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link to www.thebigmoney.com]
With chaos and fear running rampant in financial markets in recent weeks, many investors have once again stampeded to gold. Shortages of the precious metal are being reported at refineries and mints around the world.
Last week, the U.S. Mint announced it was ceasing production for the half-ounce and quarter-ounce American Eagle gold coins for the rest of 2008 because strong demand has depleted its inventory.
In theory, mankind could have picked any precious metal as a security symbol, so why do we seek out gold when everything else is tumbling down?
"It is very irrational from a business standpoint, because we have so much better technology now for transferring wealth," says the slyly named Douglas Silver, chairman of International Royalty Corporation, a company that buys royalties associated with mining properties. "But it's cultural. It's built into our psyche that when things get ugly, gold will store value."
Still, there are some logical reasons behind the value assigned to gold. It's one of the earth's rarest elements-gold makes up about one part per billion of the earth's crust. It is also durable. Gold cannot be destroyed and it won't rust or decay. It's a very good conductor of electricity, and there's a little bit of gold in every computer, cell phone, and airbag, among many other things.
And gold is easily divisible. Unlike, say, real estate or cattle, you can reliably break it up into smaller quantities. (Try giving someone change for a cow.) Most importantly, unlike hard currency, gold cannot lose its value because of government or corporate mismanagement.
"As a physical asset, gold is no one's liability," says Matthew Graydon, head of external relations at the World Gold Council, a mining-industry trade group. "There is no risk that a coupon or a redemption payment will not be made, as for a bond, or that a company will go out of business, as for an equity, or that savings will be lost through a bank that is going out of business."
Historically, gold wasn't widely viewed as a speculative investment. "It was simply money, cash in its most basic form," writes gold watcher Doug Casey, editor of the International Speculator, a financial newsletter. "People did not accumulate gold because it could make them wealthy, but because it was a convenient liquid way to keep the wealth they had."
It's only since 1971, when the United States abandoned the gold standard to the dismay of gold bugs (people that play in gold stocks) everywhere, that the potential for making-and losing-big money in gold came to light.
And there was definitely money to be made. During what might be called the golden era of gold in the 1970s, prices soared from $35 an ounce to more than $800. Then the commodities market came crashing down, and a 21-year bear market for gold followed. But, lately, particularly as the financial crisis in this country has deepened and spread around the globe, gold has once again become a favored investment, with the price per ounce hitting its lifetime high of $1,030.80 in March as investors snapped up both physical gold and Exchange Traded Funds, like GLD, that invest in gold.
What determines the price of gold? Supply and demand is the simple answer, but there are some important caveats. The supply of gold is theoretically fixed. Like peak-oil advocates, some gold bugs maintain that gold production has reached a peak and will decline going forward, sending the price to ever-greater highs.
There are some problems with the peak-gold theory. For one thing, the supply of gold above ground, estimated at 158,000 tons, isn't going anywhere. Unlike oil, it will never be used up. One renewable source of gold is "scrap metal"-the pieces that people sell when they need to raise fast cash-that are then melted down and resold.
"In the first quarter of this year, the supply of scrap was up 30 percent up on the first quarter last year, due to selling back in response to price changes," says Graydon of the World Gold Council.
Alan Coyner, the also slyly named administrator of Nevada's division of minerals (about 80 percent of gold mined in the United States comes from Nevada), doesn't buy the peak-gold concept but says there have been recent production declines in some areas like South Africa, where gold fields' output is the lowest it's been in decades. The easiest mining spots have been tapped out, so mines are getting deeper-two miles below the surface-and people are less inclined to work in the deepest mines. There are power and other practical issues that become especially problematic working that deep underground.
Coyner says that now, for the first time on an annualized basis, South Africa is not the world's leading gold producer.
"Assuming what they're telling us is true," says Coyner. "
China is now the world's largest producer of gold."
If it's true, that's good news for China, since global demand for gold is now exceeding the supply. This, despite the fact that most of the gold that has ever been mined in the history of the world is still out there. And in any given day, a huge amount of gold is for sale, if the price is right. Coyner says that if gold's price went up to, say, $2,000 an ounce, getting it out of the ground in places that are now deemed too tough to mine would become economically viable.
There are other places where gold is relatively abundant that business deems overly risky for investment. Venezuela's outstanding gold deposits are being nationalized by its government. The same thing is beginning to happen in Bolivia. Returning assets to the people may be a popular idea in Venezuela, but it doesn't encourage business speculation. The Philippines has good deposits, but civil problems and a cyclone-prone climate make it a less-than-desirable location. In the United States, sentiment against the construction of new mines makes businesses leery of investing.
Another factor that complicates the supply chain is a lag between rising gold prices and increases in gold production: "You can't turn gold mines on and off like a water faucet," Coyner said. "In the U.S. it takes five years at a minimum to permit a new gold mine operation. If the price doubles tomorrow, it will be five years before you see that added production. That exaggerates the demand and the price because you can't bring the new gold on the market."
That brings us to the demand side of the equation, where the psychological factors surrounding the price of gold really come into play. As noted above, gold has industrial applications. But it's the investment in gold as a hedge against scary economic times-rising inflation, falling currencies, crashing stock markets-that can really juice the numbers. As we saw in the last few months, the price of gold can swing up and down just as wildly as the Dow whipsawing on news of the latest bank implosion or government bailout.
And, thus, just as with the stock market, making money off gold investments can require perfect timing, which is hard to come by. After hitting its high in March, the price of gold fell more than 28 percent, dropping to $736 on Sept. 11. Yet as the global financial crisis has gotten scarier and scarier, the movement of gold's price has been mostly upward. As one gold trader in Denver said this week, "We are experiencing tremendous demand. Everybody here is working 12-hour days. The phone just never stops ringing."
On Monday, as the stock market rallied amid coordinated efforts by major governments to stabilize the financial crisis, gold was slipping. But as John Reade, a UBS AG metals strategist, said in a Bloomberg report, gold is the "relic of last resort" and is still seeing significant buying from investors skittish about problems in the global economy.
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link to www.thebigmoney.com]
United States
this thread sucks.
