Gold Fundamentals

Gold is mainly used for jewellery, industrial application like electronics, dental purposes, and as investments in the form of gold bars and coins.


Source: World Gold Council, www.gold.org

To derive more insights, take a look at the supply side of gold.


Source: World Gold Council, www.gold.org

Notice how the Central Banks shifted from the supply side in earlier years to the demand side starting 2010? For a clearer view, kindly see the chart below:


Source: World Gold Council, www.gold.org

This change in trend is the reason why gold soared in 2011.

It is important to understand that Gold is not just a commodity but it is money. To compare money and gold:

For centuries, the gold standard existed. There are three types of gold standard:[1]
1.   Gold specie standard – it is where actual gold coins circulate in the monetary system.
2.   Gold exchange standard – it is where a metal of lesser value circulate in the monetary system but authorities guarantee a fixed exchange rate with another country that is on the gold standard. In effect, the country in gold exchange standard can maintain its currency in parity with gold without maintaining large gold reserve.
3.   Gold bullion standard – gold coins do not circulate but authorities maintain a fixed exchange rate between the currency and gold.

On August 15, 1971, the gold standard officially ended after President Nixon of the United Stated ended the direct convertibility of the dollar to gold.[2]

At present, no country uses gold standard as the basis of its monetary system but instead some hold substantial gold in percentage of their total reserves. Statistics of a few countries that might interest you are as follows: [3]

The cash that is in your pocket right now is called currency. Currency is a unit of account, a medium of exchange but never a store of value. Currency has value because the government declares that it has and hence the term “fiat money” (Fiat is a Latin word for “let it be done”). Any central bank can just print more currency and cause inflation thus in effect reduces the value of the currency.

Gold is recognized around the world as a protection against inflation and it is for a good reason. Currencies are steadily depreciating against the value of gold.


Source:  http://www.gold.org/investment/why_how_and_where/why_invest/gold_and_inflation/

Central Banks recognized this reality and started to diversify their dollar exposure to the real money which is gold.  The Bank of Korea acquired in September this year 16 metric tons of gold, increasing their reserves to 70.4 tons.[4] Kazakhstan expressed their plans to increase the gold it holds from the current 15% to 20% of their total reserves. Kazakhstan Central Bank will be buying 24.5 metric tons of gold this year.[5]

The Central Banks have become the biggest supporter of the price of gold. Institutional investors are also being optimistic in the price outlook of gold as Goldman Sachs Group Inc.[6], Bank of America Merril Lynch[7], and Barclays Capital[8] anticipates another round of inflation from the US.

Sources:
1.   Gold Standard; http://en.wikipedia.org/wiki/Gold_standard
2.   Nixon Shock; http://en.wikipedia.org/wiki/Nixon_Shock
3.   Latest World Official Gold Reserve; http://www.gold.org/government_affairs/gold_reserves/
4.   “Korea Raises Reserve Third Time Since June Last Yearhttp://www.bloomberg.com/news/2012-08-01/bank-of-korea-increases-gold-reserves-for-first-time-this-year.html
5.   ”Kazakhstan Plans to Increase Gold’s Share to 20% Of Reserveshttp://www.bloomberg.com/news/2012-06-13/kazakhstan-buying-24-5-metric-tons-of-gold-this-year-correct-.html
6.   “Goldman Stands By Gold-Rally Forecast Even as Price Dropshttp://www.bloomberg.com/news/2012-05-10/goldman-stands-by-gold-rally-forecast-even-as-price-drops.html
7.   “Blanch Says Gold May Reach $2,000 After QE3”  http://www.bloomberg.com/video/88237460-blanch-says-gold-may-reach-2-000-after-qe3.html
8.   “BarCap banks on gold as prices hit 2-month lowshttp://www.reuters.com/article/2012/03/22/us-commodities-outlook-barclays-idUSBRE82L0ZT20120322

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One thought on “Gold Fundamentals

  1. Pingback: Done!, EU Turmoil- Cyprus, Stock Thoughts: MBT | Fundamental Enthusiast

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