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The world’s gold stocks: The world stock of above-ground gold consists of all the gold ever extracted in the course of history. The combined weight of all this gold is around 167,000 tons, or approximately 5.2 billion troy ounces (1 troy ounce = 31.103 grams). If it was melted down together, the whole lot would fit into an 18x18x18-metre cube. It has a total value of almost 4,500 billion US dollars (as at February 2009). Based on current annual production figures, it’s a simple matter to calculate that, even with today’s technology, it would take 64 years to double above ground stocks. Although the washing and mining of gold has been going on for thousands of years, some 75% of the world’s above ground stocks were only brought to the surface in the past one hundred years. Half of the world’s above ground stocks are in jewellery, while the rest is locked away in the vaults of national banks and private investors, or used for industrial purposes.
Gold reserves: The majority of official gold reserves are held by the major central banks and the IMF. The gold stocks underlying certain ETFs (Exchange Traded Funds) represent a growing proportion of gold reserves. Total gold reserves mounted to some 28,000 tons in 2008. This represents around 17% of all the gold ever mined. After the US dollar and the euro, gold is the third largest reserve currency. The diagram below shows the distribution of official gold reserves.
Gold production: Annual gold production is estimated at some 2,500 tons (80 million ounces), which at 2008 prices represents an overall value of approximately 70 billion dollars. In the middle ages (until the colonisation of the Americas) the Kingdom of Hungary was regarded as Europe’s largest producer of gold. During the reign of King Matthias, annual production was estimated at 5,000 kg (0.16 million ounces a year). It is impossible to estimate total world production at that time, but it was probably less than 1 million ounces (31 tons) a year.
Supply and demand, usage of gold: The jewellery industry has the greatest influence on demand for gold, accounting for almost 60% of overall usage. From this perspective India is the biggest player, the reasons for which are to be found in Indian wedding customs. (Since most weddings in India take place in the dry season, demand for gold tends to increase at the end of the year.)
In 2008, ETFs and other investment funds investing in gold also made a substantial contribution to the rise in global gold demand. The demand for gold outstrips mining capacity. The shortfall is made up from the sale of central bank reserves and the reclaiming of gold from industrial waste and used jewellery.
Until recently the largest gold mines were in South Africa. However, the pecking order has since changed, as according to data from the beginning of 2009, China now tops the ranking in terms of mining capacity (10 million ounces per year), and South Africa only comes in second (9.5 million ounces). Other major producers include Australia (9.3 million ounces), the USA (8.5 million ounces, Peru (6 million ounces), Russia (6 million ounces), Indonesia (5.2 million ounces) and Canada (3.6 million ounces.).
Means of investing in gold:
Physical gold bars and coins: Wholesalers use the “London Good Delivery” bar, which is cast from 400 ounces of pure gold, and has an overall weight of 12,441 kg. Popular among wealthier private investors is the 1kg cast bar, which is roughly the size of a mobile telephone. The 100-gram and 1-ounce pure gold ingots are affordable for a large proportion of the population. Bullion coins are also of an ideal size for small investors. The various physical forms of gold are convertible with each other, but an important factor is which refiner’s hallmark adorns the gold bars. The conversion margin on bars from refiners on the “Good Delivery List” is lower than on bars from refiners who aren’t on the list. Another consideration is the size of the bar or ingot. The smaller the bar (ingot), the wider the conversion margin. In addition to the cost of pure gold that they contain, gold investment coins may also come with a slight premium (5-10%), which results from the minting cost and the collector’s value of the coin itself. Gold commemorative coins and antique gold coins are only recommended for investors with a sound numismatic background, because besides the calculated value of the gold they contain, the coins may also be sold at a considerable premium, the fairness of which can only be judged by a highly experienced specialist. Gold jewellery can only be regarded secondarily as an investment, since in many cases it is only saleable at a considerable discount in the second-hand market.
Gold certificates: Securities issued in respect of physical gold, which can be traded in the OTC (Over The Counter) market or on the commodities exchange. An advantage of these is that they enable investors to invest in gold without needing to actually store and insure the physical bullion.
