Despite high gold prices, the demand for gold has been surging worldwide, with investors expecting gold to increase to new heights, claiming that they were buying gold as a hedge against economic upheaval, inflation, and because it provides protection against default risk, a risk that afflicts the stock market.
“Gold is a highly effective vehicle for diversification and risk management. … Gold’s volatility is not only typically lower than commodity and real estate indices but also lower than equity indices. … Gold’s volatility remains much lower than that of equities,” according to the World Gold Council’s report “Gold: alternative investment, foundation asset.”
What are the risks of owning gold? Experts suggest that during times of economic growth, gold remains static, without any increase in price, while investment in securities offers a much higher return, depending on the risk one is willing to take.
“Buying gold today is nothing more than a bet that someone else will want to pay you more for it tomorrow. Considering that the recent spike in gold is significantly driven by investor fear, rather than any solid economic indicator, this makes investing in gold even riskier. There is often no real value or basis for investing in gold,” according to an article on the investopedia website.
Historically, gold prices were stable, hovering between $200 and $300 until the beginning of 2002. In mid-2004, gold prices started edging up and reached a cumulative annual average of $972 in 2009 and $1,225 by 2010. On Sept. 6, gold prices peaked at $1,895 an ounce but then went on a downward slide, hitting a low of $1,587 on Sept. 26, after which they slowly rebounded, reaching $1,715 at closing on Dec. 8.
“Gold and silver prices continue to zigzag on a daily basis. … The upcoming ECB [European Central Bank] interest rate decision and tomorrow’s [Dec. 9] EU [European Union] summit in Brussels will probably affect the forex markets and consequently also affect gold and silver prices,” suggested Trading Nrg in a Dec. 8 article on its website.
Predicting Gold Prices
“Despite a pullback from its all-time high of about $1,920 an ounce set in September, gold is still trading in the $1,750 range. In fact, the glittering metal has gained 22% in the past 12 months,” said a Dec. 9 article on the Money Morning website.
The article said that gold experts expect the gold price might go above the $2,000 mark in 2012. Despite rising gold prices, the Money Morning article recommends that investors should invest in gold mining companies instead of gold itself. According to the Money Morning article, good investment bets are Alamos Gold Inc. and Eldorado Gold Corp.
The above prediction is based on careful observation of the HUI Index value, which stood at 555.93 at closing on Dec. 8. It had zigzagged up and down, with an Index high of 604 on Nov 7. The Index is predicted to be on an upward trend, as gold miners are more willing to invest money in their mining operations.
The Amex Gold BUGS Index (HUI Index), one of the most popular gold indices, includes 15 gold production firms that do not hedge their gold production for more than 1.5 years.
“With gold at today’s price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk-adjusted returns even if gold does not advance further. Since we believe gold will continue to rise, we expect gold stocks to do even better,” said David Einhorn of Greenlight Capital Inc., an investment firm, in the Monday Morning article.
Demand for Gold Realigned
“Investment demand for gold was a key driver during the third quarter. Increasing levels of inflation, the US credit rating downgrade, a worsening eurozone sovereign debt crisis and the lacklustre performance of many assets drove investors to increase holdings in gold,” summarized Marcus Grubb, managing director of investment at the World Gold Council, in a recent press release.
During the third quarter of 2011, demand for gold had increased by 6 percent over the same period in 2010. Investments were the main driver behind the demand for gold.
Demand for gold has been realigned, moving from North America and Europe to the East. In the 1980s, North Americans and Europeans were responsible for 68 percent of the demand. Beginning with 1990, gold demand by the North Americans and Europeans had fallen to 38 percent and to 27 percent by 2010.
The demand from the Indian subcontinent and East Asia totaled 35 percent in the 1970s, increasing to 58 percent by the end of 2010.
Jewelry accounted for most of the shift in demand from the West to the East. India and the Far East accounted for 66 percent of jewelry purchases in 2010, a 44 percent increase since 1980.
“The evident shift in demand from West to East is substantially influenced by the regulatory and reform development in emerging markets following economic liberalization,” according to the November World Gold Council report “Gold Demand Trends.”
The gold demand was met with adequate supply, as gold mines excavated 5 percent more gold during 2011.
“Demand for gold jewellery [sic]among Chinese consumers will remain buoyant throughout the remainder of 2011, as the year-end holiday season approaches,“ according the World Gold Council ”Gold Demand Trends” report.
Next...Conspiracy Speculations
Conspiracy Speculations
“Is it really so preposterous to believe the United States and Europe would conspire to keep pole position in the global financial system?” asked the writer of a November article on the Money Morning website.
The writer argues that from 1999 to 2009, central banks sold more gold than they bought, despite the increase in gold prices.
For three years, beginning with 1999, the British finance minister sold 50 percent of that nation’s gold reserves, in an effort to drive down gold prices.
In 2011, a U.S. District Court subpoenaed April 1997 minutes from a meeting by the G-10 Gold and Foreign Exchange Committee.
“The minutes suggest that officials from the G-10 governments and their central banks were, in fact, conspired to synchronize their policies to affect the gold market,” according to the Money Morning article.
One of the participants in the G-10 meeting, assumed to be Peter R. Fisher, suggested that the increase in gold prices would exacerbate the U.S. debt.
Money Morning quoted Fisher as saying: “U.S. gold belongs to the Treasury. However, the Treasury had issued gold certificates to the Reserve Banks, and so gold also appears on the Federal Reserve balance sheet. If there were to be a revaluation of gold, the certificates would also be revalued upwards. … This would lead to sales of government securities. ... Sales of government securities would expand the public portfolio of government securities and hence also expand the Treasury’s debt-servicing burden.”
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