Gold price

Price of one troy ounce of gold in US Dollars 1968 2008. (Note that this graph in nominal USD terms may mislead. In real terms, the peak value was 1981 by some margin). Gold has been used throughout history as a form of payment and has been a relative standard for currency equivalents specific to economic regions or countries. After World War II a gold standard was established following the 1944 Bretton Woods conference, fixing the gold price at INDIAN RS35 per troy ounce, or, in effect, pricing the RS dollar as 1/35th of a troy ounce of gold. The system existed until the 1971 Nixon Shock, when the US stopped the direct convertibility of the United States dollar to gold. Since 1919 the usual benchmark for the price of gold is known as the London gold fixing, a twice-daily (telephone) meeting of representatives from five bullion-trading firms. Furthermore, there is active gold trading based on the intra-day spot price, derived from gold-trading markets around the world as they open and close throughout the day. The following table sets forth the gold price versus various assets and key statistics: Trade World US Debt, Weighted GDP, USD bn[5] US dollar USD tn[4] Index, [6] 3.3 6.4 11.8 370.1 533.2 907.7 33.0442 35.6922

Gold, Silver, Year [1] USD/ozt USD/ozt[2]

DJIA, USD[3]

1970 1975 1980

37.4 140.3 589.5

1.6 4.2 15.5

838.9 852.4 964.0

1985 1990 1995 2000 2005 2008

327.0 353.4 369.6 272.7 513.0 865.0

5.8 4.2 5.1 4.6 8.8 10.8

1,546.7 2,633.7 5,117.1 10,786.9 10,717.5 8,776.4

13.0 22.2 29.8 31.9 45.1 54.6

1,823.1 3,233.3 4,974.0 5,662.2 8,170.4 10,699.8

68.2042 73.2249 90.3097 118.6013 111.5580 96.0884

In March 2008, the gold price exceeded INDIAN RS1,000[7], achieving a nominal high of INDIAN Rs1,004.38. In real terms, actual value was still well below the INDIAN RS599 peak in 1981 (equivalent to Rs1417 in RS 2008 dollar value). After the March 2008 spike, gold prices declined to a low of INDIAN RS712.30 per ounce in November. Pricing soon resumed an upward momentum by temporarily breaking the INDIAN RS1000 barrier again in late February 2009 but regressed moderately later in the quarter. After fluctuation returned near the INDIAN RS1,000.00 mark in mid-September 2009, international gold markets peaked at INDIAN RS1,023.30. Pricing later declined moderately again in late September 2009, falling back to INDIAN RS991.70 for the week ending on September 25, 2009. Later in 2009, the March 2008 intraday spot price record of INDIAN RS1,033.90 was broken several times in October, as the price of gold entered stages of new highs.[8][9] Current 2009 peaks have been attributed to media speculation[citation needed] expressing both: inflation will accelerate; and the likelihood of an end to dollar hegemony. India had recently purchased over 200 tons of gold from the IMF contributing to a surge in gold prices in November 2009. Financial commentator Jim Rogers predicts that gold will reach INDIAN RS2000 per troy ounce without citing a time frame.[10] Some analysts attribute this to central banks diverting their reserves away from US dollars.[11] However, economics professor Nouriel Roubini sees another investment bubble that will burst spectacularly.

Factors influencing the gold price

Today, like all investments and commodities, the price of gold is ultimately driven by supply and demand. Unlike most other commodities, the hoarding and disposal plays a much bigger role in affecting the price, because most of the gold ever mined still exists and is potentially able to come on to the market for the right price.[13][14] At the end of 2006, it was estimated that all the gold ever mined totaled 158,000 tonnes.[15] This can be represented by a cube with an edge length of just 20.2 meters, nearly the length of an Olympic-sized swimming pool. Given the huge quantity of stored gold, compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production.[16] According to the World Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes.[17] About 2,000 tonnes goes into jewellery or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds.[17] This translates to an annual demand for gold to be 1,000 tonnes in excess over mine production which has come from central bank sales and other disposal.[17] 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 aboveground gold as official gold reserves.[18] 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.[19] European central banks, such as the Bank of England and Swiss National Bank, have been key sellers of gold over this period.[20] 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.[21] In early 2006, China, which only holds 1.3% of its reserves in gold,[22] announced that it was looking for ways to improve the returns on its official reserves. Some bulls hope that this signals that China might reposition more of its holdings into gold in line with other Central Banks. India has recently purchased over 200 tons of gold which has led to a surge in prices.[23] Bank failures When dollars were fully convertible into gold, 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 ownership of gold by US citizens.[24] 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.[25]
[26]

War, invasion, looting, crisis 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.

