Is today’s economic climate we find that gold has reached record highs and quite frankly there appears to be no end in sight. However, many economists are stating that the gold buying frenzy is nothing more than an artificial market creating another bubble that is going to burst. Is this true?
The answer to that question is yes and no. Here is why:
Recently many US wealth managers are recommending that individuals have overbought gold and that now the investment carries hidden risks. Now whether or not gold has been overbought is the question that everyone is asking and is the question that is debatable. Here are a couple of key figures to keep in mind:
– Gold has nearly doubled in value since October of 2008.
– Both spot gold and gold futures on the commodities exchange reached an all time high of $1,387 an ounce in October of 2010.
Now, basic fundamental economic principles of supply and demand should be kept in mind here. Forget all the fancy talk. Basic economic principals have a tendency to reduce the complicated to the simple thus allowing the average person to make an informed decision.
Basic economic principals dictate that there is a limited amount of gold and given the economic climate demand for gold has continued to grow thus forcing the prices up. So we know that there is a limited supply and a growing demand. So, now the basic economic question remaining is how long will the demand continue?
Let us take a look at a couple of key factors;
– George Soros, the billionaire investor who broke the British Pound, increased his holdings in gold. According to reports Mr. Soros raised his stake in exchange-traded fund SPDR by 3.7 million shares in the three months ending on December 31, 2009 which took his total holdings in this gold exchange traded fund to $663 million dollars. (http://www.reuters.com/article/idUSTRE6A277A20101103)
– Many central banks from several different countries have stopped selling gold and are now buying gold. To date Europe, Turkey and India have all increased their purchasing and holdings in gold. (http://www.reuters.com/article/idUSTRE6A277A20101103)
– China has finally admitted for the record that it fully intends to increase its gold holdings. China is buying gold and has increased its gold holdings by over 76%. (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azu2GgdtzJqQ)
First Basic economic indicator; Sector Demand
World governments, some of the richest people in the world and central banks are all buying gold and further, at the time of this publication, there is no indication that they have any plans to hold at their current levels or reduce their current gold holdings.
Second Basic economic indicator; Industry Demand
-There is a heavy demand for gold in both the medical and dental field. Gold is now being used in delicate eye and brain surgery equipment and demand continues to grow as new breakthroughs are made.
-There is a heavy demand for gold in the aeronautical and space industry; the uses of gold in this industry are too many to list and the continues to grow.
-There is an ever increasing demand for gold in the “high tech” industry including but not limited to telecommunications, wireless cell phones, super conductors, circuit boards and micro-processors.
To give you an idea as to what current demand for manufacturing purposes in just two countries is;
Currently reports indicate that in the electronic manufacturing industry alone the total gold tonnage used in 150 tons! Currently Japan, the largest electronic manufacturer, uses about 45% of that consumption with the United States consuming about 30%.
Given the above information one can conclude the following;
Yes, currently gold is showing record highs and there are some indicators that the market is due for a correction. However, there are no clear indicators that there is a “bubble” that is going to burst when you consider worldwide demand and the position of several countries and central banks as well as the number of individual investors that are holding gold in their portfolios further limiting supply.
However; do not for a minute think that buying gold is the “magic bullet!” Gold and other precious metals are great underlying holdings of any well diversified investment plans and must be held for the long term; anything else is mere speculation.
Caveat; the author is merely sharing his ruminations and opinions on the buying of gold and this should not be considered professional investment advice.