Taking The Trade To New Dimensions
Q. Globally, in spite of Gold Mining Companies releasing positive information about Gold Production. How is it that the Price of Gold has been increasing rationally?
This is an intriguing question and has been the subject of endless debate over many years. Is the price of gold driven by supply or demand? In my strong view it is the latter, i.e. demand, although of course there is influence at times from the latter, supply. As you can see from the chart below, gold mine production over the last 10 years has been extremely stable, exhibiting a high degree of price inelasticity with a maximum variance of just 6.43% between the high point of 2,645 tonnes in 2001 and low of 2,476 tonnes in 2007.
This is an intriguing question and has been the subject of endless debate over many years. Is the price of gold driven by supply or demand? In my strong view it is the latter, i.e. demand, although of course there is influence at times from the latter, supply. As you can see from the chart below, gold mine production over the last 10 years has been extremely stable, exhibiting a high degree of price inelasticity with a maximum variance of just 6.43% between the high point of 2,645 tonnes in 2001 and low of 2,476 tonnes in 2007.
Data Source GFMS Gold Survey 2008
The inability of gold producers to change production patterns came in the face of an increase in the average price of gold between 2001 and 2007 of 156%.
The inability of gold producers to change production patterns came in the face of an increase in the average price of gold between 2001 and 2007 of 156%.
Now compare jewellery fabrication demand, producer de-hedging, and implied net investment net investment over the same 10 year period.
Data Source GFMS Gold Survey 2008
Data Source GFMS Gold Survey 2008
Gold jewelry fabrication demand was 5 times more responsive to price changes than supply, with the lower gold price at the start of this millennium attracting good demand from the world’s major offtake markets in the Indian sub-Continent, South East Asia and the Middle East. However the biggest impact on the gold price came from the sharp increase in producer de-hedging and fresh investment demand for the yellow metal following the sad events of September 2001 and the ensuing surge in geo-political tensions with gold embarking on its second longest bull run that remains in place today.
>Q. What is your input on Investing in Gold? Is it still the Safe Haven for investments?
I have been involved in the international currency and precious metals markets since 1971 and joined the bullion desk of Samuel Montagu in 1978. At that time the conventional wisdom advocated by the Swiss asset managers was to keep at least 5% of any portfolio in gold with the flexibility to increase this to 10% at times of political or financial uncertainty This model faded with the gold price during the 1980’s and 1990’s but appears to be firmly back in vogue with modern day fund managers embracing the concept of gold as an insurance policy or safe haven with a fervor not seen for 30 years. The advent of Exchange Traded Funds has made it possible for a whole new genre of investors, including the pension funds, to deal in gold and has, in my view been the key driver of the Bull Run that has seen gold rally from $252 in July 2001 to a record price of $1,030 in March of this year. With the US dollar in retreat, energy costs soaring to new highs on an ‘almost’ daily basis, and the world’s banking system reeling from the sub-prime credit crisis, gold is most definitely taken centre stage as a safe haven in time of political and financial turbulence.
>Q. Dubai is the hub for Gold and Gold Jewellery trading. How do you think the rising Gold Prices has impacted this trade?
Gold embarked on its current bull run in the summer of 2001 and since that time the price has risen from $252 to an all time record of $1.030 in March before giving up some if its gains over the last two months. During this period Dubai’s physical gold market has shown remarkable resilience in terms of the amount of gold imported into the Emirate. As this chart illustrates the total volume of physical gold imports, in the form of jewellery, bullion bars and scrap reached 559 tons in 2007, its highest level this decade and achieved despite the gold price posting its highest average price since 1980.
Gold jewelry fabrication demand was 5 times more responsive to price changes than supply, with the lower gold price at the start of this millennium attracting good demand from the world’s major offtake markets in the Indian sub-Continent, South East Asia and the Middle East. However the biggest impact on the gold price came from the sharp increase in producer de-hedging and fresh investment demand for the yellow metal following the sad events of September 2001 and the ensuing surge in geo-political tensions with gold embarking on its second longest bull run that remains in place today.
>Q. What is your input on Investing in Gold? Is it still the Safe Haven for investments?
I have been involved in the international currency and precious metals markets since 1971 and joined the bullion desk of Samuel Montagu in 1978. At that time the conventional wisdom advocated by the Swiss asset managers was to keep at least 5% of any portfolio in gold with the flexibility to increase this to 10% at times of political or financial uncertainty This model faded with the gold price during the 1980’s and 1990’s but appears to be firmly back in vogue with modern day fund managers embracing the concept of gold as an insurance policy or safe haven with a fervor not seen for 30 years. The advent of Exchange Traded Funds has made it possible for a whole new genre of investors, including the pension funds, to deal in gold and has, in my view been the key driver of the Bull Run that has seen gold rally from $252 in July 2001 to a record price of $1,030 in March of this year. With the US dollar in retreat, energy costs soaring to new highs on an ‘almost’ daily basis, and the world’s banking system reeling from the sub-prime credit crisis, gold is most definitely taken centre stage as a safe haven in time of political and financial turbulence.
>Q. Dubai is the hub for Gold and Gold Jewellery trading. How do you think the rising Gold Prices has impacted this trade?
Gold embarked on its current bull run in the summer of 2001 and since that time the price has risen from $252 to an all time record of $1.030 in March before giving up some if its gains over the last two months. During this period Dubai’s physical gold market has shown remarkable resilience in terms of the amount of gold imported into the Emirate. As this chart illustrates the total volume of physical gold imports, in the form of jewellery, bullion bars and scrap reached 559 tons in 2007, its highest level this decade and achieved despite the gold price posting its highest average price since 1980.
