2011 gold price forecast

Gold has undergone an over-expected rise in prices last year. How will gold move this year? The state-run Thanh Nien newspaper cited the article of Le Hung Dung-head of Saigon Jewellery Co’s director board and Eximbank, hereafter:

This year the world and Vietnam will continue facing difficulties and challenges. One of major issues many people from macro managers to small businesses and civilians is gold price, he forecasted.

Previously, in 1971, US ex-president R.Nixon decided to abrogate the rule: any one who wants to issue $35 to the market must have at least 1 ounce of gold for deposit. Since then, gold has kept rising to $35/oz in December 1971, $850/oz in October 1980, $424/oz in January 2005, $1,117.8 per ounce in January 2010, and especially it bounced to all-time record high of $1,432.50 per ounce in December 7, 2010.

Therefore, in the past 40 years, gold has surged 40 times attributed to the continuous depreciation of US dollar. In 2010 alone, US dollar depreciated 26 percent while the world’s economic crisis broke out along with the meltdown of real estate and stock market.

Both investors and people wanted to ensure their own asset value so they had to see gold as an essential tool. It is said that “money can be printed by any government but gold cannot.

In the last 40 years, gold showed main trend of future gold as the conditions for the expected increases in price almost are unchanged in 2011. Following factors will continue affecting further rises in gold this year.

According to statistics, there was a tight link between US government debt and gold price. Last year US’s public debts totalled at $13.8 trillion, gold averaged $1,350 per ounce. The figures are expected to be $15.3 trillion and $1,500 per ounce in 2011, and $16.5 trillion and $1,663 per ounce one year later.

The Federal Reserve Department (FED)’s $600 billion-Quantitative easing 2 programme is actually to print more banknotes to save US economy.

In 2008, FED also had launched QE1 programme with an initial estimate of $800 billion which then was raised to $1.7 trillion and assessed to be ineffective. Now, with QE2, many economists doubt that the size of QE2 will not stop at $600 billion.

Thus, a huge amount of US dollar banknotes have been printed and injected into the market. Such a hot money inflow being put in circulation will have made inflation rise not only in US, but also other countries who receive the inflow of greenback because of large forex rate spreads between US dollar and other currencies. Hence, a rise in gold price is inevitable. Data said US dollar depreciated 26 percent while gold advanced 37 percent, representing the consecutive 10th year gold kept rising.

To deal with such a hot US dollar flow, countries including China previously established Exchange Trade Funds (ETF’s). Till now, the funds have purchased 2,000 tonnes of gold (including 274 tonnes of Q2 last year). ETFs are the sixth biggest gold holders in the world. If ETFs keep such a purchase pace, China will become the third largest gold holder in the world, after US and Germany by 2012.

Being a gold specialist, Le Hung Dung added, with the foreign currency reserve of $2.6 trillion, gold only accounted for 1.7 percent of China’s total reserve, equaling to 1,054 tonnes. Currently, if China raises gold reserve volume to 2-3 percent from 1.7 percent and also their foreign currency reserve is hiked regularly, its gold demand will create a heavier pressure on gold supply and price.

At this time, US leads the world in terms of gold reserve with 8,133 tonnes or 78.9 percent of the national foreign currency reserve, remaining 8 countries and International Monetary Fund (IMF) rank among top ten gold holders including Germany (3,412 tonnes or 71.5 percent of its total foreign currency reserve), IMF 3,217 tonnes, Italy 2,602.6 tonnes or 66.5 percent, France 2,987 tonnes or 72 percent, amounting to total 24,080 tonnes.

Central banks sold out only 4,500 tonnes in 20 years and started to buy in. In 2009, People’s Bank of China purchased 450 tonnes, India 200 tonnes, Russia 71 tonnes. South Korea’s central bank last October also announced it would set aside $290 billion to purchase gold for reserve. In addition, Thailand, Bangladesh, Sri Lanka also joined to buy a smaller volume.

According to World Gold Council, total gold reserve of 2009 increased 44 percent. Total gold investment in Q3 of 2010 bounced to the record high of $9.6 billion, up 60 percent year-on-year.

In response to QE2, The Dubai International Financial Centre (DIFC), Gulf Cooperation Council (GCC), and Shanghai Cooperation Organisation (SCO) all announced to raise gold reserve to directly protect their domestic currencies in fight against depreciation of banknotes of US and Europe. – Thanhnien

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