Gold has been considered a key store of value since antiquity. In ancient times, its natural properties resisting corrosion and degradation made it the best form of measurable value to facilitate trade. It has historically encouraged empire-building campaigns, financed wars and was used as the measure of the money-supply of nations during the era of the gold-standard in the late 19th century.
For several decades of post-war economic prosperity and relative stability, the world did not care much for gold other than for its beauty in jewellery and decorative fixtures.
In today’s world, faced with unprecedented debt problems, high unemployment and devaluing currencies, investors are reverting back to gold’s attraction as a store of value.
Importantly, the central banks of countries with surpluses in dollars and euros have been buying gold to diversify their reserves.
It has become apparent, following the global financial crisis, that indebted nations will print money to inflate their way out of trouble. This year the ECB and the FED have made this a priority, with the launch of successive, unlimited quantitative easing. Demand for gold among investors, therefore, keeps rising.
But what about supply? It is very difficult to account for all the “above-ground” gold available in the world today and due to its natural indestructible properties the whereabouts of gold may be unknown but it will exist somewhere.
Some may be in sunken galleons at the bottom of the sea, some hidden in churches and chapels, some in gold-leaf decorating historical artefacts and buildings around the world.
Much of it is not available to trade for other goods. Investors wanting gold for their portfolios need to buy bars, coins or, more recently, exchange traded funds, most of which back their shares with gold bullion.
It is useful to compare new supplies of gold, from mines and re-cycling, to the growth in demand in order to determine the real trends.
According to data from the World Gold Council, global demand in 2011 was 4,067 tonnes, worth $205bn.
Of that demand, jewellery accounted for 1,963 tonnes – 48 per cent – while investors bought around 40 per cent or 1,641 tonnes, with the balance split equally between central banks and technology.
By comparison, in 2000, world demand was 3,281 tonnes valued at $29bn at the then prevailing average price of just $279 per ounce.
Jewellery then accounted for 2,901 tonnes – 88 per cent – while investors demanded only 379 tonnes.
In volume, demand was 24 per cent greater in 2011 to that in 2000 but, in value terms, it grew sevenfold.
Mine supply, on the other hand, was 2,573 tonnes in 2000, growing to 2,809 tonnes by 2011, a modest 9 per cent growth during the period. The difference between mine supply and total demand is typically met by recycling and adjusting stocks.
Investment demand for gold grew more than four times in volume terms during these 11 years of bull markets but, in value terms, investors bought $98bn worth of gold in 2011, about 30 times greater than the $3.3bn they invested in 2000.
Not surprising, then, that investment demand has been driving the gold price higher, and it will likely continue to do so until the world’s problems are resolved.
Angelos Damaskos is the portfolio manager of the MFM Junior Gold portfolio. The views expressed here are his own.