Gold Market StabilityOver the last few months, I have been explaining some of the background features of the currency and gold markets. In March, the relative stability of the worldwide gold market was given a boost. Fifteen central banks in Europe have agreed a cap on the total amount of gold they can sell in each of the next five years. As expected, that figure is 500 tonnes per year. This is an extension of a deal struck in 1999 and will last until 2009. The only EU nations not included in the deal are the UK and Denmark (the UK has been excluded because they have no intention to sell any gold over the next five years, although that strikes me as a perfect reason to join the agreement...) This is likely to be important in maintaining the stability and price of gold and therefore, by extension, the stability of some major currencies. Gold would normally be bought or sold to strengthen or weaken a currency and trades have to be made carefully to obtain the most advantageous prices and currency rates. In order of total reserves held, the main global players are: 1. USA 2. Germany 3. IMF 4. France 5. Italy 6. Switzerland 7. Netherlands 8. ECB 9. Japan 10. China As you can imagine, with six of the world's top ten holders of gold party to the new agreement, (Switzerland were also included) a fair amount of stability is likely to be provided by the deal. That in turn is likely to help gold prices maintain their current, recently increased, value. Although the gold markets are extraordinarily complex to fully understand (mining companies will use options and derivatives to forward price or hedge their expected output to protect against a negative turn in the market price), they are still supply and demand driven. Thus, limiting the supply has to help. Conversely, demand for gold has been rising and will continue to do so. In both India and China, the direct ownership of gold by 'the individual' has been legalised in the past year. Even more importantly, throughout the Middle East, the re-issue of the Gold Dinar has stimulated demand and will, in time, replace the US Dollar as the currency of choice for many in the region. This, it is reasonable to assume will have a related impact to the dollar too. If worldwide demand for dollars falls, because areas of the world with a previously high demand start to shun the currency in favour of another asset, it seems like a safe bet that the currency in question will face little upward pressure. In turn, if you happen to be an investor in any sort of company linked with gold production, mining or jewellery manufacture, profit margins are likely to be helped by this news. Many of these types of companies (especially mining) are able to earn windfall profits as the sale value of their raw product increases. Mines in the last decade have barely been able to make a profit. However, as the price of the commodity rises so do profits (as the fixed costs of production are usually just that - fixed). Perhaps there might be more good times to come for hard asset investors. * This was first published in April 2004 * To read more about related topics, please also visit:
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