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10 Things You Didn't Know About Gold

Tyler Durden's picture




 

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 showthe 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”

 

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Thu, 12/13/2012 - 11:40 | 3059421 proLiberty
proLiberty's picture

Gold will be a store of wealth no matter how little supply is developed and extracted in the future.   Gold is unique in human history in its position.  Indeed the less gold that is extracted, the more secure it is as a store of wealth exactly because that wealth cannot be diluted by new supply.  That is the exact point of having gold as money instead of infinite perpetual debt instruments.

 

Thu, 12/13/2012 - 15:01 | 3060302 AnAnonymous
AnAnonymous's picture

Absolutely. And when there is no more wealth around but gold, wealth will still be secured.

That is the blessing of gold.

Signed: an American.

Thu, 12/13/2012 - 15:35 | 3060469 akak
akak's picture

Absolutely. And when there are no more unshat-upon roadsides around but America's, roadside crappery will still be secured.

That is the blessing of General Tso's dog in black bean sauce.

Signed: a Chinese shitizen.

Thu, 12/13/2012 - 15:31 | 3060448 zerozulu
zerozulu's picture

Every ounce of gold we see is backed by the sweat and blood and physical human hard work. FIAT is simply printed.

Thu, 12/13/2012 - 11:52 | 3059493 Bansters-in-my-...
Bansters-in-my- feces's picture

Kitcos gold news headline..... Mysterious price drop in asian trading.

I guess Kitco has never heard of the USA PPT,and the Exchange Stabilization Fund.

Ps fuck you little Weasel timmy.

Thu, 12/13/2012 - 12:05 | 3059554 caimen garou
caimen garou's picture

doomsday preppers, a tv show with a bunch of fools that get paid to show the world what dumb asses they really are! I would like to make a reality show called the Real fools of washington DC! People that prepare for disasters be it natural or man made is a must for us that live in rural areas! after seeing the resonse by the  govt. for countless disasters ie katrina,sandy, who in their right mind would'nt prep! and having real assets is part of it!  

Thu, 12/13/2012 - 13:27 | 3059915 flattrader
flattrader's picture

>>>for countless disasters ie katrina,sandy, who in their right mind would'nt prep! and having real assets is part of it!!<<<

Which brings up an interesting point.

If all your preps are localized in one location, what are the chances they'll get flooded, blown away, be inaccessable due to earthquake, raided in a civil disturbance etc...???

Pretty damn good from what I've seen particularly if you live near water.

Multiple locations is the answer.  May involve some cooperation.  People don't seem to get this.

Thu, 12/13/2012 - 14:41 | 3060199 nofluer
nofluer's picture

As a rural person, I find the "preppers" to be highly amusing. Because we can veggies and such, and make jam out of our fruit, we've been asked by co-workers if we are "preppers". I usually respond "You bet! Right now we're prepping for winter! And as soon as Spring comes, we'll start prepping for NEXT winter!!!"

In a book written back in the 1800's an old Sioux woman (Buffalo Bird Woman) told a missionary how her tribe survived through the years. She told how they store things (and hoped that the mice didn't get into the stores - just like today) and included the fact that they try to keep at least 3 years of food stored up for when (not if) the bad years came along. And here we are just barely keeping a few months worth of food, major cities having at any given time about 3 days to a week of food supplies.

OUR "favorite preppers" came early in the series. There were these two seemingly sweet little old ladies with shelf after shelf of canned food. When asked how they'd defend their hoard if they were attacked by thieves, one waved her shotgun and replied, "I'd shoot 'em, then can 'em up!" And I have no doubt that she'd do exactly that. ;-D

Thu, 12/13/2012 - 12:09 | 3059567 Antifederalist
Antifederalist's picture

" 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. "

My comment:

Ha, ha, ha, that is a good one.  Stop, you are killing me.  Really, this is just too much.

Let me see:

Investors demand gold, the Establishment satisfies that demand by issuing paper tickets for gold.  No gold required.  Tell me again why that is good for the price of gold?

 

 

Thu, 12/13/2012 - 13:04 | 3059865 AgShaman
AgShaman's picture

It reconfigures the actual demand for physical and allows for the paper price suppression schemes....

soze "Pikers" like me can pick it up on the cheap

Investment Banks, AP's, Govt slush funds, and ETF's have been my best friend for a decade now.

Alas, I must saddle my horse...and ride off into the sunset

(This "material friendship" has a shelf life and is ending soon)

Thu, 12/13/2012 - 15:12 | 3060357 MrSteve
MrSteve's picture

The GLD prospectus tells you the product location facilities are not audited and you are an unsecured creditor of their corporation.

How is that owning gold? It isn't is the simple, easy answer.

GLD is the illusion that you own gold.

Thu, 12/13/2012 - 12:18 | 3059648 bob_stl
bob_stl's picture

Darn, I knew I shouldn't have been saving these Continentals.

Thu, 12/13/2012 - 12:24 | 3059674 tradewithdave
tradewithdave's picture

Yet more chatter. Premature no doubt. Standby for mature chatter... coming soon.

