Global Knowledge Management and Economy - Nik Zafri

WHAT'S DRIVING GOLD?

(A)

Cause :

Growth in World Money Supply

Years of easy monetary policies by central banks and now the trillions of dollars in economic stimulus to fight the global recession

Effect :

Inflationary Pressures

Excess cash in marketplace eventually tends to bid up prices for goods and services

Possible Ramifications

Declining Confidence in Paper Money

The prospect of inflation lowers confidence in Paper money a a store of value leading may investors to buy gold to preserve their wealth

(B)

Cause :

Volatile Stocks and Oil Prices

After several bull market years, stock and commodity markets turned down dramatically in 200 as the global economy slid into recession. While markets have partially recovered from their low, they remain volatile and many investors remain focused on capital preservation

Effect

Safe Haven Appeal

With other hard assets like real estate and commodities losing value, there was a revived appreciation of gold as a safe haven for investors seeking to protect themselves during difficult times.

Possible Ramifications

Increased Demand for Gold

The recession of 2008 created a large new class of gold investors. The strong demand exerted by this group, along with traditional gold buyers, drained the global inventory of gold coins and gold bars, thus driving up the price of bullion at a time of shrinking worldwide production.

(C)

Cause :

China

Gold has long been prized in China, which is one of the world's largest producers and consumers. Increasingly China's gold market has become more liberalized

Effect :



Trade Surplus

China has a huge trade surplus with the U.S. and Europe that generates vast quantitites of foreign currency. China also has one of the world's highest savings rates.

Possible Ramifications

China buys a considerable amount of U.S. Government debt, but it is diversifying its reserves by increasing its holdings of gold. In addition, China is pursuing investments to recycle its dollars into natural resource projects.

(D)

Cause :

Low Gold Price in 90s

After climbing as high as $850 an ounce in 1980, gold dropped as low as $252 an ounce in 1999.

Effect :

Cuts in Exploration

Low prices and environmental controls discouraged mining companies from spending the money to find new supplies of gold

Possible Ramifications

Falling Production

The lack of investment during the low-price years means new supplies of gold have not kept pace with gold demand

(E)

Cause :

Low Interest Rate

When real interest rates are low many investors turn away from paper assets with declining value and instead turn towar assets with real value, like gold.

Effect :

Hedging Curtailed

When interest rates are low, there is little incentive for hedging. As a result, gold is removed from the market.

Possible Ramifications

A decline in hedging shrinks short-term gold supply, creating a market imbalance during a time of escalating demand.

(F)

Cause :


Credit Crisis

The U.S. economy has been hurt by tighter liquidity associated with heavy losses in the key housing and financial sectors

Effect :

Interest Rate Cuts by Fed

The Federal Reserve has cut interest rates effectively to zero in an effort to lift the economy out of recession

Possible Ramifications

Weaker U.S. Dollar

Rate cuts drive down returns for currency investors. Many of those investors will buy gold as an alternative reserve asset, thus driving up demand.