The upward trend for gold
The single most important driver of ABG’s earnings is the market price of gold.
We operate in a volatile marketplace. In 2010 prices ranged from US$1,045 to US$1,431 per ounce. The average price was US$1,225 per ounce – an all-time high.
We feel confident this upward trend will continue, due to:
Inflation and the US dollar
The global easing of monetary policy, as well as large fiscal deficits, could point to inflation and a depreciating US dollar. These conditions augur well for gold which is viewed as a hedge against inflation and has historically been inversely correlated to the US dollar.
Investors looking for a safe haven
Investors dislike uncertainty and this drives an increased demand for gold as a safe haven. Throughout 2010, we saw increased volumes held by exchange traded funds (ETFs) and global exchanges. The worldwide demand for physical gold, in forms such as bars and coins, was also buoyant.
Declining supplies from gold mines
Over the long-term, we expect lower supplies from mines due to:
- a trend of lower-grade production by many producers
- lengthier timescales and greater obstacles to bring projects into production
- a lack of global exploration success in recent years
- a scarcity of new, promising regions for gold exploration and production.
Lower gold sales by central banks
Sales of gold under the Central Bank Gold Agreement (CBGA) have a significant bearing on gold prices. In 2010, these official sector sales were less than 2% of the full-year quota of 400 tonnes. We are now in the second year of the current CBGA which runs to September 2014 and allows for the sale of up to 400 tonnes per year.
In 2010, the IMF completed its previously announced sale of 403 tonnes of gold, with no future sales planned at present. Net official sector sales have been declining in recent years; indeed, the central banks were net buyers of gold in 2010.
Active buying by the BRICs
The BRIC countries (Brazil, Russia, India and China) hold markedly lower gold reserves than the more developed countries. Rather, they are significant holders of US dollars. As they identify a need to reduce their exposure to the dollar, we believe that gold will benefit.
The below-quota selling under the CBGA, and net purchases by global central banks, strongly suggests that gold is viewed as a reserve asset and a de-facto currency.