From Dollar to Monsoon: Factors That Affect Gold Prices

Gold prices have fallen from dizzying highs on global cues. HT explains the factors that influence its prices and its linkages to the dollar and monsoon in India.

Why do people invest in gold?

Gold is one of the several assets that people invest in. Unlike equities or bank deposits, gold is a physical asset and has been a traditional favourite for parking surplus income.

How are gold prices determined?

Gold is considered to be a safe haven asset. In times of high inflation and volatile stock markets, gold prices usually tend to go up. Its price had more than doubled from early 2009 to end of 2013 as investors in Europe and the US flocked to add more glitter to their investment portfolio rather than park funds in unstable and risky equity markets.

What triggered the fall in gold prices on Monday?

There were reports of massive selling of gold in China on Monday. According to some reports, more than 30 tonnes of gold were sold in the Shanghai spot market on Monday. The heavy selling triggered global prices to fall sharply.

What is the relationship between dollar value and gold prices?

Under normal circumstances, the value of the US dollar and price of gold are inversely related. A stronger dollar usually makes gold cheaper. This is because international prices of gold, like many other commodities, are denominated in dollars. If the dollar strengthens, it makes such commodities expensive in the other currencies. The resultant fall in demand sets off a fall in prices.

Why is the dollar strengthening against a basket of currencies?

The US Federal Reserve has hinted at the possibility of interest rate hikes this year, the first time in nearly a decade. Analysts expect the first rate hikes to come in by as early as September.

What does an interest rate hike mean for the dollar?

An interest rate hike in the US could trigger a dollar flight from emerging countries such as India. A rate hike in the US will encourage foreign, particularly US-based funds, to move money out of India to safer locations closer home. Global funds park money based on expectations of yields.

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Germany to Bring Its Gold Home

Germany -- For the great many Germans who still rue the day they had to trade their deutsche marks for euros, there has been at least one consolation. If the common currency did not work out, Germany still had huge reserves of the hardest currency of all - - gold.

Except, many people learned for the first time last year, it didn't. More than two-thirds of Germany's gold reserves, valued at 137 billion euros ($182 billion) are abroad, stored in vaults in Paris, London and, above all, New York. In fact, there is considerably more German gold in Manhattan than in Frankfurt.

On Wednesday, the German central bank said it would begin gradually repatriating some of the reserves, the second-largest stock in the world after that of the United States. The Bundesbank was responding to a public outcry last year after a clash in Parliament about whether all the gold was properly accounted for.

The goal is to house more than 50 percent of German gold in Bundesbank vaults in Frankfurt by 2020, up from a little less than a third today, the bank said. About 45 percent of the reserves are 80 feet below street level in a Federal Reserve Bank of New York vault.

The move will include the complete withdrawal of German gold stored at the Banque de France in Paris, about 11 percent of the total. Bundesbank officials were anxious to note that the decision was not a reflection of French trustworthiness. Rather, it is because France and Germany now share the euro, so there is no need for reserves as insurance against currency crises.

"The gold in Paris is in the best of hands," Carl-Ludwig Thiele, a Bundesbank executive board member, said Wednesday. "We are thankful to the Bank of France for storing it."

Still, news of the planned transfer caused some tongue-clucking in financial circles after news leaked out Tuesday.

"Central banks don't trust each other?" William H. Gross, a founder and managing director of the investment firm PIMCO, asked on Twitter.

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From Gold Rush to Gold Standard: History's Filigree

A timeline of the precious metal's effects on the world - from gold rush to gold standard.

- 5500-2500 BC Gold is first discovered in the later part of the Stone Age, probably in Mesopotamia.

- 3000 BC Gold rings are used for payments in Egypt.

- 650 BC The Lydian Lion - a bean-shaped gold piece stamped with a lion - is considered the first true coin. It is first minted by Lydia, the ancient Greek kingdom ruled by Croesus a century later.

- 250 BC The Greek mathematician Archimedes demonstrated that the purity of gold can be determined by calculating its density (weight and amount of water it displaces- ).-

- AD 1284 Venice introduces the gold ducat, which becomes the most popular coin in world commerce for more than five centuries.

