Gold is coming back in fashion in China, according to latest reports, with the middle class queuing up to purchase the precious metal.
Evidence of the demand for gold was particularly clear when the Caishikou department store sold all its gold bars in just a matter of hours last month.
When a second set of gold bars was released, the top gold retailer in Beijing asked people to register by phone and nearly 3,000 people did.
The urban middle class is looking to cash in on the value of the precious metal and all made sure they benefited from the recent price peak for gold.
Although exporting gold is still banned, a booming home-grown market has now allowed the metal to trade relatively freely, according to the China Post.
Last year 235.35 tonnes of gold were traded on the exchange and the figure had already reached 170.04 tonnes of gold in the first half of 2004 alone.
The Bank of China, which is the main foreign exchange lender in the nation, has now announced it is expanding its programme to the whole of China, rather than just Shanghai.
Source: World Gold Council
What is the Gold Trade?
Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a way of diversifying risk, especially through the use of futures contracts and derivatives. The gold market is subject to speculation and volatility as are other markets. Compared to other precious metals used for investment, gold has the most effective safe haven and hedging properties across a number of countries.
Gold has been used throughout history as money and has been a relative standard for currency equivalents specific to economic regions or countries, until recent times. Many European countries implemented gold standards in the latter part of the 19th century until these were temporarily suspended in the financial crises involving World War I. After World War II, the Bretton Woods system pegged the United States dollar to gold at a rate of US$35 per troy ounce. The system existed until the 1971 Nixon Shock, when the US unilaterally suspended the direct convertibility of the United States dollar to gold and made the transition to a fiat currency system. The last currency to be divorced from gold was the Swiss Franc in 2000.
Since 1919 the most common benchmark for the price of gold has been the London gold fixing, a twice-daily telephone meeting of representatives from five bullion-trading firms of the London bullion market. Furthermore, gold is traded continuously throughout the world based on the intra-day spot price, derived from over-the-counter gold-trading markets around the world (code “XAU”). The following table sets forth the gold price versus various assets and key statistics on the basis of data taken with the frequency of five years:
| Year | Gold USD/ozt | DJIAUSD | World GDP USD (trillions) |
US DebtUSD (billions) | Debt per capita USD |
Trade Weighted US dollar Index | |
|---|---|---|---|---|---|---|---|
| 1970 | 37 | 839 | 3.3 | 370 | 1,874 | ||
| 1975 | 140 | 852 | 6.4 | 533 | 2,525 | 33.0 | |
| 1980 | 590 | 964 | 11.8 | 908 | 4,013 | 35.7 | |
| 1985 | 327 | 1,547 | 13.0 | 1,823 | 7,657 | 68.2 | |
| 1990 | 391 | 2,634 | 22.2 | 3,233 | 12,892 | 73.2 | |
| 1995 | 387 | 5,117 | 29.8 | 4,974 | 18,599 | 90.3 | |
| 2000 | 273 | 10,787 | 31.9 | 5,662 | 20,001 | 118.6 | |
| 2005 | 513 | 10,718 | 45.1 | 8,170 | 26,752 | 111.6 | |
| 2010 | 1,410 | 11,578 | 63.2 | 14,025 | 43,792 | 99.9 | |
| 1970 to 2010 net change, % | |||||||
| 3,792 | 1,280 | … | 3,691 | 2,237 | … | ||
| 1975 (post US off gold standard) to 2010 net change, % | |||||||
| 929 | 1,259 | … | 2,531 | 1,634 | … | ||
Influencing factors
Like most commodities, the price of gold is driven by supply and demand including demand for speculation. However unlike most other commodities, saving and disposal plays a larger role in affecting its price than its consumption. Most of the gold ever mined still exists in accessible form, such as bullion and mass-produced jewelry, with little value over its fine weight — and is thus potentially able to come back onto the gold market for the right price. At the end of 2006, it was estimated that all the gold ever mined totalled 158,000 tonnes (156,000 long tons; 174,000 short tons). The investor Warren Buffett has said that the total amount of gold in the world that is above-ground, could fit into a cube with sides of just 20 metres (66 ft). However estimates for the amount of gold that exists today vary significantly and some have suggested the cube could be a lot smaller or larger.
Given the huge quantity of gold stored above-ground compared to the annual production, the price of gold is mainly affected by changes in sentiment (demand), rather than changes in annual production (supply).According to the World Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes. About 2,000 tonnes goes into jewelry or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds.
Photo credit: DarkB4Dawn via VisualHunt / CC BY-NC-ND
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