With gold and silver down this morning - following a mysterious vertical plunge last night (once again) - we thought ConvergEx's Nick Colas' timely discussion of gold was worthwhile. As he notes, Gold is the ultimate personality test for investors. Some hate it, excoriating its adherents for their lack of faith in human ingenuity – gold has been valuable since before humans could write. And some swear by the yellow metal, in the belief that it is the last vestige of rationality in a world of financial assets manipulated by central banks and opaque trading venues. What gets lost in the wash is that gold is a commodity and can be analyzed as such. On that basis, here is the 'Top 10' list of real-world fundamentals for gold.
Via Nick Colas and Sarah Millar of ConvergEx,
If you haven’t caught onto the show already, I highly suggest sitting down one night for the National Geographic Channel’s “Doomsday Preppers”. A documentary-style reality TV series shot right here in the US of A, Doomsday Preppers just began its second season following a variety of survivalists preparing for the end of civilization as they know it. From Chris Nyerges in California who prepares to live in the jungle after a massive earthquake to Bruce Beach, who runs drills to prepare his family for nuclear warfare, the show can be quite a hoot. To touch a little closer to home, consider Season One’s Pat Brabble and Doug Huffman: the first, a religious Southern gentleman, believes the world is on the brink of hyperinflation. To prepare, he stocks a room with guns, ammo, and alcohol; not to use, mind you, but to sell. Huffman, on the other hand, has dug holes into the Sierra Nevada Mountains in anticipation of a second Great Depression – he’s stashed away the essentials for survival should the US break into chaos.
My personal favorite “Doomsday Prepper”, though, has yet to appear on the show: the apocalyptic gold buyer. It seems everyone knows one of these guys/gals nowadays, what with the lurking fiscal cliff and continuing worries of an economic slowdown. They warn of inflation, tightening gold supply and growing demand, political risk, you name it. Their solution? Buy gold. Buy as much as you can. Even at $1,700/oz., they say, it’s a bargain when you consider the insurance it provides you.
While I have to agree that gold will be a valuable asset to hold in 2013, I find it hard to sympathize the “end of the world as we know it” logic that drives some to buy. I am not a believer in the world-is-coming-to-an-end mentality, fiscal cliff and Mayan apocalypse or not. And based on the facts we’ve found listed below, it looks like some of the more ominous warnings from the fearful gold buyers are reminiscent of those characters from NGC’s show. Better to know the facts before you buy. So without further ado, we present our “10 Things You (Probably) Didn’t Know About Gold”. These interesting data points come from a variety of sources, including the World Gold Council, bullion firms, the US Geological Society, and mises.org.
1. India is the largest consumer of gold in the world, but Greater China (including China, Hong Kong, and Taiwan) is slowly creeping up on the long-time leader. In Q3 of 2012, according to the World Gold Council, India’s consumer demand was 223.1 tons, while Greater China reached 185.1. This now 38 ton gap (fueled largely by greater jewelry demand in Greater China) has narrowed 71% since Q3 of 1997. For Q3 2012, India represented 30% of global consumer demand, while Greater China was 25%. Hong Kong is home to the highest gold consumption per capita in the world: with total consumer demand of 6.4 tons in just the third quarter, there are about 0.03 ounces (or, at today’s prices, about $50 in gold) for each person in the SAR.
Bottom Line: Gold is, at least partially, an emerging markets play.
2. On the production side, South Africa has been ousted as the once gold-mine capital of the world: now China and Australia are the leaders on that front, having produced 335 and 270 tons in Q3 2012, respectively. Interestingly, though, China is still a net importer. However, the singular most productive gold mine in the world wasn’t even in either of those countries: it’s the Grasberg Gold Mine in Papua, which produced more than 63 tons (2 million ounces) in 2011. Uzbekistan holds the next largest, Maruntau Gold Mine, which pushed out 56.3 tons (1.8 million ounces).
Bottom line: Gold is one of those rare products that China actually imports.
3. The IMF has the third largest gold reserves in the world, with 2,814.1 tons. That’s more than India (557.7), the Netherlands (612.5), Japan (765.2), China (1,054.1), and France (2,435.4). If the SPDR GLD ETF was including in the count, it would come fifth in the world with 1,289.8 tons. As many might know, the US has the highest total gold reserves both absolutely (8,333.3 tons) and as a percentage of total foreign reserves (75.4%). 25% of the world’s gold is also located right here in the US at the Federal Reserve Bank of New York – 540,000 gold bars – though most of it belongs to foreign governments.
Bottom line: Even central banks still see the value in having stores of gold.
