Gold — yet again a medium of investment

All over the world gold prices are breaking previous records and reaching to the highest level. The importance of gold as a store of value and a reliable medium of investment is increasing that has resulted a sharp surge in prices of gold. The price of gold topped $1,500 an ounce for the first time on April 21, 2011, with weakened dollar and fears of high inflation and countries’ debt have attracted investors to shift to the safe haven of precious metals.
The price of gold was expected to reach $1,700 to $2000 in 2015. But the gold price in international market already reached to $1819 per ounce, on 19 September, 2011. On that day, the gold price was Rs51,810 for 10 gm in the domestic market of Karachi. The main cause of the increase was massive quantitative easing in the US and growing inflationary pressure in emerging economies, encouraged investors to avoid paper currency and invest into gold. The paper currency value is declining day by day, therefore it not a reliable source of investment.
The price increase was 30 per cent in 2010 and 25 per cent in 2009. Gold prices are also on the rise because central banks of many countries and global investment companies continue to shift in their assets from falling dollar value and dollar backed assets to gold. The investors are pulling out their money from shares backed funds. Besides, a new class of rich is emerging in China and India is also contributing to additional demand for gold.
The latest scenario is that President Hugo Chavez signed a decree to formalise the nationalisation of Venezuela’s gold mining industry, a move aimed at giving the government total control over gold produced in the South American country. He also announced the repatriation of $11 billion in Venezuelan gold reserves currently held in US and European banks. However, the decision has not given details how the new decree differs from the law that nationalised gold mining in 1965. In 1977, the government granted itself exclusive rights to extract gold. The present law will increase powers of the authorities to expel wildcat miners from illegal mines, said President.
In addition to repatriating gold reserves, the president of Venezuela’s Central Bank has said that the government plans to move other international assets to buffer the country against economic woes in the US and EU countries. The analysts said that this move will shake investors’ confidence and they would see the country as riskier. The government is also looking at the possibility of transferring its non gold reserves to banks in China, Russia, Brazil and other countries of Asia and Latin America.
A report indicated that about $3.7 billion of those bank reserves are at the Switzerland Bank for international settlements. It said Britain based Barclays Bank has about $1.1 billion and smaller amounts are held at France’s BNP Paribas, Deutsche Bank, J.P. Morgan Chase, and the US Federal Reserve and World Bank. Central banks of Brazil, Russia, China, India, Iran, Sri Lanka and Bangladesh have bought hundreds of tonnes of gold since 2008 when the yellow metal was trading around $800 an ounce. The global financial crises, Great Recession of 2008-09, have eroded confidence in banking, stock market and real estate as a viable investment medium. It was forecasted that gold’s decade long Bull Run could continue in the next four years.

Gold price in Pakistan

Price of gold in the local market is rising too. It was less than Rs16,000 per 10 gram in early 2008 rose to Rs51,725 per 10 gram, 24k on 21 April, 2011. Stock investors, real estate buyers and individuals including housewives and widows and pensioners are preferring to invest in gold.
The gold price continued its journey upward in 2011 and touched to record high. The prices reached Rs57,800 per tola, and further rose to Rs60,800 per ten grams. While it increased to $1786 and later $1800 per ounce in international market. In August 2011 alone, gold prices increased by Rs4,214 per tola, while in international market its price increased by $127 per ounce. It was due to the poor returns on bonds, no immediate signs of revival in the world largest economies and higher buying by China, India, South Korea and some European countries.

Global gold demand

Demand for gold is spread all over the world. East Asia, the Indian sub-continent and the Middle East accounted for 70 per cent of world demand in 2008. About 55 per cent of demand comes from five countries, India, Italy, Turkey, USA and China.
Jewellery consumes about two thirds of gold. In the 12 months, to December 2008, this amounted to $61 billion, making jewellery one of the world’s largest consumers of gold. USA is the largest market for gold jewellery, whereas India is the largest consumer in volume terms, accounting for 24 per cent of total demand. The economic crisis and the consequent recessionary pressures of 2007-08 had negatively impacted consumer spending and resulted in the reduced volume of jewellery sales, particularly in western markets. Generally, jewellery demand is a combination of affordability and desirability by consumers. It rises when prices are stabile or gradually increasing and declines in the periods of price volatility. The gold follows an 8 year cycle, with prices likely to its peak, above $2,000, but that sudden rise will not stay long and fall at the same or speedier and prices could retreat to $1,000 by 2015, said experts. They said this is the bubble that will burst sooner or later. However, the gold investors are wondering how much higher the gold and silver would climb. The analysis shows that the price of gold had risen from $600 an ounce to more than $1,400 an ounce in less than five years. It also indicated that gold would have important position in future investment.

