The Short View: On gold If all the gold that has ever been produced and sold were melted down, it would fit into a cube with sides of 20 metres.
The Short View: On gold
By John Authers, Investment Editor
Published: July 19 2007 17:38 | Last updated: July 19 2007 17:38
If all the gold that has ever been produced and sold were melted down, it would fit into a cube with sides of 20 metres. This valuable object would fit easily into the hold of a modern tanker - although, as gold is an unusually dense metal, the tanker would sink.
It is this scarcity that has made gold into a coveted asset for centuries. With supply so constrained, small moves in demand take on big significance. New sources of demand, from the rising Asian middle classes who want gold jewellery, and from speculators using exchange-traded funds to turn gold into a tradable asset, have sparked a gold price rally.
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Broadening demand helped an impressive rally that brought gold beyond $700 per ounce in May last year. After a sell-off, it has rallied consistently of late. It is back to $675, up 5 per cent for the month, and speculators are piling in.
Speculators have changed the way gold behaves as an asset. It was once an inflation hedge, gaining when assets affected by inflation fell back, and not correlated with the market.
But last May, when an inflation scare triggered a correction in world stocks, gold fell 22 per cent in a month. It no longer functions as a hedge for stock prices, or inflation. But investors are using it to hedge against a weak dollar. Its latest rally has coincided with another sell-off in the dollar, which has brought it to 16-year lows.
Ashraf Laidi of CMC Markets points to the price of gold in yen, which has been relatively stable in the last months while gold’s value in dollar terms has risen sharply. This is a sign that gold is being used to hedge against a weak dollar.
Gold ETFs, now available in the US, the UK, Switzerland, South Africa, Turkey and Australia, accounted for 9 per cent of gold consumption last year. This is a new source of demand, and fundamentally speculative. While that demand remains, the gold price will stay high - unless someone finds another tankerful of gold. |
