Will Gold Keep Talking?

THE price of gold soared above 1,100 dollars per ounce in early November 2009, more than a 40% increase from 760 dollars 12 months ago. On the other hand, the dollar fell to a 15-month low as of November 16 when the US Dollar Index recorded 74.9.

Indeed, history shows that the gold price has always increased. However, the standard analysis is that this drastic increase is a response to the weakened dollar and concerns over inflation. As countries implemented expansionary monetary policies to overcome the financial crunch and signs of an earlier economic revival could be seen, inflation appeared to be nearing. The key currency discussion also influenced this increase. On September 27, World Bank President Robert Zoellick said, “The United States would be mistaken if it takes for granted the dollar’s place as the world’s predominant reserve currency.”

Meanwhile, the G-20 Summit in Pittsburgh did not overly support the dollar as the key currency. Countries and investors are seeking gold to diversify risks against the dollar’s seemingly faltering status. The New York Times analyzed that recent political circumstances also contributed. As regulations on tax havens become stronger, the rich have increased investment in gold to hide their assets more effectively. Furthermore, the prediction that the gold price will continue increasing drastically as supply has reached its peak, appears to be coming true.

The International Monetary Fund (IMF) decided to sell 403 tons of gold in September to strengthen its finance, with central banks of various countries buying more gold. The People’s Bank of China has bought 454 tons of gold since 2003, doubling its gold reserves to 1,054 tons. The IMF sold 200 tons of gold to the Reserve Bank of India earlier this month and this is supposedly a factor behind the increase. Russia bought 49 tons in 2009 alone. The Central Bank of Sri Lanka increased its gold purchase over the last 5-6 months, while the Bank of Mauritius bought two tons of gold from the IMF. The basic rule of demand and supply fits. While demand for raw materials persists, the supply of gold is limited. Gold reserves are 10,000 tons, which is expected to be exhausted in 20-30 years. According to the Korea Trade- Investment Promotion Agency, South Africa, one of the world’s largest gold deposits is not benefiting from this gold price increase with its supply decreased since 1993.

Korea stands rather afar from this trend.

The Korea Customs Services estimates that gold imports this year up until September amount to 81 million dollars, a 77.8% decrease from 2008. In addition, gold investment products have not excelled in the market, yet. The Bank of Korea (BOK) remains prudent. The BOK has remained negative regarding the expansion of gold reserves as gold is basically a nonperforming asset with strong price fluctuation. The bank once stated that diversified foreign currency reserves would be better than increasing gold as a hedge. Korea has 14.4 tons of gold, the world’s 58th largest stockpile, while it has the world’s sixth largest foreign currency reserves. The BOK has never bought gold since the 3.04 tons it purchased during the citizens’ campaign for gold collection conducted to overcome the Asian Financial Crisis in 1998. Therefore, there is an opinion that Korea is likely to increase its gold reserves and develop more alternatives to the dollar.

Whether the gold price increase will continue invites heated discussion between two extreme views. Jim Rogers, CEO of Rogers Holdings forecasted that the gold price will reach 2,000 dollars, while Nuriel Roubini, a US economist believes this to be ‘utter nonsense’.

While more moderate opinions of an increase up to 1,200 dollars next year can be seen, overall, the gold price is expected to increase until the dollar recovers its stability as the key currency and concerns over inflation subside.