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Gold Market. my essay will revolve around the following points ; 1)The sudden rise in the price of Gold and Silver in the past decade 2)The volatility of the gold and silver markets 3)What influences/drives these markets and 4)Why did Gordon Brown sell

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Uday Puri

During the course of this essay  I will be writing about the global Gold market in specific ,my essay will revolve around the following points ; 1)The sudden rise in the price of Gold and Silver in the past decade 2)The volatility of the gold and silver  markets 3)What influences/drives these markets  and 4)Why did Gordon Brown sell of a considerable proportion of UK gold reserves in 2000.

Before I start the main part of this essay I would like to give a short history of gold and silver, and what role they play in the modern market. Since the beginning of civilization Gold and Silver seem to have mesmerized the human mind with the first record of Gold being used for ornaments dating back to 4000 BCE.From the Egyptian to the Greek civilizations silver but Gold especially seem to have been given a very prestigious place in society, even today this role has not changes with Gold and silver playing a very important part in the development of the economic and the industrial sectors. The reason behind these almost “divine” statures given to gold and silver lies in their physical properties and man’s greed. Gold (chemical symbol Au) and Silver (chemical symbol Ag)-due to their chemical properties- are inert, metals meaning they don’t react very easily with other things, this is why if you take a bar of gold and leave it outside in the rain for a few days nothing will happen to it as it won’t react with the air nor with the water. This property combined with the fact that mankind always wants more (gold and silver aren’t very abundant naturally compared to other metals ) and doesn’t want to lose anything (gold and silver stay the same) make gold and silver very precious metals. In modern day society with very important advancements in technology (microchips, medicine etc) and globalization of markets and economies, the roles of gold and silver have not changed they have just expanded, contributing to the rise in their prices. A very important use of gold is its use as a form of money (one of the oldest forms). During the mid 19th century just after the silver currency crisis in England and the United States, the international Gold Standard was created in Germany with the creation of the Reich mark a Gold Standard currency -meaning that all the money in circulation (often paper) had a direct value in gold, thus if a German citizen wanted gold he could have taken his money/currency  (paper) and exchanged to for a fixed amount of Gold- by the beginning of the 20th century most of the western nations had started using the Gold Standard. It was only during the 1960’s when economies had started to grow faster than gold supplies that the Gold standard was abandoned ( first by the US followed by most other powerful economic countries) ,in favour of a system of Fiat currency, meaning the amount of money supply can be increased or decreased without any  respect  to a fixed standard. This marked a turning point in the use and role of Gold.

Over the last decade the prices of Gold and Silver have risen sharply. For example the price of a troy ounce of gold (31.3g) has risen from an average of 270 dollars (US) in 2000 to an average of 1100dollars (US) in 2010; this mark’s a rise of 870 dollars for the average price of a troy ounce in just ten years.image00.png

 A mix of geological, economical and political factors has caused the price of gold to rise sharply during the last decade. I will start by discussing the economical and political factors and then move on to discussing the geological and factors.

During the late 80’s(early nineties) gold prices started dipping ,the consequence of this dip was that central banks (countries) started to sell of their Gold reserves  causing Gold prices to fall even further .In 1999 Gordon Brown who was  Chancellor of the Exchequer of England at that time to decide to sell of 395 tones of England’s Gold reserve (close to 50%)the decision at that time was seen as a strategic move to “reduce over-exposure to a single asset in the net reserves portfolio” and was seen  as “a long-term investment decision designed to reduce the risk to the Government in our foreign currency reserves”. The government raised 3.5 billion pounds which was then used to invest in foreign currencies. Many critics at that time considered it to be a very inappropriate move and even now it is seen as a blunder. Blunder or not the move was very significant and is seen as the turnaround point for the Gold market. By putting such large amount of Gold for sale in an already weak gold market, the move caused gold prices to fall to a twenty year low (average price of gold in 1976=306.68$ in 1999=278.98$ (per troy ounce)).At that time many other countries were selling parts of their gold reserves but the large fall in price in 1999 which was a direct consequence of Gordon Brown’s actions caused many countries to realize that they need to work together to stabilize the Gold market (prices),leading to the creation of the Washington agreement in 1999 (26 September).The agreement which was signed by the Central Banks of the (then) 11 European Union member countries, United Kingdom, Sweden and Switzerland stated that “gold should remain an important element of global monetary reserves and to limit their sales to no more than 400 tones (12.9 million oz) annually over the five years September 1999 to September 2004”.By creating this agreement these nations ensured the stabilization of gold prices ,marking the beginning of  the rise of gold prices.

Another very important economical factor that helped increase the demand of gold-thus causing the price to rise- was the creation of the Gold Exchange Trade Fund’s (Gold ETF) in 2003. Gold ETFs make it easier and more attractive for small private investors to invest in Gold. What happens is that a Gold exchange trade fund will purchase gold then it will, divide the value of the Gold into shares which it will then sell to investors on the stock market who can sell it further on, just like trading company shares. When the value of gold rises the value of the shares will rise proportionately. The advantage of investing in Gold ETF’s rather than buying gold the conventional way from the bank is that ETF’s represent gold in the form of paper shares, meaning unlike the conventional method they don’t require special storage (gold) ,logistics and many other inconveniences that would be encountered by using the conventional method.ETFs also make it very easy to resell Gold without many complications, What ETF’s have done is that they have cause many small private investors to invest in the Gold market, they have had such a strong impact on that these funds in total now hold more “gold” than the central banks of Switzerland and China do.

