Fundamental Report on GOLD

Prepared under the guidance of

Submitted by:

Diksha Bansal
PGDM (e-business) 2013-15
Roll No: PG13010



2

Contents

Acknowledgement .................................................................................................................................. 3
Objective of the study ............................................................................................................................. 4
Executive summary ................................................................................................................................. 5
Introduction ............................................................................................................................................ 6
Properties of Gold ................................................................................................................................... 7
Factors affecting gold prices ................................................................................................................... 8
Demand ............................................................................................................................................... 9
Jewellery ......................................................................................................................................... 9
Bars and Coins ............................................................................................................................... 12
Industrial and dental demand ....................................................................................................... 14
ETF (Exchange Traded Fund) ......................................................................................................... 17
Supply ................................................................................................................................................ 19
Gold Mines .................................................................................................................................... 20
Recycled Gold (scrap) .................................................................................................................... 23
Central bank .................................................................................................................................. 23
Interest rate .................................................................................................................................. 26
Economy ........................................................................................................................................ 26
Geopolitical condition ....................................................................................................................... 31
Currency ............................................................................................................................................ 32
Price outlook ......................................................................................................................................... 34
Conclusion ............................................................................................................................................. 36
Bibliography .......................................................................................................................................... 37








3


Acknowledgement
The success of my project work depends upon the hard work rendered by me and various
other individuals whose help and guidance contributed to the detailed insight of my
internship project. It is my duty to acknowledge with gratitude the help rendered to me for
understanding the various concepts for my project.
I am also indebted to my project guide Samir Shah who was the prime guidance force and
inspiration for the successful completion of my project. I thank him profusely for sparing his
precious time for assisting to the best of his knowledge.
Further, I would like to thank the Co-ordinator of PGDM (e-business) to provide the best
facilities and good working environment to prepare the report.

4

Objective of the study

Gold is a vital source of investment for the world and will likely to remain for many decades,
even under the optimistic assumption about the growth of other investment avenue. Majority
of the markets are affected by movement in gold prices. Rising price in gold is supported by
the weak world economy. So it becomes crucial for the world economies to understand the
significance of gold price movement. Many a times gold is called as currency without a
country.

The objective of the study is to understand how the price of gold is determined and to study
the fundamentals affecting gold price with respect to various dimensions. Study relates to the
biggest consumers and producers of gold and various geo-political concerns which affect the
gold price.

5

Executive summary

The world gold market is complex. Governments as well as private companies play roles in
moving gold from producers to consumers. Central banks, own gold reserves to diversify
their funds. Slowly and gradually gold reserves are depleting but todays technology can
recover it.
The reason for this high share in the world is due to the advantages that gold has over the
other constituents of metals such as diverse application, its physical and chemical
composition, and resistance to corrosion.
This report gives information of the properties of gold which are used in various sectors like
dental, industrial etc. Also it focuses on bringing about information related to various
countries in the world and their individual demand and supply.
The various factors which affect the gold fundamental and subsequently its prices have been
recorded along with the price movements of gold over specified years.
This report also highlights future projection of gold as on 2014.
















6

Introduction

Gold, the most preferred of all the precious metals, is acquired for its beauty, liquidity,
investment qualities, and industrial properties. It is primarily a monetary asset, and partly a
commodity. Gold holds its purpose as an adornment and investment
As much as two thirds of golds total accumulated holdings relate to store of value
considerations. Holdings in this category include the central bank reserves, private
investments, and high-cartage jewellery bought primarily in developing countries as a vehicle
for savings. Thus, gold is primarily a monetary asset. Less than one third of golds total
accumulated holdings can be considered a commodity, the jewellery bought in western
markets for adornment, and gold used for industrial purpose.
Some analysts like to think of gold as a currency without a country. It is an internationally
recognized asset that is not dependent upon any governments promise to pay. Gold is
measured in grams or troy ounces. Eagerness of the people to find alternative investment
option often drives demand for gold. Gold is also considered as a hedge against inflation.


7

Properties of Gold

Out of the earth comes a remarkable metal with an unparalleled combination of chemical and
physical properties that make this metal invaluable to a wide range of everyday applications
essential to our modern life. Thousands of common, everyday appliances require gold to
ensure perfect performance over a long period of time.
This indestructible metal is completely recyclable and virtually immune to the effects of air,
water, and oxygen. Gold will not tarnish, rust, or corrode. This unique combination of
properties makes gold a vital component in many medical, industrial and electrical
applications.

Resistance to Corrosion
Gold is the most non-reactive of all metals. It is benign in all natural and industrial
environments. Gold never reacts with oxygen (one of the most active elements), which means
it will not rust or tarnish.

Electrical Conductivity
Gold is among the most electrically conductive of all metals. This makes gold a vital
component for electrical connectors in computers and telecommunications equipment.

Ductility and Malleability
Gold is the most ductile of all metals, allowing it to be drawn out into tiny wires or threads
without breaking. As a result, a single ounce of gold can be drawn into a wire five miles long.
Gold's malleability is also unparalleled. It can be shaped or extended into extraordinarily thin
sheets. For example, one ounce of gold can be hammered into a 100 square foot sheet.

