Gold is a popular precious metal for investment purposes due to several reasons. One reason is that gold, throughout history, has been used as a substitute for money, which has led to many central banks still holding large reserves of gold. Because of this, gold is still a significant part of the economic system and is considered a very stable asset class that protects the owner against inflation, turbulent stock markets and other uncertainties in the financial system.
The price of gold is determined by supply and demand, but because gold can be reused and production holds long lead times, for example, opening a mine can take several years, demand plays a bigger role than the supply on the price development. Demand for gold is driven by several factors, but in general it can be said that the price correlates negatively with factors such as the stock market’s rise and fall in inflation. After rising prices for almost a decade, the price of gold reached its peak in late 2011 with a price of scarce 1 900 USD/oz. After 2011 the price has been decreasing, however, during the latest months, a rebound has occurred. As of mid-august 2016, the price of gold was 1 327 USD/oz.
The general gold price decline since 2011 has affected the mining companies’ values, which in turn has affected gold exploration companies’ shares. In the long term, there is potential for the rise in the price of gold, among other things because of a possible slowdown in China’s economy.
Meanwhile, Russia’s anticipated economic recovery has been delayed, and the country continues to adjust to an adverse external environment of lower oil prices and international sanctions. In 2015, the consequences of these twin shocks caused real GDP to contract 3.7 percent. The adjustment to the worsening external environment caused an estimated 10 percent drop in gross domestic income, which had a negative effect on consumer demand and discouraged investment. Thus far, the government’s policy response has facilitated Russia’s economic adjustment. Thanks to the Central Bank’s flexible exchange rate policy, the exchange rate alignment improved which supported the economic transition. Due to the flexible exchange rate, the fiscal impact of the adjustment was less severe for Russia than it was for other oil exporters, though a fiscal consolidation plan remains necessary. Moreover, the depreciation has presented Russia with an opportunity for a broad-based improvement in Russia’s international competitiveness and to transform its export profile by diversifying away from primary commodities. The World Bank expects that the Russian economy faces a long journey to recovery. While the conditions that pushed Russia’s economy into recession may be gradually abating, the World Bank’s current baseline scenario anticipates a further contraction of 1.9 percent in 2016, before growth is expected to resume at a modest rate of 1.1 percent in 2017. Meanwhile, the continuing recession is projected to partially reverse Russia’s recent progress in alleviating poverty and promoting shared prosperity. The World Bank emphasizes that risks to Russia’s economic outlook are tilted to the downside. The economy faces strong headwinds from an uncertain global recovery. Russia’s longer-term growth path will depend on the strength of its structural reforms. Economic reforms designed to bolster investor confidence could, according to the World Bank, greatly enhance Russia’s long-term growth prospects. Administrative barriers to doing business, high transportation and logistics costs, and the perception of an uneven playing field all discourage investment, particularly in the non-resource sectors. The Russian ruble has declined in value against other currencies during the recent years. The Russian ruble has weakened by about 10 percent against the Swedish krona, and by about 11 percent against the US dollar, during 2016. During 2015, the fall towards the Swedish krona was about 18 percent and in 2014 the ruble depreciated by almost 31 percent. The weakened ruble has led to companies that have their revenues and funding in other currencies (than ruble), and costs in rubles, have experienced a decline in the cost of its operations in Russia.
For a recent update on the world gold market, go to www.gold.org