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Goldseek reports
that gold remains under-invested.
(emphasis mine) [my
comment]
Fear,
Evil & Gold
By:
Adrian Ash, BullionVault
--
Posted Wednesday, 20 May 2009.com
Deprecated
and reduced as a financial asset, gold is fast-gaining new buyers yet remains
under-invested compared to previous crises...
"FEAR, Mr. Bond, takes gold out of circulation and hoards it
against the evil day," as 007 learns from a Bank of England officer in
Ian Fleming's Goldfinger (1959).
So "in a period of history when every tomorrow may be the evil day, it
is fair to say that a fat proportion of the gold dug out of one corner of the
earth is at once buried again in another corner."
Evil-day gold buying really motored since the credit collapse began in August
2007. Soaking up investment dollars worldwide, in fact, new allocations to
the metal – whether trust-fund or owned outright – swelled by 38%
during the first quarter of 2009 compared with total demand between Jan. and
March 2008, according to marketing-group the World Gold Council
(WGC).
Within that figure, what the GFMS consultancy (who supply the WGC with its
data) calls "identifiable investment" leapt 248% compared to Q1
'08. And Gold ETFs made the headlines once more, sucking in "another
quarterly record" as new inflows required 465 tonnes of metal to back
them, thus dwarfing the previous record of 149 tonnes set in the third
quarter of last year.
That
doesn't mean the world's investors are now all in, however. According to the World Gold Council's Marcus Grubb last
month (using we-don't-know-which data), current Gold Investment allocation
stands at less than 0.6% of total global wealth.
[This
chart shows that owning gold is not even close to being
"mainstream", yet...]
It
makes a nice pie chart, and it offers a useful snapshot of different asset
classes vs. each other. But here at BullionVault, we also think the idea's
worth refining. Because this estimate both over-states liquid assets in
toto and under-estimates the stock of gold available to investment flows
– whether retail or wholesale.
First,
note the scope for double-counting between pension, mutual and insurance
funds. I'm not saying the WGC's data trips up on that error, but you can see
how likely it seems given the end-allocation categories applied. For
instance, "hedge funds" are stripped out separately (as are REITs
and private-equity), even though institutional allocations via funds-of-funds
will be counted elsewhere under the broader "funds" title.
Similarly,
but more pertinent, the outstanding quantity of "gold – investment
stocks" underplays the true volume of metal held as a store of wealth. Simply
counting the "investment" volume excludes fully 84% of the
above-ground supply, as another chart from the WGC's presentation shows.
Why
not also include "official sector" gold hoards? Sovereign wealth
funds and FX reserves were included on the other side of the ledger, after
all.
More crucially still, why not include jewelry? Trying to split out the volume
of trinkets held for aesthetics alone might feel easy enough to a Western
analyst just back from window-shopping at Mappin & Webb. But across
south-east Asia, and most particularly in India – typically the world's
No.1 destination for physical gold each year – large, chunky necklaces
and bracelets make for "investment jewelry", acting as a store of
wealth in the absence of any formal banking network.
Still, the point is well made, we believe. Gold remains but a slither of
investable wealth – albeit a fast-growing slither as the value of other
assets has dropped.
"Gold [has] been deprecated and reduced as a financial asset," as
Jeffrey Christian of the CPM consultancy put
it earlier this year. "In 1968 gold may have represented 4.5% to 5.0%
of the world's wealth...By the 1990s it was down to 0.2% of the world's
wealth. Not that gold was falling in value so much as the other wealth
– stocks, bonds, paper assets, government bonds, corporate bonds, bank
deposits – were exploding once the tie to gold was severed.
"In 2006 gold represented 0.2% of world wealth. At the end of 2007,
it was about 0.4%. Depending on what you think about wealth destruction in
2008, it may have been 0.6%." [Notice a pattern
here?]
That figure just about matches the WGC's estimate of 0.7% (perhaps they used
the same inputs and excluded the same volumes of central-bank and jewelry
gold?). It also contrasts with our own Estimate of Gold as a Proportion of
Investable Wealth at nearer 2.7% by the close of 2008.
Either way, gold is fast-attracting attention – both from
nay-sayers, retail investors and new die-hard bulls amongst the professional
institutions. Regulatory filings show legendary hedge-fund manager John Paulson took
his position in the SPDR Gold ETF to
30% of his portfolio during the first quarter of 2009. Paulson & Co. now
owns 8.7% of that paper – as well as significant chunks of the Gold
Miners ETF (GDX), Kinross Gold (KGC), Gold Fields (GFI) and AngloGold Ashanti
(AU) – if not any actual bullion itself.
Does that in itself make gold a buy? Of course not. But compared to the
evil days of 1930s depression – or the fearful inflationary panic of
the late 1970s – the world's wealth remains very under-invested in
metal right now.
My reaction: The
graphs above should help people conceptualize the demand/supply dynamics of
the gold market.
1) Current Gold Investment allocation stands at less than 0.6% of total
global wealth.
2)
In
1968 gold may have represented 4.5% to 5.0% of the world's wealth.
3)
Gold is fast-attracting attention, and gold share of the world’s wealth
is rapidly increasing.
4)
Only around 27,000 tons of gold is investment form (bars, coins, etc…)
5) Another 85,000 tons of gold is held in the form of jewelry. If gold prices
soar, much of this jewelry gold will be turned in and melted into gold.
However, there is a limit to how fast this process can happen.
6) In June 2007, the amount of gold derivatives (gold
IOUs) exceeded 50,000 tons. Since then,
this amount has undoubtedly grown.
Conclusion: The
key point to take away from this is that gold is still hugely undervalued.
When the dollar collapses, gold will rise to at least 5.0% of the world's
wealth.
Eric
de Carbonnel
Market Skeptics
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