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Gold in review: how it fared in 2011

Gold extended its record bull run in 2011 for an 11th year as confidence in the world’s financial leaders and their stewardship of fiat currencies plummeted.

At the start of 2011 gold carried a spot price of $1,432.10 per troy ounce. By Sept. 6 it was worth $1,923, a 34 percent increase and a nominal record (though on an inflation-adjusted basis not close to the high of 1980).

Subsequent to reaching its new high, prices fell, tumbling particularly hard during September and again in December. Gold closed out 2011 with a more-than 10 percent gain on the year as it hugged its 200-day moving average.

In the first quarter, global gold demand rose 100 metric tons or 11 percent year-on-year to 981.3 metric tons worth $43.7 billion, according to the World Gold Council. Much of the increase stemmed from rising investor interest in bars and coins.

In the second quarter global gold demand was 919.8 tons, down from the year-earlier level, worth $44.5 billion, up from the dollar amount in the second quarter of 2010. “Healthy growth in jewelry demand and modest gains in demand from the technology sector were offset by a year-on-year decline in investment, particularly in exchange-traded funds and similar products,” the council said.

In the third quarter gold demand was up 6 percent to 1,053.9 tons worth a record $5.77 billion. The council credited a strong rise in investment demand that offset a decline in jewelry demand. The technology sector’s demand for gold was steady.

Figures for the fourth quarter were not available from the council at the time this article was written.

Overall, the year’s increase in gold’s value stemmed from a loss of confidence in the world’s financial leaders, particularly those in the Eurozone and the United States, and their responsibility for ballooning sovereign debt.  Early in 2011 Greece’s national debt climbed to about 200 percent of its gross domestic product. Late in the year the U.S. national debt blew past the 100 percent of GDP.

While the U.S. central bank can print money to inflate away some of its sovereign debt, Eurozone politicians who had spent years borrowing to pay for entitlements were not so lucky. By the fall of 2011, Greece had to pay more than 20 percent to borrow money for 10 years. It was a burden Athens had no way of carrying.

That forced the European Union to scramble for ways to keep Greece from defaulting. Eventually, a series of aid packages were arranged on condition that Athens impose severe austerity on the nation. Greek lawmakers accepted that condition for rescue money but riots marred the process.

Despite Greece not formally defaulting, Eurozone leaders pressured the continent’s largest banks to accept a 50 percent loss of principle on their Greek government bonds — in effect a de facto default and a finger in the eye of investors who were counter parties to credit default swaps on those government bonds.

In addition to Greece, Portugal and Ireland also required European Union bailouts for similar reasons.

No sooner had these four nations — collectively called “PIGS” in a reference to their initials – been rescued than the crisis deepened dramatically: Italy, the Eurozone’s third-largest economy, began having to pay record-high interest rates to borrow. Shortly thereafter Spain found itself in the same boat, as global bond investors, also known as bond “vigilantes,” began demanding huge yields to lend money.

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Posted by on Dec 24 2011. Filed under Gold predictions. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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