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Gold & Silver Prices

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Factors influencing the Gold Price
Throughout history, Gold has been seen as a store of value. Gold items were often buried with pharaohs to use in the after-life, because gold is free from corrosion or decay.

Today, like all investments and commodities, the price of gold is ultimately driven by supply and demand. Unlike most other commodities, the hoarding and selling plays a much bigger role in affecting the price, because almost all the gold ever mined still exists and is potentially able to come on to the market for the right price.

Given the huge quantity of above-ground hoarded gold, compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production or supply.

According to the World Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes. About 3,000 tonnes goes into jewellery or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds. This translates to an annual demand for gold to be 1000 tonnes in excess over mine production which has come from central bank sales. Demand from the electronics industry is rising by 11% a year, jewellery by 19%, and industrial and dental by 21%.

Central banks and the International Monetary Fund play an important role in the gold price. At the end of 2004 central banks and official organizations held 19 percent of all above-ground gold as official gold reserves.

The Washington Agreement on Gold (WAG), which dates from September 1999, limits gold sales by its members (Europe, United States, Japan, Australia, Bank for International Settlements and the International Monetary Fund) to less than 400 tonnes a year. European central banks, such as the Bank of England and Swiss National Bank, have been key sellers of gold over this period.

Although central banks do not generally announce gold purchases in advance, some, such as Russia, have expressed interest in growing their gold reserves again as of late 2005. In early 2006, China, which only holds 1.3% of its reserves in gold, announced that it was looking for ways to improve the returns on its official reserves. Many bulls hope that this signals that China might reposition more of its holdings into gold in line with other Central Banks.

Gold becomes more desirable in times of Fear
When dollars were fully convertible into gold and silver, both were regarded as money. However, most people preferred to carry around paper banknotes rather than the somewhat heavier and less divisible gold coins. If people feared their bank would fail, a bank run might have been the result. This is what happened in the USA during the Great Depression of the 1930s, leading President Roosevelt to impose a national emergency and to outlaw the holding of gold by US citizens.

Low or Negative Real Interest Rates
If the return on bonds, equities and real estate is not adequately compensating for risk and inflation then the demand for gold and other alternative investments such as commodities increases. An example of this is the period of Stagflation that occurred during the 1970s and which led to an economic bubble forming in precious metals.

War, Invasion, Looting
In times of national crisis, people fear that their assets may be seized and that the currency may become worthless. They see gold as a solid asset which will always buy food or transportation. Thus in times of great uncertainty, particularly when war is feared, the demand for gold rises.

Gold Investors
Investors may buy gold for a variety of reasons. Many desire to diversify their assets; some to hide wealth from tax authorities; others fear the effects of inflation on their wealth; many see it as a hedge against an economic depression or other serious crisis.

Methods of Investing in Gold
Investment in gold can be done directly through bullion ownership, or indirectly through certificates, accounts, spread betting, derivatives or shares. Gold coins and jewellery is another method which is becoming increasingly popular. Ebay offers a ready marketplace for buying and selling gold.

Fundamental Analysis
Investors using fundamental analysis analyze the macroeconomic situation, which includes international economic indicators, such as GDP growth rates, inflation, interest rates, productivity and energy prices. They would also analyze the total global gold supply versus demand. Over 2005 the World Gold Council estimated total global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes. Others point out that total mine production is only about 2,500 tonnes each year, leaving a 1,300 tonne deficit that must be made up by central bank or private sales. While gold production is unlikely to change in the near future, supply and demand due to private ownership is highly liquid and subject to rapid changes. This makes gold very different from almost every other commodity. The number one reason most gold investors cite is that they see Gold as a hedge against inflation and the devaluation of fiat currency, especially in relation to the US dollar.

In January 1959 US M3 money supply was $288.8 billion, and the official gold reserves of the United States was then 17,335.1 tonnes, or 557,336,000 ounces (there are 32,150.7 troy ounces in a tonne). That means that in 1959, there were $518 in circulation for every ounce of gold reserves held by the USA. Although the actual ratio of dollars to gold was $518 per ounce, the actual price, as fixed under the gold standard, was only $35 an ounce.

By August 2005, the US M3 money supply had risen to $9,873.9 billion, whilst at the same time the Official Gold Holdings of the United States had fallen to just 8,133.5 tonnes, or 261.50 million Troy Ounces. This means that in 2005, there were $37,831 in circulation for every troy ounce of gold held by the United States. The situation is even more shocking in England and the European Union. Most of the Eurozone countries and the United Kingdom dumped much of their gold reserves onto world markets at very low prices between 1995 and 2001 as a means of supporting their own fledgling currency, the Euro.