As per the World Gold Council, gold prices rose for the tenth consecutive year in 2010, ascribed to recovery in key sectors of demand and continued global economic uncertainty. In 2010, gold prices jumped 29%, reaching $1,405 per ounce as of December's end.
During 2010, the price of gold rose to record levels on several occasions, trading as high as $1,420 per ounce. Gold's performance was strong and volatility remained low. The World Gold Council suggests that the increase was not only driven by driven by inflationary forces but was also inflated as both the private and public sectors of India and China rushed into the gold market.
Gold demand went up 9% over 2009, showcasing a 10-year high of 3,912.2 tons, driven by the rise in jewelry demand, the revival of the Indian market and strong momentum in Chinese gold demand. Moreover, central banks became net purchasers of gold for the first time in 21 years, hiking the demand for the yellow metal.
Major demand came from India and China. India bought 746 tons, a 69% increase over 2009, and China bought 400 tons of gold of jewelry. China bought 179.9 tons of gold in the form of bars and coin, a 70% increase over 2009.
Gold remained a coveted asset given its long-term supply and demand dynamics and influenced by macro-economic factors. Concerns regarding economic growth in developed countries made gold an attractive and safe investment option. The European sovereign debt crisis made European investors use gold as a currency hedge. Pressure on the US dollar against various currencies coupled with higher inflation expectations in many countries, including India and China, also pushed up gold prices.
The value and wealth preservation attributes of gold continue to attract investors and consumers. Jewelry and investment demand in non-Western markets continues to rebound while industrial demand has started to recover in response to an improvement in economic conditions. India, which alone consumes nearly 45%−50% of the world gold production, should drive demand for gold along with China. Chinese gold demand is expected to double in 10 years.
Even though gold price dropped 7% in January this year, it again recorded a rise in February. We believe gold demand and prices will strengthen in 2011. As China and India continue to grow rapidly, their demand for gold will also rise in tandem.
Higher prices bode well for gold producers, which should benefit giants such as Barrick Gold Corporation (NYSE: ABX), Agnico-Eagle (NYSE: AEM) and Goldcorp Inc. (NYSE: GG). However, gold producers like Newmont Mining (NYSE: NEM) and Kinross Gold Corporation (NYSE: KGC) suffer from lower ore grades that subdue production levels, increase mining costs and offset the benefits of rising gold prices.
Overall, the stock prices of gold producers are not expected to benefit much from this favorable commodity-price backdrop. This is reflected in our overall long-term neutral view on the space. As major economies continue to recover, investors' confidence will be restored to invest in stock markets, which could cause gold prices to fall. However this is not going to happen in the near future. We have a Zacks #3 Rank (Hold) on Barrick Gold, Agnico-Eagle, Goldcorp and Kinross Gold Corporation. However, Newmont Mining has a Zacks #4 Rank (Sell).
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