Private gold holders challenge
central banks
By: Laura Clancy
Posted: 2001/11/16 Fri 10:05 | © Miningweb 1997-2001
TORONTO – The World Gold Council and Gold Fields
Mineral Services have just completed a study that
shows where all the gold the central banks have been
dishoarding has gone. Mostly to the private sector
outside of Europe and the United States is the short
answer.
Speaking at the Autumn Precious Metal Seminar here,
WGC head of retail investment, Albert Cheng, painted
a surprisingly optimistic picture of retail investment
demand for gold (as opposed to institutional investment
demand which is in the sink).
Although the volume of net retail gold investment (coin
and bar, but not jewellery) is pitiful relative to
alternative securities at less than $3 billion per year,
there has been an impressive accumulation of private
metal holdings in the last two decades.
Privateers have been all too happy to mop up the gold
central banks have been selling so aggressively in
recent years. Commerzbank precious metals
representative, Ian McDonald, believes the banks will
inevitably be embarrassed for selling their bullion at
twenty-year lows.
Central banks have access to 965 million ounces while
retail investors control 707 million ounces, or 15 per
cent of total aboveground stocks of 4.6 billion ounces.
Compared with 1950, private holdings have doubled
from 350 million ounces (17% of the then total), while
central banks have reduced stocks by 96 million ounces
from the 1.06 billion ounces they controlled (32%) half
a century ago.
Intriguingly, GFMS excluded gold lent into the market
by central banks when counting their total holdings.
That is a quiet, but significant rebuke of IMF
accounting guidelines that disguise gold loans and
swaps by encouraging central banks to itemize such
gold as an asset. The GFMS view is more appropriate
because the gold is unlikely to ever be recovered at par
with the value of the loan or swap; if at all.
Market on a hair trigger
Retail investor demand is fractional averaging less than
$3 billion a year, or 278 tonnes (7% of global demand),
over the last 8 years reflecting gold's diminishing
appeal. The value of privately held gold is not more
than $200 billion which is just 2 per cent of the $10
trillion valuation of the S&P 500. That provides
considerable leverage on both sides of the equation.
Shorts have ably demonstrated their price capping
power, but they have operated in favourable
circumstances against the backdrop of two decades of
declining prices. If rising prices stimulate further
buying, say a modest doubling in annual retail
transactions to $6 billion, then the WGC expects a
strong positive gearing impact on the gold price.
However, it remains curious that speculators haven't
stepped forward to exploit this obvious flaw in the
market. Arbitrageurs are making hay in many other
markets with far less certainty so the only reasonable
conclusion is that poor liquidity has a strong repulsive
effect on institutional interest. It seems evident that
traders want the additional insurance of volume and
volatility before tilting at the gold market's glaringly
obvious upside.
Powershift
Since 1993, GFMS says net retail investment demand
saw Europe dishoard 207 tonnes (6.7moz) which was
more than balanced by North American uptake of 294
tonnes (9.4moz). East Asia and the Middle East
continue to demonstrate a long-standing affinity for
gold after buying 2,140 tonnes (68.8moz) over the
same period.
It is fascinating to note that buyers outside Europe and
the U.S. countries appear to be focused on the U.S.
dollar price by which measure gold is certainly cheap.
That is counterintuitive to the idea that significantly
depreciated emerging market currencies are inhibiting
gold purchases.
Positive as the retail demand seems, it belies ground
lost relative to other securities, especially equities and
the dollar in the late 1990s. GFMS says the primary
reason for the lack of interest is the secular decline in
the gold price: "This has been an immense turnoff to
investors who have become ever more short-term
oriented."
There is widespread disbelief that gold can ever reverse
its long-term decline, particularly with the dollar
ascendant and as attention spans become shorter.
Indeed, an entire generation of investors has grown up
without any notion of the power that gold exerts in the
international political economy.
To find new gold investors or recover defected ones
GFMS believes the market needs retail-friendly gold
products, preferably securitized with paper assets.
Securitized gold should raise trading margins for
financial institutions and intermediaries while reducing
the risk and cost of holding and moving physical
product.
The gloomy outlook perhaps obscures the reality that
gold has not only become the property of citizens
rather than governments, but ownership is steadily
moving away from the traditional Euro-American
money powers to the old world powers in the near and
far east.
That has fascinating political and economic
repercussions. History shows the willingness of the
West to undermine South African and Soviet reliance
on gold to sustain undesirable regimes, but those were
producers. The eastern powers are not dependent on
future gold production, but control liquid stocks. That
alters the balance of power and reduces the options
available to the monetary hegemons.
It would be melodramatic to think in a power struggle
between the hemispheres (in the sense of the gold war
between France and the U.S. in the late 60s), but the
inevitable devaluation of the dollar – and consequent
revaluation of gold – has important implications for
future regional investment trends.
And, perhaps, the greatest implication lies in the fact
that, per capita, Western private investors are a lot
worse off than their Eastern peers when it comes to
owning gold. That is irrelevant in the context of the
outperformance of competing securities in the last
twenty years, but there is every reason to believe that
that is not a permanent condition.
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