The yellow metal has maintained its relative price strength during the most recent financial market correction, and gold is now closer to its all-time high than most stock market indices. As an illustration of gold’s leadership, note the following chart. At no time in the last four years has the performance of the benchmark S&P 500 Index (SPX) outstripped that of gold. The following chart compares the relative percentage performance of the SPX versus the iShares Gold Trust (GLD), a popular and heavily traded gold ETF that tracks the gold price.
As you can see, gold has dramatically outstripped the stock market in terms of relative percentage gains over the last three years since the U.S. economy went into recession. Gold has been the major beneficiary of safe haven funds, as investors rushed to buy gold as a defensive investment. What many analysts are wondering, though, is how much of the gold bull market of recent years is due to safe haven-investment flows and how much is due to other factors, such as industrial and jewelry demand.
A Gold Demand Trends report released on May 19 by the World Gold Council (WGC) suggested that much of gold’s gains in the first quarter of 2011 were driven by growing demand from China and India. Analysts have pointed out that the increasing prosperity of those two countries has made it easier for its citizens to purchase gold bullion, in coin and other forms, but primarily as jewelry, which in India serves the dual role of decoration and personal investment.
The WGC report estimated that Indian households own more than 18,000 tons (18 Kt.) gold, making the country the world’s biggest holder of gold. By comparison, official gold reserves in the United States total about 8,100 tons. Commenting on these statistics, BusinessWeek magazine wrote: “Indian consumers aren’t done buying: In this year’s first quarter, they purchased an additional 206 tons of gold jewelry and 85 tons of gold bars and coins. And China’s appetite is growing rapidly and could soon overtake India’s.”
BusinessWeek found that if Chinese and Indian demand is stripped away, “the rest of the world’s hunger for gold isn’t nearly so vibrant. Some new buyers have shown up; some prior speculators are cashing out. But a global flight to gold as a hedge against Armageddon doesn’t appear to be taking shape.”
There is reason to believe, however, that this conclusion is mistaken. To begin with, jewelry demand doesn’t account for the bulk of the tremendous run-up in gold’s price over the last few years. Gold’s strong performance can be linked primarily to the following four classes of buyers:
- Individual investors
- Central banks
- Hedge funds
- ETF holdings
Individual investors in Western countries bought gold as a safe haven investment in the aftermath of the 2008 credit crisis, for obvious reasons. Fear was very high in 2009 and 2010, and demand for gold and silver bullion coins in many categories hit record levels. The extraordinary increase in gold’s cost-per-ounce may have pushed many marginal players out of the market in the last year or two, but that demand was easily supplanted by institutions and hedge funds. Indeed, the appetite for gold displayed by these big money investors has been an oft-overlooked factor in gold’s upside run since 2009, just as it was in the years preceding the 2008 financial collapse.
Gold Fields Mineral Services (GFMS) recently published the 44th edition of its annual survey of the world gold market, Gold Survey 2011. According to GFMS, gold investment demand last year continued to drive the gold price higher; it rose nearly 26% in 2010 on an annual-average basis. GFMS noted that global gold investment in 2010 was the second highest on record, while world gold investment set a new high last year, in value terms. ETF holdings, notably, experienced the second highest annual gain in 2010 according to GFMS.
In more recent times, added to the list of key drivers behind the metal is a fifth major player—academic institutions—which have been increasingly looked to the yellow metal as a long-term investment. It was reported in April that the University of Texas Investment Management Co., which also handles Texas A&M, had 5% of its $19.9-billion endowment in physical gold bullion. The endowment took delivery of 6,643 bars of gold (664,300 oz.) in what is widely regarded as an extremely unusual move for a typically conservative university endowment.
This may not be the “flight to gold as a hedge against Armageddon” that BusinesWeek talked about, but it makes you wonder what exactly the folks at Texas Investment Management Co. are so concerned about that they would take delivery of physical gold. Perhaps, they know something the rest of us don’t.
If not Armageddon, what reason(s) could there be for owning gold in the years ahead? When it comes to evaluating gold’s long-term prospects, two factors must be considered. Within the typical lifespan of an investor, there are two major periods to buy gold. The first is in the face of hyperinflation, due to its proven performance as the ultimate hedge against an erosion of purchasing power. For example, in the hyperinflation that began in the late 1960s and lasted until about 1980, gold went from $35/oz. to around $800/oz.—proving its utility as an inflation hedge.
The second time to buy gold for the long term is in the face of economic collapse or financial market volatility, as gold has a proven record as the ultimate storehouse of value. For instance, after peaking in 1980 when hyperinflation ended and disinflation began, gold bottomed in 1999 at about $250/oz. at the beginning of economic winter. It has been going up since then, notwithstanding temporary setbacks. If history repeats, gold should begin to accelerate when economic collapse comes to bear, as we approach the fateful year 2014, when the 60-year long-wave, or Kondratiev wave, cycle is scheduled to bottom.
As Cycle Analyst Samuel J. Kress has observed, any portion of the similar increase from 1966–1981 bodes for astronomic prices in gold from here. In recent decades, the buy-and-hold mentality for conventional equities worked until revolutionary changes at the turn of the century retired this strategy along with the buggy whip. “Consequently,” he said, “replacing that gold will be the contemporary equivalent [of equities] and investors should retain long-term positions in gold and add to positions on interim corrections.”
