1. The article identifies five factors affecting the world demand for gold.

List at least two of them.
Start with the demand side which has two main parts: demand for gold as jewellery, and demand for gold as an investment. (Some is also used in industry and dentistry.) Jewellery has conventionally accounted for the lion’s share, but it has been declining in both absolute and proportional terms. Between 2000 and 2007 global gold-jewellery demand slid from 3,205 tonnes to 2,417 tonnes; as a share of the total demand for gold, it declined from nearly 80% to just over 60%. The fall was precipitate in the Western world. Demand in India, the biggest jewellery market, was little affected until last year. Demand in China, the next biggest, has continued to rise. As jewellery demand went down, investment demand went up: for gold in the form of coins or bars, for gold exchange-traded funds (ETFs) and for the services of online companies that allow investors to buy small amounts of pure bullion, stored in underground vaults. Buyers of jewellery might be put off by a rising price; investors are more likely to see it as a sign that the price will increase further still. Annual “identifiable investment”, as the World Gold Council puts it, was 611 tonnes in 2004-07, a little more than twice the average for the four previous years. That just about offset the fall in jewellery demand. Since then, however, investment demand has accelerated and jewellery demand has collapsed.

The seemingly insatiable demand of mainly Western investors, drawn to gold as a store of value rather than as an adornment, has driven the price from less than $700 an ounce in 2007 to more than $1,200 since May this year.

Gold’s main drawback is that it pays neither a dividend, like a share, nor a coupon, like a bond, nor a rent, like property. But monetary policy has been keeping official interest rates, and thus the opportunity cost of holding gold, low and seems set to do so for a while.

2. The article identifies three factors affecting the world supply of gold. List at least one of them.

the main source of new gold—what is dug out of the world’s goldmines—has been flat or declining. Mine production peaked in 2001 at 2,646 tonnes and has been a little less than that ever since. A combination of rising production and exploration costs, dwindling output from long-established mines in North America and South Africa, and political and economic instability in other parts of Africa means that mine supplies cannot be ramped up at will. Another potential source of supply is sitting in the vaults of central banks. In June national central banks, the ECB and the IMF held more than 30,000 tonnes in all. On average, they sold 520 tonnes a year between 2000 and 2007. Last year the flow of central-bank gold almost dried up, even as the price soared. Only 41 tonnes made it to market. Some bulls argue that central banks will at some point become net buyers. However, this week China’s foreign-exchange agency said gold would not become an important element of the country’s official reserves. The third main source of supply is scrap: jewellery sold to dealers for the value of the metal. While the price was rising steadily in the first few years of the century, scrap sales did not respond: in 2003, when the price averaged $300, 986 tonnes were sold; in 2007, when the price was $700, the amount was four

But as the price has climbed steeply since. 3. taking off the shine. When interest rates eventually rise.674 tonnes last year. the opportunity cost of holding gold will go up. that will provide another reason for some investors to retreat from gold. argues Mr van Eeden. These things suggest that the swelling in investment demand in 2009 and the first half of 2010 cannot last indefinitely. This.tonnes smaller. Ronald Stöferle. When the overall economic climate improves so that uncertainty about the prospects of companies is no longer so pervasive. he argues. a former professor at the London School of Economics who is now the chief economist of Citigroup. heaven help us—or the world will become a less nervous place.” 4. He says that he would not invest more than a sliver of his wealth “into something without intrinsic value. Summarize Ronald Stöferle's and Willem Buiter's position regarding the long-run trend in the price of gold. And even if inflation rates do increase. they are unlikely to be high enough to justify the prices at which gold has been trading. Yet at some point either the worst fears of the gold bugs must be realised —in which case. an analyst at Austria’s Erste Group. points out that the value of American gold holdings amounts to about 1. record quantities have been sold for scrap— 1. something whose positive value is based on nothing more than a set of self-confirming beliefs. . Willem Buiter. He expects the gold price to hit $2. Using the answers to three questions The Economist uses to predict the future price of gold make a prediction on the future price of gold.300 by 2012. In 1940 it was above 20% and in 1980 close to 7%. has called gold the subject of “the longest-lasting bubble in human history”. points to continued demand for gold from investors.85% of the country’s GDP.

If not.33 bushels per acre over the projection period. respectively. The trend-yield estimate for winter wheat includes 2009 and 2010. . For comparison. corn and soybean annual trend-yield gains are projected at 2 bushels per acre and 0. adjusted for specific 2011 information.8 bushels per acre. how much was the loss per acre? Yields for 2012 and beyond are a composite of historical trends by class of wheat beginning in 1985. and average total cost of producing an acre of wheat? variable costs drop off quickly from a peak of more than $150 per acre for the 2011/12 marketing year and level off near $100 per acre. The 2011 trendyield estimates for durum and other spring wheat did not include 2009 and 2010 yields because the weather in those years on the Northern Plains was unusually favorable for wheat and resulted in markedly higher yields than trend. which is below the national all-wheat trend yield.a. b. how much per acre. The yield projected for 2011 is 43. Did the average wheat grower earn a profit in that year? If so.45 bushels per acre. but was adjusted to account for the expected recovery from the prevented plantings in the soft red winter (SRW) areas from 2010. average total fixed cost. This yield was projected using trends by type of wheat. What are the average total variable cost. The assumed annual increase averages 0.

S. milling wheat. ending stocks were only 306 million bushels. .45 mid-period before slowly rising to $5. wheat exports in 2013/14 and beyond. exports level off at 900 million bushels. but remain high. and Australia. Long-term annual growth in total food use reflects 1) slowing annual population gains from 0. rising to account for 15 percent of global trade by then end of the decade.S.c. supported. 2) stable per capita use. Ending stocks remain high.85 percent. in part. As Russian production recovers with more normal weather. Wheat prices remain historically high. in 2007/08. Though stocks are lower at the end of the projection. the year of the worldwide wheat shortage. Per capita food use of wheat in the United States has fallen sharply in recent years. U. While other countries also increase their exports. The severe 2010 drought in Russia triggered an export ban and reduced global exportable supplies. Domestic use rises due to increasing food use. Should the average wheat grower shut down? Why or why not? Total use of wheat is driven primarily by a sharp decline in exports in the first three years of projections.50 per bushel for 2011/12 to a low of $5. Unfavorable harvest weather reduced wheat quality in EU-27. the lowest since the mid-1940s. the country will rebuild stocks and slowly increase its exports. Prices drop from $6. and 3) continuing high flour-extraction rate with high wheat prices. For comparison. market share of world trade declines from 27 percent to 16 percent.S. For the same time period. d. In the long run. by high corn and soybean prices.91 percent to 0. Wheat food use increases slowly. the U. the recovery of Russian exports is the primary cause of the lower projected U. while feed and residual use is unchanged for the rest of the period. describe (you will not be giving a numerical answer) the lowest price wheat can fall to so that growers can continue to operate in the short run. Wheat prices are projected to increase in 2011/12 largely due to high export demand. Canada.S. Expected prices then drop with lower exports.60 as carryout stocks fall with rising food use. As U. but this decline is projected to end. growing domestic use slowly raises total wheat use. boosting 2010/11 demand for higher quality U. they are still significantly larger than 600 million bushels. Russia’s exports expand over the projection from the low level in 2010/11.S. Refer to your textbook. Exports in the first year are expected to decline from the high 2010/11 level.