Gold: Like a Bridge Over Troubled Waters

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Major investment banks and brokerage firms that were long silent on gold are now talking it up. On October 30, Credit Suisse, a major broker/dealer in precious metals, issued its price forecasts for gold: $838 an ounce in 2008, $950 an ounce in 2009 and $1,050 an ounce in 2010...

...According to the World Gold Council, the demand for gold reached a record high of $65.3 billion in 2006, driven by strong demand for industrial purposes and jewelry manufacturing. At the same time, the supply of gold has contracted considerably. Central banks have reduced their planned sales, while mining companies have accelerated the unwinding of their hedge books. In fact, the mine supply of gold dropped by a jaw-dropping 15 percent during 2006.

This supply/demand imbalance is expected to continue — and it may even increase. Indeed, several recent articles have indicated that many central banks, including those in Spain and Germany, intend to curtail their gold sales. Most central bank officials have recognized that gold’s strong financial performance makes it a useful counter to the swings shown by the U.S. dollar. While it is no longer the foundation of the international financial system, central banks still consider gold to be a crucial reserve asset. Rumors are also abuzz that China and a number of wealthy nations in the Middle East have swiftly scooped up what little gold that the European central banks have been selling.

The data around the gold supply strongly signals that it will not keep pace with demand in coming years. The global mine supply of gold peaked in 2002, and has fallen each year since. Several of the world’s largest mining companies expect further declines in production next year, and are in a scramble to increase reserves through acquisition of new mining properties. Last year South Africa, the world’s single-largest gold producer, produced its lowest amount of gold since 1922 — and its overall output is down 72 percent from its 1970 peak...

Major investment banks and brokerage firms that were long silent on gold are now talking it up. On October 30, Credit Suisse, a major broker/dealer in precious metals, issued its price forecasts for gold: $838 an ounce in 2008, $950 an ounce in 2009 and $1,050 an ounce in 2010...

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