Gold is a soft metal with a characteristic deep lustrous yellow or yellow-brown color. Gold is an element with the atomic number 79, and gets its chemical symbol Au from the Latin word Aurum.
Gold is one of the most highly-sought after precious metals in the world. It is used in jewelry, electronics, and coinage. Gold is widely considered to be an effective hedge against inflation, which means that when the dollar depreciates, demand for gold increases. In addition, during times of economic and political uncertainty, the demand for Gold rises due to its high intrinsic value and relative stability. Moreover, the introduction of gold ETFs and the increasing wealth in emerging markets, such as China, India, and Latin America have contributed to rising demand for gold. While demand for gold has been rising, supply has been dropping as many of the top gold producing countries have had decreasing production over the past few years.
Gold has been used as money for more than 3,500 years as it doubles as a currency and a store of value. Gold is one of very few assets that are not the obligation of someone else. It has also proven to be a good hedge against inflation since the experiments with unbacked fiat money began in Europe and the USA in the 18th century.
The effect of the falling supply of Gold coupled with increasing demand from the US economic slowdown has lifted Gold to its highest price ever. Gold started 2011 at $1,412/oz, peaked intraday at $1923/oz in September, and ended the year at $1,575/oz. This represented the 11th straight year of annual gains for Gold. The previous all-time highs for gold were set back in 1980 at $850/oz. (note: after factoring in inflation and the CPI for over three decades, $850 back in 1980 is equivalent to around $2,500 today. Some put this as high as $5,000 to account for how the CPI may understate inflation).
Gold is valued for its use in jewelry and decoration, and to guarantee the value of currencies. Gold is the purest form of money, both the oldest and most durable. Gold, Aurum was already legal tender before the first coins. The oldest Gold Coins derive from the seventh century BC.
Investors use Gold as a store of value. Gold metal offers the appearance of capital appreciation compared to depreciating currencies. Gold has always had favorable liquidity, but Gold is sterile, it does not provide any current income. Gold owners also must pay to maintain, store, and insure it, which is an expense. On a cash flow basis Gold is a liability, as it costs you to own it.
Gold ETF's also pay holding costs that get reflected in their price. An alternative to paying these holding costs, and to receive some cash flow income from dividends, is for investors to own shares in publicly traded Gold producing companies. More active Gold investors and speculators can also trade resource exploration and development stage stocks. These volatile stocks usually don't pay dividends, but this higher risk/return strategy can be another way to own, diversify or hedge gold opportunities.
Gold futures contracts are traded on the COMEX under ticker symbol GC and are delivered in January, February, April, June, August, October, and December of every year.
Historical Gold Prices
Whether as the basis for the monetary unit of a country, or in its role in comparison to the currency price of silver, the history of gold prices have long been a subject of great interest to both the scholar and the general public.
Below are five series for determining the value of gold prices historically:
- British Official Price for the years 1257 to 1945
- U.S. Official Price for the years 1786 to 2007
- New York Market Price for the years 1791 to 2007
- London Market Price for the years 1718 to 2007
- Gold/Silver Price Ratio for the years 1687 to 2006
Top 10 Gold Companies by Production
- Barrick Gold Corp. (NYSE: ABX)(TSX: ABX) is a Canadian company that operates 26 mines in four continents and is the largest global producer of gold by ounces produced: 217.7 tonnes FY 2011
- Newmont Mining Corp. (NYSE: NEM) is a United States company with mines in five different continents and is the world's second largest gold producer: 145-150 tonnes FY 2011
- AngloGold Ashanti (NYSE: AU) is a South African company with 21 operations in 4 continents and is the third largest gold producer: 122.75 tonnes FY 2011.
- Gold Fields Ltd. ADS (NYSE: GFI) is a South African company with mines in 3 different continents and is the fourth largest gold producer: 98.8 tonnes FY 2011.
- Kinross Gold Corp. (NYSE: KGC)(TSX: K) is a Canadian company with 8 operations in three continents and is the fifth largest gold producer: 74 tonnes FY 2011 (Kinross 65.14, Red Back 11.4).
- Newcrest Mining Ltd. (PINK: NCMGY)(TSX: NM) is an Australian company with 7 operations in three continents and is the sixth largest gold producer: 71.44 tonnes FY 2011 (NC 49.95, Lihir 24.52).
- Goldcorp Inc. (NYSE: GG)(TSX: G) is a Canadian company with mines in North and South America and has the lowest cash costs of any tier 1 gold miner. It is the seventh largest gold producer: 71.29 tonnes FY 2011.
- Polyus Gold (OTC: PLZLY)(OTC: OPYGY) is a Moscow based company with mines in Russia, Kazakhstan, Romania and Kyrgyzstan and is the eighth largest gold producer: 39.7-42.5 tonnes FY 2011.
- Yamana Gold (NYSE: AUY)(TSX: YRI) is a Canadian company with operations in Brazil, Argentina, Chile, Mexico and Colombia. Yamana is the ninth largest gold producer: 25.98 tonnes FY 2011.
