Over the past few years, the price of gold has taken an upward path, breaking every record, never faltering, never relenting. Many have followed gold’s rapid ascension. Since 2007, gold prices have appreciated by more than 30%, to over $900 an ounce by January 2008.
According to Carole Rouhana from Lebanese jeweler and distributor Antoine Hakim, the spike in the gold price is not the first, as everyone still remembers the soaring gold price of the 80s. “However,” she said, “we are currently witnessing an unprecedented rallying of gold prices, recently having increased by almost $50 on some days!” The jeweler admits that the company has decided to modify its price structure in order to absorb the rise in gold value, a measure it has rarely resorted to in the past. “We have been able to spread the cost for our diamond jewelry lines, although prices of diamonds have also known an upward, though slower, trend.”
The jeweler complains that prices of other precious metals have also increased, without matching gold levels. “Because of the rise in price of precious metals and diamonds, any offer made on one of our items or diamond solitaires will stand for a week’s time only, until the publication of the new Rapaport prices (the wholesale diamond index). In addition, we also renew our stock of gold every week, and thus we are affected significantly by elevated gold prices.”
In 1980 gold prices towered at around $860 an ounce, but then quickly fell from their lofty heights as new supplies of gold came on the market coupled with a slowing demand. Central banks around the world also intervened, pushing prices down by adopting measures such as sales and leasing, which accelerated the supply of precious metals. Inflation, which roared at the time, was also progressively subdued with an increase in interest rates levels.
Steady increases
“Comparatively, in the last few years, the behavior of gold has been far from erratic, witnessing a steady increase since 1999,” explains Nassib Ghobril, head economist at Byblos Bank. On the eve of the 21st Century, gold hit an all-time low at around $250 an ounce. “These levels reflected the decision taken by the Central Bank of Great Britain to sell its gold reserves. At the time, many analysts saw gold a dying commodity, one which would be slowly phased out as central banks around the world toyed with the idea to sell their reserves,” he added. In 1999, the Washington Agreement (WAG) was also signed. Its stated purpose was to maintain gold’s role as an important element of global monetary reserves. The agreement structured the market by outlining the organizations allowed to sell gold and limited supply to 400 tons a year. The second agreement that followed took place at the end of the fourth year of the Washington Agreement, limiting sales to 500 tons a year.
Other factors have also influenced the price of gold. Recently, with a growing physical demand, inflationary trends, oil soaring to unprecedented levels, commodity prices up and the dollar plummeting to unprecedented lows, gold prices seem to be following an upward, and even skyrocketing trend.
“This surge in the value of gold can be attributed to several factors,” said Ghobril. The growing physical demand for gold is first driven by an expanding middle class in countries such as India, Russia and China. Inflation is another factor exerting an upward push on price levels. And with recession looming over the near economic horizon, there is little chance that the Fed increases interest rates anytime soon. “On the contrary, with the current stagflation occurring in the United States, interest rates will probably be brought down,” points out Ghobril. According to the Country Risk Weekly Bulletin which quoted Credit Suisse, “in the recent rally, Fed Fund expectations play the most important role. It seems that gold prices start rallying when markets are pricing in more than 100 basis points (bp) of interest rate cuts. At the moment, markets are expecting more than 150 bp of interest cuts by the Fed. Rate cuts of such a dimension could lead to higher inflation expectations and a significantly weaker dollar, which is why investors are turning to gold.”
The price of gold has also been paired by some with oil prices and with current oil levels heading irresistibly towards the $100 bracket, a break in gold prices is not expected anytime soon. “I cannot establish a definite correlation between the rise in prices of oil and gold,” says Ghobril. The price of gold has been rising for the last six years while pressures on oil prices have been mounting over the last five years. However, he underlined that the regional geopolitical instability as well as the volatility of markets will lure investors into considering gold as a safe haven.
From physical holdings to shares
In the 1970s, investment was solely in the form of bullion or coins. This is still the method used by some individuals as witnessed in growing volumes traded at the moment. Today, bullion banks such as Goldman Sachs, JP Morgan Chase, the International Monetary Fund, the US Exchange Stabilization Fund, the US Federal Reserve, the German and French central banks come seventh behind certain funds specializing in gold trading. These Exchange Traded Funds (ETF) have changed the face of the gold market, issuing shares against physical holdings of gold in bank vaults and further structuring the market. With ETF, individuals are now able to buy shares that move in line with gold prices. The money under management by these institutions is significantly growing as gold prices rise, as well as demand for such instruments. Today it seems that institutions and central banks have around 33,000 tons of gold in their vaults. However, estimates vary to a great extent with the Gold Anti-Trust Committee putting the figure at a mere 16,000. One more factor that can be accounted for the high prices of gold is the decline in global gold outputs, especially in South Africa, one of the producers.
“We can exclude the speculation factor in such a market, which has been growing steadily, and is considered to be a safe haven away from the fluctuations known by other investments opportunities,” explains Ghobril. “This trend is also exacerbated by the weakening dollar, considered to be one of the last factors affecting gold prices.”
In Lebanon only, the central bank’s value of gold reserves have massively risen due to a rise in the international price, reaching an all time high of $7.64 billion, a figure picking up by 30% from its 2007 levels. As Ghobril points out, “It was probably a very wise idea not to sell our gold in 1999, as advocated by some analysts. Today, for many people gold remains a source of confidence.”
