Gold Report 2011

Gold Report 2011

New Zealand Mint’s Mike O’Kane tracks gold’s ups and downs

Gold has had a year of ups and downs, surging to record prices in both USD$1921 and NZD$2325 before pulling back and trading within a range for the last 2 months. Key price influences during the year have been a mix of the predictable – for example the Indian wedding season – and the unforeseen – a third quarter price run.

Here’s a quarter-by-quarter analysis of the year.

Q1
Demand for the first quarter of the year was up 11% year on year, driven by investment demand for bars and coins. Physical investment demand was up 52% on 2010, driven by a dip in the gold price in January, continuing Euro zone crises in credit worthiness and unrest in the Middle East and North Africa. S&P started its process of downgrading credit ratings for various PIGS nations (starting with Spain and Portugal) highlighting the move from sovereign debt and bonds to physical assets such as precious metals and cash.

Gold in USD$ started the quarter strongly at USD$1420 and NZD$1830 (up from USD$1135 and NZD$1550 in January 2010) but immediately started to pull back. March saw the beginning of the first surge with a top at USD$1550 at the end of April with NZD$ topping at $1950 mid March and then remaining stable.

Q2
Q2 saw USD$ gold trading in a range between $1450 and $1600 – driven by sovereign debt fragility fears in Europe and inflation concerns in the USA. Negative inflation is usually seen as being detrimental to gold prices as the two tend to correlate – the anticipation of higher inflation usually drives gold prices up, the reverse meaning gold prices weaken.

Chinese and Indian investments tend to cool during this period and this softening in demand also affected the prices.

The NZD strengthened against the USD so in local terms we saw the gold price trade from $1850 to a low of $1790.

Q3
Here is where all the action kicked in - Gold had a run of USD$400, starting at a low of $1490 at the beginning of July and peaking at its record high of USD$1921 at the beginning of September. In NZ$ terms we saw a move from NZD$1800 to NZD$2320.

The price rise was partly a function of, and partly a reason for, the strong upsurge in global investment demand. Markets were buffeted by the worsening crisis in Europe, a shock US debt downgrade and deteriorating confidence levels among consumers and businesses.

Equity and credit markets suffered the consequences and gold was increasingly a beneficiary as investors recognized its unique attributes of risk reduction and security, with the additional benefit of positive returns.

In Middle Eastern and Asian markets primarily, the rising price reaffirmed bullish expectations and prompted an upward revision of target prices among the investment community.

The increase in investment demand during the third quarter was notable for its widespread geographical distribution. Virtually all markets saw strong double-digit growth in demand for gold bars and coins, with only three countries - India, Japan and the US - experiencing a year-on-year contraction.

These growth rates are all the more remarkable when considering the substantial profit-taking which accompanied the price correction in September. Western investors were attracted to gold’s insurance-like properties given the worrying developments in the euro area. Meanwhile, investors in Eastern markets focused on positive price expectations for gold as well as its inflation-hedging properties (inflation levels remained elevated in a number of these markets).

Activity among central banks continued to fulfil expectations of continued purchases in Q3.
As with any significant run, there was a pull back. In September we watched as the USD$ price dropped down to a low of $1530 (NZD$ dropping to $2025 late October) as risk fears and profit taking kicked in, before trading settled back into the range between USD$1600 and $1800).
NZD$ pricing has again pushed back up to above NZ$2300, primarily due to a weakening of the kiwi vs. the USD$, as the Euro zone issues again drive investment funds in to the US treasury market and US Cash.

Q4
To date Q4 has been fairly range-bound, with USD$ prices trading between $1600 and $1800, as risk appetite and continuing concerns around the Euro zone, US deflation and the Middle east continue as normal. Local market activity has been steady throughout the period, with buys and sells both up, as people take advantage of good price movements and a moving kiwi dollar.

Where to from here?
My long term prognosis is based on the understanding we still have a long way to go before any outlying issues are resolved. We may yet be due for a very turbulent time, as different solutions for the debt crisis are explored. The issues in Europe are currently affecting the USA both on a state and local level, which is helping to drive long term physical investment demand in the US. In the eastern region (China, India, Middle East) demand is growing strongly as economies there strengthen.

Currently we are seeing the Kiwi dollar slowly slip against the US dollar, partly due to the resurgence in US as investors move from more “dangerous” centres, and partly due to the weak NZ economy. This is allowing those who have bought previously to enjoy a good return on their investment and many who are buying are viewing this as the beginning of a larger drop in the exchange rate, again making their investment better in the long run.

Gold Price – 2011 (in USD$ and NZD$)

Ends

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