- Eldorado Gold Corp. (NYSE: EGO)(TSX: ELD) is a Canadian company with operations in China, Turkey, Brazil, Greece and Romania. Eldorado is the tenth largest gold producer: 18.69 tonnes FY 2011.
Other Major Gold Producers
- Harmony Gold Mining (NYSE: HMY) is the largest gold producer in South Africa and also has mines in Papua New Guinea.
- Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) is a United States company with operations worldwide, and is the largest copper and molybdenum producer.
- Compania de Minas Buenaventura S.A. ADS (NYSE: BVN) is Peru's largest, publicly traded, precious metals company with gold and silver mines: Orcopampa, Poracota, Uchucchacua, Antapite, Julcani, Recuperada, El Brocal, La Zanja, Coimolache and CEDIMIN.
- Redback Mining (TSX: RBI) is a midcap unhedged producer with mines in Ghana and Mauritania. Redback combined with Kinross in the fall of 2010.
- Agnico-Eagle Mines Ltd. (NYSE: AEM) is a Canadian company with operations or exploration/development projects in Canada (Ontario, Quebec, the Yukon and Nunavut), the United States (Nevada), Finland and Mexico (Chihuahua).
- IAMGold Corp. (NYSE: IAG)(TSX: IMG) is a Canadian based leading mid-tier gold producer of one million ounces annually from five mines in Canada, South America and Africa. Also owns Niobec Inc., a producer of over 4.5 million kilograms of niobium annually, and its nearby (REE) rare earth element resource.
Small-Cap Gold Exploration and Development Companies
Search to discover hundreds of small-cap gold, resource and non-resource stocks at InvestorsGuru.com's Small Cap Directory.
Other Companies Helped by Rising Gold Prices
Gold Exchange Traded Funds
Most gold ETFs buy gold as backing for the fund. As of June 2007, one the largest gold ETF's, SPDR, was ranked as the 8th largest stockpile of gold in the world.
- SPDR Gold Trust (NYSE: GLD) accounts for over 80% of the 665 tons (as of June 2008) of gold owned by Gold ETFs.
- iShares Gold Trust (NYSE: IAU) owned over 54 tons of gold as of November 2007.
- ETFS Physical Swiss Gold Shares (NYSE: SGOL) inception date September 9, 2009.
- ETFS Physical Asian Gold Shares (NYSE: AGOL) inception date January 14, 2011.
- ETFS Physical PM Basket (NYSE: GLTR) precious metals basket: gold, silver, platinum and palladium, inception October 22, 2010.
- ZKB Gold ETF (OTC: ZKBHF) owned 22 tons of gold as of August 2007.
- Central Fund of Canada (AMEX: CEF)(TSX: CEF.A)(TSX: CEF.U) owned 28.5 tons/gold and 1423 tons/silver as of March 2008.
- Central Gold Trust (AMEX: GTU)(TSX: GTU.U)(TSX: GTU.UN) owned over 5 tons of gold as of March 2008.
Other Gold Exchange Traded Funds
- ETFS Physical Gold (LSE: PHAU)
- Gold Bullion Securities (GOLD), acquired by ETF Securities in 2008.
- Lyxor Gold Bullion Securities (GBS), acquired by ETF Securities in 2008.
- ETFS Gold Trust (NYSE: SGOL)
High End Jewelry Companies
High end jewelers actually benefit from rising gold prices because as the price rises, gold jewelry becomes a more valuable and coveted option. In 2007, demand for gold jewelry was up 22%.
- Tiffany & Co. (NYSE: TIF)
- Harry Winston Diamond (NYSE: HWD)(TSX: HW)
- DGSE Companies (AMEX: DGSE)
- Finlay Enterprises (FNLY), filed for Chapter 11 bankruptcy protection in 2009.
Companies Hurt by Rising Gold Prices
Low to Mid End Jewelry Companies
Low to mid end jewelry companies tend to suffer from increasing gold prices because the company's lower income clientel are less flexible to price changes.
In addition, individual consumers are hurt by the rise in gold prices as they are no longer able to afford it. This is particularly true for cultures which rely on gold articles as a symbol or key aspect to ceremonies.
Factors that Influence Gold Prices
Gold Demand Rises as Governments Issue Debt and Print Money
Due to the 2008 Financial Crisis, government's across the globe, particularly in developed countries, have increased government debt in order to stimulate the economy. The G-20 countries increased government debt levels to 14% of GDP, the highest since World War II. In addition, many countries, like the US, have printed money to buy bonds and increase the money supply. The combination of rising government debt and the printing of money both increase inflationary pressure and lower the real returns of other investments. In addition, the high levels of debt the US government has issued and possible inflation has increased fears that US bonds may not be as valuable in the future. The combination of a fear of inflation and a decrease in the real return on US bonds has pushed both governments and investors to buy Gold instead.
