The persistent rumors of a possible short squeeze, in which gold players who borrowed gold and sold it expecting a price decline would be forced to buy it back at higher prices, driving bullion even higher, may have contributed to gold's rise. In the world of gold trading, central banks have been criticized for a long time for lending a lot of money to bullion banks like Goldman Sachs and J.P. Morgan Chase at low rates. However, it's not clear how much money is out on loans at any given time. This leads to a large short position in the market. In 2000, the Gold Anti-Trust Action Committee (GATA) officially raised the concern that central banks might use this strategy to manipulate gold prices and, as a result, interfere with the operation of financial markets. The head of the British gold mining company that bears his name, Peter Hambro, expressed concern in April 2007 that the Bank of England might have lost control of the "small amount" of gold that was still in its vaults as a result of this practice.10 This could further limit what monetary authorities will be able to sell in the future and put additional pressure on supply if, as the GATA claims, between one-third and one-half of central bank holdings have been loaned out, regardless of the reasons for the loan.
This is not the case for the mining sector, despite the possibility that sales restrictions imposed by central banks are partly voluntary. In 2001, the supply of gold by miners was 2,621 tons, but it hasn't been that high since. South African production peaked at close to 1,000 tons in 1970 and has been steadily declining ever since. The massive Australian mine production that reached its peak in 1997 and that of the United States that reached its peak in 1998 partially account for the low gold price of the late 1990s.11 However, production in both countries has decreased significantly since then, and rising supplies from China and Latin America have failed to compensate. While some research firms, like BMO of Canada, anticipate that the wave of new investment in gold mines will increase gold production beyond the peak in 2001, others, like J.P. Morgan, are skeptical due to the absence of any new large deposits.12 On the other hand, even if the mining supply returns to levels of 2001, the cost of extracting and refining an ounce of gold has skyrocketed as a result of rising costs and increasing difficulty in finding it. The global average cost to produce an ounce of gold has nearly doubled since 2000, reaching nearly $500 per ounce. Miners at the South African Savuka deposit, which means "rise up," work at a depth of 2.4 miles just to extract 20 cubic centimeters from a cubic meter of rock, or just 20 parts per million by volume, in order to maintain production.13 Given that mining costs are continuing to rise, the only thing that will make it justifiable to conduct new exploration to reach the deposits that are becoming increasingly difficult to extract all over the world is higher gold prices. According to GFMS, the world's leading precious metals consultancy, there are still 49,000 ounces of gold underground. Many of these ounces would require significantly higher prices than what they currently are in order to be economically extracted.
Even though central banks have reduced sales and miners have struggled to increase production, jewelry, industrial use, and investment demand continue to drive global demand for gold. About 2,300 tons of jewelry are consumed annually, or 68% of total consumption and gold jewelry worth $ 44 billion was purchased worldwide in 2006.14 A weakening dollar has caused prices in their currencies to rise more modestly than they have in the United States, and the growing influence of consumers across Asia, particularly in India and China, has led to an increase in purchases.
India is still the world's largest consumer of gold, accounting for 35% of all bullion coins and gold bars and 22% of all jewelry demand, despite the fact that demand has increased in many other countries. The nation purchases 1.5 times as much gold annually as the second largest consumer, the United States.15 Despite the fact that cultural and religious practices that date back thousands of years have a strong demand for gold, the most significant driver of Indian gold consumption has been the country's economic boom. Millions of skilled Indian workers are demanding ever-higher wages as a result of an increase in outsourcing and information technology jobs.
By 2015, the number of people working will reach 167 million, 30 million, and 3 million, respectively, according to the economic forecasting agency Global Insight. These workers will earn between $ 13,000 and 30,000, $ 30,000 to 80,000, and more than $ 80,000.16 Another significant source of Indian demand is the rural community, which is home to 70% of the population and has traditionally relied on gold as a safe means of saving money.
The demand for gold in China, the third largest consumer in the world, lags behind that of India and the United States. This is due, in part, to the fact that citizens in China were not allowed to own gold in any form until 1982.Also, until 2007, only professional traders could buy and sell gold bullion. Before that, people had to buy it with investment funds or pay more for gold in jewelry and coins.In July 2007, the Shanghai Gold Exchange began nationwide individual gold bullion trading, a move that is anticipated to be a significant source of demand in the future.17 Despite the fact that the exchange-traded 1,249 tons of gold in 2006, a 38 percent increase from the previous year, the new demand from individuals who will eventually be able to purchase bullion at prices that are more appealing may be a significant factor driving gold prices. The highest rate of savings in the world is achieved by the average Chinese worker, who saves more than 40% of their take-home pay. Perhaps the Chinese will begin accumulating gold more quickly than they have been doing so now that there is growing concern regarding the burst of real estate and skyrocketing Chinese stock markets.
16% of the approximately 4,000 tons of gold that miners, central banks, and scrap dealers sell annually is intended for investment demand. This is the gold that is melted down to make gold bars, a wide variety of coins and medals that are purchased by individual investors, various precious metals funds, and exchange-traded funds, a brand-new demand for investments.
For the first time, international investors can buy and sell gold bullion for their investment accounts through exchange-traded gold funds without having to store it. Seven gold exchange-traded funds (ETFs) are currently trading on nine stock exchanges around the world, with the first one debuting in 2004 on the New York Stock Exchange.18 ETF securities are guaranteed to be backed by gold held in a vault on behalf of investors, and transaction costs are extremely low. Gold ETFs had amassed 648 tons of gold by the end of 2006, so the ability to actually buy gold, not some gold fund invested at the whim of a portfolio manager at high account management fees, has been a significant driver of demand in just the last two years.19 Gold ETFs, like individual gold trading accounts that were recently authorized on the Shanghai Gold Exchange in China, are a brand-new source of demand for gold. Over the next two years, plans are in the works to launch them on a number of other exchanges, perhaps most notably in India.