Gold Investment: Why You Should Buy Gold Today
A Gold Investment Report from Smart Commodities UK
By Garry White
First Published: 25th August 2007
The current gold bull market started in 2001 - but the rally is not over yet. In fact, it’s far from over. Is your portfolio ready for the next leg up of the rally?
In 2001 the gold price stood at around $268 an ounce. Today, it stands at $664.10 an ounce.
The fundamental reasons why the gold bull market exists are quite clear. Let’s take a look at some full-year data from 2006. This will remind you why gold is a great asset to own and why you should buy some now. It’s all about supply and demand.
- According to the World Gold Council demand hit a record $65 billion...
- At the same time, production fell by a staggering 13%.
- Gold jewellery sales rose 14% to a record $44 billion, although they dropped 16% by volume to 2,267 tonnes.
- Industrial demand for gold increased 45% to $8.9 billion and 7% by volume to 458 tonnes.
- Importantly, investment demand increased 45% to $12.3 billion and 7% by volume to 636.7 tonnes.
- A 27% year-on-year boost in tonnage holdings of gold Exchange Traded Funds and similar products helped fuel the growth in investment. This is significant - and it is a point I will expand on in a moment.
A similar thing has been seen in the oil market - that is a major reason for the fall in the oil price. Fretting investors have done the wrong thing and sold positions.
Gold Investment:
Half the World’s Mine Output
Consumed by Just ONE Country
So, demand growth in 2006 was solid, but mine supply fell, as I’ll show you in a moment. But what’s going on in 2007? Well, the World Gold Council has recently published its second quarter report card. It revealed that dollar demand for gold in the jewellery, investment and industrial sectors all hit new highs in the three month period to 30 June.
Jewellery demand was particularly strong, hitting a record $14.5 billion, a 37% increase on the equivalent quarter of last year.
In tonnage terms India, the world’s largest gold market, showed record demand in terms of both investment and jewellery. These figures are not compiled by the World Gold Council itself, but are prepared by independent consultancy GFMS Ltd.
The figures showed that identifiable gold demand made a further substantial recovery in the second quarter, rising 19% in tonnage terms compared with the second quarter of last year.
In value terms, there was a 27% year-on-year increase to $19.8 billion.
World Gold Council Chief Executive James Burton said: "Several countries stand out. The figures from India this quarter are particularly pleasing and we will continue to encourage India‘s ongoing love affair with gold."
India’s total demand hit 317 tonnes in the quarter - which was equivalent to half the global mine output for the period. As India’s economy continues to grow at an unprecedented rate, demand is set to increase further.
Russia is also a major market for gold. Consumption in the quarter rose 27% to 20.3 tonnes. Globally, net retail investment rose by 51% by weight to 132.9 tonnes, and 60% in monetary value to $2.9 billion, compared to Q2 2006.
Russia and India are creating millionaires at a rapid rate. The number of dollar millionaires in Russia exceeded 100,000 in 2006, that is 15.5% higher than 2005, according to Merrill Lynch and Cap Gemini’s 11th annual World Wealth Report.
The Russian Federation is ranked among the world’s top 10 countries which showed the highest increase in the number of dollar millionaires. Regarding the largest growth of its dollar millionaires or high net worth individuals, Russia is second to India, where the number of high net worth individuals grew by 20% in 2006.
In the Middle East, tonnage demand rose 20% to 97.5 tonnes, with Turkey seeing secondquarter records for both jewellery, which rose 14% to 52.2 tonnes, and net retail consumption, which rose 5% to 20.5 tonnes.
