The Truth About Gold
The Truth About Gold
The Truth About Gold
BUSINESS INSIDER
Image: AP Photo/Mark Lennihan
table of contents
a brief intro (3) what drives gold prices (7) but wait, thats not all (20) what about real interest rates (24) so where are prices going (29) everyone has an opinion (37) the actual production of gold (45) the Fed responds (52) appendix (58)
For thousands of years, gold has been used as a currency, investment, and commodity cementing its importance as an asset
4600 B.C.
Earliest evidence of gold used as jewelry China legalizes the use of gold as money Gold coins are minted by King Croesus (present day Turkey); Julius Caesar introduces a gold coin as common currency
1091 B.C.
Venice and Great Britain issue the gold ducat and florin, respectively
Spain launches its hunt for gold and finds massive reserves in Brazil in 1700. By 1720 the country is producing more than 60% of the worlds supply Gold production begins in the U.S.
1799
1848
Gold rush gets underway in the U.S., with more than 300,000 people moving to California
The U.S. passes the Gold Standard Act The Gold Reserve Act of 1934 ends the minting of gold coins and raises the price of gold to $35 per ounce to trade in to the treasury (formerly set at $20.67) President Nixon ends the ability to trade U.S. dollars in for gold Gold sets a then-record high of $870 per ounce China becomes the worlds largest producer of gold after deregulating its market The first gold ETF begins trading The Great Recession in the U.S., and a larger global slowdown, push gold prices over $1,000 for the first time ever
1900
1933 to 1937
1971
1980
2001 to 2007
2004
2008 to 2010
The price of gold remained unchanged following the Gold Reserve Act of 1934 (which set a fixed rate). But in the 70s the price of gold began fluctuating as markets set pricing PRICE OF GOLD (TROY OUNCE PER USD)
Over the past five years, the price of gold has rallied to record highs, making it the center of the investment conversation
PRICE OF GOLD (TROY OUNCE PER USD)
Then, after hitting highs in 11, gold retreated. Where its going next is anyones guess
PRICE OF GOLD (TROY OUNCE PER USD)
In the last decade, booming demand from emerging markets has been a major driver
In 1999 Asia accounted for 39 percent of global gold demand
By 2010 the Asian market reached 57 percent of total market demand
Those increases are being driven by India, China, and Vietnam
Over the past decade, gold prices have followed the uptick in Asian demand
GMOs Amit Bhartia and Matt Seto charted the two figures through 2010 the results highlight Asias importance in gold pricing
And gold has generally been bid up in overnight trading in Asia even as it sells off in London AM trade
PRICE OF GOLD INDEXED (2007 = 100)
Prices in India currently the worlds largest market are driven by consumers
Gold prices appreciate in November at the time of Dhanteras, the start of a fiveday gold buying period
However recently both countries have logged slower gold demand growth concurrent with golds sell off
Jewelry sales remain the largest input of gold demand, although it declined marginally year-on-year
Jewellery has been the prime source of demand for gold over many decades, and it remains in poll position. In 2010, it accounted for just over half of global demand and the trend has persisted this year. Consumer appetite is in evidence across the world, particularly in golds cultural heartlands, China and India. World Gold Council
Demand by central banks has also been a major driver now topping $82 billion
Growth has been driven by the rapid ascent in average prices year-on-year Investment, as a portion of overall demand, jumped 160 basis points to 40.3 percent of total demand in 2011
Geographically, the Pacific region accounts for a substantive 58.1 percent of global gold demand
(jewelry and investment)
On the ETF investment side, more than half of all gold is held by the SPDR Gold Trust (GLD) at 41.1M troy ounces
Top ETF Holders of Gold (as of April, 30, 2012):
GLD: 41,099,101 troy ounces (53.8%) ZKB: 7,072,607 troy ounces (9.3%) IAU: 5,792,446 troy ounces (7.6%)
And those ETFS have been increasing their investments in tandem with golds appreciation
Since 2003, there are now 21 major gold ETFs and ETNs
Largest Asian ETF: Gold Benchmark ETS (IN) with 0.4% of total
Largest Australia/Pacific ETF: GBS (ASX) with 0.6% of total Largest Middle Eastern ETF: GOLDIST (ISE) 0.07% of total
And investors generally shift assets into gold ETFs when volatility peaks
Citi charted ETF flows to the VIX index and found some graphic corollary between the two
Investors moved to gold after a number of major events, including Lehman Brothers bankruptcy and the Sept. 11 attacks
Many economists have offered the premise that gold rallies when real interest rates fall below 2%
The real interest rate is simply the nominal interest rate minus inflation
They point to the 80s and 90s when the real interest rate ran mostly above 3%
When inflation began to cycle higher at the start of the 80s, golds ascent was cut short
That said, the recent run-up (2001-2011) in gold has yet to eclipse the highs hit at the beginning of the 80s when prices are adjusted for inflation
PRICE OF GOLD (TROY OUNCE PER USD) INDEXED TO CPI
At the start of 2012, BI surveyed commodity experts and found an overwhelmingly high price targets even after the precious metal had sold off
LOW $1,850/oz. MEDIAN $1940 HIGH $2,200
The banks weigh in: DEUTSCHE BANK: Consequently, our strongest conviction trade remains long precious metals and specifically gold. In an environment where real interest rates are negative and the US equity risk premium is high we expect this will sustain strong private and public sector demand for gold. GOLDMAN SACHS: We expect gold prices to continue to climb given the current low level of US real interest rates. Further, with our US economics team forecasting slower US economic growth throughout 2012, we expect US real interest rates to remain lower for longer, supporting higher gold prices. MORGAN STANLEY: Beyond the safe haven status associated with uncertainty surrounding the European sovereign debt crisis, we also believe that: 1) the gold to oil ratio highlights that, on a long-term real purchasing power basis, gold is close to fair longterm value; and 2) the prospect of sustained negative real interest rates reduces the opportunity cost of holding non-yielding assets.
