RFE/RL: What are the main factors driving up the price of gold?
Jill Leyland: The general political and economic background is favorable to gold investment. Here we see, for example, concerns over the fact that the U.S. dollar may plunge further because of the situation on the U.S. balance-of-payments current account [characterized chiefly by a huge trade deficit] and gold is a statistically proven dollar hedge [an investment to reduce the risk of another investment]. We've also got concerns about inflation with, for example, the oil price rising, and gold is a long-term inflation hedge. And then we have political issues such as Iran, and gold is always seen as a safe haven.
The Other Factors
RFE/RL: Why is this uncertainty such good news for gold?
Leyland: It is seen as the safe haven people turn to in times of doubt. Because gold is nobody's liability, so if you have gold, nobody can take it away from you and no government can reduce the value of gold in the sense that they can, for example, be responsible for a fall in the value of their own currencies through inappropriate economic policies.
RFE/RL: What else is behind the rise?
Leyland: There was a dearth of exploration a few years back and, of course, if you don't explore you don't find, and there have been relatively few major finds of gold in recent years to replace exhausted mines. People are exploring more now, but there's a very long time lag between exploring and bringing a mine on-stream, so there are fears there might be a constrained amount of gold coming out of the ground for the next few years. On the other hand, demand for gold is very strong. The final reason is that it's become easier, particularly for institutions like pension funds, to invest in gold with the advent [in recent years] of exchange-traded funds, which means they don't have to take physical delivery [of gold].
RFE/RL: What kind of role was played, if any, by speculation that China might increase its gold reserves?
Leyland: That expectation that central banks are looking differently at gold is also another factor. Central banks at the moment are net sellers, but in the last year or two we've seen a bit of a change in attitude in central banks' public announcements. But I would want to emphasize here that while we're aware that some central banks are starting to look at gold, central banks also have a very long decision-making process, so we in the World Gold Council are not expecting any major move here in the immediate future.
RFE/RL: Is strong demand for jewelry in places like India and China contributing to the price rise?
Leyland: That was very strong last year. Despite the fact that the price rose 9 percent last year, jewelry buying rose 5 percent in volume terms, which meant that in dollar terms it rose 14 percent. At the moment, almost certainly jewelry demand will be a bit on the sidelines, because, in the price-sensitive markets of Asia and the Middle East, it will take time for people to adapt to higher prices and they tend to hold back when the price is volatile. But they will return to the market when the price is stable, though we don't know when that will be.
The Prospects For Prospectors
RFE/RL: Who is benefiting from the price rise?
Leyland: Gold-producing countries certainly benefit and here it's important to realize a large number of poorer countries in the world are gold producers. Gold is an extremely important export for some of the poorest countries in the world, like Mali or Laos, so they will be benefiting from this, as well as the gold companies.
RFE/RL: Gold has been trading as high as $704 a troy ounce, its highest in 25 years. But it's still a long way off its 1980 peak, is that right?
Leyland: The peak, which was a very short-lived peak, was $850, I'm told it was there for about 20 minutes. In today's terms that would be the equivalent to over $2,000 in real terms.
RFE/RL: So does gold still look relatively cheap?
Leyland: It depends on your point of view, but if you look at the real price of gold, since the price of gold was freed in 1971, and look at the long-term average of that, the price at the moment is only just above the long-term average in real terms. So, on that measure, it doesn't look particularly overblown.