São Paulo – After 20 years practically stagnated, gold has returned to gaining strength during the decade. To have an idea, the price in London rose from less than US$ 300 per ounce in 2001 to a peak of almost US$ 1,900 in September 2011, oscillating since then, but never to less than US$ 1,520. This month, the price has constantly been above US$ 1,760.
The metal appreciated mainly due to the international financial crisis, starting in 2008. With the volatility of the markets, many investors ran to safer investment, and gold has played that part ever since the world became the world. With the global economy now shaken by the European debt crisis, the news is full of bad information and the only certainty is that there will still be much uncertainty before global finance gets back on track.
In this scenery, the evaluation is that the metal should continue oscillating, but should probably not drop below the level reached in recent years. “Gold should not drop below US$ 1,500 or US$ 1,600 [per ounce] in the medium run,” said geologist and mineral economy consultant Luciano Borges. “I believe neither in a [greater] drop nor in economic and political stabilisation,” he added.
The price of gold was also boosted by a phenomenon resulting from the crisis, the monetary policy adopted by the governments of several countries, especially the United States – after all, the global standard is the dollar -, which is practicing a “quantitative easing”, an euphemism for printing more money. The objective is to inject greater funds in the economy, stimulate credit, consumption and, consequently, growth.
But this strategy also causes depreciation of the currency and pushes investors who usually buy dollars to gold. To this mechanism may be added the extremely low interest rates currently practiced on the international economy, which makes other investment little attractive, as well as the peaks and troughs of the stock markets.
“When there is an economic crisis, there is a rush to gold. This is a phenomenon that has been present for millennia,” said the Mineral Affairs director at the Brazilian Mining Institute (Ibram), Marcelo Ribeiro Tunes. “The historic [price] curve of gold rises and never returns to lower levels,” he said.
It is truly hard to know to what level the price of the commodity may rise. “That is the US$ 1 billion question,” said Borges, who says there are companies in the mining sector that say that the ounce may reach US$ 2,500, but he does not believe in a price over US$ 2,000, at least not in the short term.
To the Gold Operations director at brokerage OM Grupo, from São Paulo, Aquiles Júnior, the value may climb as high as US$ 1,900 by the end of the year. He pointed out that the evolution of dollar rates is according to projections early this year, and says that despite the oscillation, in the future, the value of the metal “should not drop much”.
Saying that gold should continue appreciated, however, is not a guarantee of return. The finance professor at the School of Economics and Business Management at the University of São Paulo, Keyler Carvalho Rocha, pointed out that the price should continue rising, but that, as it is already high, it may also drop, despite remaining at a higher level than the historic average.
“There is nothing scientific about gold,” pointed out Rocha. The professor mentioned phenomena that may take place and cause investors to seek other investment, like a significant change in exchange rates, sales of metal by central banks and an improvement in the international economy. To him, a very pessimistic view of the international scenery is necessary to bet on continued appreciation of gold.
Rocha pointed out that investment like shares, although it may oscillate much, has other advantages, among them the payment of dividends, which depend much more on company performance than on market rises or drops.
Consumption
Aquiles Júnior recalls, however, that it was not just financial assets that expanded the demand for the commodity. He pointed out the growth of emerging nations and the significant increase in the number of consumers in nations like China, India and Brazil. This has increased the demand for gold not just as an investment, but also for jewels and other industrialized goods that use gold as an input.
In fact, although the demand for gold as a value reserve has been growing, the jewellery industry is the main destination for the metal produced worldwide. According to figures supplied by the National Mining Production Department (DNPM), an organisation connected to the Ministry of Mines and Energy, jewellery consumed almost 2,000 tonnes last year, against little less than 1,700 tonnes turned to investment.
This difference, however, has been greater. The fact is that as the price of the metal rises as a financial asset, it also grows as an input. There has been growth in consumption of jewellery in recent years, but the volume of the metal used per item has dropped, at least in Brazil. “We have identified a significant increase in the price of gold [as an input] and we even need to use gold as a substitute,” pointed out the director of the International Area of the Brazilian Institute of Gems and Precious Metals (IBGM), Luiz Lacombe. Items in silver, plated, lighter, with stone and greater attention to design help economize on gold. Lacombe stated, for example, that refined design “guarantees visual value” and may allow production of a lighter product.
“Brazil had a ‘boom’, a new [middle] class, that had been forgotten in the consumer point of view, but that, with economic and social change [in recent years] entered the market,” said Lacombe. “If these people cannot buy jewels, they buy plated jewellery. A silver ring is no less a ring,” he added.
Exports
But if the market is growing, that does not mean that the metal produced here is sold in the country. Commodities are not recognized for their fidelity to the market of origin. In this sense, of the 55 tonnes of gold produced in Brazil in 2011, according to the Ibram, 44.6 tonnes were exported, which generated US$ 2.24 billion. The estimate for this year is for production of 58 tonnes and foreign sale of 46 tonnes (read more about Brazilian production in the link below).
The world’s main market is India, followed by China, Europe, the Middle East and the United States. Jewellery and precious metal trade is traditional in Asia and in Arab countries. According to figures compiled by the DNPM, for example, Egypt imported 11.6 tonnes of gold in the second quarter of 2012, growth of 40% in comparison with the same period in 2011.
It is worth recalling that from the start of the year to now, popular protests resulted in the ousting of dictator Hosni Mubarak and the election of a new president after three decades and that there is still a lot of political and economic uncertainty, a scenery that usually results in people seeking gold as a safe haven, in this case in the shape of Jewels. Of the total imported by Egypt from May to June, 11.1 tonnes were for jewellery.
Culture also plays an important part on influencing the interest in gold. In Muslim countries, it is still common for the family of the groom to offer a dowry to the bride’s family, given in the shape of jewellery, and gold is considered a good investment opportunity, as religion does not allow the faithful to make money with interest. Profit with the purchase and sale of good, however, is allowed. In the region, the main importers are Saudi Arabia, the United Arab Emirates and Egypt.
*Translated by Mark Ament