Thermal Conductivity
Gold is also an excellent conductor of thermal energy or heat. Since many electronic
processes create heat, gold is necessary to transfer heat away from delicate instruments. For
example, a 35% gold alloy is used in the main engine nozzle of the Space Shuttle, where
temperatures can reach 3300 centigrade.

8

Factors affecting gold prices

The year was characterised by two major changes in sentiment that will impact upon the gold
price for years to come. The first was a move by institutional investors out of non-yielding
asset classes as equity markets reached new highs and the possibility of an end to quantitative
easing saw treasury yields recover. This investor flight saw ETF holdings peak on 1st January
2013 at 2,698 tons before falling by 880 tons over the course of the year, the first decline
since their establishment in 2003. It also helped cause a series of sharp downward moves in
the gold price that elicited the second major change in sentiment a resurgence of retail
demand.


9

Demand

Gold is used in making jewellery, coins and industrial wires. About 45% demand come from
jewellery, 45% in the form of investment and the remaining 10% in the form of industrial
demand.
China is the largest consumer of gold followed by India and Thailand. India, till 2012, was
the largest net importer of gold. However due to alarming current account deficit certain
stringent steps were taken by RBI and central government such as increasing import duty
from 4% to 10% lead to the fall in official gold import.

Jewellery

It accounts for 45% of the total demand for its price and beauty factor. India is the largest
consumer of gold jewellery due to attached cultural values followed by China and US.
Demand for jewellery rises during the wedding and festive seasons like Diwali, Aksaya
Tritiya etc. as it is considered a good omen.
Compared to last year demand for gold jewellery increased due to falling price. Jewellery
demand globally grew by a notable 18% in 2013, to a six-year high of 2,361 tons, boosted by
the lower gold price. India has witnessed marginal surge in demand because of the increase in
import duty from 4% to 10% and quotas. Demand for jewellery increased from 1998 tons to
2361 tons in 2013.
Other Asian and European countries witnessed growth compared to 2013. Jewellery
fabrication in East Asia rose by an impressive 40%, led by strong gains in China, where
production soared by 46%, to a new record high of 871 tons. US jewellery fabrication up by
14%, to a three-year high of 61 tons. Turning to Europe, last year saw a near 4% rise.

10


During 2004-2009 value for gold was rising and the world saw major change in demand after
the subprime crisis 2008 as gold was considered safe haven against burst of housing bubble.
And in 2013 demand rises due to falling price.
EUROPE
European jewellery fabrication posted a modest recovery, growing by 4% in 2013, largely
thanks to a strong rebound in Turkey. This was largely attributable to the significant drop in
the average gold price, which boosted demand from key export destinations, helping, to some
extent, to mitigate losses from the continued weakness in the local market.
NORTH AMERICA
Due to improving economy and lower prices gold jewellery consumption is estimated to have
rose to 76.6 tons in 2013, up 4.6% from an upwardly revised 73.3 tons in 2012. This marks
only the second annual increase in demand over the course of the past 13 years.

SOUTH AMERICA
Jewellery fabrication in South America grew robustly in 2013 on the back of a weaker gold
price to reach an estimated full year total of 42 tons. While economic growth has boosted
consumers purchasing power, the meteoric rise in the gold price in the past ten years has
priced gold jewellery beyond the affordability of the masses in the region.

11

MIDDLE EAST
Jewellery fabrication increased by 18% in 2013 to reach 87.1 tons, the largest increase since
the financial crisis but still only 35% of the peak tonnage reached in 2005 of 251.1 tons.
INDIAN SUB-CONTINENT
Indian jewellery fabrication fell by 2% in 2013, as a result of policies that restricted official
supply. Continued expansion by large retailers limited the decline, however. A surge in first
half demand lifted annual consumption by 11% last year. Jewellery fabrication in Pakistan
jumped by almost a fifth, reversing seven consecutive years of losses, due to a price elastic
response and unofficial supplies to India.
EAST ASIA
Jewellery fabrication in East Asia surged by 41% last year, thanks largely to the acute fall in
the gold price, with the lower price environment driving consumption higher across the entire
region. Chinese jewellery fabrication increased by an extraordinary 46% in 2013, reaching a
new record high of 872 tons and in so doing surpassing India as the worlds largest jewellery
fabricator.

12

Bars and Coins

Bars and coins are mostly purchased for the purpose of investment. The demand for Bars &
Coins has considerably increased due to the financial instability as gold is considered as safe
haven commodity. Gold is comparative hedge against adverse economic situations.
Demand for bullions decreased in India due to many factors:
Rise in import duties from 4% to 10% made gold costlier
Restricted banks, agencies and trading house to import on consignment basis. It will
have direct impact on domestic jewellers making gold unavailable to them
RBI also made it compulsory to import could happen only on 100% cash margin basis
Also policy stated that at least one fifth of every lot of imported gold is exclusively
made available for purpose of export. It means 20% of every lot of gold imported
should be exported back and the remaining is used for domestic purpose
Demand for medals and imitation coins in India decreased to 96.3 tons due to restricted
advances against coin weighing more than 50 grams.

