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 lions share, but it has been declining in both absolute and proportional terms. etween !""" and !""# global gold$jewellery demand slid from %,!"& tonnes to !,'(# tonnes) as a share of the total demand for gold, it declined from nearly *"+ to just over ,"+. -he fall was precipitate in the .estern world. /emand in 0ndia, the biggest jewellery mar1et, was little affected until last year. /emand in 2hina, the ne3t biggest, has continued to rise. 4s jewellery demand went down, investment demand went up: for gold in the form of coins or bars, for gold e3change$traded funds (5-6s) and for the services of online companies that allow investors to buy small amounts of pure bullion, stored in underground vaults. uyers of jewellery might be put off by a rising price) investors are more li1ely to see it as a sign that the price will increase further still. 4nnual 7identifiable investment8, as the .orld 9old 2ouncil puts it, was ,(( tonnes in !""'$"#, a little more than twice the average for the four previous years. -hat just about offset the fall in jewellery demand. Since then, however, investment demand has accelerated and jewellery demand has collapsed.

-he seemingly insatiable demand of mainly .estern investors, drawn to gold as a store of value rather than as an adornment, has driven the price from less than :#"" an ounce in !""# to more than :(,!"" since ;ay this year.

Golds 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 worlds goldmines has been flat or declining. !ine production peaked in "##1 at ",$%$ tonnes and has been a little less than that ever since. & combination of rising production and e'ploration costs, dwindling output from long(established mines in )orth &merica and *outh &frica, and political and economic instability in other parts of &frica means that mine supplies cannot be ramped up at will. &nother potential source of supply is sitting in the vaults of central banks. +n ,une national central banks, the -.B and the +!/ held more than 0#,### tonnes in all. 1n average, they sold 2"# tonnes a year between "### and "##3. Last year the flow of central(bank gold almost dried up, even as the price soared. 1nly %1 tonnes made it to market. *ome bulls argue that central banks will at some point become net buyers. 4owever, this week .hinas foreign(e'change agency said gold would not become an important element of the countrys official reserves. The third main source of supply is scrap5 6ewellery sold to dealers for the value of the metal. 7hile the price was rising steadily in the first few years of the century, scrap sales did not respond5 in "##0, when the price averaged 80##, 9:$ tonnes were sold; in "##3, when the price was 83##, the amount was four

tonnes smaller. But as the price has climbed steeply since, record <uantities have been sold for scrap 1,$3% tonnes last year.

0. *ummari=e >onald *t?ferle@s and 7illem Buiter@s position regarding the long(run trend in the price of gold. >onald *t?ferle, an analyst at &ustrias -rste Group, points out that the value of &merican gold holdings amounts to about 1.:2A of the countrys GBC. +n 19%# it was above "#A and in 19:# close to 3A. This, he argues, points to continued demand for gold from investors. 4e e'pects the gold price to hit 8",0## by "#1". 7illem Buiter, a former professor at the London *chool of -conomics who is now the chief economist of .itigroup, has called gold the sub6ect of Dthe longest(lasting bubble in human historyE. 4e says that he would not invest more than a sliver of his wealth Dinto something without intrinsic value, something whose positive value is based on nothing more than a set of self(confirming beliefs.E

4. 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.

<et at some point either the worst fears of the gold bugs must be realised=in which case, heaven help us=or the world will become a less nervous place. .hen interest rates eventually rise, the opportunity cost of holding gold will go up, ta1ing off the shine. .hen the overall economic climate improves so that uncertainty about the prospects of companies is no longer so pervasive, that will provide another reason for some investors to retreat from gold. 4nd even if inflation rates do increase, argues ;r van 5eden, they are unli1ely to be high enough to justify the prices at which gold has been trading. -hese things suggest that the swelling in investment demand in !""> and the first half of !"(" cannot last indefinitely.

a. 7hat are the average total variable cost, average total fi'ed cost, and average total cost of producing an acre of wheatF
variable costs drop off ?uic1ly from a pea1 of more than :(&" per acre for the !"((@(! mar1eting year and level off near :("" per acre.

b. Bid the average wheat grower earn a profit in that yearF +f so, how much per acre. +f not, how much was the loss per acreF
<ields for !"(! and beyond are a composite of historical trends by class of wheat beginning in (>*&. -he assumed annual increase averages ".%% bushels per acre over the projection period. 6or comparison, corn and soybean annual trend$yield gains are projected at ! bushels per acre and ".'& bushels per acre, respectively. -he yield projected for !"(( is '%.* bushels per acre, which is below the national all$wheat trend yield. -his yield was projected using trends by type of wheat, adjusted for specific !"(( information. -he !"(( trend$ yield estimates for durum and other spring wheat did not include !""> and !"(" yields because the weather in those years on the Aorthern Blains was unusually favorable for wheat and resulted in mar1edly higher yields than trend. -he trend$yield estimate for winter wheat includes !""> and !"(", but was adjusted to account for the e3pected recovery from the prevented plantings in the soft red winter (SC.) areas from !"(".

c. *hould the average wheat grower shut downF 7hy or why notF Total use of wheat is driven primarily by a sharp decline in e'ports in the first three years of pro6ections. -'ports in the first year are e'pected to decline from the high "#1#G11 level. The severe "#1# drought in >ussia triggered an e'port ban and reduced global e'portable supplies. Hnfavorable harvest weather reduced wheat <uality in -H("3, .anada, and &ustralia, boosting "#1#G11 demand for higher <uality H.*. milling wheat. &s >ussian production recovers with more normal weather, the country will rebuild stocks and slowly increase its e'ports. 7hile other countries also increase their e'ports, the recovery of >ussian e'ports is the primary cause of the lower pro6ected H.*. wheat e'ports in "#10G1% and beyond. >ussias e'ports e'pand over the pro6ection from the low level in "#1#G11, rising to account for 12 percent of global trade by then end of the decade. /or the same time period, the H.*. market share of world trade declines from "3 percent to 1$ percent. &s H.*. e'ports level off at 9## million bushels, growing domestic use slowly raises total wheat use. Bomestic use rises due to increasing food use, while feed and residual use is unchanged for the rest of the period.

d. >efer to your te'tbook, describe Iyou will not be giving a numerical answerJ the lowest price wheat can fall to so that growers can continue to operate in the short run. +n the long run.
Wheat food use increases slowly. Ber capita food use of wheat in the Dnited States has fallen sharply in recent years, but this decline is projected to end. Eong$term annual growth in total food use reflects () slowing annual population gains from ".>( percent to ".*& percent, !) stable per capita use, and %) continuing high flour$e3traction rate with high wheat prices. Ending stocks remain high. -hough stoc1s are lower at the end of the projection, they are still significantly larger than ,"" million bushels. 6or comparison, in !""#@"*, the year of the worldwide wheat shortage, D.S. ending stoc1s were only %", million bushels, the lowest since the mid$(>'"s. Wheat prices remain historically high. .heat prices are projected to increase in !"((@(! largely due to high e3port demand. 53pected prices then drop with lower e3ports, but remain high, supported, in part, by high corn and soybean prices. Brices drop from :,.&" per bushel for !"((@(! to a low of :&.'& mid$period before slowly rising to :&.," as carryout stoc1s fall with rising food use.