Lear Capital: Gold Price at Tipping Point

By Roger Baettig | February 20 2013 9:53 AM

It’s no secret, central banks are buying more gold than ever. Early 2012 estimates were blown away as central bank gold buying, for the year, reached 534.6 tonnes. While those numbers should have everyone clamoring for their own share of the world’s gold supply, the average investor is still the weak hand when it comes to owning gold.

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Since their introduction in 1986, more than thirteen million Gold Eagles have been sold. Because American Eagle Gold Bullion Coins (their official name) are the world's best-selling gold bullion coins, they provide instant liquidity. Minted at West Point, New York, American Gold Eagles come in four sizes: 1-ounce, 1/2-ounce, 1/4-ounce, and 1/10-ounce. The 1-oz Gold Eagles are by far the most popular and sell at small premiums over the value of their gold content. American Gold Eagles are 22-karat gold, which means they contain 91.6% gold and 8.4% of a copper-silver alloy. Because Gold Eagles are 22-karat, many investors incorrectly believe that Gold Eagles have less than an ounce of gold. This is not so.

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With global wealth estimated near $223 trillion, the world supply of gold pales in comparison at $7 trillion, give or take a few billion. Of the $7 trillion, Indian women alone are said to hold $1 trillion worth and central banks hold a reported $1.6 trillion. Although, it is suspected that China, whose gold imports have reached a 1000 tonnes per year, has grossly understated its own central bank and government reserves. That could skew our totals leaving individual investors with an even smaller share of world gold supplies.

Conservatively, that leaves $4.4 trillion of the $223 trillion of global wealth – less than 2% - in the hands of “other” private investors. Consider this! If each citizen in India and China, accumulated just an additional quarter ounce of gold in this next year, that would increase demand by $1 trillion at today’s price near $1600 per troy ounce. With global production at a mere $128 billion, that means someone would have to cough up $872 billion of gold, (12.4% of world supply) to meet this demand.

Now you see why stories surface from time to time to scare current gold owners out of their gold. Somebody always wants your gold. A recent story that comes to mind involved George Soros’ reported gold selling. The headlines read, “Soros Dumps Gold as Gold Price Sinks.” At first glance it sounds like George is selling gold now. In actuality George sold his gold in 4Q 2012, months before the gold price dipped to its current levels.

These stories always seem to be conveniently after-the-fact, totally ignoring the other side of the trade. You can’t have a seller without a buyer. If the headline read, “Central Banks Buy Out George’s Gold Supply,” the story would be perceived in an entirely different light.

The bottom line is this. The gold supply is finite and it appears central banks want it. Why? Consider this. Global debt, considering derivatives and unfunded liabilities is said to now exceed $1 quadrillion. Some 4 times the total of global wealth. According to this Wall Street Journal article, our own real total of debt, considering unfunded liabilities is $86 trillion. Did someone say we can tax our way out of that one? @AHHBullTweet. In my opinion, and it is just that, we are just a headline away from another debt crisis and a few trades away from a gold price explosion.

What do you think? @scottcarter @davethegolddoctor