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Nuking the economy -- Americans should forget Iran and worry about this
Expert: What Buoys Gold Price After a Downturn
By Li Jianmin
People's Daily Online, Beijing
Tuesday, February 14, 2006
http://english.people.com.cn/200602/14/eng20060214_242681.html
The international gold price has soared 37 percent over the past six
months and hit the peak for the past 25 years doubling that of five
years ago. This has aroused much attention of the world financial
circle. What are the reasons for the considerable rise following its
plunge?
Before 2002, the gold price was dragged down largely by the
obsession in paper wealth on the bull capital market. Even central
banks thought it cost to hold gold and reduced their gold assets by
putting gold under hammer. In the meantime, gold mining businesses
sold their gold reserves yet to be exploited on the international
futures market to prevent the gold price from falling. That gave a
further blow to the gold price.
The burst of the US stock market bubble finally gave people a dose
of sobriety. A concept remains a concept even if it is priced at a
hundred dollars. Tangible things give more sense of security.
Investment in products beyond stocks and bonds gained increasing
popularity and investment on precious metals like gold and silver
rebounded significantly.
Generally speaking, the gold price has been boosted by:
--- Consumers. There are industrial consumption and consumption for
jewelries as well as personal investment. People from India, China
and East Asian nations traditionally favor gold. Richer people there
have spurted the demand for jewelries. There is a spending spree on
gold among average Japanese. The gold price denominated with
Japanese Yen has even become one of the decisive factors on the
Asian gold market.
--- The change of central banks' attitude toward gold. Central banks
reducing their gold holdings have slowed down their pace of
reduction given the recovery of gold price. Some central banks (such
as those of Russia and South Africa) have begun to add more gold to
their reserves mix.
--- The change of gold enterprises. They have given up their policy
of hedging by selling gold futures, which in turn helps to ease the
pressure of gold price. In this case, many gold enterprises have to
make short hedge and that pushed gold price up.
--- Demand from fund investment. Funds are seeking investment
opportunities on gold to diversify risks, directly leading to gold
price rise. Some banks have established specialized trading floors
for gold exchanges. Gold held by this new type of fund has reached
420 tons since 1995, very close to the two years' production of
Newmount, the world's largest gold mining company.
Gold is expected to continue to be strong, mainly boosted by the
uncertainties in the international politics, which highlights the
role of gold in avoiding risks. Historically the unrest in world
situation always gave rise to a gold fever. The gold price hit its
historic high of 850 US dollars per ounce in 1980 during the Iran-
Iraq war.
The diversity of investment will continue. The public have also
joined the game that used to be dominated by professionals. Now the
domestic financial institutions, the Bank of China in particular,
have offered financial products to investors, either in the form of
tangible gold or gold accounts.
Although there is surging demand on the gold market, the global gold
reserves and mining capacity do not go up at the same pace. The
imbalance in demand and supply will continue to fuel the gold price.
In addition, investing in gold is one of the ways to offset the
inflation. Some market insiders regard the rising gold price as the
expectation for the future inflation by the financial market. The
global economy recovered after the US slashed its interest rates
between 2001 and 2004 but the low interest rate environment also
underpinned the risk of inflation.
Investment goes with risks. Gold price in particular normally
fluctuates more sharply than any other financial products like
foreign exchange. Sustainable profitability is secured only when a
well-structured portfolio is designed.
A mature investor, therefore, should set a clear bottom line of
risks for his/her investment. Unfavorable market scenarios call for
prompt measures to minimize losses.
-----------
The article is written by Li Jianmin from the gold counter of the
world financial market section, Bank of China, and edited and
translated by People's Daily Online.
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