It is clearly seen in the graph that the demand for bars and coin is increasing year by year.
From 2009 to 2013 one can see growth in demand from almost 800 tons to 1000 tons.
Uncertainty in the markets about the U.S. Fed rate hike and geo-political tensions across
13

Middle East and falling gold price in the end of 2012 and 2013 supported increase investment
of gold.
EUROPE
After reaching a peak of 337 tons in 2011, physical bar investment in Europe has fallen for
two consecutive years, reaching 240 tons in 2013. This was largely the result of the continued
investor interest in physical gold bullion products last year, in light of ongoing uncertainty
over the financial stability and economic health of the European countries.
NORTH AMERICA
After declining by over 50% in three years, physical bar demand in North America surged
30% to 41 tons in 2013. North America, which includes the United States, Canada, and
Mexico, accounted for 3% of global retail bar demand in 2013. The decline in price
throughout 2013 spurred greater interest among smaller individual investors, who are more
price-sensitive and who also often purchase gold as a long-term investment.
INDIAN SUB-CONTINENT
Investment demand surged 29% to 266 tons last year. However, Indias share of the global
total fell to 19% from a five year average of 24%. This was primarily due to a fall in the
demand during the second half following the surge in premia. To quantify this, the first half
grew by 144% year-on-year, while the second half declined by 36% from the same period last
year. Kerala, Maharashtra, Gujarat and Uttar Pradesh are major demand centres of gold
jewellery, coins and bars in India.
Bar investment in Bangladesh and Nepal increased by 21% and 35% respectively in the
expectation of higher prices, although high customs duties meant that a large proportion of
investment bars were imported unofficially. Political instability in Bangladesh was also a key
reason for increase in retail activity there.

EAST ASIA
Bar investment demand in china in 2013 reached 360 tons, representing a 45% year-on-year
increase. The exceptional rise was primarily due to the lower price environment for the first
half of 2013, especially during the significant price correction. After declining by over a
quarter in 2012 as a result of strenuous government regulations on gold ownership, Vietnam
investment demand rebounded 29% in 2013 to an estimated 84 tons.
14

Industrial and Dental demand

Gold is used in a wide range of technological/manufacturing applications because of its
electrical conductivity, malleability and resistance to corrosion. Applications include
electronic goods and equipment, telecommunications devices and household appliances. Gold
is also used in healthcare services and pharmaceutical products due to its biocompatibility
and resistance to bacterial colonisation. Industrial fabrication fell by 2% to estimated 278.9
tons in 2013 due to continued thrifting in electronics sector. Gold used in electronic
allocation slipped due to growing use of copper, silver, aluminium in the production of
bonding wire.
A moderate 4% decline in 2013 in electronics demand was solely due to substitution losses in
the area of bonding wire. Golds share of the gold bonding wire market (the primary use for
gold in electronics) was further eroded, despite an apparent improvement in consumer
sentiment stimulating demand for electronics.
Demand for gold used in other industrial and decorative applications mirrored the 4% decline
in electronics. The fact that this segment is dominated by India (specifically in demand for
jari a golden thread used in clothing) makes the year-on-year decline rather unsurprising
given the import restrictions. Other uses are in the commercial chemistry. In dentistry, gold
alloys are used in tooth restorations. In medicine, gold can be applied as a conductive coating.
As gold reflects infrared light 98%, this metal is used as a coating on glasses and mirrors.
Besides the increasing number of appliances for industrial gold, demand also expands due to
the strong economic performance of emerging countries. Currently, only the minority of
industrial gold is used in industrialized countries. Besides these uses, gold is, or will be used
for the following purposes: gold-based therapeutics, diagnostic technologies based on gold,
as catalysts in industrial processes, for water purification and advanced consumer electronics.
Gold used in electronics fabrication in the U.S. fell 1% to 55 tons in 2013. This unremarkable
outcome was mostly a function of continued substitution away from gold to cheaper
alternatives. Following two consecutive years of declines, gold used in Europe electronic
applications posted a modest recovery in 2013, growing by 4%, to just above 32 tons. This
was mainly thanks to a combination of higher GPC exports and a recovery in end-user
demand, buoyed by the lower gold price environment.

15

ELECTRONICS (including the use of scrap) (Tons)
Countries 2010 2011 2012 2013
Japan 115 108 88 85.7
United States 55.8 58.3 55.7 55.4
China 46.4 51 48 49
South Korea 33.4 31.6 27 23.5
Taiwan 19.4 18.1 16.7 16.2
Russia 12.4 12.5 12.6 12.7
Germany 16.3 13.8 11.3 9.9
Singapore 5.9 5.6 5.4 5.3
India 2.6 2.5 2.4 2.4
CIS (ex. Russia) 2 2.1 2 2
Hong Kong 1.9 2 1.8 1.8
Other Countries 2.5 2.5 2.4 2.6
World Total 326 319.9 284.5 278.9
Source: Thomson Reuters gold survey report 2014

Due to advancement in technology and other substitutes available in market there is decline
in the use of gold in electronics in past few years i.e. from 2010 to 2013 demand decreased
from 326 tons to 278.9 tons. The chart includes the use of scrap too. During the period of
2004-2013, demand had been fluctuating.

