End of a Golden Era?

End Of A GOLDen Era?

The price of gold has followed a downward trend over the past 16 years. Still the announcement by the Australian central bank to sell 167 tonnes (two thirds of its reserves) of gold in July of 1997, resulted in the price of gold falling to the levels seen 13 years ago. Australia replaced it with US dollars denominated paper. Selling of gold by central banks was common throughout the world. But the huge sale by gold producing country like Australia, resulted in questioning of the traditional role of gold as a store of value.

Not long after this, financial systems of the Asian countries collapsed and brought economic turmoil to the region. This deteriorated the demand for gold, also sold in the form of jewelry. This coupled with the large scale short selling by young screen jockeys, saw the price falling to $280, well below the 100 year average of $285.

The recovery of gold prices and the fate of the profitability of gold mining industry are in the hands of the European Union. Fortunately the major gold holding central banks like Germany, France & Italy have not sold any significant amount of gold. The perception of gold as a store of value is fading among the developed western economies. However, the increased purchase of gold by the Russian central bank, and the record demands from the Middle East and India imply that the developing nations still perceive gold as a store of value.

There are various factors on which the short term recovery of gold prices depend.

Primary factors include the physical demand and supply of gold, which to date remains firm with the demand substantially exceeding the supply and the speedy strengthening of the Asian economies. Considering the basic fundamentals of economics and the Asian culture, gold's recovery appears to be unquestionable.