This is the third in a series of articles that looks at how the major commodities performed in 2010 and how they might do in 2011. Having covered the natural gas market and the crude oil market, I will now take a look at gold.
In particular, I will analyze the gold price and the interaction between gold supply and demand during 2010. Finally, I will present an outlook for gold in 2011.
2010 analysis
Many investors and traders fell back heavily on gold after the U.S. recession commenced in 2008. Many still consider gold a safe haven in times of market uncertainty.
During 2010, there were a couple of other key factors that convinced investors to hold on tight to their gold:
- The U.S. economy and the ongoing reduction in the value of the U.S. dollar, partly as a result of the Federal Reserve’s bid to stimulate the economy through quantitative easing.
- Europe's slow down: at the beginning of 2010, Greece was flirting with bankruptcy; later on that year, Ireland was also bailed by the European Union. Currently, Portugal is in dire straits and looks to be next in line for rescue. In any case, the financial problems in these countries, and the economic slowdown in the rest of the Euro zone only adds to the pressure on the Euro.
The following chart looks at the correlations among major currencies, WTI oil and the price of gold in 2010. The data is based on monthly percentage changes.
India and China, according to the World Gold Council, are the driving force in the rise in demand for gold in Asia. These countries, along with Turkey and Russia, accounted for 63% of total global demand in the third quarter of 2009. Therefore, it's no surprise to see a strong correlation among these currencies and the price of gold. The influence of China and India will be important in 2011 as both are major players in driving demand.
Let's check how the gold market performed from the perspective of supply and demand in 2010 in comparison to 2009:
Gold price (USD/t. oz.), demand and supply (tons) 2009-2010 (quarterly basis)
* Q42010 is an estimate.
The chart above shows that demand peaked during the second quarter of 2010 at 1,055 tons, while in 2009 it peaked during the first quarter.
Demand in 3Q2010 fell 12.6% from levels seen in 2Q2010.
The supply in 2010 is estimated to peak in the final quarter. By comparison, supply in 2009 peaked during the first quarter.
In conclusion, there wasn't a shortage in supply for gold, since in every quarter, supply exceeded demand.
For the gold price, as expected, the graph shows it rises in every quarter very sharply with no apparent relation to shifts in supply and demand.
Could the rising prices be an indicator of inflation? As the price of most commodities increased, the relative price of gold didn't change much. Inflation has not been a problem in western countries as far as I’m aware (e.g. Crude oil and natural gas prices aren't higher than they were a few years back).
2011 Outlook
Let's break down the factors which could affect the gold market in 2011 into their two main components: gold as an investment, and as a commodity.
Gold as an investment: The already mentioned news about the U.S. and Europe are among the factors that could further weaken major currencies in 2011, and will probably convince investors to hold onto their gold, further driving prices up. However, if we see improving news on the U.S. economy, it could help to boost confidence in the U.S dollar.
Gold as a commodity: China and India are two of the major countries that led the growth in demand for gold last year, mainly in the jewelry & industrial sectors. Can we expect to see a similar performance from these countries in 2011? Perhaps we can. However, it is important to note that China is having inflation problems, which it seems determined to fight. This could slow economic growth, adversely impacting the demand for gold.
The bottom line is that the price of gold probably (let's say 90%) won't decrease dramatically in 2011, and could in fact continue to rise. However, there is also a small chance (let's say 10%) that goldwill fall as the year progresses.