Precious metals accounts: Some banks and refiners also offer a “gold account”, which works similarly to any securities account, with the difference that it is secured with physical gold as collateral.
GoldMoney: A trademarked financial innovation in the form of gold-backed “digital currency”, which can even be spent using a bank card.
Shares in mining companies: A potential benefit of investing in the stock of gold-mining companies is the dividend paid on the shares, although a drawback is the uncertainty with regard to how long the gold in a given mine can be economically extracted. The growing political and environmental risk also needs to be priced in.
Investment funds: There is a wide range of these, from diversified precious metal mining company shares through ETFs (Exchange Traded Funds) that invest in physical gold. The latter are the most popular at present.
Stock exchange gold derivatives: Gold futures and options can also be bought and sold on the stock exchange. This sector has seen rapid growth over recent years. The advantage of this investment form is that it provides opportunities for both speculation and hedging, while tying up only a small amount of capital. Besides these types of transaction, some contracts also offer the option of physical delivery, which allows the physical gold can rapidly be converted into ready cash, or vice-versa: to purchase physical gold at a bargain price.
World Gold Council: The WGC was founded in 1987 by the world’s leading gold producing companies, with the aim of boosting demand for gold. Its members are mainly Canadian, US, South-African and Australian mining companies. The WGC regularly published important research on global gold market trends.
OTC gold market: Trading on the OTC (Over The Counter) gold market takes place 24/7 by telephone and via closed electronic trading systems. London’s trading volume is outstandingly high, accounting for some 35% of global trade, while other major centres include New York, Zürich, Tokyo, Sydney and Hong Kong.
London Bullion market: The London Bullion Market is the wholesale market for gold and silver and the main pricing centre for the gold market. Trading is conducted between the members of the LMBA (London Bullion Market Association), which is overseen by the Bank of England. Most of its members are large international banks and precious metals traders, mines and refiners. In January 2009 it had 11 market-making members, 60 full members, and 54 associates. London is the most important of the OTC gold markets. Five of the LBMA members fix the price of gold twice a day. The Gold Fixing takes place in the morning at 10:30 GMT, and in the afternoon at 15:00 GMT, by telephone. The fixing is performed in three currencies (USD, EUR and GBP). The gold forward (GOFO) rate is also set. The London market has the highest trading volume among the OTC gold markets, with close to 20 million ounces changing hands every day, representing a daily volume of approx. 18 billion US dollars. The equivalent of the world’s annual gold production passes through this market every four days on average. London’s share of the world’s overall gold trade is at least 35%.
http://www.lbma.org.uk/stats/currstat
Gold exchanges: Although most gold trading continues to be take place in the OTC markets, in 2008 the volume of exchange-traded futures and options trading grew by around 80%, and thus the contribution of bourses to overall gold trading is now approaching 20-25%. In 2008 the annual volume reached 6,000 billion dollars, which is around 10 times the level of six years previously. Of this, the New York exchange accounts for 70-80%, Tokyo 10-20%, and the Indian MCX some 4-5%. Gold contracts can also be concluded on the Istanbul, Shanghai and Dubai bourses. Only a tiny proportion of exchange-traded gold contracts are physically delivered.
Gold exchanges with the highest volume:
-NYMEX (New York Mercantile Exchange)
-COMEX
-Zürich
-TOCOM (Tokyo Commodity Exchange)
-MCX India
ETFs, gold certificates: Among the ETFs (Exchange Traded Funds), the first funds to invest in precious metals (gold, silver) were launched in 2003. At least 70% of securitised gold trading is in ETFs. Also popular, especially in Central Europe, are stock exchange-traded gold certificates. The ETF market also has a considerable impact on the physical gold market. The accumulated stocks of gold underlying the ETFs are now approaching the size of the gold reserves held by the large central banks and the IMF.
Gold market v stock market: The shares listed on the world’s stock exchange represent a far higher value than the global stock of above ground gold (at least this was the case in spring 2009), but the trading volume of gold is nevertheless comparable to the total volume of stock trading, because gold has a proportionately higher turnover rate.
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