What’s going on with gold? It’s been left behind in the great base metal melt up. China’s demand for base metals-and a desire by global investors to hedge against a falling US dollar by owning tangible assets with real economic value-has powered the rise in zinc, copper, lead, iron ore, and aluminium (and the profits for Rio, BHP, and others.)
Gold, by contrast, has little real economic utility. About 300 tonnes of gold are consumed each year in various electronic and industrial applications, according to the World Gold Council. By contrast, the Silver Institute reckons some 575 million tonnes of silver are used in industrial and photographic applications each year. Gold is dignified. Silver works.
Annual gold mine production has actually been in decline since 2001, when it peaked at 2,645 tonnes. Australia produced 249 tonnes of gold last year, down from the previous year and third behind the US at 252 tonnes. South Africa again topped global gold production, with 275 tonnes. Yet even South African production was down 8% in 2006 to its lowest level since – get this – 1922.
With annual mine supply in decline-owing to increased production costs and the fact that finding gold is just plain hard-what about gold demand? Well, industrial demand is the aforementioned 300 tonnes. New gold ETFs scooped up over 600 million tonnes of the stuff. But this burst in investment demand seems to have abated after the funds launched. Indian jewellery demand is cyclical.
Gold’s demand as money is what has lagged. With huge returns available in other asset classes, gold has been left behind. For now.
It doesn’t help that there are huge above-ground supplies of gold. These supplies-especially the 23 thousand tonnes from the top ten central bank holders of gold-threaten to enter the market any time the gold price starts to look like challenging US$700. There are even some who suggest that gold is being deliberately held down by central banks. But we won’t get into that today.
All we can say now is that when the demand for gold as money and a store of value goes up, so will the gold price. As a capital asset, gold compares poorly to other assets investors are choosing today. Until those assets decline in value, gold’s appreciation will be sluggish.
Markets and Money