Estimates on this page as of 1/15/12
But since then, targets have been cut nearly across the board as gold faltered. Citi now predicts 2012 prices of $1,720 per troy ounce
Gold prices should remain supported given low real interest rates and continued financial interest from central banks and private investors. However, price action could be volatile as markets are caught between changing inflation and monetary policy expectations, political turnover and sudden demand for liquidity. - Citis Edward Morse
Morgan Stanleys Hussein Allidina remains bullish on gold despite the likely end of QE. Morgan now projects a 2012 PT of $1,825 per troy ounce. We do not believe the removal of trades predicated on additional liquidity and further unconventional monetary policy signal the end of the bull market in gold. This 'liquidity trade' is only part of the investment case and has also been overwhelmingly focused in the paper gold market, rather than in the physical investment market. Indeed, the recent price weakness appears to have encouraged further physical demand for gold, reflected in heightened inflows into physical ETFs.
UBS, which used to have an above-consensus gold estimate, slashed its price target 18% at the end of the first quarter to $1679
UBS believes that capital flows are accelerating out of emerging markets and that tighter liquidity is hurting commodity demand. Furthermore, China has not been stimulating private construction, lowering commodity intensity. Coupled with the risk of a cyclical slowdown in the US that may trigger renewed credit stress, UBS has reduced its near-term commodity outlook. UBSs Brian MacArthur
Image: TwicePix/Wikimedia Commons
But over the past decade, the price of gold has far outpaced U.S. house prices
After hitting highs in 2006, the S&P Case-Shiller Index has lagged gold price increases
PRICE OF GOLD (TROY OUNCE PER USD) DIVIDED BY S&P C/S Index (SEASONALLY ADJUSTED)
Warren Buffett
Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.
Image: Michael Loccisano/Getty Images
Ben Bernanke
"Gold standards are far from perfect monetary systems have to go to South Africa and dig up tons of gold, and move it to New York and put it in the basement of the Federal Reserve bank of New York."
Ron Paul
What did the Romans do to their currency? The Byzantine Empire had a gold standard for a thousand years and they did quite well and they didnt fight wars. But the Roman empire eventually destroyed their currency. They put in wage and price controls before they diluted the metals. They inflated. They thought wealth could come by fooling the people.
Peter Schiff
Whats so appealing about gold is that it does have intrinsic value. Its paper money, its the dollar and the euro that ultimately have no intrinsic value. They are just pieces of paper with numbers written on them. The government can put any number they want on that paper, but gold is real. The government cant create gold out of thin air, it has to be mined. The big picture is all bullish for gold.
Image: Jessica Hill/AP Images
Jim Grant
uncomplicated formula, and all you have to do is divide one by n. And n, Im glad you ask, n is the worlds trust in the institution of paper money and in the capacity of people like Ben Bernanke to manage it. So the smaller n, the bigger the price. One divided by a receding number is the definition of a bull market.
Image: Bebeto Matthews/AP Images
Nouriel Roubini
But, since gold has no intrinsic value, there are significant risks of a downward correction. Eventually, central banks will need to exit quantitative easing and zero-interest rates, putting downward pressure on risky assets, including commodities. Or the global recovery may turn out to be fragile and anemic, leading to a rise in bearish sentiment on commodities and in bullishness about the US dollar.
Image: Chiang Ying-ying/AP Images
1. Mine is excavated, elevator shaft installed, cooling systems set up, etc.
3. Materials are sent up to ground level where a sieve filters gold from excess earth
6. The refiner reworks the gold into a bar over 99% purity, stamps with a unique identifier and ships to its final owner
Image: CNBC
The physical production of gold is not central to the U.S. or Europe in fact, countries like China, Russia, and Australia are huge producers
And production does not simply mean mining scrap supply/recycled gold accounts for more than a third of the worlds supply
Increased production of gold will be driven by two new large projects in Latin America
(+): Pascua Lama on the Chilean-Argentinean border and Pueblo Viejo in the Dominican Republic; as well as increases in Mexico and Brazil (-): Declines at Yanacocha and Lagunas Norte in Peru
Goldcorp
Kinross
Newmont
UBS recently cut guidance on many gold mining companies because of the weakness in commodity prices
EPS price targets are now on average 37 percent lower than earlier this year
After repeated attacks in 2012 to end the Fed and return to a gold standard, Ben Bernanke hosted a lecture series at GWU heres what he said:
One of the big problems: the U.S. would be exposed to bad policies of other countries using the gold standard
And lastly, a gold standard can cause huge medium term issues
The Fed pointed to a global shortage of gold in the 19th century that hurt farmers who faced declining crop prices, but non-fluctuating mortgage and debt payments
e-mail: eplatt@businessinsider.com
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