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  Gold Net Australia Online Magazine


  GOLD COMMENT - September 2005  

It is obvious to all that the price of oil skyrocketed during August 2005. What caused this this trend was the exceptional demand, in particular from the emerging economies of China and India, as well as many other smaller developing nations, that finally reached the maximun production point of supply. Demand was there - without supply, and the price went into orbit.
The global consumption of oil had finally reached a point where current world production of oil was no longer keeping pace with demand.

With the incredible destructive power of Hurricane Katrina, and the havoc it has reapt in the US oil fields in the Gulf of Mexico, it is clear that world oil prices will remain at exorbitant levels for the foreseeable future, as production from this area has effectively stopped. I t will take some time before this production is restored to previous levels.

What then does this have to do with Gold... The answer is not so hard to find as traditionally Gold and Oil have followed a similar financial course over the past 35 plus years. For example the price of gold and oil have been around about 15.7 barrels of oil to one troy ounce of gold, on average over the last three and a half decades, until now.

At this time there is a massive distortion to this traditional correlation. At around US$67 for a barrel of oil and US$443 for an ounce of gold, the current ratio is 6.6.
If the average ratio over the past 35 years was applied, the price of gold would be US$1,052....
So what does this mean?
Does it mean that the gold price will rise sharply or will the price of oil drop. Due to current world demand it is unlikely that the price of oil will reduce sharply in the immediate future. On the other hand the price of gold will be controlled by a myriad of factors, including increasing demand for jewellery. Emerging nations e.g. Indonesia and China producing more gold, challenging the traditional gold producers in total tonnage also have an impact. The developing markets of Gold Based Exchange Traded Funds is also placing pressure on gold.

Gold markets are effected by a myriad of factors, far too complex to deal with in a small venue, such as this comment. However, it seems to Gold Net that there is only one way Gold can go at the moment, and that is to sharply rise in price.

Common sense dictates that if supply is outstripping demand regardless of the reasons, the price will rise. Just how much it will rise is another question. Who would have predicted that oil would hit US$67.00 a barrel. Who would predict that Gold will hit US$1,000 an ounce? Well maybe it will not do that but it seems to us that investing in gold now is a very wise investment right now.

Supposing the price of gold did rise from US$440 to US$800, which is not outside the realms of possibility or probability, that's serious dollars in profit.


Demand for gold jewellery reached a record US$38bn in the year to June 2005, according to the World Gold Council report for the second quarter.
The main reasons were favourable economic conditions in key emerging markets such as India and China, together with consumer confidence that the gold price would remain firm.
Demand from Asian and Middle Eastern economies also reflected continuing political and economic tensions, which enhanced gold’s appeal.
For the six months to June 2005, gold demand rose 21% in tonnage compared with a year ago and 29% in dollar terms.
Demand from the jewellery sector rose 17% in tonnage, while investment demand rose 20%.

On the supply side, there was a small increase in mine production in the second quarter and in sales of gold scrap. Net central bank selling was lower because of the timing of sales under the central bank gold agreement, but it could pick up in the last quarter of this year.
India showed the highest-ever quarterly demand in the second quarter of this year because of its strong economy, gold promotion among urban consumers, the boost to rural incomes from a good harvest and growth in new retail outlets.
Chinese jewellery demand remained robust because of the buoyant economy and promotional campaigns, especially of 18-carat K-gold, while investment growth was 53% for the second quarter, off a low base. That's a very positive increase.
Middle Eastern countries continued to be good gold markets, with the United Arab Emirates and Egypt showing the effects of a record number of tourists and Saudi Arabia benefiting from government measures, including a reduction in customs duty.
In the US the growth seen in the first quarter continued into the second quarter. But trends in Europe were weak as the Italian market receded and consumer nervousness in the UK spilt over to the jewellery industry.
The industry per se shows encouraging signs for a higher gold return for investors in the future.

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