1193 words free essay on the rising price of Gold

The price of gold continues to set new records with almost three times increase in last few years. There are several factors at play which are leading to demand for gold rising, pushing up the price. Some of them are the weakness of the dollar, speculation, and inflation risk. Due to the weakening of the dollar, those who have invested in that currency are looking for other places to put their money where it will, they hope, gain value. Secondly, gold becomes attractive when money can be borrowed extremely cheap or when banks offer very low rates of interest on savings.

Thirdly, gold is seen as a hedge against inflation. So, mounting worries about potential inflation entice more investors to the precious metal. Fourthly, gold tends to hold its value over the long term and is not anchored to the value of cash. So, people are drawn to it in uncertain times. Added to this is the factor of seasonal increase in gold purchases in countries like India and China, because the metal is traditionally given as a gift. Also, Indian farmers see buying gold as a way of keeping their profits safe after harvest, free from threat of currency fluctuations.

A high gold price could be bad news if someone is looking for an engagement ring or another piece of jewellery. On the other hand, it could be good news if someone has gold that is no longer needed and could do with making some money. However, if inflation is taken into consideration, gold prices are actually falling in real terms.

From economy point of view, gold and silver are needed because they make trade easier and more efficient, or economical. Furthermore, a gold or silver coin cannot be tracked, does not need to be kept in a bank, does not need to pay interest, and therefore, cannot be taxed on every transaction. Therefore, gold and silver are very efficient for trading, far more efficient and useful than paper money.

Gold and silver save time and energy, and are extremely useful. They grow ever more valuable over time as production grows more efficient and prosperity increase when gold and silver are used as money. A no-interest gold loan, when gold is used as money, is generally repaid with gold and silver that is more valuable than before.

According to the Gold Demand Trends (GDT) report of the World Gold Council (WGC), the global gold demand was down 11 per cent in 2009. People fail to understand how gold prices could remain strong, especially when supply was up 11 per cent over this same time period. The precious metal was not immune to wild 2009 markets that were colored by global economic woes, the reverberations of an infamous stock panic, and a spectacular recovery.

One of the main reasons for 2009’s average gold price being 12 per cent higher than 2008’s, was the growing investment demand. In the face of economic uncertainty, intrinsic appeal of gold really blossomed leading to skyrocketing of investment. Though gold investment did pick up some of the slack from jewellery and industrial shortfalls, overall demand was still off.

As for supply, one of the biggest peculiarities was also driven by the wild economic volatility. Convinced that financial meltdown was imminent, many pawned off their jewellery and ornaments in order to raise cash. And this was seen via a huge increase in scrap supply. From Q4 2008 to Q1 2009 recycled gold increased by a staggering 62 per cent. Though scrap supply subsided soon, when the panic sellers exhausted their resources, 2009 still saw a giant 27 per cent increase over 2008. But with a large component of supply, scrap has and will be overshadowed by the activity of two other major supply components- central banks and mining.

For a long time central-bank sales had a major influence on the overall balance of the gold markets. However, by volume what the central banks delivered to the markets had been smaller than what was generated by recycled gold; they have the ability to supply or demand gold, to be net sellers or net buyers. And in 2009 central banks actually shifted to becoming net buyers of gold—a strategic shift that would have a resounding effect on the gold trade. Central banks could not be ignored on the supply side of the gold trade, and should not be on the demand side either. They have a lot of buying power, and if they decide to start stockpiling gold again it could have a material impact on the balance of these markets.

Last on the supply front is mine production. Mining is responsible for the majority of gold supply, about 60 per cent over the last several years. And the prevailing trend of this component is one of the major fundamental reasons for gold’s secular bull. But instead of ramping up production to meet growing demand, a startling trend has taken shape. Since 2001 mined gold production has fallen by 8.6 per cent.

This clear downward trend is foundational fundamental support for gold prices to remain high. There is a lot of conjecture as to why and how this trend has unfolded. And it is peculiar being that all throughout history the miners had no trouble finding and mining gold. In fact, with the help of modern mining methods such as heap leaching, annual global gold production doubled from 1980 to 1997. But with production capping out in 2003 at about 2600 metric tons, it is being assumed that the world has seen a peak in gold mining output.

In addition to it being increasingly difficult to find ore, grades have dramatically fallen over the years. In the major gold-producing countries of Australia, Canada, and the US, ore grades have fallen from an average of about 12 grams of gold per metric ton in 1950 to 3 g/t today. Lower grades have been a major factor in South Africa’s colossal gold production declines as well. Irrespective of whether 2003 was “peak gold” production or not, there is no denying the fact that the mining industry is in a state of disarray, in a period where gold demand is rising yet mine supply is falling by an average of over lm ounces per year.

On the demand side of this greater economic question, there is no reason why higher prices should deter people’s wants and needs for gold. In our current age of consumption and out-of-control government spending, people are watching the value of their fiat-currency-backed holdings erode with every passing day.

They see many fundamental merits in gold, but it is essential for investors to hedge their portfolios against the vagaries of the global economic scene. And we are seeing more and more investors come to this realization with the growing Popularity of such vehicles as gold-backed ETFs. But since gold investment has yet to decisively penetrate mainstream ideology, the ,world has likely not seen anything yet on the demand front.

Thus, with investment demand expected to be the driving force of the ongoing bull, the heavy lifting of the gold market balance will lie on the shoulders of the suppliers.