Dental and medical demand fell by 6% to 36 tons in 2013. Similarly due to high gold prices
over the decade there has been a thrifting in the industry and also decline in demand is due to
changing consumer preferences for more aesthetically pleasing white teeth. However other
industrial and decorative demand was higher than last year due to price led recovery in India
and china.

16

Dental gold fabrication:

The figures shows demand for dental fabrication from 2004 to 2013 of United States, Japan,
Germany and others. Chart indicates gradual decline in consumption of gold in dental
fabrication. One of the main reason is change in consumer behaviour. From 2004 to 20013
demand in Japan had decreased from 22% to 19% approximately. Demand in Germany fell
drastically from 50% to 33%.

17

ETF (Exchange Traded Fund)

Gold commodity exchange traded funds are a simple way to investment in performance of
gold, without actually owning any gold products. There are many types of gold ETFs, some
of which consist of futures and derivative contracts in order to track the price of gold which
means one can invest in gold and speculate like go short or long depending on the price and
gold-related indexes, while others consist of gold assets held in a trust. There are even gold
ETFs that track companies in the gold industry.
Advantages of Investing in Gold ETFs:
Potentially cheaper to have price exposure to gold price as compared to other
available avenues
Quick and convenient dealing through demat account
No storage and security issue for investors
Transparent pricing
Can be traded on stock exchange like buying / selling a stock
Ideal for retail investor as minimum lot size to trade is one unit in secondary market

Since their launch a few years ago, gold ETFs have emerged as a highly popular investment
avenue among retail investors. Gold ETF units, which are equivalent to 1gram of gold, are
held electronically in the demat form and traded on exchange. In these investors dont have to
bother about the purity of gold as these funds are required to hold equivalent quantity of
standard gold bullion of 99.5%. Some funds have now launched gold funds of funds (FoF)
schemes. Gold ETFs have seen redemption pressure in the last few years as compared to the
2007-2011 period. With a steep fall in gold prices, this pressure may continue. 2013 saw
decline in ETF holdings by 45% in 2013 to a six year low of 898 tons but in the beginning of
2014 investment began to rise due to the developing stress arising between Russia and
Ukraine. Investors should not expect super-normal profits from the gold ETF space as there
is renewed faith in the dollar due to the recovery of the US economy.

18

Gold ETFs & other similar products

2012 2013 Change (Absolute)
SPDR Gold Shares 1350.8 798.2 -552.6
ZKB Gold ETF 235.7 176.1 -59.6
iShares COMEX Gold Trust 217.7 162.4 -55.3
ETF Securities 161.3 108.3 -53
GBS LSE 139.2 97.3 -41.9
Julius Baer 111.7 66 -45.7
Xetra Gold 51 44.5 -6.5
NewGold Gold debentures 45.2 41.3 -3.9
Central Fund of Canada 52.7 52.7 0
Source Physical Gold ETC 73.5 38.5 -35
Others 202.1 177.3 -24.8
Total 2640.9 1762.6 -878.3

From 2012-2013, there was a redemption from 2691.1 tons to 1811.1 tons. In 2013 Between
July and September the pace of investor selloffs continued to fall, particularly during August
where total monthly redemptions recorded 18 tons. This in part was supported by rising
concerns over Syrias alleged use of chemical weapons. Despite this declining pace, by end-
August ETFs had reached their lowest level since 2009. Thereafter, as expectations of US
tapering increased (following the Fed unexpectedly announcing the continuation of QE in
September), ETF outflows once again gained momentum resulting in end-2013 total ETF
holdings of 1,811 tons.

19

Supply

During the formation of Earth, molten iron sank to its centre to make the core. This took with
it the vast majority of the planet's precious metals - such as gold and platinum. In fact, there
are enough precious metals in the core to cover the entire surface of Earth with a four-metre
thick layer.
There are gold mines on every continent except Antarctica. As old mines play out, new mines
begin production, helping to keep the amount of mined gold relatively consistent. Since the
1880s, South Africa has been the source for a large proportion of the worlds gold supply,
with about 50% of all gold ever produced having come from South Africa. Production in
1970 accounted for 79% of the world supply, producing about 1,000 tons. However by 2007
production was just 272 tons. This sharp decline was due to the increasing difficulty of
extraction, changing economic factors affecting the industry, and tightened safety auditing. In
2007 China (with 276 tons) overtook South Africa as the world's largest gold producer.
Other major producers are United States, Australia, China, Russia and Peru. Mines in South
Dakota and Nevada supply two-thirds of gold used in the United States. Today about one-
quarter of the world gold output is estimated to originate from small scale mining. The
world's oceans hold a vast amount of gold, but in very low concentrations (perhaps 12 parts
per 10 billion).
Gold supply consists of three sources- newly mined gold, recycled Existing gold and gold
sales by central bank.