Reasons investors buy gold

Investors generally buy gold for two main reasons: because they believe that gold prices will continue to rise and thus that they can gain financially, and/or as a hedge or a perceived safe haven against any economic, political, social or currency-based crises. Of course prices can fall as well as rise, so investors must make a best guess on what the future holds.

Methods of investing in gold

Main article: Methods of investing in gold Investment in gold can be done directly through bullion or coin ownership, or indirectly through gold exchange-traded funds, certificates, accounts, spread betting, derivatives or shares.

Investment strategies
Fundamental analysis

One troy ounce along with the certificate 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 yearly global gold supply versus demand. Over 2005 the World Gold Council estimated yearly global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes.[29] 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.[13][14]

[edit] Gold versus stocks

Dow/Gold Ratio 1968-2008

The ratio of the Dow Jones Industrial Average index divided by the price of an ounce of gold. A surrogate index was used to generate all points before 1897. Note: The vertical scale of this chart is logarithmic. The performance of gold bullion is often compared to stocks. They are fundamentally different asset classes. Gold is regarded by some as a store of value (without growth) whereas stocks are regarded as a return on value (i.e., growth from anticipated real price increase plus dividends). Stocks and bonds perform best in a stable political climate with strong property rights and little turmoil. The attached graph shows the value of Dow Jones Industrial Average divided by the price of an ounce of gold. Since 1800, stocks have consistently gained value in comparison to gold in part because of the stability of the American political system.[30] This appreciation has been cyclical with long periods of stock outperformance followed by long periods of gold outperformance. The Dow Industrials bottomed out a ratio of 1:1 with gold during 1980 (the end of the 1970s bear market) and proceeded to post gains throughout the 1980s and 1990s. The peak of 1980 also coincided with the Soviet Union's invasion of Afghanistan and the threat of the global expansion of communism. The ratio peaked on January 14, 2000 a value of 41.3 and has fallen sharply since. In November 2005, Rick Munarriz of Motley Fool.com posed the question of which represented a better investment: a share of Google or an ounce of gold. The specific comparison between these two very different investments seems to have captured the imagination of many in the investment community and is serving to crystallize the broader debate.[31][32] At the time of writing, a share of Google's stock and an ounce of gold were both near Rs700. On January 4, 2008 23:58 New York Time, it was reported that an ounce of gold outpaced the share price of Google by 30.77%, with gold closing at Rs859.19 per ounce and a share of Google closing at Rs657 on RS market exchanges. On January 24 2008, the gold price broke the Rs900 mark per ounce for the first time. The price of gold topped Rs1,000 an ounce for the first time ever on March 13, 2008 amid recession fears in the United States.[33] Google closed 2008 at Rs307.65 while gold closed the year at Rs866. The cost of holding onto tangible gold yields risk. Because of gold's value, that risk must be hedged by secure protection. Because of this additional cost and security risk, some opt for mutual funds.[34]

Technical analysis
As with stocks, gold investors may base their investment decision partly on, or solely on, technical analysis. Typically, this involves analyzing chart patterns, moving averages, market trends and/or the economic cycle in order to speculate on the future price.

Using leverage
Bullish investors may choose to leverage their position by borrowing money against their existing [gold] assets and then purchasing [more] gold on account with the loaned funds. This technique is referred to as a carry trade. Leverage is also an integral part of buying gold derivatives and unhedged gold mining company shares (see gold mining companies). Leverage via carry trades or derivatives may increase investment gains but also increases the corresponding risk of capital loss if/when the trend reverses.

Price speculation
Since April 2001 the gold price has more than tripled in value against the US dollar, prompting speculation that the long secular bear market (or the Great Commodities Depression) has ended and a bull market has returned[35]. A World Gold Council report released on February 18, 2009 showed physical gold demand rose sharply in the second half of 2008. Identifiable investment demand for gold, which includes ETFs (exchange-traded funds), bars, and coins, was up 64 percent in 2008 over the year before.[36] In the last century, major economic crises (such as the Great Depression, World War II, the first and second oil crisis) lowered the Dow/Gold ratio, an indicator of how bad a recession is and whether the outlook is deteriorating or improving, to a value well below 4. The ratio fell on February 18, 2009 to below 8. [36] During these difficult times, many investors tried to preserve their assets by investing in precious metals, most notably gold and silver.

