Is there a "peak-gold" like there is a "peak-oil"? by Steve Austin - 2007/06/01
Oil prices have increased significantly in recent years, due to a market condition called "peak oil", whereby consumption outpaces production and new discoveries. Spot Gold price has increased also, but is this increase tied to the same market conditions as crude oil?
Gold and oil market dynamics differ in at least one way. Unlike manufactured or petroleum products, gold's price fluctuations are not tied to its extraction costs. You may have read a different story in the press, but the floating volume of gold (the amount of gold that would arrive on the market if its owners decide to sell it) at around 20,000 tons exceeds by far the 3,500 tons mined each year. Furthermore, trading prices currently at around $700/oz are multiples of actual extraction costs in the $150/oz range.
Like Oil however, the consumption of gold by the jewelery, electronics and manufacturing industries has surpassed gold extraction for many years now. But to counter-balance this, hundreds of tons of gold are issued on the market every year by central banks, which attempt to liquidate as much as possible of this asset considered non-productive.
Why does gold rise?
Gold is a "blue-chip", stable investment. Even more so than real-estate since one can move gold to a different location. Its price goes up when those willing to buy it outnumber those willing to sell it. The main three reasons why buyers seek gold are:
Uncertainty due to war
Risk of high inflation
Lack of confidence in the economy and its leadership.
Today, all three conditions are present in the US market. The Federal Reserve has been artificially deflating the US inflation rate but today's real, high inflation, is the leading cause for high gold prices. More dollars buy less gold because the dollar is weak against all major currencies, consequently inflation is high. In addition, liquidity flooding BRIC countries allow investors to invest in gold which they traditionally value.
As inflation increases and the dollar depreciates, count on the price of gold to increase again in the coming months.