Data from gold.org and wikipedia
Factors influencing the gold price
Central banks and the International Monetary Fund play an important role in the gold price. At the end of 2004 central banks and official organizations held 19 percent of all above-ground gold as official gold reserves. The ten year Washington Agreement on Gold (WAG), which dates from September 1999, limits gold sales by its members (Europe, United States, Japan, Australia, Bank for International Settlements and the International Monetary Fund) to less than 500 tonnes a year. European central banks, such as the Bank of England and Swiss National Bank, were key sellers of gold over this period. In 2009, this agreement was extended for a further five years, but with a smaller annual sales limit of 400 tonnes.
Although central banks do not generally announce gold purchases in advance, some, such as Russia, have expressed interest in growing their gold reserves again as of late 2005. In early 2006, China, which only holds 1.3% of its reserves in gold, announced that it was looking for ways to improve the returns on its official reserves. Some bulls hope that this signals that China might reposition more of its holdings into gold in line with other Central Banks. India has recently purchased over 200 tons of gold which has led to a surge in prices.
It is generally accepted that interest rates are closely related to the price of gold. As interest rates rise the general tendency is for the gold price, which earns no interest, to fall, and as rates dip, for gold price to rise. As a result, gold price can be closely correlated to central banks via the monetary policy decisions made by them related to interest rates. For example if market signals indicate the possibility of prolonged inflation, central banks may decide to enact policies such as a hike in interest rates that could affect the price of gold in order to quell the inflation. An opposite reaction to this general principle can be seen after the European Central bank raised its interest rate on April 7, 2011 for the first time since 2008. The price of gold responded with a muted response and then drove higher to hit new highs one day later.A similar situation happened in India: In August 2011 when the interest rate were at their highest in two years, the gold prices peaked as well.
Hedge against financial stress
Gold, like all precious metals, may be used as a hedge against inflation, deflation or currency devaluation. As Joe Foster, portfolio manager of the New York-based Van Eck International Gold Fund, explained in September 2010:
The currencies of all the major countries, including ours, are under severe pressure because of massive government deficits. The more money that is pumped into these economies – the printing of money basically – then the less valuable the currencies become.
If the return on bonds, equities and real estate is not adequately compensating for risk and inflation then the demand for gold and other alternative investments such as commodities increases. An example of this is the period of stagflation that occurred during the 1970s and which led to an economic bubble forming in precious metals.
Jewelry and industrial demand
Jewelry consistently accounts for over two-thirds of annual gold demand. India is the largest consumer in volume terms, accounting for 27% of demand in 2009, followed by China and the USA.
Industrial, dental and medical uses account for around 12% of gold demand. Gold has high thermal and electrical conductivity properties, along with a high resistance to corrosion and bacterial colonization. Jewelry and industrial demand has fluctuated over the past few years due to the steady expansion in emerging markets of middle classes aspiring to Western lifestyles, offset by the financial crisis of 2007–2010.
Gold jewelry recycling
In recent years the amount of second-hand jewelry being recycled has become a multi-billion dollar industry. Some companies have been offering good prices and fair services for their customers. However there are many companies that have been caught taking advantage of their customers, paying a fraction of what the gold or silver is really worth, leading to distrust in many companies.
The price of gold is also affected by various well-documented mechanisms of artificial price suppression, arising from fractional reserve banking and naked short selling in gold, and particularly involving the London Bullion Market Association, the United States Federal Reserve System, and the banks HSBC and JPMorgan Chase.Gold market observers have noted for many years that the price of gold tends to fall artificially at the start of New York trading. Andrew Maguire, a former Goldman Sachs trader, went public in April 2010 with assertions of market manipulation by JPMorgan Chase and HSBC of the gold and silver markets, prompting a number of lawsuits.
War, invasion and national emergency
When dollars were fully convertible into gold via the gold standard, both were regarded as money. However, most people preferred to carry around paper banknotes rather than the somewhat heavier and less divisible gold coins. If people feared their bank would fail, a bank run might result. This happened in the USA during the Great Depression of the 1930s, leading President Roosevelt to impose a national emergency and issue Executive Order 6102 outlawing the “hoarding” of gold by US citizens. There was only one prosecution under the order, and in that case the order was ruled invalid by federal judge John M. Woolsey, on the technical grounds that the order was signed by the President, not the Secretary of the Treasury as required.http://www.gold.org/investment/statistics/gold_price_chart http://en.wikipedia.org/wiki/Gold_as_an_investment