Gold Hits the Heights: There's a Distinctly Bullish Sentiment in the Precious Metals' Markets Driven by Renewed Economic Growth and Strong Buying in the Main Consuming Regions, Principally the US, the European Union, Asia and the Middle East. Moin Siddiqi Analyses the Trends

By Siddiqi, Moin | African Business, January 2006 | Go to article overview

Gold Hits the Heights: There's a Distinctly Bullish Sentiment in the Precious Metals' Markets Driven by Renewed Economic Growth and Strong Buying in the Main Consuming Regions, Principally the US, the European Union, Asia and the Middle East. Moin Siddiqi Analyses the Trends


Siddiqi, Moin, African Business


The gold price rose to a 25-year high of $530.90 a troy ounce (oz) on 9 December, while platinum reached $1,004/oz. Both metals' prices were driven by robust demand and heavy buying from private investors seeking an option to paper money like stocks and bonds--assets whose value falls during periods of higher inflation and subdued corporate earnings.

Palladium, platinum's sister metal, also posted gains reaching an 18-month high of $295/oz and the price of silver, a precious metal in heavy demand from the jewellery manufacturing sector, rose to $9.03/oz.

The World Gold Council, the gold industry's promotional arm, reported: "People are looking for an alternative investment to products such as US dollar-based bonds. The expectations of inflation in the coming year are very high."

Strong investor appetite reflects gold's unique qualities as a store of wealth, a medium of exchange and a unit of value.

Over a long-term period, the world's oldest monetary asset has preserved its value in terms of real purchasing power. Unlike equities, fixed-income and derivative products, the metal's status cannot be undermined by rising inflation. As one analyst put it: "Gold, with neither an underlying economy nor price sensitive supply and demand issues, is the purest of the currencies." In other words, gold remains a proven hedge against the risks of renewed inflationary spirals and large currency devaluations.

Gold 'de-hedging', where producers buy-back previously hedged positions and/or reduce the amount of bullion they sell onto the derivative markets, has been a positive factor in the recent price rise. An additional factor is that Middle Eastern OPEC producers are also using their petrodollars deposits to buy bullion.

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Interestingly, the US dollar's recent impressive rally (see View from the City p) has not derailed the gold market. That is a positive signal for long-term investors. A tight supply and demand balance suggests that gold's price should settle above the symbolic $500/oz mark in the coming months. The Royal Bank of Canada's Capital Market report notes: "We believe gold will continue to appreciate to the $550-600/oz range beyond 2007."

The metal has doubled in value from the historical lows of $250/oz in 1999 when the Bank of England disclosed plans to sell official reserves.

It is worth noting that gold and crude oil are invariably deemed 'correlated' commodities. What this means is that usually, when oil prices rise, the value of gold increases on fears of energy-fuelled inflationary pressures.

Gold: Gold is produced from mines located on every continent of the world, with the exception of Antarctica where mining is forbidden. Worldwide, there are over 900 gold mines in operations ranging from the tiny to the enormous like the Grasberg mine of Indonesia (the world's largest), which produced 114t in 2004.

Structural factors have underpinned the price growth in recent years, reflecting ageing mines, scarce new capacity and reserve depletion. Industry analysts estimate that since 1990, about 37,320t has been produced, but only 12,440t of reserves were discovered. This trend has resulted in a tightening of supply-demand fundamentals.

Global production of gold from ore in 2004 was estimated at 2,461t. A further 829t was recovered from scrap, according to the World Gold Council (WGC). These figures indicate that the market was in deficit to the tune of 160t. Africa's output (led by South Africa) was 567t; South America 419t; North America 394t; the former Soviet Union 367t; and Asia (including China) 366t. Though South African production has declined from highs of 1,000t/year in the early 1970s, it still remained the world's top producer, with 345t, or 14% of the continent's aggregate. But the US and Australia were not far behind with 262t and 258t, respectively.

The top-10 gold producing companies in 2004 were Newmont (US) with 212t; Anglo-Gold Ashanti (South Africa) 188. …

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Gold Hits the Heights: There's a Distinctly Bullish Sentiment in the Precious Metals' Markets Driven by Renewed Economic Growth and Strong Buying in the Main Consuming Regions, Principally the US, the European Union, Asia and the Middle East. Moin Siddiqi Analyses the Trends
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