Just a sudden thinking during a few minutes before London opens, I think people spent too much time talking on gold. Just looking at the gold prices, it’s terrific: all of the fears floating around, safe hard assets accumulating, influx into the US money market in the short-term and not-known-place-yet in the longer-term, double dip forecasting, US and EU possible failure in leading the world economy, inflation worldwide, and whatever you and I can think of.
This is the quick chart on 5-yr gold I grabbed on MarketWatch:
Thank to the Dodd-Frank Act took effect on July last year, I can’t make a nice chart with technical analysis by my forex platform, U.S.’s traders are banned from leveraged precious metals trading (non leverage and minimum of 10 oz per trade acceptable) and oil markets. This canvas is absolutely not worth a thousand words, but whatever.
Look at the prices, from 1500 to now near 2000. This steep angle reminds me a lot of other charts: Tulips, dot-com, 1929, … I know gold are being predicted to get higher and higher and higher, but this chart just washes me off.
However, I find some reasons just forget this nightmare that people use “Inception” to dream a dream into a dream of a dream.
Think about the market characteristics of gold. If you remember the last 3 weeks from the S&P downgraded US credit, there was, I still remember the numbers, $48 billion withdrawn from the global stock markets pumped into the US money market and a relatively $1.6 billion or so put into the gold market. For the $48 billion – US Treasury Yield got to among the lowest levels in history, around 2% – a figure made us remember the Japanese government bond in 1997 followed by a crashed economy. Then the $1.6 billion – gold prices peaked to 1917.9/oz. Stress: only $1.6 billion helped making a big run on gold market. This tells me how illiquid and narrowed gold market is.
So this raises me a question: how large is the gold market? – The calculation is interesting. Recently I’ve just read a new report on biggest gold reserves at the end of August, I show the 3 largest here:
- US: 8,965.6 tons – US$ 522.6 billion market capitalization
- Germany: 3,747.9 tons – US$ 218,28 billion
- IMF: 3,101 tons – US$ 180.6 billion
US is the largest gold owner and holds ONLY $552 billion worth of the asset. $552 billion is not a big number if you think about the current debt of US: somewhere near $14 trillion. The global stock markets value around $58 trillion, the number is $82 trillion for global debt market. So how large is the global gold market?
15 largest countries and financial institutions store around 16.7% of the world’s gold which is 30,700 tons. So this number for the world is: 186,061 tons. A ton converted to 32,000 oz – then there is around 5.95 billion oz of gold out there. Let’s take $1900/oz of gold for easy calculation, we have $11.3 trillion value of total world’s gold. This is 5 times less than the world’s stock market capitalization and 7 times less than the global debt market. Plus, most of gold are not in trading.
This simple figure tells me one thing: the abandon of gold out of the world’s financial market in 1972 was a right decision. The whole world economy can’t base on gold as the blood (i.e. money) of the system because the fast growing boy (economic speaking, the world just started to grow since late 16th century) can’t be limited by the amount of blood for him just to grow.
Here is the gold production since 1850:
The gold production peaked around 2000 (price: $300/oz), and decreased steadily. Gold production will continue to move backward (don’t take it literally, take it as “gold is a limited resource”) and the world will continue to move forward.
So gold prices will move higher. That’s undeniable. Inflation, fears, total output declining are telling the same story. However, bringing the world back to gold-standard system as pre-1972? No, definitely.