- 1511 King Ferdinand of Spain sets the tone for his expeditions to the New World, admonishing his explorers: "Get gold, humanely if you can, but at all hazards, get gold."

- 1787 First American gold coin - the Brasher doubloon - is struck by gold- and silversmith Ephraim Brasher.

- 1792 The Coinage Act puts the US on a bimetallic silver-gold standard, defining the dollar as equivalent to 24.75 grains of fine gold and 371.25 grains of fine silver.

- 1799 The first US gold rush is sparked by the discovery of a 17- pound gold nugget at Little Meadow Creek, N.C.

- 1821 Britain institutes the first gold standard.

- 1848 The discovery of gold at Sutter's sawmill near Sacramento, Calif., sparked the California gold rush and accelerated settlement of the American West.

- 1851 Australian gold rush begins in New South Wales, in the southeast.

- 1870s North American gold finds make the metal more plentiful, prompting the US, Germany, and France to adopt the gold standard, followed by many other countries.

- 1886 While digging up stones to build a house, George Harrison makes the largest gold discovery in history in Witwatersrand, South Africa. The deposit produces 40 percent of the world's gold by 1985.

- 1887 Scottish chemist John Steward MacArthur wins a British patent for the gold cyanidation process. It enables the separation of gold from ore and doubles the world gold output within 20 years.

- 1897 The Klondike gold rush sees 100,000 "stampeders" head north after gold is discovered in the Canadian Yukon the previous year.

- 1900 The Gold Standard Act places the US officially on the gold standard, a fixed exchange rate in relation to other countries on the gold standard.

- 1903 The Engelhard Corporation creates a liquid medium to print gold on surfaces - for tender and decoration. The medium becomes the basis for microcircuit printing technology.

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Surprising Gold Market Boosts Mining Stocks

They expected its price to continue drifting lower because of the mild inflation outlook and growing bullion production.

``Everybody assumed it would just keep going down and down and down. But it didn't,'' said Frederic S. Bogart, head of precious metals for the Republic National Bank of New York.

Instead, gold bullion has rallied strongly since bottoming out at $360 an ounce in September, sending volatile mining stocks soaring.

The group is up about 35 percent since this summer and should advance further, according to Vahid Fathi, an analyst with Prescott, Ball & Turben Inc.

``If gold is in a bull market, as we believe it is for the first time in several years, the reward in these stocks could be subtantially higher,'' he said.

Market participants sa a key test of the rally's strength began last week as gold passed $400 an ounce, a level it previously saw in January on the way down from its recent high of just over $500 in 1987.

If the rally propels gold well above $400, buyers' enthusiasm is expected to swell.

``There are a lot of people who invest in this area who are still on the sidelines,'' said Marc J. Loew, manager of Shearson Lehman Hutton Inc.'s SLH Precious Metals Portfolio. ``Breaking the psychological barrier of $400 gold is what's going to bring them in.''

What is the best way to participate in the rally?

For investors who can tolerate risk, mining stocks carry the biggest potential gains. Their earnings and share prices are highly sensitive to gold prices.

``For example,'' said Fathi, ``if bullion goes up 10 percent, you shouldn't be surprised to see a 20 percent move in the price of gold mining shares.''

Fathi recommends shares in large, efficient mining companies with high production growth. One of his favorites, the American Barrick Resources Corp., has expanded production by about 40 percent this year.

The company's bottom line has also benefited from forward sales of gold that locked in an average price of more than $400 an ounce for its 1989 production.

But Fathi still questions whether the gains in gold shares have been sufficient to compensate for the volatility and risks.

To reduce risks, mutual funds provide diversification. Laurie Kaplan, an analyst for Morningstar Inc., a mutual fund rating service, said the three dozen gold-oriented funds offer a wide range of risk levels.

``The first thing the investors have to figure out is what kind of exposure they want, how aggressive they want to be,'' Kaplan said.

