All that Glitters: Gold Prices Rise 100% Since 2009

Spend Matters welcomes a guest post from Yuliya Nam-Wright, Commodity Analyst and Nick Peksa, Business Development Director of Mintec, Ltd.

Uprisings in North Africa, economic turmoil in Greece, and fluctuating reports from all across the globe with positive and negative economic results being released by various governments, leads us into a quandary: where we should be investing our money? I would highly recommend in investing in jewellery.

Precious metals are among top beneficiaries when there is global uncertainly. The price of gold has risen 100% since the start of 2009, while silver prices have risen more than 200% in that same period! So what is behind the recent rally in the world's oldest currencies? While market fundamentals and price drivers for gold and silver vary substantially, one common denominator behind recent increases was (and still is) the uncertainty surrounding a global economy that faces the challenge of recovery from the worst economic crisis in 80 years.

What has been driving prices of precious metals?
The global economic recovery has been patchy and worryingly reliant on emerging economies with largely export-driven growth in some major economies. Plus sovereign debt crisis have put a pressure on Eurozone and exposed the Euro's weakness.

Also, inflation is rising amid increased money supply in the major economies as governments around the world embark on variety of intervention programs to stimulate their economies. Gold and silver are historically seen as an attractive store of value when inflation is high.

Another reason is the weakness of the US currency, which has a negative correlation with gold and silver, partly because they are priced in dollars, which leads to an increase in price, but also because major currencies are typically viewed as a safe store of value. USD, still by far the most traded currency in the world, has been falling over the last decade.

In addition, external shocks, such as spreading unrest in the Middle East and North Africa and low interest rates that made investing in cash less attractive, led to an increased demand for gold and silver.

Why prices for silver rose more sharply than gold
To understand the differences in market dynamics between gold and silver, we need to take a closer look at the modern demand structure for these precious metals.

According to the World Gold Council, around 60% of gold (only 165,000 tonnes of gold has been mined up to date) is used to make jewelery, with India and China driving growth in global consumption. However, today the most important use of gold is as an investment holding by private investors and by governments' central bank reserves. Supply factors are not very significant in the gold markets. Prices usually change in response to the central banks trading or as a result of speculative activities. Central banks and international financial institutions hold about a fifth of global gold supply available today. Governments of advanced economies keep about half of their official reserves in gold.

Silver is also seen as a store of value, hence prices of gold and silver often move in tandem. Demand for silver tends to fluctuate between industrial and store-of-value uses. Industrial demand for silver is has been growing steadily in the last two decades. Today it accounts for more than half of total silver consumption, causing world supply to tighten. Industrial uses of silver range from electronics, car manufacturing and packaging -- all rapidly growing sectors in China and other emerging nations that have been driving global recovery. All these factors combined with the increased demand for precious metals as a store of value led to dramatic upswings in silver prices that we have witnessed in recent months.

Industrial demand for silver is more sensitive to the trends in economic growth than to price movements as there are not many substitute materials, and the Silver Institute projects it to grow by more than a third by 2015. So, new record highs in silver prices in the months to come will not be a big surprise.

In conclusion the price of jewelry (made from precious metals) has increased in price and probably will not decrease in the foreseeable future. The consumer demand for attractive, affordable, and cheap-end jewelry may increase as the high-end jewelry specialists are suffering the same increase price pressures, with decreasing demand in austere times. Either way, jewelry is a nice investment for yourself or a loved one.

-- Yuliya Nam-Wright, Commodity Analyst and
Nick Peksa, Business Development Director at Mintec, Ltd.

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