 

http://tradewithdave.com/?p=14106

http://tradewithdave.com/?p=14057

http://tradewithdave.com/?p=14173

Thu, 12/13/2012 - 12:31 | 3059720 mfavorit
mfavorit's picture

Maybe I missed something but, dow to gold ratio 1 or 2 to 1 in 1980 and 2009.  2009 was more like 7:1, I think the other 1:1 was in the 1930's.

Fri, 12/21/2012 - 20:48 | 3088903 MeelionDollerBogus
MeelionDollerBogus's picture

You got it. Not sure what the article writer was smoking but certainly not reading the real chart.

Thu, 12/13/2012 - 13:03 | 3059860 Fix It Again Timmy
Fix It Again Timmy's picture

One has life insurance, car insurance, home insurance, why not consider FOOD insurance?

http://www.nuvonapremiumfoods.com/

 

Thu, 12/13/2012 - 13:07 | 3059873 Fix It Again Timmy
Fix It Again Timmy's picture

Be prepared!  I never step out of the house without carrying concealed WEAPONS and thinking of Confrontation Psychology 101: Use Your Head...

Thu, 12/13/2012 - 15:12 | 3060359 Geruda
Geruda's picture

You are speaking like a people who is having many fears.   You are being a people who make other people not like to have you being with them because no people are liking guns to always be with them in the places they are eating and the places where they are being happy talking with other peoples are not always so much afraid to be having to have guns to be making them feel better.   You should be leaving your houses having many thoughts about being kind to whoever the peoples are who you will be meeting.   If your fear is so great you should also be making a rod that will keep lightening from hitting you too and be wearing it on you back.   Also you should always be wearing gloves to be having protection from MERSA bugs you should be fearing even more than things you can be shooting with a gun.   

Thu, 12/13/2012 - 13:22 | 3059935 whoknoz
whoknoz's picture

people in poor countries buy gold "jewelry" as a store of wealth and also an investment...they have little access, or desire to use, banks, and the safest place to keep their savings is around their arms and their necks...every town has a local gold market where people trade into and out of gold as their circumstances require--often in tiny $$ amounts...as these millions of people move up the economic ladder, their aggregate demand is becoming more and more important...and when tshtf, their investment/savings is in hand and ready to travel...

Thu, 12/13/2012 - 13:49 | 3060023 Joebloinvestor
Joebloinvestor's picture

You need gold to build a nuke (fission type).

It surrounds the "pit" and keeps the plutonium from oxidising, ensuring a successful blast.

 

Bet ya didn't know that one either.

 

Thu, 12/13/2012 - 14:24 | 3060140 nofluer
nofluer's picture

and that still wouldn’t be enough to pay off our public debt.

No... but I bet confiscation of your 401 Ks and other retirement accounts would do nicely. As a nation, we're not really in debt. All the govt has to do is pull a Kirtchner (Argentina) and TAKE your retirement money and *poof* the USA is out of debt!

Thu, 12/13/2012 - 18:45 | 3061060 obthedgehog
obthedgehog's picture

Much of the debt will be repudiated by raising the collection ages for items like SS and Medicare, and stiffing direct pensioners.  I think it is only the holders of bonds that will be paid off in worthless money.  It does no good to send your 69 year-old grandmother a check for $900 that only buys $4.38 worth of stuff, better to tell her she needs to be a greeter at WalMart until age 77.  She might be disappointed but it'll make sense.  Bondholders get screwed by inflation all the time.  Individuals will figure it out and other governments are all doing the same thing so that's a wash.  Using those options will allow the government to continue to function while saving some face.

I'm not suggesting they won't do a lot of other ugly stuff (force you to convert your 401ks to Treasuries, raise taxes and regulations, throw a few folks into reeducation camps...) but I have a hard time worrying about $220T.  It can't be paid, so it won't.  That being the case, dividing that (or any other specific number) by ounces of gold is a meaningless exercise.

The only thing anyone needs to know about gold is that if the government doesn't confiscate it outright, it'll be worth something while paper and digits lose value.

Thu, 12/13/2012 - 14:44 | 3060210 fuu
fuu's picture

SELL MOAR GOLDZ!

Thu, 12/13/2012 - 14:52 | 3060255 crusty curmudgeon
crusty curmudgeon's picture

You had me at "bling king"

Thu, 12/13/2012 - 22:23 | 3061649 malek
malek's picture

 5.  That said, ETFs are actually the fasting growing market for gold demand, up 56% over the four quarters ending in Q3 2012. 
 Bottom line: Gold fans tend to bad mouth “Paper gold.”  They shouldn’t – demand here helps the overall investment story for the yellow metal.

I call complete and utter bullshit.

Fri, 12/14/2012 - 11:38 | 3062721 silverwatcher
silverwatcher's picture

China will not only increase gold prices but also the prices of silver. http://www.cachemetals.com/news/silver-articles/327-silver-lining-around...  

Fri, 12/21/2012 - 20:39 | 3088884 MeelionDollerBogus
MeelionDollerBogus's picture

Ya? Where do you think that new slope will fit on the scatterplot?

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