See also

The crude oil market has lost most of its popularity since it is no longer near Rs150 per barrel (no longer do oil-related topics dominate the main financial websites), but nonetheless Im

sure that nobody can deny crude oils importance in todays globalized economy. It is vital for both businesses and individual consumers, as fuels are derived from it. Most of us need to drive and purchase goods that also need to be transported to us directly or indirectly. Since crude oil is so vital to the modern economy, it should not surprise anyone that it influences many markets, and virtually none of them can be completely free from oils influence. Therefore, this week I will analyze this particular market, from the precious metals perspective. I will use the scatter chart in order to focus on the trend and the average shape of the correlation.

As you may see on the above chart, the price of gold/oil has been trading considerable above the dotted trend channel in the past few months. The reason was that most commodities were reacting to the deflation scare that was being hyped by the media about a year ago, and crude oil was no exception. Gold did not suffer that much. One of the reasons might have been that it was perceived as a form of money and during deflationary periods cash is king. Im not suggesting that we are in one right now - this is just a brief reminder of what was popularly heralded in the mass media. Im not saying that this was done on purpose so that the powers that be could get away with printing more and more money, but that is definitely a food for thought. Anyway, crude oil dropped much more than gold and the gold/oil price combination moved far from the trend channel on the chart above. Generally, prices sooner or later tend to reverse to their means, and I dont expect this time to be much different. However, this time, I do not expect gold form a long consolidation while crude oil soars. To the contrary, I believe that the fundamental and technical factors are in place for a substantial rally in the metals. So, if the relative value of crude oil to gold is to rise, and go back to the previous trendline (it would mean oil at about Rs130 given todays gold price), I would see

this process to take place by oil slowly catching up, in a similar way to what we see today. Consequently, the gold/oil ratio rose significantly, and is now moving lower, which has important implications for PM stocks, but I will leave this part of the analysis to my Subscribers. Another possibility is that metals are going to take off regardless of the situation on the crude oil market. This is probable, but most likely will not take place untill we are in the third stage of the bull market - please keep in mind that this is what took place in the previous bull market - PMs outperformed other commodities. Before summarizing, I would like to comment on the short-term situation (charts courtesy of http://stockcharts.com) in gold.

The situation did not change much since the previous week. We are still in a trading range after a significant rally, and I still view the short-term correction after a brief rally as the most probable scenario for the following weeks. The red-rectangle marks the probable topping area. It is based on the size of the rally predecing the September consolidation (history tends to repeat itself, particularly during the ABC upswings/downswings), and the Phi (1.618) multiplier used on it. The question that Im often asked recently is how low would the correction take us. The answer is that although the September correction did confirm the breakout, the size and significance of the move suggests that a one more re-test of the previous high of Rs1,033 is likely, but nobody can rule out a decline to Rs1,000. The media buzz that was caused by gold breaking into four digits caused many momentum chasers to enter the market that dont want

to stay in it for longer. As soon as the rally runs out of steam (for instance we will see declining volume during days when PM rise), they will dump their gold and silver positions thus igniting the decline. The history often repeats itself, but even more often it rhymes, meaning that the analogy is not ideally precise, but is still present. This is why I marked the whole area, instead of focusing on just one point. The dollar is in the lower part of its trading range while precious metals are likely to move a little higher before the post-Rs1000-breakout rally runs out of steam. Since the RS Dollar is one of the most important drivers of PM prices in the short run, the temporary effect a small upswing would indicate a decline in gold and silver, however that is not in tune with what gold chart is suggesting at the moment. My best guess is that we may have a very quick (few days at most) drop in the value of the USD Index - below the short term support line, but it fails to close below that level for three consecutive days and once again rallies above this level to test the upper border of the declining trend channel. Should this take place, I dont expect the resistance - the upper border of the trend channel - to be broken. As mentioned in one of the previous essays, I expect USD to trade sideways before finally breaking much lower. This action would correspond to a decline after a brief rally in gold. Summing up, although many commodities declined sharply in 2008, we are still in the secular bull market in the commodities. The most important commodity - crude oil - has also been hammered and - contrary to gold - did not pass its previous highs yet. Although oils underperformance to gold might put the commodities bull market into question, I believe the situation is slowly moving back to the normal state. In other words, I dont think that one must be worried about the fundamental situation in gold, nor in the crude oil. The precious metals market has been trading sideways this week, and points raised in the previous Premium Update are still relevant today. The most likely scenario for the coming weeks in my view is that gold and silver would move briefly higher and then correct the postRs1000-breakout rally.