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- CRB Fundamentals - 2008 Commodity Articles

Gold

Gold is a dense, bright yellow metallic element with a high luster. Gold is an inactive substance and is unaffected by air, heat, moisture, and most solvents. Gold has been coveted for centuries for its unique blend of rarity, beauty, and near indestructibility. The Egyptians mined gold before 2,000 BC. The first known, pure gold coin was made on the orders of King Croesus of Lydia in the sixth century BC.

Gold is found in nature in quartz veins and secondary alluvial deposits as a free metal. Gold is produced from mines on every continent with the exception of Antarctica, where mining is forbidden. Because it is virtually indestructible, much of the gold that has ever been mined still exists above ground in one form or another. The largest producer of gold in the U.S. by far is the state of Nevada, with Alaska and California running a distant second and third.

Gold is a vital industrial commodity. Pure gold is one of the most malleable and ductile of all the metals. It is a good conductor of heat and electricity. Gold melts at 1,064 degrees Celsius and boils at about 2,808 degrees Celsius. The prime industrial use of gold is in electronics. Another important sector is dental gold where it has been used for almost 3,000 years. Other applications for gold include decorative gold leaf, reflective glass, and jewelry.

In 1792, the United States first assigned a formal monetary role for gold when Congress put the nation's currency on a bimetallic standard, backing it with gold and silver. Under the gold standard, the U.S. government was willing to exchange its paper currency for a set amount of gold, meaning the paper currency was backed by a physical asset with real value. However, President Nixon in 1971 severed the convertibility between the U.S. dollar and gold, which led to the breakdown of the Bretton Woods international payments system. Since then, the prices of gold and of paper currencies have floated freely. U.S. and other central banks now hold physical gold reserves primarily as a store of wealth.

Gold futures and options are traded at the New York Mercantile Exchange. Gold futures are traded on the Bolsa de Mercadorias and Futuros (BM&F) and on the Tokyo Commodity Exchange (TOCOM), the Chicago Board of Trade (CBOT) and the Korea Futures Exchange (KOFEX). The Nymex gold futures contract calls for the delivery of 100 troy ounces of gold (0.995 fineness), and the contract trades in terms of dollars and cents per troy ounce.

Prices - Nymex gold futures prices in 2007 extended the rally that began in 2001 and closed 2007 with a +31% y/y gain at $838.00 per ounce. Gold prices continued higher in early 2008 and as of March 2008 the price of gold reached a record $995.20 per ounce. Supportive factors for gold prices included (1) safe-haven buying due to the global credit crisis, which picked up steam in the latter half of 2007, and (2) inflation fears as the weak dollar along with the Federal Reserve's aggressive interest rate cuts prompted investors to buy gold as an inflation hedge. The World Gold Council estimated that gold demand in 2007 rose +4% to 3,547 tonnes but that supply fell by -3% to 3,469 tonnes.

Supply - World mine production of gold rose +1.2% yr/yr to 2.470 million kilograms in 2005 (latest data available), which was still below the record high of 2.570 million kilograms seen in 1999 and 2000 (1 kilogram = 32.1507 troy ounces). The world's largest producers of gold are South Africa with 12% of world production in 2005, followed by Australia (11%), the U.S. (10%), China (9%), Russia (7%), Indonesia (6%), and Canada (5%).

Gold mine production has been moving lower in most major gold-producing countries such as South Africa, Australia, Canada and the U.S.. South Africa's production of 294,803 kilograms in 2005 was down -13.4% yr/yr and was less than half the production levels of more than 600,000 kilograms seen in the 1980s and early 1990s. On the other hand, China's gold production in 2005 rose +4.7% to a record 225,000 kilograms.

U.S. gold mine production in 2006 fell 3.1% yr/yr to 248,000 kilograms, which was the lowest production level since 1988. U.S. refinery production of gold from domestic and foreign ore sources in 2005 (latest data available) fell 26.6% yr/yr to 163,000 kilograms. U.S. refinery production of gold from secondary scrap sources in 2005 fell by 17.6% yr/yr to 75,600 kilograms.

Demand - U.S. consumption of gold in 2005 (latest data available) fell 1.1% yr/yr to 183,000 kilograms. The most recent data available from the early 1990s showed that 71% of gold demand came from jewelry and the arts, 22% from industrial uses, and 7% from dental uses.

Trade - U.S. exports of gold (excluding coinage) in 2006 rose by +20.1% yr/yr to 389,000 kilograms, up from the 17-year low of 257,000 kilograms seen in 2004. U.S. imports of gold for consumption in 2006 fell 22.9% yr/yr to 263,000 kilograms, down from the 2005 level of 341,000 kilograms, which was a 21-year high.




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