Demand for Gold Rises During Periods of Economic Turmoil
Increased uncertainty about the safety of banks and the volatility of the stock market has pushed for an increased demand for gold and other high value commodities. In Novemeber 2008, the US Mint was forced to end the sale of the "American Buffalo" coin due to excess demand. Gold traders and minters across the globe have recorded shortages resulting in extremely high demand for their goods in recent months.China, India, and Others Consider Gold for their Reserves
In the past, China and India have purchased US Securities and held US Dollars in their Reserves. For China, this has helped to maintain a devalued currency and keep the level of exports high since they are still relatively less expensive.
However, due to large US deficits many countries, China and India in particular, have begun to reconsider diversifying their reserves to protect themselves from a devaluation of the US Dollar. In November 2009, the Indian Central Bank announced that it would purchase $6.7B worth of Gold to diversify its reserves. China, which is the single largest purchaser of US Securities, has similarly increased its reserves of Gold by 76% since 2003 and has hinted at further purchases. The decision of these large countries to shift increasingly towards Gold and away from US Dollar denominated assets will further increase the price of Gold. As Central Banks and Governments move to purchase Gold for their reserves and to store their excess income from trade, Gold Prices will continue to rise.
Scarcity and Falling Gold Supply
There is an estimated 5.5 billion ounces of Gold above ground with central banks officially holding about 30,000 tons of Gold. Mine production, which historically makes up 60% of the world supply of Gold, has been consistently decreasing since 2001. Only China has been able to increase output - largely due to the opening of new mines. In addition, central banks, which made up 14% of the supply of Gold in 2005, have become net buyers of Gold. This decrease in supply from both production and central banks raises the prices of Gold.
Continuing power woes in South Africa hamper mine production which has decreased in a year-on-year comparison. China has overtaken South Africa as the biggest Gold producer in 2007. In the 1970's South Africa's market share was around 70% but has decreased since.
Political risks can erupt anytime in mineral-rich but impoverished African countries, putting investor's capital in local mining ventures at the whim of political change. Costa Rica is reevaluating all mining licenses in 2008. Political change in Congo has led to similar events there, leaving investors in a costly wait-and-see attitude that may not be resolved soon.
Gold is often purchased to hedge against inflation risk. Because inflation makes the returns on securities such as US Bonds less valuable, Gold is purchased instead. Because Gold is a real good, inflation will only cause the price of Gold to rise. So, while a rise in prices will make investments less profitable, gold maintains its value. Thus, during times of high inflation, Gold prices also rise.
Since June 2006, the U.S. Federal Reserve has lowered interest rates 10 times, bringing the key Fed Funds rate again to a 50-year low of 0.25% chiefly because of a subprime-mortgage mess that grew into a global financial crisis. Many foreign central banks have either reduced interest rates in kind, or opted to stand put. Low worldwide interest rates have contributed to global inflationary pressure.
Inflation has a 14-month time lag to gold, a study of McClellan Financial Publications from 2005 shows. Gold and inflation have only diverged in the event of external disturbances, like wars, which drove inflation higher for short-lived periods. Including such exogenous factors the correlation coefficient of gold and inflation still comes in at a very high 0.69 on a scale from -1 to +1.
Since 2007 rising consumer prices have been leading to higher inflation rates in Europe and Asia too. Central banks are in a difficult situation as the medicine of higher interest rates against inflation is at the same time poison for the economy. The European Central Bank ECB has so far not done enough to combat inflation which peaked in July at 4% or double the target rate of the ECB.
Demand from Emerging Markets
As per capita wealth increases in such emerging markets as China, India and Latin America, demand for US goods increases considerably and that is only augmented by a depreciating dollar. Aside from traditional goods, these emerging economies demand jewelry, gold, gems, and other precious metals because growing middle classes in these economies have more money to spend on wares that aren't just necessities.
Indian savers are the single biggest group of gold buyers. Indian demand from the wedding season usually ends the time of seasonal lows during the summer. The buying of gold (and silver) in India is also influenced by important Hindu religious holidays. Total Indian gold consumption is expected to exceed 800 tons in 2008. Their purchases have been effectively subsidized by the Central Bank Sales Agreement that allows Western central banks to sell up to 500 tons per year until 2009.
Like many other commodities, gold also exhibits some seasonality in prices. In addition to the seasonal Indian demand for weddings and festivals mentioned above, gold has also historically shown a mid-March low that sets up a rally through May, and a weak period from June to late July. These trends tend to prevail even in secular bull markets.
Top Ten Largest Gold Bullion Reserves
Gold reserves (or gold holdings) are held by central banks as a store of value. The top 10 Central Bank reserves total 26,014.4 tonnes, or in excess of 836,362,960 troy ounces, equal to about 836.4 Billion dollars.
As one metric tonne equals 1,000 kilograms (or 32,150 troy ounces), one tonne of gold equates to a value of US$32.15 million as of March 2008 ($1,000/troy ounces). In 2001, it was estimated that the total amount of gold ever mined equaled only 145,000 tonnes, with a total value at today’s prices of some US$4.66 trillion.
The following chart depicts the top ten holdings of Gold in tonnes and the percentage of their total reserves it makes up as of June 2009.
|Country||Tonnes of Gold||% of Reserves|
Gold Coin Production
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