History of gold

In 1694, the Bank of England was established which became the first central bank to have gold reserves. In 1717, the price of gold was fixed, putting Britain on a gold standard until 1931. In 1792, the Coinage Act put the US on a bimetallic silver-gold standard. But, in 1873, the US adopted gold standard unofficially after silver was eliminated. In 1900, the country adopted the gold standard through the passage of the Gold Standard Act.
In 1931, Britain abandoned the gold standard. In 1944, the Breton Woods agreement laid the foundation for the post war monetary system. The US dollar was set to maintain a conversion rate of $35 to an ounce of gold. In 1961, central banks of the US, U.K. and six European countries constituted the London Gold Pool and agreed to buy and sell gold at $35.09 per ounce. In 1968, the London Gold Pool collapsed and subsequently, the US, Britain and other European countries were unable to maintain gold price at $35 per ounce. The gold price began to float freely for the first time. In 1973, the US devalued the dollar and raised the official selling price of gold to $42.22 per ounce. During 1976-80, the IMF abolished its official gold price allowing governments to trade gold in private markets. In 1980, gold reached as high as $875 on January 21, but dropped to $591 by the year end. In 2009, central banks the world over returned to buying gold for the first time in two decades. In 2011, gold hit a level of $1,445 per ounce on March 7. Although the era of gold coins ended during the last century, but central banks of the world still keep a part of their reserves in gold. Some years ago, the IMF offered a certain percentage of the gold in its possession for sale, which was pur chased by world’s central banks. In Asia, China and India took the lead in buying gold from the IMF, since they wanted to diversify their foreign exchange reserves. The US has the largest official holdings of gold at 8,134 tonnes. The era of gold coins had ended due to limited supply of gold that could not match with the continuous growing demand for money, resulting from the massive expansion in the size of the global economy in the world. Although paper currency had taken the place of gold which together with the modern banking system, is taking care of the world’s unlimited appetite for money. But the post gold standard era has witnessed manifold increase in prices of gold. Gold was considered valuable long before the emergence of paper currency, cheques, stocks and bonds etc. and it is expected to continue its journey together with its aforesaid partners, in one form or the other. However, the United Nations is considering to bring reform in the present monetary system to make it more stable and reliable. As prices of gold are rising, jewellery exports from Pakistan sinked to $404 million in 2010-11 as compared to $638 million in the corresponding period of last year.
It is estimated that by the end of the second quarter this year, global gold demand would be 919.8 tonnes, down by 17 per cent. However, in value terms, gold demand surged 5 per cent to reach $44.5 billion. Almost half the demand came from the jewellery with buyers from India, China, Saudi Arabia and USA. These four countries together have a share of 46 per cent of the world demand not depending on demand and supply but determined by the speculators. The example is that the commodity boom of 1980s, when gold prices reached $850 per ounce, soon settled within $300 to $400 for many coming years. Due to high prices, gold import in the country dropped by 14.49 per cent during the first month of 2011-12. The 60 per cent of the gold products are being manufactured by recycling the gold. The demand for bars and coins rose by 42 per cent in 2QCY11 over the same period last year. The gold supply increased 7 per cent during this quarter. However, the metal import was 2,816kg valuing $109.6 million in 2010-11 as compared to 4,779kg valued $139 million in the last year. The traders said the domestic sale of gold declined by around 82 per cent in seven months of 2011.

Safest haven for
investment

Presently, gold is supposed to be the safest haven for investment, besides high returns on investment and hedging became the driving force behind the rising prices of gold in the global markets. Gold prices in the international market gained 7.7 per cent in 2011. Over the last one year, gold prices in India have risen by 35 per cent, in Pakistan 48 per cent and this was because of the current poor outlook for the global economies, the rising inflationary pressure and the weakness of the US dollar against other major currencies, that may result gold price at $2,000 per ounce on international demand by end 2011. Investors have lost confidence in the bourses across the major stocks exchanges, besides the spread of the debt crisis that has now engulfed the euro zone’s third and fourth largest economies, Italy and Spain. A new trend was observed in Mexico City, a fewer customers are coming to buy bullion but a large number of people are interested to sell their ornaments, due to fetching high prices. The same trend was seen in India. The trend was most notable in the US, which contributes about 10 per cent of global scrap supply. Last year scrap supply was 143 tonnes, equivalent to more than 10 million wedding bands. Some of that recycled gold also comes from industrial sources such as computer motherboards. Unlike some nations such as Turkey and India, where recycling jewelry is common for decades, most Americans had been unaccustomed to the idea of selling off old jewellery. Then a network of cash-for-gold businesses popped up after 2008 that encouraged the people to sell old jewellery. At the start of 2011 gold was trading at $1,400 per ounce that was previously about $833 per ounce; showing a return of 37 per cent per year. This was similar that was witnessed in the late 1970’s. Central banks and the governments have a share of 16.5 per cent of the world’s gold reserves. In 2011, emerging market central banks’ were the biggest buyers of gold purchased about 180 tonnes; double the 73 tonnes purchased in 2010. Gold investment of China is growing at 14 per cent per annum since the deregulation of the local market there. A similar trend has also seen by the central banks of India, Russia, Indonesia, Thailand, and Korea.
Investors of Pakistan are also diversifying their investment into gold, because such investments typically have had an inverse relationship with stock market movements. Technology has changed the environment in which there are very few obstacles today to hind investors from buying or selling assets anywhere in the world. Owing to sharp increase in gold and jewellery prices and lack of personal security sale of original gold jewellery sets is falling. As a result purchasing of imitation jewellery is gaining popularity and they are fast becoming dearer.
Gold’s conflicting role suggest that it is a bubble which could lead to large losses if popped. The experts believe there are no signs of any immediate revival in the world’s largest economies, so the ‘outlook for yellow metal’ is bright. However, the investors will again prefer gold for a store of value against a plunging loss of purchasing stocks. Enter gold and silver and reap benefits, said traders.