The gold "bubble" keeps on going higher!

Gold is one of the oldest commodities traded by man.  For hundreds of years the value of money has been determined by a country’s gold supplies but now you can trade on the price of gold from the comfort of your own home.

The past decade has seen a transformation in the gold market. For much of the 80's and the 90's the gold metal fell and it was largely ignored by investors. The market was so quiet that central banks had little interest into holding their large gold reserves and began selling pushing the price down further. But since then demand for investors has been voracious pushing jewellery to the sidelines and quadrupling the golds value since 2001. The appeal of the bullion* has rarely been clearer than in the wake of the financial crisis as investors lost faith in the security of other assets, they bought record amounts of gold, from german housewives, to hedge funds and wealthy individuals with private vaults in Switzerland. For the first time in three decades investment overtook jewellery as the main in source of gold demand in 2009. And in may this year, gold buying spiked once again as conservative european investors feared the debasement of their euro denominated savings in the face of the european sovereign debt crisis.      out dealers stocked of popular Krugerrands starting a rally that pushed gold to a fresh high above 1260 dollar an triounce. The trend has been helped by the development of new investment vehicules notably exchange traded founds backed by physical gold : the largest SPDR gold shed in New York now holds more than most central banks. At the same time selling from central banks has dried up. A few years ago the sector was selling more than 500 tonnes of gold a year the equivalent of 20 % of the annual production from mines, but that trend has reversed and this year central banks as a group were expected to be a small net buyer of gold as China, India and Russia have been boosting their gold holding. Despite  these positive factors, gold divides commentators sharply. Prominent figures in the financial market have described gold as a bubble dominated by speculators arguing that the market will be vulnerable to a correction as soon as other assets such as bonds start offering investors attractive returns. Gold advocates reply that while prices may have more than quadrupled in the past decade when adjusted to inflation they remain below their peak in 1980. Bubble or no bubble, they say that gold prices are further to run. 

On Tuesday 27th of September 2010 the spot gold price climbed to a new all-time high of $1,311. 

In the following paragraphs I will explain in depth 4 factors that can affect the price of gold.

  

Supply and demand

As with most commodities, the price is partly affected by supply and demand.  If more people want to own gold, the price will generally rise.  If people prefer other investments, the price of gold will generally fall.

However, as annual production of gold comfortably meets supply, the saving and disposal of gold plays a bigger role in determining price than the speed at which gold is used.  Most of the gold ever mined still exists (unlike oil which is consumed) and so the gold could potentially come back onto the market at any time. If the return on bonds, shares and property is poor, and investors are struggling to make any real returns (taking into account risk and inflation) then demand for gold will generally increase. This happened in the mid 1970s during the period of ‘stagflation’ where commodities such as gold were highly prized. 

Sentimental

The price of gold is mainly affected by changes in sentiment – the desire to own gold – rather than changes in annual production. This makes it very different from other commodities in the market.

For example if people begin to lose faith in their country’s currency or stock markets, they often feel that gold is the only asset worth investing in. A natural disaster, war or period of civil unrest can cause demand for gold to increase in this way. People see gold as a solid asset which will always buy food or transportation.
Unusually, the true value of gold doesn’t necessarily increase or decrease. As there is plenty of gold to be used for industrial and jewelery purposes, the price of gold may rise dramatically or fall dramatically simply because of the way people feel about gold as a rare and collectible item.

Central banks and the IMF

The gold price is also affected to an extent by central banks and the International Monetary Fund.  Since 1999 there have been agreements in place which limit the sales of gold by major countries including the Australia, the UK, USA, Japan and other European countries.  This prevents major players selling large quantities of gold and potentially bringing down the price.

Although central banks don’t normally announce gold purchases in advance, countries including China and Russia have expressed interest in growing their gold reserves. India has recently purchased over 200 tons of gold which led to an increase in gold prices.

Changes in seasons

The price of gold can often increase in the final quarter of the year.  This is because there are several religious and ‘gift-giving’ festivals towards the end of a calendar year including Christmas and Diwali.


In addition, many Indian weddings occur in November and December with the gold given as part of a dowry usually purchased after the harvest in September.

I hope you enjoyed reading this article about gold just as much I enjoyed learning and explaining to you readers this fascinating metal. 

Regards, 

Yacine Dessouki


*bullion : Gold, silver or platinum in form of bars or ingots.


Sources : www.ft.com 
http://in.reuters.com/article/idINIndia-51403320100910

http://www.investorwords.com/614/bullion.html

How to combat poverty? Get africa's children an education

Dear Readers,

My first blog entry is about a delicate subject that is covered in all the headlines on daily basis and more recently it was the topic of the United Nations millennium developing goals. 

As developed countries strive for post-crisis growth, Africa is on the verge of an economic leap forward. A $1,500bn economy, the continent is ready to leave the third world. Its resources, both natural and human, are untapped. Foreign investment is at last beginning to flow. Its leading nations are even competing to join the fast-developing “Bric” countries. But as will be clear at today’s millennium development goals summit in New York, while Africa is close to a breakthrough it has not happened yet.

Three crucial factors ....

In my opinion any African advance will depend on three crucial factors. First, a wider opening to trade, given that 80 per cent of current exports remains in oil and agriculture. Second, a new African common market is needed. Only regional integration can overcome the fact that only a 10th of Africa’s trade is within Africa itself. Finally, better infrastructure: African road capacity is half that of Latin America and less than a third of Asia’s.

But also, Africa's future depends on a really important fourth factor : developing the skills the labour market needs. There are now up to 1m foreign workers in Africa, as some investors bring with them whole armies of workers to staff plants, build roads and work farms. Without more investments in education, i think Africa will struggle to move up the economic value chain and runs the risk that any new investment will lead to inequitable growth. Governments,  in the developing world, must think strategically about which investments will help them to grow out of the crisis and education budgets should be near the top of this list.

I would like to express my disgust about the injustice and waste in denying education. As well as boosting jobs and gross domestic product, the evidence is clear that education combats malnutrition, maternal and infant mortality and HIV/Aids. According to Unesco if every child could read, 171m children could be lifted out of poverty. In simple words, offering education to children is the best anti-poverty, anti-famine, anti-disease and anti-unemployment programme.

What can be done to realise the gravity of this vision ? 

Developed countries should help the less developed countries by honouring their aid commitment but also should allocate at least 15 % of its aid budgets to basic education and recruit more teachers (something that would be impossible without the aid of developed countries). Please do excuse my pessimistic view of the reality but I still do feel there is light at the end of the tunnel : there is hope at the end of tunnel.  Building on the rapid expansion of mobile phones and increases in the access on online education materials, Africa could be opened to a "new world of learning". And who knows, this could help the African Lionesses match the Asian Tigers. 


Regards,


Yacine Dessouki




Sources : 

http://www.thecommonwealth.org/news/190683/163043/151685/promoting_flexible_education_for_nomadic_populatio.htm (Image)

http://www.un.org/millenniumgoals/

Welcome

Dear readers, 

Nowadays, most  of the financial newspapers and magazines (such as the Financial Times or Thomson Reuters), seem to assume that readers already know the story behind a financial or economical topic, and that all they require is an update. In reality few of us have the time, knowledge or the background to cope with the thousand and one issues that crowd in on us. And many stories seem to have gone beyond the point where we can make any sense of them. For some of us finance or economics are like "alien territories" and demand that we think in unfamiliar ways.

In this blog I will weekly decorticate, analyse, give my opinion and comment a financial or economical headline that sparked my interest and caught my eye. 

I hope you will enjoy reading my work just as much as I enjoyed writing it. 


Thank you for your interest.


Yacine Dessouki