20

Gold Mines

Gold mines are mostly found in South Africa, US, Australia and Russia. Output of gold
mines has increased in the last decade from 262 tons in 2003 to 3022 tons in 2013. It showed
6% year on year growth.
Eight countries posted gain of over 10 tons. China, Canada and the Dominican Republic each
posted greater than 20 tons last year. The main reason for increase in supply is the
commissioning phase of the mines. Many miners increased the production to boost output
and lower unit cost. The six largest producers China, Australia, the United States, Russia,
Peru and South Africa, extracted more than half of the gold mined globally.
Reduction in exploration expenditure has resulted in fewer new discoveries. Changes in the
mineral licenses too have affected gold supply. (Especially mining & petroleum resources
development act).
All in cost which include cash and non-cash costs rose 27% to $1620. It reflects large number
of write-downs as producers re-evaluated reserves using lower gold prices, write down
goodwill associated with acquisitions made in previous years and revised mine plans.
Earlier the reserves were valued at higher value but in 2013 producers revalued them at
currently prevailing lower price leading to increase in cost. Goodwill written off increased the
cost.

21

Top 20 mining countries:
2013
Countries 2012 2013
1 China 413.1 438.2
2 Australia 251.4 266.1
3
Russia 229.7 248.8
4
United States 231.3 228.9
5
Peru 180.4 181.6
6
South Africa 177.3 174.2
7
Canada 108 133.1
8 Ghana 95.8 107.9
9 Mexico 102.8 103.8
10
Indonesia 89 99.2
11 Brazil 67.3 79.9
12 Uzbekistan 73.3 77.4
13 Papua New Guinea 57.2 63.3
14 Argentina 54.6 50.1
15
Chile 48.6 48.6
16
Mali 50.3 47.1
17
Tanzania 49.1 46.6
18
Kazakhstan 40 42.4
19
Philippines 41 40.6
20 Colombia 39.1 40.4
21 Rest of the World 461.7 504
World total 2860.9 3022.1
Source: Thomson Reuters gold survey report 2014
The table shows the top 20 gold mining countries and their ranking and production in tons for
the year 2012 and 2013. World total production in the year 2012 was 2860.9 tons whereas in
2013 it increased to 3022.1 tons.
AFRICA
African output was flat year-on-year in 2013, producing 580 tons of gold. The regions output
was characterised by strong gains in the north and western parts of the continent being offset
by lower production in the eastern and southern sections of the continent.

NORTH AMERICA
North American gold production registered its largest positive year-on-year change since
2010, adding 24 tons in 2013. The outcome was led by fresh supply from Canada on the back
22

of a ramp up at four operating mines and one recently commissioned operation. Output from
the other two countries combined was broadly flat, with a slight increase in Mexico
compensating for losses in the United States.

SOUTH AMERICA
Gold production from South America registered its highest year-on-year increase in eight
years, to a total of 531 tons. The ramp-up in production at new mines and recently
commissioned operations offset losses elsewhere, adding 33 tons by year-end.

ASIA
Chinese mine production rose by 6%, or 25 tons in 2013, a 14
th
successive annual increase,
to reach 438 tons. This increase was largely attributable to a 35 tonne gain in toll smelter
production, as output from the countrys integrated mining and refining industry fell back
slightly in 2013. Indonesia, the regions second-largest producer after China, saw a 10 tons,
or 11%, increase in its gold output during 2013. This was largely the result of two major
stories in the country; the ramp-up in output from Martabe, which was commissioned in
2012, and a return to higher output levels at Grasberg, which had produced at relatively
modest levels during 2012.

EUROPE
European output grew strongly, by 25 tons, or 9% year-on-year in 2013, to 308 tons.
Underlying this, the regions largest producer, Russia, and to a lesser extent Turkey,
contributed to the bulk of this growth.

OCEANIA & OTHER
Output in Oceania rose by 23 tons, or 7%, to total 345 tons, led by a significant growth in
Australia and Papua New Guinea. In Australia, the regions largest gold producer, output
increased by 15 tons driven by contributions from the recently commissioned Tropicana,
Murchison Goldfield, Mount Carlton, Garden Well and Andy Well properties. These five
operations added a combined total of 10 tons. Elsewhere, output among established operating
mines grew significantly as well, with Tanami and Ridgeway posting the highest year-on-
year increases.
23

Recycled Gold (scrap)

Gold sourced for mould products which have been recovered and refined back into bars. The
location of gold recycling activity is not tied to mine production and is more likely to be
linked to gold consumption.
Global scrap supply declined by 22% to 1280 tons in 2013. The main reason is 15% drop in
the annual dollar gold price and depletion of close to market stocks. Only china recorded
increased supply globally. Moreover individuals who were willing to sell their old fashioned
and inherited pieces postponed the selling.
Indian scrap supply declined by 11% to 101tons.One of the source of scrap was from jari. Jari
were separated from silk, cotton and melted to form gold bars.

