Philip Klapwijk

Gold has been the focus of news reports many times over the past year. Especially in early 2009, due to the unprecedented turmoil in the global financial system, investors regarded gold as a safe haven. Since then, from September to December 2009, as the U.S. dollar continued to decline and investors were increasingly worried about high inflation in the future, investors' pursuit triggered a new round of gold price rises, and gold once again made headlines. news. Driven by strong investment, the price of gold has soared from below US$1,000, once exceeding the US$1,200 mark. Generally speaking, since 2002, the price of gold has been gradually rising amid ups and downs.

Figure 1-1-6 Gold price trend chart from 2002 to 2009

(Data source: GFMS)

1. Supply and demand in 2009

Investment demand is the main factor driving gold prices. The importance of investment is fully reflected in the "world investment" data compiled by GFM S ("world investment" is the sum of inferred net investment, gold coin and gold bar hoarding). According to statistics, the world's total gold investment almost doubled in 2009, reaching 1,722 tons. In addition, the proportion of investment in the world's total gold demand has also surged to 42%, which is almost the same as the proportion of jewelry. Investment growth mainly comes from three aspects, namely, individual and institutional investors have significantly increased their holdings of gold ETFs, net long positions have steadily increased in the futures market and the over-the-counter market, and individual investors have increased their direct purchases of gold bars and coins. In early 2009, the financial crisis caused investors to worry about the global financial system, especially some large financial institutions. The main purpose of investors investing in gold was to preserve wealth. Since September, the weakness of the U.S. dollar (and the associated U.S. dollar “carry trade”) has been an important driver of investment demand. At the same time, excessively loose fiscal and monetary policies have also caused investors to worry about high inflation in the future, and gold has been bought in large quantities as a tool to avoid inflation.

According to preliminary statistics from GFMS, global mined gold supply increased to 2,502 tons in 2009. This is the first time that global mined gold production has shown positive growth since 2005. The main reason for the increase in production is that some new mines started production in 2009, and some mines that just started production in 2008 entered full-year operation for the first time in 2009. In addition, after experiencing a significant production reduction in 2008, production at Indonesia's Grasberg mine rebounded significantly in 2009. By region, the countries with the largest increases in production were Indonesia, China and Russia, while the countries with the largest production reductions were South Africa and the United States. According to statistics, the total global gold mine reserves are now about 35,000 tons, which is equivalent to the total of global gold mine production in 14 years.

Table 1-1-1 World gold market supply and demand (unit: tons)

(Source: GFMS)

Due to the substantial growth in gold prices and global The economy is weak. Old gold recycling is expected to reach 1,537 tons in 2009, an increase of 27% and a record high. Gold recycling has also seen a strong pick-up as gold's dollar price and other currency prices hit another record in the fourth quarter of this year. However, the recent volume of old gold recycling is still far lower than the scale at the beginning of this year. At the beginning of this year, large quantities of jewelry were shipped back to the refinery, which was almost at capacity.

Official net gold sales dropped significantly in 2009, only 56 tons. The decline is mainly due to low sales from central bank gold agreement countries, while gold purchases from non-agreement countries are also an important reason. This result is in sharp contrast to the past 20 years. According to statistics, from 1989 to 2008, global central banks sold an average of nearly 400 tons of gold to the market every year. There is no doubt that this also marks a major shift in the role of central banks in the gold market. The most representative example is that in the fourth quarter of 2009, the central banks of India, Sri Lanka and Mauritius successively purchased gold from the International Monetary Fund (IM F).

In 2009, gold jewelry consumption is estimated to have dropped to 1,756 tons, a decrease of 20%, which is the lowest consumption level in the past 20 years. Gold jewelry's share of total world gold demand fell to 43%, the lowest level since the early 1980s. The decline in demand for gold jewelry is mainly affected by the continued rise in gold prices. In addition, in most countries, slowing economic growth or direct economic recession has also suppressed demand for gold jewelry. The only exception in the world in 2009 was China. As China's gold jewelry consumption continues to rise and India's consumption drops sharply, the gap between China and India, the world's largest consumer of gold jewelry, continues to narrow.

With the exception of growth in official gold coins, demand for gold fell across all other manufacturing components. By definition, the demand for gold in other manufacturing industries is mainly industrial gold, while industrial gold is mainly used in the electronics industry. The global economic downturn is the fundamental reason for the decline in demand, and high prices are only a secondary factor.

Gold bar hoarding decreased by 50% in 2009 to 197 tons. The decline was mainly due to the large-scale gold bullion sell-off in Asia in the first quarter of 2009.

On the buyer side, demand for investment gold bars has maintained strong growth momentum in China, making China the only bright spot in the world in 2009.

GFMS estimates that global producers will hedge and reduce gold holdings by nearly 240 tons in 2009. Most of the hedging reduction activity came from Barrick Gold, which decided to reduce its hedging positions to zero. This left producers with only 400 tons of butterfly-tower-adjusted hedging positions by the end of 2009.

2. Outlook for 2010

GFMS expects gold prices to remain strong throughout most of 2010. The upside in prices depends largely on the scale of investment demand that will reach. Considering that interest rates will remain at extremely low levels, and that government fiscal deficits will become increasingly serious in many countries, especially the United States, the macroeconomic backdrop will continue to have a positive impact on investment demand in 2010. This also means that gold prices will hit a new record high at some point in 2010. However, since gold prices are overly dependent on the support of private and institutional investors, once investors' interest in gold weakens, gold prices are likely to be greatly affected. Indeed, without the support of investment demand, the price of gold would be well below $1,000. Specifically, regardless of investment demand, other factors in gold supply and demand will have a negative impact on gold prices in 2010. For example, demand for gold jewelry is expected to decline further in 2010. In addition, as global hedging positions have been significantly reduced, the pace of hedging and reduction of manufacturers will continue to slow down in 2010, so the support of hedging and reduction of gold prices will be further weakened. Looking at the central bank's gold sales, in the medium and long term, the central bank's role in the gold market will become neutral, which is very beneficial to the gold price. But for 2010, GFM S expects official net gold sales to pick up. Unless a central bank is willing to buy the remaining 190 tons of gold from IM F, this will have a negative impact on gold prices. Finally, global gold mine production is expected to rise slightly in 2010, but this change is unlikely to have a substantial impact on gold prices, especially in the medium to long term, global gold mine production will still show a downward trend. Overall, given that gold prices are very likely to reach new highs in 2010 and market participants will once again face an extremely volatile market environment, 2010 will be another exciting year for the gold market.