LONDON (Commodity Online): The world has been hit with recession, subprime crisis, bubbles, inflation, deflation and stock market crashes in the last 10 years. But one asset has withstood the economic turmoil and remained as the most robust investment vehicle for the poor and the rich alike in the world is, of course, gold.
What is that lures people to invest in gold, the yellowish precious metal? Gold shops that showcase thousands of jewellery items glitter the streets of cities and small time towns in major gold consuming nations like India, China and the Gulf countries. Why are people bewitched by gold when other metals like platinum, copper, nickel and zinc have outperformed gold as far as investment is concerned?
Yes, gold lures and people love to buy gold for two main reasons: investment and jewellery.
Noted bullion analyst Mark Robinson says that gold has charmed people from time immemorial. If you study the history of gold, you come to know that people and rulers have been mesmerised by the passion to own gold. People continue to be fascinated by gold because the metal has withstood the test of time as the soundest investment in the world, he points out.
Gold is these days trading around $1100 per ounce. Nearly nine years back in 2001, gold was trading around $ 255 per ounce. So, in the last one decade, there has been more than 400% increase in the price of gold.
Gold price reached a historic record of $1227 per ounce in December last year in the wake of India's purchase of 200 tonnes of gold from the International Monetary Fund (IMF). These days, gold funds and investors are focusing their attention on China, as the dragon country has announced that it wants to take its gold reserves to a whopping 10,000 tonnes in the next 10 years. Currently, China's gold reserves are a little over 1,000 tonnes.
Now that there is a hue and cry over investing in gold, it would be prudent to know the status of gold in the world.
How much gold is there in the world?
According to www.galmarley.com, each person in the world owns around 23 grams of gold.
Here is a brief on gold from galmarley.com:
In the world there are currently somewhere between 120,000 and 140,000 tonnes of gold 'above ground'. To visualise this imagine a single solid gold cube with edges of about 19 metres (about three metres short of the length of a tennis court). That's all that has ever been produced.
Divided amongst the population of the world there are about 23 grams per person, about 1.2 cubic centimetres each. This equates to about $250 - $350 worth per person on Earth, depending on the current price.
The value of that short tennis court sized cube is about $1.8 trillion. This compares to the US government's sovereign debt of $6.9 trillion, which until 1971 was part-backed by gold. The US Gold Reserve is just over 8,000 tonnes - which is about 6% of the total gold ever mined. It is worth about $100 billion, or 1.5% of the US national debt.
$1.8 trillion is about one fourteenth of the paper based international bond markets, which themselves, at about $26 trillion, are about two thirds composed of western government sovereign debt almost all of which has appeared, co-incidentally, since 1971 and the declared supremacy of paper money, which was what allowed governments to borrow without caution. The total gold content of the world would pay - at current values - about 7% of the international bond market's sovereign debt. But of course 75% of the world's gold is not available to governments - being held privately as jewellery, bullion and coin. In fact only about 30,000 tonnes, about 1% of the world's sovereign debt is what is held in central bank gold reserves.
Meanwhile the entire gold stock of the world - including the privately held bulk - is much less than one half of one percent of the underwritten risk in the global financial derivatives markets.
The world has placed absolute trust in paper currency denominated assets. Investors have shunned gold for about twenty years while the notional value of paper based financial assets has exploded.
If people want to buy more and more gold, where is gold price headed? Will it explode into the $2,000 per ounce this year?
Last year, several analysts had predicted that gold would zoom to touch $2,000 in the next year thanks to shrinking supply of the yellow metal and rising demand for gold, gold exchange traded funds, gold bars and coins for investment.
Gold ETFs have been the most interesting investment vehicle for bullion investors in recent years. Gold ETFs allow investors to diversify into gold without the transaction costs and storage expenses associated with holding physical bullion or coins. The assets of gold ETFs increased 84% in 2009 as investors sought protection from a declining US dollar and economic uncertainty in the world, according to Credit Suisse estimates.
Credit Suisse estimates that leading gold ETFs like SPDR Gold Shares, iShares Comex Gold Trust, ETf Securities, Physical Swiss Gold Shares, PowerShares DB Gold and UBS E-Tracs Gold Total Return ended 2009 with nearly 2,000 tons of gold in their vaults.
Will gold continue to charm the investing world in 2010 and coming years?