Central bank

According to the World Gold Council there are multiple -reasons why central banks invest in
gold:
Gold acts as a hedge against inflation
Central banks get income from leasing gold
Gold offers worldwide confidence
Gold offers a diversification benefit
Changes in the world monetary system do not affect gold
Gold provides physical safety in case other assets are blocked on accounts
The price of gold is unaffected by adverse government decisions, unlike currencies
that are prone to bad decisions made by governments
Central bank maintains its reserve in the form of USD, gold and other few currencies like
Chinese renminbi, Canadian dollar, and Australian dollar. Financial crisis & sovereign debt
crisis have made the central bank to diversify its reserve.
Global central banks were shifting from US dollar to EURO but then due to the euro crisis,
banks have started exploring other currencies too. Shares of currencies like Chinese renminbi,
Canadian dollar, Australian dollar etc. have increased. The limited roles of other reserve asset
24

has made GOLD one of the important reserve portfolio for central banks because of its no
credit risk and liquidity.
For decades ago, central banks in emerging markets relied on buying US treasuries. Since
2010 central banks have become the buyers of gold. Net official sector purchases in 2013
declined by 25% against 2012. Despite the drop in official sector purchase, it still represented
8% of overall demand.
Since 2010 central banks have declined the share of gold and bought gold instead. It is
expected that the central banks in emerging markets to continue their moves into gold as
monetary policies in advanced economy remain to be ultra-loose for some time. Russia was
the largest announced buyer in 2013 raising its official gold holdings by 77 tons. 2013 was
the third consecutive year which saw fall in gross sales from official sector at about 12 tons.
The largest seller worldwide was Germany who realised just over 4 tons of its coin
programme.
In particular, countries with current account deficits like India, Belarus, Egypt, often prefer
gold to stabilize their currency, while Western central banks still stick with the former IMF
rule not to buy gold any more.
In 1999, 14 European central banks and ECB signed the first Central Bank Gold Agreement
(CBGA). In that it was agreed not to sell more than 400 tons per year for next five years.
Later it was increased to 500 tons. But due the changing landscape of central bank activity
the agreement may not be renewed.
In 2010, several central banks announced to increase their gold reserve. This includes china,
India and Russia. The recent discussion about the Cyprus gold reserves had woken up fears
about the gold sales of other central banks like Spain and Italy.
On the other hand the dip in gold prices makes the metal interesting for central banks with
continuing surpluses.
25


During 2004-2009 to diversify its reserve central bank was reducing the share of gold. Due to
the prevailing condition in the world economy, central banks have again started investing in
gold since 2010 as it has no credit risk.

26

Interest rate

Interest rate measures the opportunity cost of keeping money in cash relative to any other
asset. In US, FOMC (federal open market committee) sets interest rate which makes it either
easier or harder for banks to borrow money from other banks. Higher interest rate would
make it difficult for other bank to borrow which ultimately affects people borrowing. In times
of high real interest rates, the gold price is weak and vice versa.


Economy

Local government implications
Import duties, strict import quotas & restrictions on gold related lending & coins sales affect
its supply in the domestic market. Supply restrictions lead to rise in premium. For instance, In
India it is compulsory that 20% of all gold imported should be exported as jewellery. In Jan
2014, 5 banks were granted license to import gold. Indias lust for gold was blocked by a tax
increase to 10% for all imported gold.
Progress of the U.S. economy
There is a negative relation between U.S. economy and gold. The fragile outlook for
economic growth drives people to buy gold.
27

While the 2013 economic data shows positive sign that the U.S. economy is recovering, it is
still unclear whether the economy is fundamentally strong, considering the support it received
from the Federal Reserve. The Fed took measures on stimulating the economy from mid-
2012 through 2013 by keeping interest rates historically low via its bond purchasing program,
however the Fed has started to taper its monthly buying programme.
i. Inflation rate
Inflation means that the value of paper currency falls in respect of other goods and services.
When the global money supply increases in excess of growth that means more money chasing
fewer goods. This leads to inflation which leads to more investment in hard assets like gold.
Inflation is considered as the most important factor affecting the price of gold. High inflation
has become a positive driving force for gold as it is considered as a hedge against uncertainty
and inflation. Metals appreciated until 2011 with rising money supply and inflation in
emerging markets


28

ii. FOMC policy
The FOMC's decision to taper its asset-purchase program (also known as quantitative easing)
led to a sharp drop in the price of gold at the end of 2013. Quantitative easing is an
unconventional monetary policy used by central bank when the standard monetary policy
becomes inefficient. It means central bank buys financial asset from other commercial bank
so that it raises their price which ultimately decreases yield. The FOMC continues to cut
down its asset-purchase programme; it will have adverse effect on gold. At the start of 2013,
an ounce of gold could be purchased for $1664. Conversely by the end of the year, it was
worth $1202, a substantial drop of 28%.
Additionally, the recently appointed chairman of the Federal Reserve, Janet Yellen, might
also decide to take additional expanding monetary steps to make sure the U.S economy
continues to recover. If the FOMC comes up with new monetary measures such as pegging
long-term interest rates or raising the inflation target, these measures could increase the
demand for the yellow metal as a safe-haven investment.
iii. Non-farm employment change
It means the number of employed people during the previous month except farming industry
and government. If actual is more than forecast, it is good for currency. Non-farm pay roll
has a negative correlation with gold. As the number of jobs rises, investor tends to show more
confidence in U.S. economy so the demand for gold declines.

