Gold prices moved in a range in the second half of 2002 fluctuating between about $300 per ounce and $330 per ounce. In September 2002 gold prices had moved up to about $330 following an early August low of $300. Prices then eased back to about $310 before moving higher once again. There were many factors affecting gold prices one way or another. Gold is often considered a safer investment in times of uncertainty. Following the events of September 2001, that continued to be the case. The Iraq situation along with the ongoing war on terrorism was two developments that were fraught with uncertainty. The U.S. economy did not show any signs of inflation but the price of crude oil moved higher which was likely related to the situation in Iraq. The sluggish U.S. economy forced the Federal Reserve to lower interest rates which was positive for gold prices in that it reduced the amount of short hedging that gold producers engaged in. This decline in hedging activity was considered by many in the industry to be the most positive fundamental development in the gold market. Another positive development was the long decline in the U.S. equity markets. This resulted in more demand for gold as an alternative investment. Another development that was being watched closely was the situation in South Africa. New mining legislation was proposed that would diversify ownership of South African mines in the coming years. What effect this would have on gold production in the future was not known but if it resulted in increased production costs that would act to reduce production. South Africa is the largest producer of gold in the world and production in that country has been trending lower.

While there were a number of positive developments in the gold market, there was also the potential that there would be more negative developments which could result in a decline in gold prices. One likely possibility is that at some point in 2003 interest rates would start to increase and that would start to increase the amount of hedging that producers engaged in. For now the trend has been in the other direction toward the lifting of short hedges and reducing or eliminating hedgebooks. It is also likely that the equity markets will start to move higher and some investments in gold will be shifted back to the equity markets. Higher prices for gold are also likely to result in increased gold production which would further pressure prices.

The U.S. Geological Survey reported that 2001 world golf production was estimated to be 2,530 metric tonnes, down 1 percent from 2000. South African gold production was estimated to be 400 tonnes, down 7 percent from the previous year. U.S. gold production was 350 tonnes, nearly the same as 2000. Australia produced 290 tonnes, down 2 percent from the previous year. China produced 185 tonnes compared to 180 tonnes the previous year while Russian production was 155 tonnes, up 23% from 2000. World reserves of gold are estimated to be 50,000 tonnes. South African gold production has been declining and in 1993 was 619 tonnes. In South Africa, the Chamber of Mines reported that gold production in the quarter ended June 2002 was 3.2 million ounces, an increase of almost 4 percent from the 3.08 million ounces produced the same quarter a year earlier. Between the first quarter of 2002 and the second quarter, gold production increased 169,370 ounces. In the January-June 2002 period, South African gold production was 6.26 million ounces, a very slight increase from 6.23 million ounces in the first half of 2001.

U.S. mine production of recoverable gold in June 2002 was 23.9 tonnes. In the January-June 2002 period, mine production was 141 tonnes. Of that total, Nevada produced 111 tonnes or 79 percent. California production was 5.3 tonnes. Other gold producing states include Colorado, Idaho, and Utah. For all of 2001, U.S. mine production of gold was 335 tonnes.

U.S. imports of refined gold bullion in May 2002 were 21.5 tonnes while in the January-May 2002 period imports were 74.5 tonnes. The major supplier was Canada with 19.1 tonnes. For all of 2001, gold bullion imports were 161 tonnes. U.S. exports of gold compounds in May 2002 were 50.4 tonnes while in January-May 2002 they were 145 tonnes. The major market was Canada.

Futures Markets

Gold futures and options are traded on the COMEX division of the New York Mercantile Exchange. Gold futures are traded on the Bolsa de Mercadorias and Futuros (BM&F) and on the Tokyo Commodity Exchange (TOCOM), the Chicago Board of Trade (CBOT) and he Korea Futures Exchange (Kofex).

Excerpted from the CRB Commodity Yearbook. For more information on CRB products click here

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