Most volatile, she said, are the ``pure play'' funds that stay fully invested in gold shares whatever the outlook for bullion prices.

The higher their concentration in small mining company stocks, the greater their volatility, Kaplan said.

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Gold Mining Loses Its Shine on Rising Costs Zz Gold Fields Chief Calls for Collective Efforts to Save Industry

THE GOLD mining sector was "under water" and its troubles, with so many factors weighing against it, were just beginning, Gold Fields chief executive Nick Holland said last week.

"As of today, gold is at $1 300 [R13 000] an ounce and the gold industry is under water. The global gold industry is under water. The platinum group metals industry in this country is under water."

According to Holland, the HSBC global mining index has lost 29 percent since the beginning of 2010, while the Dow Jones industrial average is up 47 percent and the FTSE 100 index has risen 22 percent. Gold rose 3 percent to fix at $1 369.25 in London on Friday.

Mining investments were under threat as costs rose and the industry was in crisis in South Africa and other mining jurisdictions, Holland added.

"It doesn't end there either, because existing operations are also being cut back. I think every week now you're reading about a mine that has cut back jobs, rationalised its operations, or shrunk it. And you're going to see more. We're not at the end of it. I think we're at the end of the beginning."

Earlier this month, AngloGold Ashanti, the third-biggest gold producer, said it would cut 40 percent of its 2 000 senior managers worldwide.

Sibanye Gold, the company which was spun off from Gold Fields in January, has plans to cut jobs at its Beatrix West section following a fire and subsequent shaft closures.

Village Main Reef retrenched staff at Buffelsfontein and subsequently pulled the plug on the mine, and took a R469 million write-down on the Blyvooruitzicht mine, to which it halted funding.

Gold producers have reduced capital expenditure, restructured their operations and cut thousands of jobs.

Holland added that costs had increased by 12 percent a year as mines were getting deeper, while at the same time yields had decreased.

"That means you double your costs every four years. That's what you're looking at over here. At the same time yields are going down.

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Mining Battle Lines Drawn Zz Gold Mines Set for Strike after Talks Fail

Rumblings of lockouts by gold sector employers and resolutions to strike by trade unions culminated in a firm commitment to do battle by both parties as the deadline for a wage deal expired at noon yesterday.

"This is it. This is our final offer, we cannot afford an increase," Harmony Gold chief executive Graham Briggs told a press conference hosted by the Chamber of Mines yesterday.

The industry's final stand includes insisting on a collective bargaining forum and not negotiating or settling with unions at either company or mine level.

Briggs said reaching different settlements would probably fuel inter-union rivalry and incite violence.

Across the divide, the National Union of Mineworkers (NUM) said it rejected "with contempt" the final pay offer of a 6.5 percent wage increase linked to a profit share scheme as part of a two-year wage agreement.

NUM tabled demands for 60 percent wage increments at entry-level while the Association of Mineworkers and Construction Union (Amcu) asked for a 120 percent increment. They have not budged, while employers started at 5.5 percent.

"Unions that are expecting these settlements will be disappointed," Briggs added, referring to the fact that there would not be different settlement for bitter rivals NUM and Amcu.

The chamber represents seven gold mining companies in the negotiations: Sibanye Gold, Harmony Gold, Gold Fields, AngloGold Ashanti, Evander Gold, Village Main Reef and Rand Uranium.

"By tomorrow [today] we should know what the consensus is from our members," NUM spokesman Lesiba Seshoka said. "If they want to strike, we will send a notice of strike action to the Chamber of Mines, but we have to look at other avenues of engagement."

Amcu treasurer Jimmy Gama said the union would stick to its demand and consult members on whether to strike. "We cannot be told by the employers, we need to settle on the same settlement. The final offer is a joke. I don't know what they are trying to achieve by being stubborn. They can't blame workers for not accepting the offer, they need to blame themselves for being stubborn".

The parties have exhausted all avenues as the mediation process, led by the Commission for Conciliation, Mediation and Arbitration, failed in the third round of talks.

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