0
200
400
600
800
1000
1200
1400
1600
1800
0
100
200
300
400
500
600
700
(
$
/
t
r
y

o
z
.
)
(
N
o
.

o
f

p
e
o
p
l
e

i
n

'
0
0
0
s
)
Non Farm Payroll Unemployment Claims Gold Prices ($/try oz.)
29

iv. Unemployment claims
It means the number of individuals who filed for unemployment insurance for the first time
during the past week. Gold prices rose after the data showed that number of people who filed
for unemployment assistance in U.S. was more than forecasted. If the actual is more than the
forecast, it is considered bad for currency. Currency and gold has negative correlation. If the
claims are more, it increases the government expenditure which results in depreciation of
U.S. currency and hence increase in prices of Gold.
Businesses have added 8.1 million jobs over the 2013, and are on track to register the third
consecutive year of job growth. The table below shows the improving U.S. economy.

v. Consumer Confidence
Consumer confidence means confidence of the consumer in the state of the U.S. economy.
The data indicates the health of the U.S. economy and the investors accordingly intend to
buy or sell their bonds/treasuries like 30 years treasury yield or 10 years treasury yields.

30

Gold price and ten year bonds (2001-2013)

This could suggest a shift in market sentiment - investors taking less risk and investing in
assets such as U.S. long-term treasuries and precious metals. If this sentiment continues i.e.
U.S. treasuries bond interest continues to decline, it could strengthen the price of gold.
vi. Institute of Supply Management (ISM)
The ISM Manufacturing Index monitors employment, production inventories, new orders and
supplier. By monitoring the ISM Manufacturing Index, we are able to better understand
national economic conditions. When this index is increasing, investors can assume that the
stock markets should increase because of higher corporate profits. The opposite can be
thought of the bond markets, which may decrease as the ISM Manufacturing Index increases
because of sensitivity to potential inflation. The institute of supply management said its
services sector index rose to 56.3 in May from 55.2 in April, topping expectations of 55.5.

Monthly QaUSNPMI/A 8/31/2007 - 9/30/2014 (UTC)
Line, QaUSNPMI/A, (S1, S2), 5/31/2014, 55.400
Value
32
36
40
44
48
52
56
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2007 2008 2009 2010 2011 2012 2013 2014
31

Geopolitical condition

Historians and specialist in geopolitical issues will say that there is a greater desire for peace
in the world now than ever before. There are many fewer wars and conflicts ethnic, national
or otherwise than in the past. Whenever there is a geo political trouble, investors around the
world rush to prevent their investment and gold attracts everyone. For example: 9/11 attack in
U.S. lead increase in the demand of the gold.
Gold consumption in Thailand, the biggest user in Asia after China and India, expanded 73
percent to 140.1 tons in 2013, according to World Gold Council data. Imports were higher
than local consumption in 2013 as some was re-exported, including jewellery. But in 2014
political unrest happening there has resulted in decline of gold. People feel it is better to save
money instead of buying gold as the price of gold was falling. Gold prices in Thailand will
increase when the Baht depreciates against the US dollar.
Gold futures rose as political unrest in Ukraine boosted demand for the metal as a haven
asset. Due to the increasing geopolitical tension in Ukraine, the gold prices went high to
$1385, six month high. Redemption of ETF was supported by rising concerns over Syrias
alleged use of chemical weapons.
There is the case of the yeshiva students abducted in the West Bank. And on a wider
geographic scale, the latest new flash point is Iraq, where the Iraqi government is battling
with Islamist forces for control of the country. The Islamist rebel group, the Islamic State of
Iraq and Syria, is leading the sweep toward Baghdad through the northern Iraqi cities of
Mosul, Tikrit and Baiji and no oil drilling is being carried out in these areas.
After a decade of war and with considerable cost and fatalities in Afghanistan, the U.S. has
failed in defeating the Taliban and subsequently stabilizing the country. With the global eco-
nomic recession, U.S. and NATO troop drawdown and the Karzai government lacking any
influence beyond Kabul, the U.S. has been trying to find a negotiated solution with the
Taliban. The problem the U.S. is facing is that the Taliban do not need to negotiate as they
are in a winning position; this may well prolong the war.