4. Though jewelry has traditionally been the more popular end use of consumer demand for gold, making up 78.5% of the total in 2002, in Q3 2012 jewelry made up 59.9% while investment (coins, bars) accounted for the other 40.1%. Though the increase in investment demand seems to lend fuel to the argument that consumers are becoming more interested in gold to shore-up against some kind of disaster, the US in fact still favors jewelry as its end-use for gold: 30.8 tons of US gold demand was for jewelry (75% of the total), while only 10.5 tons were in investment. India, China, and the Middle East also still see the majority of demand in jewelry.
European consumers, on the other hand, are buying up coins and bars almost exclusively. According to the World Gold Council, 91% of European demand in Q3 2012 went to physical investment vehicles. Given the uncertainty surrounding the survival of the euro currency, this rush into investment makes sense. As long as the USD is on solid ground, though, I wouldn’t expect US consumers to dive into gold just yet.
Bottom line: Gold is still the Bling King.
5. That said, ETFs are actually the fasting growing market for gold demand, up 56% over the four quarters ending in Q3 2012. As the general appetite for ETFs continues to ripen, this isn’t particularly shocking. But coupled with the fact that total investment demand fell -10.3% over the same period, it looks like investors are more interested in purchasing market vehicles similar to gold rather than physical gold itself.
Bottom line: Gold fans tend to bad mouth “Paper gold.” They shouldn’t – demand here helps the overall investment story for the yellow metal.
6. For those worried about diminishing resources, here’s some relief: according to the WGC, a total of 171,300 tons has been extracted from the earth since mining began, with about 60% of that being done since 1950. The US Geological Society estimates that about 51,000 are still underground, with the WGC reporting that about 730 tons are mined each year. Other estimates put the number at something like 86 million tons still to be tapped. Worst comes to worst, the National Ocean Service reports that there is nearly 20 million tons of gold in the ocean. And the data from the NEAR spacecraft sent in 1999 reports that the amount of gold on the asteroid “Eros” is more than has ever been mined on Earth. Unfortunately, until we find ways to economically extract it from the ocean (or from space), those reserves will remain untapped.
Bottom line: More gold supply is critical to keeping its status as the ultimate story of value. Absent the discovery of legitimate alchemy, gold supplies will remain tight until we lasso that asteroid.
7. Gold has always held governments to account. In CE 211, Roman Emperor Augustus pinned the gold coin (the “aureus”) at 45 coins to a pound of gold (that makes one aureus worth about $500 in today’s prices). In 312, Emperor Constantine revised that figure to 72 to the pound: 60% deflation in just over 100 years. Granted, the current century’s monetary inflation is a bit more shocking: from $18.92 in 1911 to over $1,700 in 2012, the price of gold has inflated more than 9,000%.
Bottom line: With that kind of track record, gold remains a valuable hedge against government-sponsored inflation.
8. The Dow/Gold ratio (how much gold it would take to buy one share of the Dow Jones Industrial Average) has typically been a good indicator of how bad a given recession might be: when the ratio drops below 1 or 2, things are probably pretty bad. This happened in both 1980 and 2009, but today the ratio sits at 7.6. Admittedly, it’s on a downward trend – but things aren’t looking “apocalyptic” quite yet.
Bottom line: Gold is that rare investment product which is historically uncorrelated to financial assets.
9. Almost 40% of total world gold supply is recycled gold in any given quarter in 2012; it was 38.8% in Q3. Recycled gold, which includes melted-down jewelry, bars, coins, and even dental implants, has become a greater part of world supply, even as “new” gold on the market (from mining) has increased year over year. That’s a relatively good sign as well: investors are willing to liquidate their gold (literally) at today’s prices, providing incremental supply and limiting the chance of a “Bubble.”
Bottom line: Every piece of gold jewelry, ever coin, every ingot ever produced still has value. Can you say the same thing about stocks or bonds? No.
10. If all the gold in the world was given to the US and sold at today’s prices, it would be worth about $10 trillion dollars – and that still wouldn’t be enough to pay off our public debt. In fact, the $10 trillion would only cover 60% of the almost $16.5 trillion we owe. Probably better to just keep the dollar going.
Bottom line: Any chatter about a new “Gold standard” is likely premature.
All in all the case for gold in 2013 looks pretty bullish, whether you’re buying for high returns or in preparation for Armageddon. A historical upward trend and increasing demand for the precious metal makes a good case for buying, though I wouldn’t be worried about resource scarcity and the replacement of national currency just yet. For those of you that still aren’t convinced, I can suggest only two things: move to Europe, where you’ll find many like-minded investors, or sign up for an audition for “Doomsday Preppers”