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