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  Gold Net Australia Online Magazine


  GOLD COMMENT - December 2005  
Gold is on the rise. But the question is, "Why IS gold on the rise?".
That is a question that experts often try to explain. To be honest, I have always found that there is usually not one single item that effects the gold price, but a myriad of factors that effect global financial and commodity markets that are too numerous and complex to understand.

For example that spike that was obvious during September was probably related to the Japanese buying gold - hedging against the falling Yen. The Yen having fallen by 10%, triggered a hedging movement on behalf of the government.
The real rise in the gold price over the last several months though, was more likely associated with the falling US$. As the greenback began to lose value, those who had invested heavily in the US$, began to reassess their investments, and of course, the old faithful, gold, was always a good haven to invest funds. This began to drive the price of gold higher.

As the US$ continued its slow but steady downward slide the gold price began a corresponding rise. This has continued to the present day.
Globally, banks who had invested heavily in the greenback began to hedge against the decline and looked more to gold. There are other factors that experts now indicate might effect the gold price, that were not evident before. Among these are the fact the US$ has NOT continued to decline, but has in the last 2 months stabilized and in fact has strengthened a little. Additionally, there is no evidence that governments are intending to buy gold, such as the Japanese market did.
It is also obvious that those who own gold at this time are reluctant to sell, while the price continues to rise.
With supply from gold producing countries under pressure, as traditional gold producers find it harder to find more gold to mine, the supply is slowly weakening from traditional markets. In the long term, the higher price will lead to increased production as the profitability in extracting gold at an economic price improves.

This is a brief resume of a very complex equation, and it begs the question, "Will the price of gold continue to rise?".
I guess that is in the lap of the God's, for I do not have the knowledge or a reliable enough crystal ball to give a definite and positive answer. However, while the price increases, it can only mean a solid future for the gold producing sector globally, with increased employment opportunities and in the foreseeable future a golden future for all those involved in the gold industry.

Many of the larger players in the gold mining industry are sure backing the price of gold to rise and rise substantially in the next 5-6 years. There are several reports of the big end of the industry buying up smaller gold companies, clearly with the object in mind of being able to supply their forward contractual obligations.

What is most amazing is the price they are paying for known reserves. In at least two instances large gold companies have paid in excess of US$1,100 per ounce for known reserves of the gold mining operation they were buying. Is this a sensible strategy on the part of the companies or no? At face value, it seems to be rather irresponsible, but then large gold companies have generally become large because they have made sound business decisions, rather than irrational and irresponsible decisions.

There may of course be other factors that are not evident to the observer that may be hiding other factors that influence the inflated prices that are being paid. Either the big end of the industry believes that gold will be double the price it is now in 5-6 years, or some big gold companies could just be filing for bankruptcy. Lets hope its the former.


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