A summary of the figures for the second quarter and first half are given in the table below, produced by the World Gold Council:
Second quarter identifiable gold demand - World Gold Council data | |||||
| CHANGE | |||||
| % | % | ||||
| 2Q07/ | 1H07/ | ||||
| Tonnes | 2006 | 1Q07 | 2Q07 | 2Q06 | 1H06 |
| Jewellery consumption | 2,279.1 | 561.9 | 675.1 | 29 | 22 |
| Industrial & dental | 452 | 113.6 | 116.5 | 2 | 2 |
| Electronics | 304.4 | 76.4 | 79.2 | 2 | 2 |
| Other Industrial | 86.9 | 22.5 | 22.8 | 7 | 8 |
| Dentistry | 60.7 | 14.7 | 14.6 | -5 | -4 |
| Identifiable investment | 643.1 | 146.9 | 130.4 | -5 | -4 |
| Net retail investment | 382.9 | 110.5 | 132.9 | 51 | 41 |
| Bar hoarding | 222.9 | 68.2 | 85.3 | 99 | 79 |
| Official coin | 129.1 | 34.1 | 34.8 | -18 | -9 |
| Medals/imitation coins | 58.9 | 21.2 | 27 | 146 | 112 |
| Other retail | -28 | -13.1 | -14.2 | -- | -- |
| ETF & similar | 60.2 | 36.4 | -2.6 | -- | -7.9 |
| Total identifiable demand | 3,374.2 | 822.4 | 922.0 | 19 | 11 |
|
| |||||
| CHANGE | |||||
| % | % | ||||
| 2Q07/ | 1H07/ | ||||
| $m | 2006 | 1Q07 | 2Q07 | 2Q06 | 1H06 |
| Jewellery consumption | 44,242 | 11,739 | 14,474 | 37 | 36 |
| Industrial & dental | 8,744 | 2,374 | 2,498 | 9 | 14 |
| Electronics | 5,908 | 1,596 | 1,698 | 9 | 14 |
| Other Industrial | 1,687 | 470 | 488 | 14 | 20 |
| Dentistry | 1,179 | 308 | 312 | 1 | 7 |
| Identifiable investment | 12,483 | 3,068 | 2,795 | 1 | -7 |
| Net retail investment | 7,433 | 2,308 | 2,850 | 60 | 57 |
| Bar hoarding | 4,327 | 1,425 | 1,828 | 111 | 100 |
| Official coin | 2,507 | 713 | 747 | -131 | 0 |
| Medals/imitation coins | 1,144 | 442 | 578 | 161 | 137 |
| Other retail | -544 | -273 | -304 | -- | -- |
| ETF & similar | 5,050 | 760 | -55 | -- | -76 |
| Total identifiable demand | 65,498 | 17,181 | 19,767 | 27 | 24 |
| London pm fix $/0z | 603.77 | 649.82 | 666.8 | 6 | 11 |
Gold Investment:
Supply Remains Tight
It is clear that demand remains robust, but what about the other side of the equation?
Overall supply remained tight, falling 7% on a year-on-year basis in the second quarter and by 4% in the first half of 2007, compared with the first half of 2006. Mine production rose 3% in both the first half and second quarter, but this growth is not significant enough to meet demand growth.
Scrap supplies fell 27% year-on-year during the second quarter. This is also an indication that the market is expecting rising prices, although scrap sales last year were exceptionally high.
Gold Investment:
Gold to Hit New Record Within a Year
Pierre Lassonde a Director of Newmont Mining recently predicted a surge in the gold price to surge in excess of $1,000 an ounce; with a new record high possible within 12 months. The current all-time high is $850 an ounce.
Lassonde was speaking at the Diggers & Dealers forum in Kalgoorlie, Western Australia. He did, however, clarify the point, indicating that for the gold price to hit $1,000 an ounce it would need a recession in the US economy, which he thought wouldn’t happen for at least another few years.
Should a recession hit the US the flight to safety in gold will become a stampede and the price will reflect this. Remember when George Soros hinted that a USW recession was possible in January 2006, there was a rush into gold that sent it to a 25-year high.
The main question is regarding the timing of a US recession; which could come sooner than most people think. An economic contraction in the world’s largest economy is not a requirement to increase the gold price, but it will certainly help.
Gold Investment:
The US Economy is Precarious -
Protect Yourself and Profit
You can profit from crisis - and it is possible to make money in a falling market. Gold is the ultimate investment in both these cases. But is a slowdown or even a full blown recession in the US likely?
The answer is a resounding YES. Let me explain...
The country is spending significant amounts of money it does not have. The country is doing this - the current national debt stands at an astonishing $9 trillion - and individuals have been doing this too.
Individual borrowers have been able to get attractive credit packages when they have no assets or income. That’s plain daft. This has led to the collapse of the subprime credit market and a slump in the housing sector. Indeed, US banks suffered their largest jump in loan delinquencies since 1991 in the second quarter, as late payments shot up 36% over last year to $11.4 billion, according to a report by the US Federal Deposit Insurance Corp.
The housing sector slump will lead to a reduction in spending going forward as people feel poorer. This will hit the entire economy.
The country also appears to be very far away from sorting out its national debt. Its profligate spending on the war in Iraq looks set to cripple the nation for many years to come. And then there is the infrastructure...
US infrastructure is falling apart. We have had steam pipes exploding outside Grand Central Station, a bridge collapsing in Minneapolis and blackouts in Southern California.
Indeed, according to the American Society of Civil Engineers, it may take as much as $1.6 trillion over the next five years to bring the country’s infrastructure up to an adequate condition. That means they have to spend that money just to stand still.
The shakeout from the credit bubble may not be over, the country is borrowing at an unsustainable rate and it needs to spend trillions just to get its house in order. The US economy is more precariously balanced than most people think - and a lot of that debt has been spread around the world. The credit markets are now truly global and if they dry up then businesses and governments all over the world could find it difficult to raise cash and keep liquid.
Gold Investment:
Private Investors Now Own
More Gold Than Central Banks
An interesting piece of news was released earlier this year from natural resource research firm CPM Group. It revealed that private investors now own more gold than central banks. This is important. It means that influence over the gold prices has moved away from central banks, which can manipulate the price for political reasons.
