Gold – the emotional metal

Abstract

There are two distinct camps of commodity analysts – the supply/demand fundamentalist who looks at economic logic and the chartist, who believes the economic logic is in the price. Both techniques have their strengths and weaknesses. With gold there are further problems. With most of the metal mined still readily available to the market, gold often behaves more akin to ‘stock’ – such as the bond market, than a ‘flow’ market – like oil. Gold is also a highly emotive metal. Furthermore, it is a small and opaque market making supply and demand balances hard to construct. This paper addresses three straightforward issues that have bearing on the future of the gold price. First, the official sector. The sales of the 1990s from a number of central banks rocked the market. The European Gold Agreement returned some stability in 1999, and was renewed in 2004. Some analysts maintain that EGA members will not sell the full quota, although the author disagrees. Also China is unlikely to purchase gold. Second, adornment jewellery. In its main markets, Europe and the US, yellow gold has a serious image problem, and is associate with the crass, vulgar and loud. It is very difficult for such attitudes to be changed by marketing, particularly with producers’ margins. Finally, investment. Two gold Exchange Traded Funds have been launched to make investment easier. After an initial burst of enthusiasm, demand has been patchy. The main hope is in the US product. Virtual Metals estimates (based on the UK and Australian version) that offtake could be 200–550 t. But can it be sustained?