KL, it basically is resolved with the ECB's Washington agreement. European CB's are by far the largest holders of gold and the supply from that source is now a fixed amount spread over 5 years. it includes only sales that were already announced, so no fresh sales will be forthcoming. what many people don't know is that quite a few CB's have lent out their entire reserve already. e.g. the CB's of Denmark, Australia, Kuwait (of those i know for sure) have not one ounce left in their vaults. all they have are pieces of paper which promise that one day they will get the gold that they lent out back. naturally they have no gold to lend or sell. the Asian CB's have generally been buyers of gold over the last decade. the Federal Reserve does not engage in, nor plan to sell any of the loot in Fort Knox. so where is the CB supply? it has become a myth.
demonetized? i strongly disagree. if that were true, the ECB would not have a gold reserve. however, it has quite a sizeable one and has officially stated that gold remains part and parcel of the monetary reserve. since it's reserve is regularly marked-to-market, it has actually an incentive to prefer a higher gold price.
after all, what guarantee is there that an entirely fiat system with zero gold backing is actually safe? we now believe it is, as confidence in CB's of the industrialized nations is high, but that could change due to events as of yet unforeseeable (although it's possible to make educated guesses of course).
gold demand/supply at the moment is as follows:
primary supply: 2,500 tons/yr. (newly mined gold) demand: 4,000 tons (excludes investment demand)
further sources of supply: CB's 400 tons/yr. (for the next 5 years, includes BoE and Switzerland)
scrap: 500 tons/yr.
total supply: 3,600 tons deficit: 400 tons/yr., excluding investment demand.
in other words, since the producers have now stopped selling forward for all intents and purposes, investment dishoarding would have to fill the gap. as it were though, as soon as prices begin to rise, investment demand begins to INCREASE not decrease. it is only when the equilibrium price is reached (estimated at $600-650/oz.) that dishoarding could conceivably become sizeable enough to fill the gap.
note that your question as to the merits of gold indicates already that interest in the metal as an investment vehicle is picking up...:)
btw, a significant price rise is not even needed to make good money with certain gold stocks. the reason is that at current prices no significant new projects come to fruition to replace depleting reserves - it takes long from discovery (which costs $10 - $35/oz.) to the point of beginning to mine a deposit (cost varies, but is in most cases very close to current prices...the higher cost mines have all been mothballed or closed altogether).
mines that have significant reserves and production costs close to the current spot price have immense earnings leverage when the PoG rises by only a small percentage.
to illustrate this with an example: the S/A miner Goldfields's earnings roughly double at a PoG of 290 vs. 280. they triple at 300, and quadruple at 310 and so on.
what's more, they pay generous dividends as soon as the earnings picture is bright enough...after all a mine is a wasting asset, and thus it makes sense to pay out whatever is earned above the capital needed for reserve replacement and expansion.
currently GOLD yields over 9%. conceivably with the PoG at 400 for an extended period of time you could (i know i will since i bought the stock near a 20-year low) recoup your investment within 3-4 years in the form of dividends alone, as they will be raised quickly.
of course at a PoG of 400, the price of the stock would explode...
that is the lure of the gold stocks when the PoG is as depressed as it is now.
in a more general vein, the demand for paper assets vs. hard assets is cyclical in nature. since the current cycle is quite long in the tooth already (21 years almost), it may well be that a new cycle will soon begin.
and finally, since gold and gold stocks have been the most shunned asset class during the bull market, they are a perfect hedge. a chart comparing the XAU to other stock indices bears this out. today's performance (XAU up a lot, everything else down a lot) is a good example on a smaller time scale.
regards,
hb |
