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The largest demand for gold is in jewelry and investments. Gold is known as a
metal that is easily used and has many industrial applications. Since gold is so
durable and luxurious, many people invest in jewelry, stocks, and gold bonds.
Considering the fact that gold is considered a world-wide valuable good, many
economies have gold reserves to help protect themselves in times of need.
Nevertheless, factors of supply and demand have contributed to the decrease of
the price of gold, which has reached an all time low since 1978. This reduction
has raised many concerns in the United States having them weigh the different
factors of the price, supply and demand, and consumption that may be affecting
the price change.
The price change commands attention since gold serves to
indicate price stability or inflation. Although, inflation is not as threatening
in the United States because it is more industrialized, the bigger fear is
facing deflation with our countries gold currency. Gold averaged 294 dollars per
ounce in 1998, when at one time the prices were in the mid $400-500 per ounce.
Due to fact that gold prices have been so low, Central Banks have threatened to
sell their gold inventories fearing that gold is no longer considered the
ultimate store of value. Regardless, prices have continued to fluctuate in both
directions throughout the year, but it is important to weigh the different
variables that are having an effect on the price.
There are different factors
associated with the supply and demand which have caused prices to decrease.
First of all, the record low prices in the past year has caused investors to
participate less causing prices to be determined largely on gold’s own supply
and demand fundamentals and the economic environment. The supply of gold
declined by less than 2% during 1998. The price reduction started to impact the
mine production by slowing the rate of manufacture growth by the end of 1998.
When prices began to weaken, this caused many mines to shut down, leaving low
grade ore in the ground. This alone is effecting the mine output and the cost to
produce more gold. On the other hand, the sales of gold jewelry are increasing
at a record pace, since the economy is strong, there are low gold prices, rising
consumption rates, the emergence of new discount chains, television shopping,
and electronic chains (Haubrich, Joseph).
The growing demand for gold jewelry
helped push gold usage in the United Sates to a first time report of 428.4
metric tons in 1998, which is an 18% increase. Since consumption has been driven
in the United States, our economy is expanding and consumers are spending more.
During the past year, according to the JCK national poll, over 150 independent
jewelers support the figures. They found that two-thirds of respondents (68%)
said they had a sales increase over the past year, while the other two out of
five (38%) claimed to have sales gains of 20% or more. Over all, the immediate
gain for jewelry retail due to the lower prices was a 15 % increase. Using the
statistics from the Commodity Price Index, for the last 12 months in 1998, it is
evident that the second half of the years prices fluctuated. In the first part
of 1998, the gold price ranged from $295.90 - 297.49, although it peaked in
April reaching to $308.40, which was the highest for the year.
The price
increase was due to higher demand of consumers and the expansion in investments
during that time period, in spite of the fact, prices did not continue to remain
as high for the remainder of the year. In fact, the following month of May,
dropped another $9.01, having the rate of gold at $299.39. As for the second
half of the year, prices still dropped but managed to stay in the low $290’s
making retailers prosperous. Regardless consumers were happy with the lower
prices, many investors and miners have been struggling to feel the same towards
the lower rate. Stocks have lost over 90% percent of their investments in gold
and have many investors wondering if the value of gold is depreciating. Miners
too, are worried about the lower prices considering they have been the major
producers of gold in the past and in future markets.
The idea that central banks
have discussed to sell partial amounts of their gold reserves has investors
worried with hopes that demand will not continue to decrease. When evaluating
the prices for the beginning of 1999, they have continued to be unsteady and
low, although there is hope for an optimistic future foe higher gold prices. The
price continues to range in the mid $250-290’s since gold is rather abundant
even though other nations released some of their reserves and placed it on the
market. This crude rate has caused some miners to be temporarily out of work and
stocks are still very low. The gold prices of April, averaged approximately $250
per ounce, and have remained in that range the next three months. According to
“The Economist,” the price of gold reported to increase at $260 per ounce in
August.
Even though, more gold has been placed on the market the demand had
increased in the past month due to agreements and regulations placed to control
the amount of gold being released on the market. Having a better understanding
with what may happen in the future investors remain optimistic. By the end of
September, prices made a positive change showing a first mark in the 300’s,
reaching a high of $315 per ounce. Thereafter, prices in the month of October
extended as high as $327 per ounce and having November prices fluctuating in the
lower 300’s. These price trends are stirring some interest to investors and
stock markets with hopes that gold will continue to have higher trends in the
future. In a memorable essay, Milton Friedman wrote that “millions of people all
over the world regard gold as ‘money,’ if not the only ‘true’ money” (Haubrich,
Joseph). This is one main reason why the price of gold commands attention
especially since it is an indicator of price stability and the possibility of
inflation. Gold is also used as a commodity, used in jewelry and by industry. It
is important that details of supply and demand do not affect the price its
price. It is essential to keep in mind the different outcomes the country may
face from the mobility in the price of gold.
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