Even more reamrkable has beent the growth of Dubai’s gold market in absolute US dollar terms with the size of Dubai’s gold trade, as measured by total imports and exports, reaching a staggering $19.03 billion in 2007, up from $4.5 billion in 2001. Although the surge in the gold pice in Q1 2008 has clearly had an impact on Dubai’s phisical market with imports slipping back to 122 tons, Dunai’s gold trade has continued to floursih with the total value of trade reaching $7.06 billion, an all time quaterly record.
While Dubai’s gold merchants has always shown a great deal of flexibility to the market, continually adapting to new conditions and trends, much of the credit for the spectacular growth of Dubai’s precious metals sector has been the guidance and support of HH Mohammed bin Rashid Al Maktoum, Prime Minister and Vice President of the United Arab Emirates, and the ruler of Dubai, and his Government and The Dubai Multi Commodity Centre. His Higness’s stated target of a 50% share of the world trade in gold flowing through is no longer just blue sky aspitration but rather a realistic objective over the coming years.
>Q. What are the changes in the Commodity Market or Commodity Exchange you think will stabilise the Gold Price?
As I have already mentioned both physical and investment demand for gold is price elastic and we do see clear evidence in Dubai that a sudden increase in the gold price can have an immediate impact on offtake, as has been the case in the recent rally from $850 to $930. This natural ebb and flow of physical demand for gold can stabilize the market when prices are coming under downside pressure from investment fund liquidation, slowing the decline, while jewellery dishoarding and scrap sales from the Middle east, India and South East Asia can often signal a top in any rally ad help take the froth our of the market. As I have often mentioned,’ trees don’t grow to heaven, nor do roots go to hell’ .
>Q. Lastly, what is your forecast on the Gold Prices for 2008-09 [Do attach statiscal information of Gold price movements of recent past?)
In 2007 Gold posted its best performance since 1980 as it extended its bull run for a sixth straight year, gaining 30% year on year while the average price in 2007 of $696 was 15% higher than 2006. The current Bull Run peaked at an all time high of $1,030 on Monday 17th March this year as the market saw panic short covering after the demise of Bear Sterns, a major US investment bank, before reversing back below $850 at the beginning of May. The key drivers of the gold price are familiar to us all. being record breaking energy prices, fuelled by on-going geo-political tensions and genuine demand/supply concerns, an ever weaker dollar, which slumped to an all time low of 1.60 versus the euro in Q1 of this year, and strong investment demand from the investment community with gold taking centre stage as the growth of ETF’s helped to push the yellow metal into the mainstream as an asset class. The continued absence of producer hedging, talk of Central Bank reserve diversification away from the dollar and a positive technical picture were also supporting factors last year and the mood of the market, at least until the last few weeks, has continued to be almost universally bullish with the same factors as in recent years still very much in play. I will admit to being one of the herd of bulls, however I have tempered my views as there are warning signs on the horizon for gold with an uncertain outlook for global equity markets, mixed views on the US economy and the likely direction of interest rates and the dollar, and, importantly, concerns that slowing global growth could impact demand for crude oil and base metals, pressuring the commodity sector lower.
>Q. What are the changes in the Commodity Market or Commodity Exchange you think will stabilise the Gold Price?
As I have already mentioned both physical and investment demand for gold is price elastic and we do see clear evidence in Dubai that a sudden increase in the gold price can have an immediate impact on offtake, as has been the case in the recent rally from $850 to $930. This natural ebb and flow of physical demand for gold can stabilize the market when prices are coming under downside pressure from investment fund liquidation, slowing the decline, while jewellery dishoarding and scrap sales from the Middle east, India and South East Asia can often signal a top in any rally ad help take the froth our of the market. As I have often mentioned,’ trees don’t grow to heaven, nor do roots go to hell’ .
>Q. Lastly, what is your forecast on the Gold Prices for 2008-09 [Do attach statiscal information of Gold price movements of recent past?)
In 2007 Gold posted its best performance since 1980 as it extended its bull run for a sixth straight year, gaining 30% year on year while the average price in 2007 of $696 was 15% higher than 2006. The current Bull Run peaked at an all time high of $1,030 on Monday 17th March this year as the market saw panic short covering after the demise of Bear Sterns, a major US investment bank, before reversing back below $850 at the beginning of May. The key drivers of the gold price are familiar to us all. being record breaking energy prices, fuelled by on-going geo-political tensions and genuine demand/supply concerns, an ever weaker dollar, which slumped to an all time low of 1.60 versus the euro in Q1 of this year, and strong investment demand from the investment community with gold taking centre stage as the growth of ETF’s helped to push the yellow metal into the mainstream as an asset class. The continued absence of producer hedging, talk of Central Bank reserve diversification away from the dollar and a positive technical picture were also supporting factors last year and the mood of the market, at least until the last few weeks, has continued to be almost universally bullish with the same factors as in recent years still very much in play. I will admit to being one of the herd of bulls, however I have tempered my views as there are warning signs on the horizon for gold with an uncertain outlook for global equity markets, mixed views on the US economy and the likely direction of interest rates and the dollar, and, importantly, concerns that slowing global growth could impact demand for crude oil and base metals, pressuring the commodity sector lower.
Chart Source Reuters
My outlook for the rest of 2007 is for a period of reduced volatility, with the typical summer slowdown impacting physical and investment demand and see a price range for as follows:
Gold High $980, Low $760, and an end of year price of $825
My outlook for the rest of 2007 is for a period of reduced volatility, with the typical summer slowdown impacting physical and investment demand and see a price range for as follows:
Gold High $980, Low $760, and an end of year price of $825
Jeff Rhodes talks about gold pricing and give a statistical analysis on the gold market
