Where are gold prices headed?

Since the US credit rating downgrade, gold prices have remained above $1,700 per ounce. The steady rise in gold prices over recent months has been caused by the same, increasingly intense phenomena. If nothing changes in the economy, where is the limit?

Although, when inflation is taken into account, higher prices have already been recorded on the gold market (in the early 1980s), demand is growing at a tremendous rate and the record will soon be broken. Realistic forecasts already predict prices of around $2,500, but the global economic situation is deteriorating to such an extent that the price may increase several times over, as demand is no longer rational. So what is causing this continuous rise in prices?

Demand from the jewelry industry is declining in direct proportion to the galloping gold prices of the last 10 years. This industry still accounts for over 50% of demand, but ten years ago it was as high as 80%! The high-tech industry has remained at around 10% for years.

The largest increase in global demand for gold has been observed among investors purchasing gold bars and coins. While in 2001 this percentage did not exceed 10%, it currently stands at around 30%.

Investment fund purchases are also reaching increasingly higher levels. Demand from ETFs has been growing steadily since 2002, and today there are already over 2,000 tons of gold in fund assets. Most funds choose futures contracts because they provide high trading liquidity and the ability to conclude transactions more quickly. Over the past ten years, trading on the physical gold market has increased by approximately 6%, and the number of long positions taken by speculators on the Intercontinental Exchange has increased 50-fold! However, it should be noted that in 2011, physical gold began to enjoy much greater interest, as it inspires greater confidence in times of uncertainty.

Global central banks are also contributing to the growing demand for gold. Until now, banks have primarily sold gold, but for the past two years they have been making increasingly large purchases. The greatest demand is observed primarily among the foreign exchange reserves of developing countries, which have a much smaller share of gold in their total funds. China has a particular impact on the gold market, currently holding only 1.6% of its reserves in gold, while the share of gold in the reserves of some European countries and the US is over 70%. If China wanted to invest at least 25% of its reserves in gold, it would have to purchase more gold than the US, France, Germany, and Italy combined, which is six times the amount mined worldwide each year.

Gold prices are rising because demand is constantly growing, not from industry or jewelers, but mainly from investors. And they will continue to rise because there are no signs of a decline in demand, while supply is falling.