yen, and other currencies — are losing their value (depreciating) slowly but surely. Some currencies are rapidly losing their value, such as those in Venezuela, Zimbabwe, and Argentina (more to come!). The main reason currencies lose their value is because they can easily be overproduced by the country’s central bank and typically at the behest of the country’s political leaders.
Because paper currencies are easily inflated, each unit of currency (dollar, euro, yen, and so on) loses value — not so for gold. As the data from the World Gold Council (WGC) confirms, the mining of gold typically adds about 2 percent to the above-ground global supplies of gold. It’s very difficult to extract it from the earth, which is part of the reason gold can retain its value versus central bank–issued currencies. You can use this chapter to find out how gold stacks up as a tangible investment amidst all the investment choices available today.
Part of what makes “money” retain value is scarcity. If it ceases to be scarce and easily created (usually leading to overcreating it), then this leads to its diminishing value. Some gold experts even make it a big point of their speeches that a paper/digital currency will always revert to its intrinsic value, which is “zero.” Gold, meanwhile, outlived every currency in the past two millennia and likely will do so in this millennium. As I write this (August 2020), we’re in the early stages of a precious metals bull market.
Understanding the Gold Market
For investors and speculators, you must get familiar with two general areas when it comes to gold. The first is the gold market, which consists of demand and supply. This relationship is important with gold, of course, but demand and supply is extremely important in virtually all matters tied to other markets and financial sectors because many of these sectors are inexorably tied to gold. (The second area is understanding what markets and assets are tied to gold and silver, such as currencies and government economic policies.)
Gold demand
Who is buying gold, and why? Is demand trending up or not? The more gold that is bought, the more pressure there is on gold’s price to rise, especially if supply isn’t keeping up with demand. For 2019, according to the World Gold Council (WGC), global demand was at a total of 4,389.70 metric tons, down 1 percent from 2018 but still trending upward historically. The following sections cover different types of gold demand.
www.gold.org, and it has a wealth of information at its “Gold Hub” (www.gold.org/goldhub).
Jewelry demand
The largest buying comes from the worldwide jewelry sector (consumer demand). In 2019, the WGC reported that jewelry-related sales for gold was 2,122.6 metric tons, which was down 6 percent from 2018. This drop was due to gold’s rising price in the second half of 2019.
In terms of who has done the buying, China and India are the primary drivers of consumer demand.
Central bank demand
The second area of demand is from central banks that buy gold as a store of value and to diversify their asset and currency reserves. This category of demand hit an all-time high of 667.7 tons.
What I find interesting about central banks is that they have a love/hate relationship with gold. On the one hand, they hate (perhaps dislike is a better word) gold because it’s a competitor to the currency they issue. When the public buys gold, it’s an admission that the currency isn’t attractive in terms of holding its value.
But many central bankers do realize that ultimately gold wins over currencies … sooner or later. In this case, the smart(er) central bankers prefer to have gold in their corner to boost their currency. Maybe not always officially but indirectly. If gold can make the central bank of that country strong(er), that in turn boosts confidence in that particular currency. The great tendency has been historically that the East (principally China, India, and other countries) have been, on balance, greater buyers of gold than their Western counterparts. Given the history and endurance of gold, central banks in the West, especially Western Europe and the U.S. central bank, the Federal Reserve, will see the wisdom and become net buyers, too.
ETF and investment demand
The third area of demand (1,273.4 tons) is investment demand, ranging from buying from gold-backed exchange-traded funds (ETFs; see Chapter 8) and from coins and bars sold (see Chapters 9 and 10). This area rose significantly in late 2019 due to gold’s price increase. Total buying rose to 401 tons, which nearly offset the decline in jewelry sales.
The reason cited for why ETFs and other investment sources increased their gold holdings was low/negative interest rates, and geopolitical uncertainty fueled this growth, while the gold price rally also attracted momentum-driven inflows. By the end of 2019, gold-backed ETFs were holding a record amount of physical gold at 2,885.5 tons.
Technology demand
Lastly (and making up the remaining quantity of sales) is global technology sales because gold is increasingly used for circuitry and electronics tied to the technology industry. In 2019, this area of gold demand hit 326 tons.
Gold supply
In 2019, the WGC reports that the gold supply went up 2 percent to a total of 4,776 tons. The primary source was from mining, which was at 3,463.7 tons — marginally lower than 2018 but the first annual decline in ten years. Extracting gold from the ground is getting more difficult, and that is a positive sign for investors and speculators. Why? Because a decline in gold supply will put pressure on the price of gold to go up if gold demand continues to be stable or increasing.
The remaining supply came from recycling. In 2019, recycling sharply increased by 11 percent as the public took advantage of gold’s rise and sold their gold holdings such as jewelry and other consumer items with gold content. Because 2020 was a good year for gold’s price rise, I suspect that recycling will be strong because gold’s price rise occurred in an economic backdrop that was dreadful as thousands of businesses closed and unemployment hit record highs due to the pandemic and subsequent government lockdown procedures across the globe.
Going Over Gold’s Recent Bull and Bear Markets
In the modern age, gold has gone through periods of popularity when its price has risen (bull markets) and when it was unloved and its price was flatlining or going down (as with bear markets). Each of these bull and bear markets essentially coincided with how the rest of the world was doing, and this bore an inverse relationship.