When we look at the reasons why gold has risen so much we also must look at the eco/political situations.Eastern economies have played a very important part in the rising price of gold. Economies like China, India (which is the biggest buyer of gold in the world) and the middle East have seen a great ‘boom” in their economies over the last decade the effect of this is that that more households have moved into higher income categories increasing their buying power ,(in the countries mentioned gold plays a very cultural role) and thus increasing the demand for Gold. The Indian government over the last decade has sharply reduced tax on gold purchase-accelerating the demand- and in China, it has been made easier for the public to acquire/invest in precious metals in a sense the public are being encouraged to go out and invest not only in gold but in silver alike. The economic boom in these nations has also caused their industrial sectors to grow massively, especially in the field of electronics. Gold is being used more and more in the manufacture of electronic components(in 2005 the electronics sector accounted for 8% of the global gold demand).Even though many third-world economies have experiences a “boom” in the second half of the decade (today still) the world was hit by a financial crisis, based around the United States economy. The fact it was based around the United States economy (US housing market collapse) is an underlining factor in the increase in the demand for gold. Up till now and still, The US dollar is used by most Central banks as their reserve currency, and one thing that banks definitely don’t want to happen is for a banks’ reserve currency to start to weaken. As the United States is hit by inflation (Fed pumping/printing money), the central banks of the world are trying to invest in gold as much as possible. In a sense Gold can be seen as a hedge (insurance) (“safe-haven”) against currency (reserve), when the dollar falls Gold prices rise, they have an inverse effect on each other and this is exactly what is happening at the moment. Proof of this can be seen in the fact that for most of the last two decades, it has been necessary for central banks to unload/sell a total of 10-20 million ounces of gold every year to try to help cover long-term supply shortages.  Last year, central banks switched from being net sellers to net buyers for the first time since 1987, the reason for this is the fall in the value of the dollar. We are seeing a complete contrast of what was happening a decade ago (Gordon Brown’s sale of Gold in 1999)

All the factors mentioned above are factors that have principally caused the demand of gold to rise, but unlike normal the reaction to the growing demand, the supply, has been very unresponsive/unflexible,the supply has not increased with the demand but quite the contrary it has in fact decreased.


There are a couple of reasons for this decrease in mining output of gold (silver also),the deposits (natural)are becoming fewer and the ones that are still left are harder to get to it can take approximately up to 5-10 years for mining to start after the discovery of a gold deposit. Gold production is a t a twelve year low, the reasons for this are the facts that a)it is becoming more expensive and harder to mine the deposits b)mining corporation don’t want to increase the input as they don’t believe the profit is not enough yet. The combination of the fact that The demand for Gold is a increasing every year for the last decade and the fact that gold production is going down is making gold prices flourish. At the moment scrap recycled gold and central banks are able to fill in the production deficit but this cannot last for long, as the number of gold buyers who dot intend to resell their gold is increasing, how long can the balance in the market last. Eventually the mining companies will have to increase production and personally I feel that all the factors point to the fact that Gold/silver (precious metal) prices haven’t seen their peaks yet, prices are going to continue to grow for a while


We must remember that silver and gold markets are very volatile markets, though for different reasons. Silver prices are highly dependent on the demand for silver from the industrial sector which is a very volatile one; on the other hand Gold demand is more or less purely based on the financial sector. The reason for this volatility in the case of gold is that, the gold market is so heavily influenced by many little factors apart from just the supply and just the demand (many “behind the scenes” actions taking place ex futures market and gold leasing) that it is impossible to determine or predict the exact rise and fall in the price of gold or their causes. Two very hidden( in a sense) but influential nonetheless factors are as mentioned the Gold futures market and the supposedly suppression of gold prices by the governments (gold leasing).The futures market is completely speculative and as we all know speculative trading is very dangerous and can really effect the price (Greek bonds and hedge funds).In the case of the futures market what happens is that a investor will fix an amount of gold that will be bought in the future  for the present price ,the investor does this because he thinks in the future the price will rise and profit will be made (even though that is a purely speculative assumption)on the other hand the seller thinks the future price will fall and the seller will make profit. If more people start investing in the futures market there will be more “optimism” and the prices will start to rise. Another phenomenon that is taking place is the so called suppression of gold prices by the Fed (United states Federal reserve).What seems to be happening is that the government is “leasing” gold to private investment houses/companies at low annual interest rates who then sell the gold on the market and with the money they make they buy government bonds with 5 percent annual interest rates. The investment houses are able to cover the costs of the low annual interest’s rates by making receiving a lot of profit on the government bonds and the government is able to suppress the price of gold by keeping optimism in United States government Bonds and thus in the dollar, but also by keeping the flow of gold on the market high enough and thus suppressing its price.

I personally think that the gold market is heavily influenced by “behind the scene” events, making it a very unpredictable and volatile market.

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