Regardless of whether the economic-Armageddon scenario comes to fruition, there are several reasons gold will maintain its long-term bull market, which began at the turn of this century. If you believe the government will continue debasing the U.S. dollar, the gold price will benefit from this debasement policy. If, on the other hand, you believe the economic, Kondratiev winter of the 60-year cycle will accelerate in the next few years, history has proven conclusively that gold should once again be the safe haven du jour for investors seeking asset protection. Armageddon or not, gold’s long-term prospects are still promising.
Clif Droke is the editor of Gold & Silver Stock Report, published each Tuesday and Thursday. He is also the author of numerous books, including most recently, Gold & Gold Stock Trading Simplified. For more information, visit www.clifdroke.com.
There is not that simple with silver.
And it’s not because of inflation and some investors or speculators.
Do you know how called silver in China among the small circle of insiders?
“SILVER – is the OIL of 21st century.”
Each square foot solar array – it is silver.
Each element of the solar battery contains about 1.2 grams of silver per 1 watt of energy.
http://www.commodityonline.com/news/It-is-time-for-silver-hunting-30198-3-1.html
India announced plans to increase its power of solar energy to 20 GW per year by 2020 from zero at the moment.
The Chinese have announced plans to raise capacity from 5.5 gigawatts to 30 gigawatts by 2020.
And in fact, the U.S. had already announced the same.
There’s your answer to the question of why China, traditionally a major exporter of silver in 2010, suddenly found himself among the largest importers of “energy metal.
Silver was a unique metal even before of introduction of “green energy”
Silver combines both the monetary property of gold and industrial properties of palladium and platinum.
With the advent in the silver third property – energy component, rise of world prices on this metal has become inevitable.
For a long time monetary governance in the U.S. has artificially held back, and continue to keep the prices of silver and gold.
http://news.goldseek.com/GATA/1305320456.php
Why do they do this? Let’s find it out.
Silver prices are inextricably linked with gold prices through so-called gold/silver ratio.
Millions of private and institutional market participants build they own trading strategy which based on the fact that for 40 ounces of silver they can buy one ounce of gold. When it’s well-established value of one ounce of gold that expressed directly in a few ounces of silver shifts in one direction or another, then market participants through their actions are driving it back.
Whether we like it or not, but even today who controls the world gold market – controls the world monetary system as a whole.
Only thanks to initial binding of dollar to gold, America’s national currency gets the status of world reserve currency with all the ensuing consequences.
After that the U.S. starts manipulating with gold.
Goals of that were not only turning gold in the “goods” relatively of paper U.S. dollar, but and artificially keeping the price of gold. A special role in these manipulations, belong the organization with the maximum degree of instability in gold prices, denominated in “a far more stable and predictable – the U.S. dollar.
Ruling in FRS bankers and appointed in their interests the U.S. government is quickly realized one simple truth: If gold will have a true price on goods and thus it will be stable, then who in the world will need their green paper called “dollars”?
But the worlds gold market is huge and it is difficult to control even for FRS – holder of the world monetary printing presses under the brand name “U.S.”
And then, in the bowels of FRS solution was made: to regulate the price of gold, through silver prices via referred above gold/silver ratio.
Silver market is very small and its regulation is not difficult and does not require huge expenditures from such a major regulator, as the U.S. FRS.
Summing up we can draw the following obvious conclusions:
- Who controls the world market for silver, controls the world price of gold through the gold / silver ratio (GSR).
- Who controls the world price of gold, controls the world monetary system.
But all this controlling idyll come to an end when China start to use FRS manipulations with the prices of silver and gold in order to replenish their own Official reserves (Gold reserves) In exchange on the accumulated trillions of dollars. From this moment any manipulation of the U.S. FRS with the prices of silver and gold began play into the hands of not only the U.S. dollar, but also the interests of China.
Any manipulation with the FRS with the prices of precious metals China has become used to supplement to replenish their gold reserves by these metals with possible lowered prices.
And FRS’s management was stunned. On the one hand, they forced to permanently reduce and hold prices of precious metals for providing inviolability of the world’s position of dollar, but in the other hand, each of that operation for decrease leads to the release in the market from china billions of dollars and irrevocable buying-out from the market any volume of gold and silver at the lowest possible prices.
In this year, China for the first time in history has overtaken India in terms of purchasing gold.
Yes, there is not that simple with silver. Among the properties of silver appeared radically new “energy» component.
Besides that, with silver starts big game – battle with U.S. and China for a control for world prices for gold. And therefore battle for a control over the entire world monetary system in total.
All this leads to the following prediction:
The index of gold / silver ratio will gradually shift from the current ratio 1:40 to 1.16 and higher.
That is, silver will go up more quickly than gold. I do not exclude that such appreciation will occur through the reduction of silver to $ 20 per ounce. However, I have no doubt that the next target for silver is far beyond the $ 50 per ounce.
http://www.commodityonline.com/news/Silver-prices-up-3733-last-time-what-about-now-39361-3-1.html
For each ounce of gold that exists on the planet, there are approximately only 5 ounces of silver. http://www.oroyfinanzas.com/2011/05/el-ratio-de-las-existencias-totales-de-oro-y-plata
(Spanish)