The gold bull market of the 21st century started when gold bottomed at US$279 a troy ounce on January 24th, 2002 and continues through August, 2011 as gold hit a high of $1,917.90 a troy ounce for the December 2011 futures contract on the New York Commodities Exchange (COMEX).

That is a 589 percent increase from low to high, the Dow Jones Industrial Average rose approximately 10 percent in the same period. The ballistic surge in gold’s price has generated significant interest in the commodity and its importance in the global economy.

It is estimated that all the gold ever mined to date is approximately 165,000 tonnes, which at current prices is a market value of $9.4 trillion.  By comparison the market capitalisation of the New York Stock Exchange, the world’s largest market, is $13.4 trillion.

In terms of world holding of gold, jewellery accounts for about 52 percent, followed by central banks at 17 percent, investments at 17 percent, industrial at 12 percent, and 2 percent unaccountable. 

Annual mine production of gold is approximately 2,500 tonnes or 80 million troy ounces.  About 2,000 tonnes goes into jewellery or industrial production and 500 tonnes into investment.  

Central Banks and investment funds hold about 17 percent of all above ground gold as bank reserve assets. In terms of countries, the United States ranks first holding 8,134 tonnes which represents close to a 75 percent share of its national foreign-exchange reserves (foreign currency deposits, bonds and gold).  Germany follows with 3,401 tonnes or a 72 percent share of its forex reserves. China ranks 6th with 1,054 tonnes, or a 1.7 percent share of national foreign-exchange reserves.

This is expected to change given the recent S&P downgrade of US long-term debt. It is estimated that exchange-traded funds hold 2,100 tonnes of gold, which in aggregate is the world’s sixth largest gold holder.

In the past, gold had a much larger role in the global monetary system. The gold standard was a monetary system in which a country would back its currency with its gold reserve. Paper currency in such a system is convertible into gold at a fixed price. The gold standard collapsed in 1971 when the United States ended the convertibility of the US dollar to gold, due to dwindling gold reserves and an unfavourable balance of payments.

Most of the world’s paper money is fiat money, currency that a country has declared legal tender, with no intrinsic value and based on faith.  

Investors generally buy gold as a hedge or harbour against economic, political or fiat currency crises. In times of investment market declines, burgeoning national debt, erosion of currency values, inflation and social unrest, gold is generally viewed as a safe haven.

In the past, economic crises have driven short spurts in gold demand, resulting in price increases, but not to the extent we are seeing presently. The difference is that there are growing concerns about the developed world’s major currencies, whose countries have unsustainable debt loads and are in difficult economic times.

This reasoning has supported the rise in the price of gold.  Still others subscribe to the belief  we are in the midst of a bubble which is about to burst. Most bubbles are justified with the belief it is different this time, but only time will tell which side has it right.

Anthony Galliano is chief executive of Cambodian Investment Management.

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