Gold in 1999 was at an ebb in the wake of a 20-year bear market, and has steadily been on the rise ever since. Gold prices are driven by several factors and there is every indication that this rising trend will continue. The factors while diverse and in constant change, are also influenced by political, economic and global monetary conditions. The price of gold is akin to a global thermometer ceaselessly measuring these varying indices. While fluctuations are influenced by the demand/supply metrics it is not as evident with gold as with other metals.
Some of the factors that drive gold prices are:
A weak US $
Due to the Current Account Deficit which exceeds 5% of GDP, and extreme debt levels exacerbating the dollar’s woes, foreign central banks have resorted to selling US dollars to broad-base their currency reserves. A steadily weakening dollar pushes up the price of gold since the yellow metal remains the most popularly traded monetary asset, no different to currency trading. The price of gold is inversely proportional to that of the dollar.
US Inflation
Negative real interest rates, history has shown, rank among the most powerful drivers of gold price. Provided the US government maintains interest rates and does not raise it to a level to control inflation, real interest rate remains below the median, which forces the price of gold up.
Demand and Supply
Demand for gold is insatiable. Alert investors and speculators play the market according to global circumstances; countries like India, especially during festival and wedding seasons, have a inexhaustible demand for the metal; and China poses a constant threat with her intent to convert foreign currency reserves into gold. These stresses impose an enormous pressure on central banks to sell gold to other banks to meet their incessant demand. The demand at current prices hovers around 3,000 tonnes per annum, far in excess of supply.
Declining Supply
The supply of gold is steadily decreasing. The Beacon Group Advisors as far back as 2002 projected a drop in production of between 30 and 35 percent in the ensuing 7 to 8-year period because of lack of exploration since 1997. Without exploration the world had no fresh gold deposits to tap. To reverse this position with new explorations requires time. It is estimated that a new mine requires anywhere from four to seven years to provide commercial gold.
Geopolitical Tensions
Gold prices are heavily influenced by turbulent conditions around the globe. Some of the recent and current issues have been a stressed situation in the Middle East exacerbated by Iran’s nuclear posturing, the fall-out of NATO troops exiting Afghanistan, a nuclear stand-off with North Korea and the ceaseless tension between the US and China. Prevalent uncertainties create a shift toward gold.
Manipulative Practices
The Gold Anti-Trust Action Committee (GATA) maintains that the price of gold is being artificially suppressed by the Bullion Banks who are in debt to Central Banks because of the unexpected rise in gold prices. There is a mountain of evidence to suggest that every time gold rallies, Central Banks divest some of their government gold stocks to hold the price. This band-aid measure cannot continue indefinitely and when the bubble bursts the price of gold is likely to go through the roof.
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