32

Currency

In 1971, world adopted floating currency and gold was no longer the official anchor of
currencies. However it retained some of its attributes. Like its reverse relationship with the
exchange rate of the U.S. dollar. For instance if US$ strengthen then gold demand falls. This
means that gold and U.S. dollar has strong negative correlation. Due to this Gold act as a
hedge against U.S. dollar.
As a strong U.S. dollar dampens U.S. inflation, it can reduce the demand for loanable funds,
and therefore reduce interest rates. The expectations of a strong dollar could also increase the
supply of funds because it may encourage saving. In addition, foreign investors may invest
more funds in the United States if they expect the dollar to strengthen, because that could
increase their return on investment.
Earlier dollar was the only currency which was backed by Gold. Soon everything was
invested in gold. Later on U.S. dollar became the substitute of gold. The US enjoys a
privilege whereby it can create an infinite amount of money to pay its bills while other
countries of the world cannot. When the U.S. creates more money, it causes its own currency
to lose purchasing power which makes U.S. goods cheaper on international markets and
improves exports for the U.S. Consequently, in relation to the US$, other currencies then rise
in value, these countries export, and tourist markets suffer.
Another effect is that when currencies remain strong during times of economic stress,
investors like to park their cash reserves in strong currencies, which creates a problem for the
country with the strong currency as local inflation skyrockets. In turn, each country is forced
to print money (or buy other currencies with money they print to do so), which again creates
an overall global effect of devaluing currencies. Commodities in this environment naturally
rise, which is part of the reason Gold is rising the other reason being that gold isnt just a
commodity; during economic cycles where governments insist on destroying the value of
their own currencies, gold rises because it retains and gains in purchasing power while all
paper currencies lose purchasing power.
The decisions of Bank of Japan and Reserve Bank of Australia to expand their monetary
policies contributed to the weakening of their respective currencies. If the U.S. dollar
continues to appreciate against leading currencies, this could result in a decline in the prices
of commodities, including gold.
33

Gold vs. US Dollar Index

Gold prices moves in correlation with some of the other commodities and global growth
Gold prices move with few commodities. Higher supply of U.S. oil and slower global growth
helped to weaken oil prices and consequently gold prices. The gold-oil relation is the one that
prices of crude oil partly account for inflation. Hike in the prices of oil results in increased
transport cost and so prices of general commodities rises. So, in other words it leads to
inflation i.e. rise in general price level. The second part is the fact that precious metals tend to
appreciate with increase in inflation. So, an increase in the price of crude oil can, eventually,
translate into higher precious metals prices i.e. Gold.

34

Price outlook

Continued economic recovery that saw quantitative easing program continue, increase in U.S.
treasury yields and equity market and a stronger dollar makes the metal less attractive as
compared to asset class. Due to all this reason it is forecasted gold prices will further
decrease.
Also Indian demand is affected by the series of tax rises and import restriction to control
current account deficit and to support rupee. Secondly the primary gold production cost
excluding impairment charges were $1205 in 2013.
Further there was news that central bank of Cyprus should sell 400 mn of its official gold
reserve to help its bailout. This pushed gold to 2 year low price.

In the first quarter of 2014 a gold price rally was driven by some weak U.S. economic data
releases coupled with a rise in safe-haven buying as emerging market risk increased and
several currencies depreciated sharply. These price developments have largely been business
as-usual with golds core price drivers little changed since the beginning of the global
financial crisis.

Following this narrative, consensus opinion would have been that the gold price will decline
over the coming months and years. Driven by a continued economic recovery that would see
tapering of the Federal Reserves massive quantitative easing program continue, increases in
35

U.S. treasury yields and equity markets and a stronger dollar, all of which are negative for
gold, or make the metal look less attractive as an asset class.

Forecasters predict that the price for gold will fall below $1,000/oz. for a sustained period.
Assuming physical demand does support prices then we would expect a trading range in the
$1,100-1,400/oz. region. The first quarter of 2014 has already shown that physical demand
currently drops off above $1,300/oz., although this is somewhat distorted by the weakening
of several emerging market currencies in early 2014 and by Indian import restrictions. The
market is yet to adjust to physical demand as a key driver, however, and this could still lead
gold to overshoot on the downside.

While we cannot write-off political and economic shocks to the global economy it seems the
dollar has already weathered its most pressing test in the debt ceiling crisis.


36

Conclusion

This study on gold provides with different outlooks in the current economy. After analysing
all the fundamental reasons the future of gold prices can be relatively forecasted. The outlook
for Gold moving ahead seems to be bearish. However, geopolitical risk, more specifically
the situation in Ukraine and slow progress of the U.S. economy than it was expected is likely
to keep prices supported in the short term.
Global supply is still picking up. As per the world council the total global demand for gold
will be still rising. Most of this growth comes from China, while demand from the rest of the
world remains stable.
Gold provides one of the most important and paramount investment avenue as it act as a
hedge. By local government implication developing countries are able to control their deficit
account by controlling the import of gold. Falling or rising price of gold gives the current
economic condition prevailing in the market.
Gold prices have been increasing since last 120 years. There are many factors affecting the
gold pricing. Demand and supply plays the most important role followed by other factors like
central bank, currency, inflation rate and etc. fluctuating price related to gold have vital
effects for supply mines and exporting countries. Therefore, there are many countries which
earn through the export of gold this enable to achieve their market objective.

37

Bibliography

Thomson Reuters gold survey report 2014
www.gold.org
www.economictimes.indiatimes.com
www.commodityonline.com