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The global gold industry is flourishing, largely fuelled by Asian demand and a weak US dollar. The boom is probably only halfway through since prices bottomed out in 2000. Since 1800, the boom and bust cycles have averaged about 10 years. While production is down, the value of gold purchased today is up 47 per cent from a year ago. The super-cycle of high metal prices is seen to be spurred largely by demand from China and India. An analysis. Gold is back with its customary charisma. Buoyed by high prices, demand from Asia and a weak US dollar, the gold industry has thrived since prices bottomed out in 2000 and probably is only halfway through the current boom cycle. The price of gold is about $640 an ounce today after bottoming out around $275 an ounce. Even though production levels are down, the value of gold being purchased today is up 47 per cent from a year ago. In October, gold has consolidated above $600 per ounce, leading many analysts to believe that prices have peaked in the current cycle. However, politically motivated dollar depreciation, rising US inflation, and mining-industry consolidation are expected to push gold above $800 per ounce in 2007. The industry's challenges include inflation, shortages of labour and supplies, and barriers that discourage entry into the business, such as the permit process, capital costs and access to property. But analysts believe that the super-cycle of extended high metals prices are spurred by demand from China and to a lesser extent India. Most up cycles historically have been based on development and consumption primarily in the US. But now, the US population of 300 million is dwarfed by China's 1.3 billion and India's 900 million. India is the largest gold-consuming nation in the world. Gold is valued in India as a savings and investment vehicle and is the second preferred investment after bank deposits. At present, 13 banks in India are active in the import of gold. This reduced the disparity between international and domestic prices of gold from 57 per cent in the past decade. The gold hoarding tendency is well ingrained in Indian society. Domestic consumption is dictated by monsoon, harvest and marriage season. Indian jewellery off-take is sensitive to price increases and even more so to volatility. In the cities gold is facing competition from the stock market and a wide range of consumer goods. Facilities for refining, assaying, making them into standard bars in India, as compared to the rest of the world, are insignificant, both qualitatively and quantitatively. China, on the other hand, has the fastest-growing economy in modern history. Both India and China are in the process of liberalising laws relating to the import and sale of gold in ways that will facilitate gold purchases on a mammoth scale. China is teaching the West something new. Its economy, growing at 9 per cent per year, is expected to become the second largest in the world by 2020, behind only the United States. Last year, Americans spent $162 billion more on Chinese goods than the Chinese spent on US products. That gap has been growing by more than 25 per cent per year. China's consumer class, meanwhile, is spending on everything from bagels to Bentleys - and will soon outnumber the entire US population. China's explosive growth could be the dominant event of this century. China recently passed legislation that will allow the country's four major commercial banks to sell gold bars to their customers in the near future. Currently, individuals in China are only allowed to buy gold-backed certificates from the Bank of China and the Industrial and Commercial Bank of China. Experts reckon that size is no longer the most important value driver in gold business. The industry will continue to consolidate, with competitive advantages shifting from the largest companies to those with the most growth. The continued appetite in the Asian market for US dollars is keeping the value of the dollar higher than it really should be in a free market. But that could change given that China has only 1.5 per cent of its reserves in gold bullion, compared with most of Europe which has about 15 per cent in gold reserves. If China were to raise its gold reserves to the 15 per cent level, it would have to purchase 8,000 tonnes of gold. Clearly, the gold story continues to charm millions of investors across the world.
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