This is good news. Central banks have stood accused of trying to keep the gold price artificially low. When gold starts to rise, they sell into strength, but the power is now moving to private investors.
It is also important to note that shortages in supply of gold have been ironed over by central banks in the past because of their large stocks of gold. Central banks have been foolishly selling off their holdings. This has removed the buffer at a time when gold demand is soaring and supply is extremely tight.
The pace of central banks selling gold accelerated during the second quarter of the year, reaching 152 tonnes. Spain became a heavy seller disposing of 70 tonnes. The European Central Bank sold a further 37 tonnes.
In June, Switzerland announced that it would sell 250 tonnes, with France accounting for the bulk of the remaining sales with small amounts from Austria, Germany and Sweden.
Gold Investment:
Constant Money Creation
Makes Gold More Attractive
Central banks, particularly the US central bank, have been printing money like it is going out of fashion. The rising tide of liquidity has created a situation where the purchasing power of money has been eroded significantly. This is another reason why gold is attractive. It is a commodity and its supply, therefore, is limited.
And then there’s inflation...
We believe that the era of cheap energy is over. This is bad news for inflation. We are also bullish on a whole raft of commodities - this will stoke the inflation monster.
The United States had a taste of high inflation in the 1970s. A basket of goods that cost $100 in 1970 soared to $212 in 1980, according to the Bureau of Labor Statistics. This is what happens when the oil price rises.
Gold is traditionally a hedge against inflation. An ounce of gold would buy you a suit of clothes in the days of Henry VIII and it would still buy you a suit of clothes today. It is real and tangible and it does not lose its value like paper money does. Looking at history, gold is the only investment that has really counted in a crisis. Not cash, not property and not even shares.
Gold Investment:
Timing is Everything: Why Now is the
Best Time Since June to Buy Gold
Gold is real. It is a tangible asset. Indeed, it is the ultimate in tangible wealth. However, it is difficult to store and transport. Do you have somewhere safe to store your assets at home? Probably not.
There is also the issue of quality. The quality of a gold bar must be guaranteed if it’s going to trade on the international gold market. Major players in the world’s gold market such as investment banks, bullion traders and gold funds will only buy gold of a guaranteed quality... that’s why the spreads on gold coins are so large.
Bullion dealers always buy gold that has been assayed for weight and purity. Buying gold coins outside the professional markets will not come with that guarantee.
The gold price has moved down from the high of $685 per ounce seen at the end of July, with the price falling further as investors liquated gold assets for margin calls. This, obviously, goes against the theory that gold is a safe haven in times of crisis, but this is a short term move. The general trend in a crisis is for gold to move higher - so why the fall when the subprime crisis unfolded?
On Thursday 16 August the gold price fell to $641.50 in intraday trade as global markets slumped. It closed at $649.10. For most of this year it has been trading in a trading range of approximately $650-$700 an ounce - indeed, it had appeared to have settled into the $660- $670 range.
The Federal Reserve’s surprise decision to cut its discount rate on 17 August has now saved many funds from liquidating bullion to cover margin calls on equity losses and meet commitments. The price is again on the rise.
However, it is important to note that here lies one of the risks of investing in gold. Not only can large funds be fickle with their purchases, but gold’s inherent strength as a liquid store of wealth allows investors to use gold as a funding mechanism when a fund sees losses in other asset classes or to cover margin calls. However, these moves are just short term – and the great thing is that this has created a buy opportunity.
Gold Investment:
Newmont Eliminates Hedging
If you are not convinced yet that now is a good time to buy gold then a decision from Newmont Mining, announced a month ago, should have you convinced. The company did something pretty dramatic - it completely eliminated its forward sales contracts, taking a $460 million charge in the process. Indeed, in the second-quarter of this year gold dehedging hit a new record high.
Such forward sales are used as a hedge against falling prices. These contracts sell gold in the ground at today’s price - a traditional hedge against a falling market. This is a confident move and it means that the management expect that they will be able to sell the gold they have in the ground at a better price than today once it is mined. In short, this move means the company expects the prices to rise.
Newmont’s management appears to be confident in the outlook for the gold price, fundamentals for the gold price are very strong and the recent subprime shakeout has presented a buying opportunity.
The fundamentals of the gold market coupled with economic uncertainty make Pierre Lassonde’s prediction of $1,000 gold look eminently achievable.
Garry White
for Smart Commodities UK
25th August 2007
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Your capital is at risk when you invest in shares – you can lose you some or all of your money, so never risk more than you can afford to lose. Figures may refer to the past or be forecasts. Past performance and forecasts are not reliable indicators of future results. The FSA does not regulate certain activities, including the buying and selling of commodities such as gold. If in doubt about the suitability or taxation implications of any investment, seek independent financial advice.
Article links
External links
Gold Price Today
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provides daily gold price news and coverage of the main stories
LBMA
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The London Bullion Market Association
Nymex
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The New York Mercantile Exchange, Inc., is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals.
World Gold Council
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The global advocate for gold.