Top 3 Reasons To Buy Gold - Part 2
April 16, 2009 by Goldy
Filed under Gold Articles
Mine production of gold is influenced by very specific factors, for example the level of exploration spending, the success or otherwise in the discovery of new gold deposits and the actual cost of extraction and processing, which actually means that some new deposits are not worth their weight in gold, extracting from source. The lead times in gold mining are often fairly extracted and prolonged affairs, it can take years to re-open a formerly dis-used closed mine, let alone further expenses incurred from finding and mining new gold reserves.
Another factor is the Central Bank themselves and their strategic decisions to buy or to sell gold, decisions which tend not to be reactive to the economic cycle. These decisions by this body are usually made several years in advance and are then carried out over a timespan of years according to their own plans, for strategic purposes. In the country of Switzerland for example, the proposition to sell gold, or the first gold sales program, was first recommended by a group of experts in 1997. However, the actual sales program did not even begin to commence proceedings until the May of 2000, with the sales then taking place over a period of 5 years, such was the confidence in this commodity to deliver it’s long term gains and profits for them. If this is good enough decision making on a strategic basis for them, this tells you that the long term investment for gold bodes well for you also.
Gold scrap supply is influenced by many factors, the most important of these perhaps being price and price volatility, however recessions and periods of economic distress have also had an impact. To demonstrate, one of the most dramatic examples was when Korea was pushed into recession during the 1998 Asian currency crisis, it’s scrap supply increased by almost 200 tonnes as the government then bought gold from the local populace in exchange for won denominated bonds. It then went on to sell the gold upon the international market in order to raise enough dollars currency to avoid defaulting on it’s external debt.
In summary, a U.S. recession does not have any negative implications for the gold price thanks to the unique drivers of gold demand and supply. The only element of gold demand that could be affected by a recession is investment demand, but that in turn will also depend to a large part on the actual ‘type’ of recession. So far, the brewing recession has been positive for gold investment purposes as it has been accompanied by a rise in inflation and a falling dollar, which has boosted the demand for gold as a dollar and inflation hedge.
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