The international gold price has soared 37 percent over the past six months and hit the peak for the past 25 years doubling that of five years ago. This has aroused much attention of the world financial circle. What are the reasons for the considerable rise following its plunge?

Before 2002, the gold price was dragged down largely by the obsession in paper wealth on the bull capital market. Even central banks thought it cost to hold gold and reduced their gold assets by putting gold under hammer. In the meantime, gold mining businesses sold their gold reserves yet to be exploited on the international futures market to prevent the gold price from falling. That gave a further blow to the gold price.

The burst of the US stock market bubble finally gave people a dose of sobriety. A concept remains a concept even if it is priced at a hundred dollars. Tangible things give more sense of security. Investment in products beyond stocks and bonds gained increasing popularity and investment on precious metals like gold and silver rebounded significantly.

Generally speaking, the gold price has been boosted by:

--- Consumers. There are industrial consumption and consumption for jewelries as well as personal investment. People from India, China and East Asian nations traditionally favor gold. Richer people there have spurted the demand for jewelries. There is a spending spree on gold among average Japanese. The gold price denominated with Japanese Yen has even become one of the decisive factors on the Asian gold market.

--- The change of central banks' attitude toward gold. Central banks reducing their gold holdings have slowed down their pace of reduction given the recovery of gold price. Some central banks (such as those of Russia and South Africa) have begun to add more gold to their reserves mix.

--- The change of gold enterprises. They have given up their policy of hedging by selling gold futures, which in turn helps to ease the pressure of gold price. In this case, many gold enterprises have to make short hedge and that pushed gold price up.

--- Demand from fund investment. Funds are seeking investment opportunities on gold to diversify risks, directly leading to gold price rise. Some banks have established specialized trading floors for gold exchanges. Gold held by this new type of fund has reached 420 tons since 1995, very close to the two years' production of Newmount, the world's largest gold mining company.

Gold is expected to continue to be strong, mainly boosted by the uncertainties in the international politics, which highlights the role of gold in avoiding risks. Historically the unrest in world situation always gave rise to a gold fever. The gold price hit its historic high of 850 USD per ounce in 1980 during the Iran-Iraq war.

The diversity of investment will continue. The public have also joined the game which used to be dominated by professionals. Now the domestic financial institutions, the Bank of China in particular, have offered financial products to investors, either in the form of tangible gold or gold accounts.

Although there is surging demand on the gold market, the global gold reserves and mining capacity do not go up at the same pace. The imbalance in demand and supply will continue to fuel the gold price.

In addition, investing in gold is one of the ways to offset the inflation. Some market insiders regard the rising gold price as the expectation for the future inflation by the financial market. The global economy recovered after the US slashed its interest rates between 2001 and 2004 but the low interest rate environment also underpinned the risk of inflation.

Investment goes with risks. Gold price in particular normally fluctuates more sharply than any other financial products like foreign exchange. Sustainable profitability is secured only when a well-structured portfolio is designed.

A mature investor, therefore, should set a clear bottom line of risks for his/her investment. Unfavorable market scenarios call for prompt measures to minimize losses.

(The article is written by Li Jianmin from the gold counter of the world financial market Section, Bank of China, and edited and translated by People's Daily Online)