For ages and ages, gold has been a part of most families' asset base, be it in the form of jewelry, coins or medals. Gold is gorgeous, relatively rare, and thus is viewed as a luxury good. Moreover, gold exhibits many characteristics of legal tender: its stability of value, metallurgical consistency, divisibility, worldwide renown, acceptance, recognition and low cost of storage.
Gold - the mere sound of the word triggers cerebral associations with luxury and power. It played a key role in the European conquest of Central and South America in the 16th century.
The treasure troves of the Incas in South America and the Aztecs in Mexico fueled the craving of Europeans and Spanish conquistadors for precious metals. These days "going for the gold" is a somewhat more peaceful endeavor.
Gold price on the move
For many months now, the topic of gold has been back in the headlines. The price of the metal has more than doubled since 2000, while investors in the US equity markets achieved only modest relative returns during that time frame. And even since the stock market low in October 2002, gold has performed better than the US equities market.
Given this euphoria, it can be easily forgotten that, over long periods of time, investments in gold have generated low or even negative returns. Driven by the second oil crisis, gold hit a high above USD 800 in January 1980 - today it trades in the area of USD 670. So is the sharp recovery in the price of gold since 2000 indicative of a bubble, or is its loss of value over the past 28 years merely being recouped and hence even more potential exists on the upside? If you view gold as an investment opportunity, this particular question will be of considerable interest to you. But if you stand in front of the display window at a jewelry store, it is perhaps the fascinating design of those works of art that becomes the primary motivating factor.
Supply and demand
From 1989 to 1997, the worldwide supply of recovered gold rose from 3,000 to 4,000 tons. However, since then, it has stagnated. Last year, goldmine production amounted to roughly 2,500 tons, with gold recycling accounting for just short of 1,1000 tons of that total. By liquidating a portion of their gold reserves in the open market, central banks also contributed 330 tons of gold to the available supply.
The jewelry industry last year processed 2,300 tons of gold, thereby representing close to 60% of global demand. The industry's demand for gold has declined over the past seven years from 3,200 to 2,300 tons per year. Apart from the jewelry sector, 644 tons of gold were used by other industries in 2006 (mainly in the electronics and dental areas). 637 tons of gold served for investment purposes in a narrower sense, of which a total of 372 tons was purchased in the form of bullion, coins and medals, as well as 265 tons for the backing of gold-based funds.
Gold jewelry consumption: Asia the leader
The largest consumer of gold jewelry is actually not the economic superpower America, but instead India. Third in line is China. Given its population of 1.1 billion, almost four times as many people live in India than in the United States, whereby per capita consumption of gold jewelry in India (ca. 0.5 grams per year) is only half as much as in the USA. The per-capita consumption data from other countries illustrates cultural differences. For example, India's personal spending on gold jewelry is higher than that in Japan, but people in Turkey buy more than in the US or Italy on a per capita basis. Consumption is particularly high in the wealthy Gulf states, because the cultural affinity with gold is tied to the desire to evidence one's prosperity. With an annual 20 grams per person, gold consumption in the United Arab Emirates is extraordinarily high; but it must be borne in mind that sales to tourists are also included in that figure. And as is known throughout the world, Dubai is a dream destination for the purchase of gold jewelry.
How do we view the prospects for gold in the coming years? Owing to the rapid increase in private earnings in the emerging countries, growing demand for jewelry has to be reckoned with. Despite the fact that India's economy has recorded an average 6.8% annual rate of GDP growth over the past six years, the country's demand for gold jewelry has declined. The damping effect of a surging gold price would appear to have had a stronger impact on demand than the driving force of heightened prosperity.
Will we run out of gold?
The US Geological Survey estimates that the global reserve of unprocessed gold amounts to 90,000 tons. If one divides that number by total mine production in 2006, the unexploited gold still in the ground would suffice for another 36 years. However, it has to be borne in mind that the figure includes only those reserves of available gold that meet certain minimum physical and chemical standards, and that the ore can be economically recovered within the time horizon of the forecast. Moreover, the remaining years of supply of gold in the ground are somewhat fewer than those of unexploited crude oil supplies, which are estimated at 41 years. Hence there is further room for fantasy in terms of the price of gold.
The opinions of gold-price pessimists appear to have had no restraining influence on the desire to buy jewelry. Over the long term, the price of gold should rise in reflection of decreasing reserves. The yellow metal is not only a collector's item; it is also attractive for investment purposes.
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