sector of the region’s economy (which was the major borrower) as well as the final consumer. The tax base shrunk while the budget burden got havier due to more social benefit payments. Weak eurozone economies started having difficulties servicing their public debts and asked for external help.
China. The Chinese authorities say the country’s economy will probably fail to sustain the minimal growth of 8%. Some experts are sure that this is a signal indicating an economic slowdown. The 8% level is crucial. If the economic growth falls below 8%, Chinese manufacturers will see stagnation, thus increasing the level of unemployment and causing social tensions (and maybe even unrest) in the Chinese society. Moreover, China is obliged to pay off $292B of debts in 2012.
India. The Indian authorities have lowered the forecast for economic growth down to 7%. The Indian economy is considered the world’s 2nd fastest-growing economy after China’s one. Last year the investments in India declined down to 10.46B rupees, the lowest level in 5 years (-45% against 2010). India doubled its gold-import duties, thus making the import decline dramatically.
How do central banks influence the demand for gold?
Central banks used to be gold sellers. But in 2009 the situation changed. Central banks started actively buying gold to expand their gold reserves, simultaneously diminishing the share of the US Dollar in their gold-and-currency reserves.
Russia. In 1999 Russia’s gold reserve was equal to 457 tons. The country’s central bank nearly doubled it in mid 2011 (846 tons). The share of gold in Russia’s gold-and currency reserves is only 8% (Russia is the world’s number 9 in terms of gold reserves).
China. This Asian country can also be seriously affected if the US Dollar collapses. US Dollar assets account for a significant share of China’s currency reserves (some $1.2trillion). So, the Chinese authorities are looking for ways and means to reduce China’s dependence on the US currency. In 1988 China owned 395 tons of gold. Today its gold reserve is equal to 1054 tons, which is only 1,6% of the total gold-and-currency reserves.
Europe. European central banks have shown significant interest in gold for the first time in 20 years. European central banks purchased 800 tons of gold in 2011.
Emerging economies. The central banks of some emerging countries are actively buying gold as well, thus trying to reduce their dependence on the US Dollar. For example, Mexico purchased 93.1 tons of gold ( increasing its gold reserve from 7.1 tons up to 100.2 tons!) while Thailand bought 9.3 tons.
Turkey’s central bank bought 185 tons of gold, pushing Turkey from number 30 up to number 22 in the list of the world’s major gold holders. Such countries as Belarus, Macedonia and Greece slightly expanded their gold reserves as well.
Gold market outlook 2012
Each of the abovementioned factors influences gold prices. Obviously, global gold reserves are limited. However, some 2 500 tons of gold is produced around the globe every year. Gold producers are not planning to reduce their production volume in the near future. Taking into account that gold has “a second life” (i.e. jewelry can be recycled) there is no actual threat that the global reserves of gold will eventually run low.
The demand for gold has been relatively steady since people discovered and started using it. Along with its primary function - money – these days gold is used in multiple industries, including aircraft construction, jewelry and medical industries etc. More and more investors start considering gold as a “safe haven” asset.
Macroeconomic factors influence the price of gold as well. Global economic sentiments are changeable. These days most countries around the globe are facing multiple problems. For example, China and India, the world’s 2 major consumers of gold, experience an economic slowdown. India has doubled the gold import duties. This “gold medal” has 2 sides. On the one hand, the mentioned economic slowdown will result in the middle class getting lower incomes, which will reduce people’s buying power. On the other hand, the overall economic instability will push gold prices up as investors will turn risk-averse, thus preferring gold to stocks and other risky assets.
The role of central banks keeps increasing. Even though the share of central banks’ purchases of gold is relatively small, the very fact that central banks around the globe are accumulating substantial gold reserves suggests major changes in global economic tendencies. Not so long ago central banks used to be major gold sellers. Now they are actively buying it and are expected to continue their purchases.
This complex mix of factors forces gold to go volatile, thus making it rather difficult for analysts to anticipate the forthcoming succession of events. However, the experts of expect gold prices to keep fluctuating within the 1600-1800 range.
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What is your gold market outlook for 2012?
