Commodities | Sep 02 2010
By Greg Peel
There is little doubt gold enjoyed a secular shift in demand around mid last decade when the US market introduced its first gold exchange traded fund. An ETF allows an investor to hold a charge on a specific amount of existing physical gold, instead of either holding actual gold, holding shares in a gold miner, or holding paper gold in the form of futures contracts. Each of the former three options has its risks, from security to mining risk to counterparty risk.
So there has been a sense of self-fulfillment in the success of gold ETFs, of which there are now many across the globe. But we have also experienced an underlying rebirth in the acknowledged value of gold over a decade or more which could best be called the “decade of debt”. At the end of the day, if you can't trust fiat currencies, be it the reserve US dollar, the euro, yen, Swissy or even any basket combination, all that is left is gold.
At the end of 2009, the US remained far and away the largest holder of sovereign gold with over 8000 tonnes. Germany was in second and the US-controlled IMF third with over 3000. Italy (4) and France (5) had over 2000, and China (6 with a bullet) over 1000, with the country we probably most associate with gold – Switzerland – coming in at number 7 with over 1000.
In pure form, all the rest of the world's gold is held by “investors”, with the bulk of that being in the form of jewellery. Although over three-quarters of each year's global gold production ends up as jewellery, and some coins, the amount of gold held on trust for investors of ETFs has been growing steadily. Indeed, Bloomberg notes that in July, ETF gold holdings reached a record 2078 tonnes. That's twice as much as Switzerland can lay claim to, and puts the “ETF central bank”, if you like, in sixth place ahead of China. 278T of that 2078t was acquired in 2010 alone.
[Note: Bloomberg tracks only the ten most popular gold ETFs. There are more.]
Over that period there's only been one seller of any note. The IMF was granted permission last year to offload 403t of its 3000t to finance the various bail-out packages and assistance commitments it has become responsible for post-GFC. The plan was not to upset the gold market, such that a five year selling plan was established. Then last year India jumped in and bought half of it. Mauritius and Sri Lanka also picked up some scraps.
In July, Russia bought 16t to take its holdings to 726t and ninth place on the list. Central banks have been net buyers in 2010.
In the past, central banks have tended to be net sellers. In the past, ETFs didn't exist. In the past, China and India did not have the wealth to put a dent on the price of gold jewellery. In the past, the reserve currency, and fiat currency in general, was considered by most to be “safe”.
It is thus perhaps no surprise that “gold's most accurate forecasters”, according to Bloomberg's tracking, have raised their 2011 forecasts for the average gold price. The current winner on accuracy has just moved to US$1400/oz. Note that another move up next year would mark the tenth straight yearly gain, and that nine years to date has seen gold rally in US dollar terms by no less than 320%.
Does this bubbling market scare the investors? No. While ETFs have become hugely popular, the paper gold market on Comex is still far, far and away the biggest gold market on earth on a non-delivery basis. Currently the biggest position on Comex is in the US$1500/oz calls expiring December this year.
But no one is talking bubble. It's a secular shift. The world has experimented since 1972 with a currency system no longer backed by gold. In 1980, gold hit US$850/oz. It depends exactly what sort of inflation measure you use, but that's around US$2300/oz in today's dollars.
So one could argue gold has not yet reached its former high.