The biggest game-changer for gold prices over the last 40 years was the start of a gold Exchange-Traded Fund (ETF) in 2003. This led to an influx of funds from general investors. Prices will probably move firmly for now, but it's difficult to make any surefire predictions.
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When I was looking for work in my late teens, I noticed an advertisement in the papers one day that said, "Do you want to travel?" The ability to travel for work was very appealing to me, so I went for an interview. The interview was in fact at HSBC, the place where I work today.
Though I failed the recruitment exam, I gained an interest in banking and eventually managed to find employment at Rothschild Bank. My first position was in the bullion department. This was 1975.
It was here that I became interested in the topic of bullion. I soon moved to another bank and took my first steps as a fully-fledged gold dealer. I found the world of gold trading very, very interesting. It was like a hobby, really.
I've been involved in the industry for nearly 40 years now, but there was one event during this time that changed the gold landscape totally. This was the launch in 2003 of a gold ETF.
In 2002, a man called me out of the blue and said, "I'm an Australian and I think I've got a very interesting idea for you on gold." When we met, he handed me an A4-sized document. On this was his idea for an ETF that could be traded like a stock, with the value of the product linked to the price of gold. I looked at it and I thought, "Yep, that's a great idea!"
This man was Graham Tuckwell, the current chairman of ETF Securities. We set to work on the development of an actual product and finally launched it on the Australian Stock Exchange in 2003.
So why was a gold ETF so groundbreaking?
Before the turn of the millennium, the price of bullion was shaped by the movements of mining companies and others on the production side of the business. Gold prices were depressed at the time. The industry was stuck in a downwards spiral--producers would hedge themselves by selling forward, but this would make the price go even lower.
What the ETF did, though, was give the world an easy point of access where they could buy gold, even in small quantities. The market was now shaped by the consumption side of the industry--the investors. Once that happened, gold prices embarked upon a sustained appreciation.
When the financial crisis kicked off after the Lehman Shock in 2008, people said, "I don't want equities, I don't want bonds, I just want my cash." The withdrawal of cash from gold, silver and other commodity funds led to a price depression in gold and silver.
The public then said: "OK, now that I've got my cash, what on Earth am I going to do with it? I don't want to put it in a bank--the bank might go bust." As a result, everybody then bought gold and silver. The cash was invested in physical products: small bars, coins, and even EFTs. So the price went straight down, then straight back up again.
Last year, gold prices temporarily topped $1,900 (around 150,000 yen) per troy ounce (31.1 grams) before coming back down to around the $1,500 mark (around 120,000 yen).
Most analysts are very bullish and believe prices are going to rise even higher from hereon. Personally, I can see the price staying very steady in the short to medium term. Even if the price does swing lower, it won't drop to the $1,000 mark (around 80,000 yen) again.
I believe the credibility of gold and other physical assets has been bolstered by measures introduced to tackle the European debt crisis, such as the European Central Bank (ECB) move at the end of last year to inject massive liquidity into European financial institutions. People's faith in governments, currencies and paper currencies has been diminished.
In Europe, the media seems to find new problems every day. These are not going to be solved in the short term. There are some great minds looking at how to resolve them, but the crisis is an immensely complex issue, and it's an issue that's not going to simply go away.
The situation in Europe is not the only reason why investment in physical assets is becoming more attractive. Another key factor is an increasingly-liberalized China, which has an enormous population with more disposable income. Everybody seems to own a car, a house and refrigerator, and they are also very big on luxury goods.
Of course, gold is the most luxurious good you can buy. It's a very traditional gift as well. Demand for gold and other precious metals is set to remain very strong in China from hereon.
However, gold prices are shaped by a great many influences from all over the globe. Forty years have passed since the 1971 "Nixon Shock," when the U.S. ended the dollar's convertibility to gold. There have been a number of political events since then, but there weren't many that have had a direct correlation with gold prices. It's an immensely complex commodity. Decisions to buy or sell cannot be made on the basis of any single factor, such as whether President Barack Obama says this or that, for example.
So what is the best way to decide whether to buy or sell? For me, the day my wife stops buying gold, that's the end of the market. There are no signs of this happening just yet.
(This article was compiled from an interview by Naoatsu Aoyama from Asahi Shimbun's GLOBE)
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Jeremy Charles was born in 1955. He worked at Britain's Rothschild Bank and Johnson Matthey before assuming his current position as HSBC's global head of precious metals in 2007.
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