GOLD REPORT

2010

World

The biggest gold rush in the history of mankind is taking place right now

Dear Sir/Madam, The first global gold rush is happening right here, right now. For thousands of years this precious metal has maintained its value and been accepted as legal tender at all times, anywhere in the world. Gold has always been a scarce commodity. Today, real gold has never been so hard to come by. For some time market indicators have proved irrefutable: the price of gold will continue to rise. No one can predict the future, but who could predict that the gold price would climb in 2009 from US$800 per troy ounce to more than US$1100? Now bullion experts are speculating about a future rate of US$2,000. Or possibly even higher! This is your personal copy of the World Gold Report 2010.

Yours faithfully,

R.G. Parker Brady Author World Gold Report 2010

This report is confidential and the property of the London Mint Office.

2010

Content
[1] [2] [3] [4] [5] [6] [7] [8] [9] The US dollar and gold - a marriage of convenience Fear of inflation raises the gold price Who owns the worlds gold? The worlds gold would fit into a cube 22 metres squared All that glistens is gold As rich as Croesus - gold throughout the ages Golden countries Golden opportunities Gold on paper drives speculation and fear 4 8 12 16 19 22 26 29 34 37 41 45 47

[10] Banks ignore gold [11] The last Gold Standard and the era of the gold reserves [12] Executive summary Sources

A weak dollar is at this moment the easiest solution for most of Americas problems. I expect between one and two percent growth, unless the export market starts growing. Secretly, everybody in Washington hopes that this will happen. If the dollar continues to lose value, there might be traction on exports. Professor Niall Ferguson of Harvard University and author of The Ascent of Money: A Financial History of the World.

[1] The US dollar and gold - a marriage of convenience

The US dollar and gold make a strange couple. The currency and the precious metal are inextricably linked to each other. The price of gold is recorded in dollars. If there is a depreciation of the dollar, the gold price in dollars automatically rises. If the value of the commodity goes down, the grin of former president George Washington on the one dollar bill gets bigger. Right now, the Greenback has fallen from its pedestal. Still, there was a time when the dollar was literally worth its weight in gold. In the last phase of WWII, 44 countries agreed to link the value of all their national currencies to the US dollar. The Greenback was aligned with gold and set at a fixed middle rate of US$35 per troy ounce, (which equals 31.10 grams). The US dollar became almighty. Although in reality the dollar had already achieved this status back in 1944 when the US owned three quarters of the worlds gold reserve. The world economy benefited from a global reserve coin which was worth its weight in gold. Governments had the guarantee that they could always trade their dollars for gold. As long as American monetary policy was trusted, there was no problem. But, in the late 1960s Washington lost its credibility. The printing presses were churning out dollar bills at full speed to pay for the costly Vietnam War. This led to a huge dollar surplus, and a rising deficit on the American trade balance. Set against the dollar, the appreciation of gold was strongly below par. From May 1971 onwards many countries responded by trading billions of dollars against gold. The safes of the bullion depository at Fort Knox, (where most of Americas gold reserve of 4,600 kilos was stocked), emptied rapidly. President Richard Nixon was left with no alternative but to end the Gold Standard that year by retracting the promise that the dollar could be traded for gold.

Gold Standard

Graph 1 US Inflation accelerates from mid 1960s

Historical price level

Global inflation, the oil crises of 1973 and 1979 and the general mood of adversity all affected the value of gold. And so the price rose. The value of the US dollar halved, while gold grew from US$35 per troy ounce to US$700 per troy ounce. In the early 1980s, price inflation was out of control. The major cause was the vast amount of money in the financial system. And yet consumers had less to spend because of the devaluation of money. The gold price peaked in January 1980 at an historical level of US$873 per troy ounce (equivalent today to US$2300 per troy ounce). It was not to last and soon gold had lost a third of its value, eventually stabilising at around US$500 per troy ounce. The market was saturated; gold mines that were able to work at a relatively low cost were flooding the market with gold. Faith in the US dollar skyrocketed in 1980 after the Federal Reserve, the US federal central bank, increased interest rates to 17 percent. It was a draconian measure for American trade and industry, but proved to be the right decision, restoring the faith of investors and governments in the American currency. The value of the dollar continued to rise and a new period of growth and prosperity followed.

The hegemony of the Greenback lasted 20 years. Gold no longer counts was a popular saying in the Nineties. In 1980, almost 60 percent of the worlds financial reserves were backed by gold, but ten years later this figure had plummeted to less than 30 percent. This decrease coincided with an enormous increase in dollar reserves. When Iraq entered Kuwait in 1990, gold analysts held their breath. They wondered whether if the precious metal would increase in value, now usual reaction in turbulent times. America prevailed, and the Iraq war came and went. It was not the price that shot up, but the value of the dollar.

Graph 2 Gold price per troy ounce January 2000 to October 2009

A weak dollar

In 2001 the price of gold hit its lowest level of US$250 per troy ounce. Since that low point, gold has increased in popularity every day. After 9/11 the value of the dollar decreased, while the American budget deficit rose. As the battle against Saddam Husseins Iraq geared up, so the Federal Banks presses returned to printing more money. Uncertainty about the costs of war from March 2003 onwards, combined with growing concerns over a much criticised tax reduction, stimulated the gold price. The dollar was dealt a final blow when the financial system imploded in October 2008, as the profligate behaviour of the nations large financial institutions led to the Credit Crunch. By 2009 Americas budget deficit was the largest in 60 years. A weak dollar is good news for the gold price, because it is less expensive to acquire in other currencies. Paradoxically, a weak dollar can also be good news for Washington; benefitting American exporters selling abroad, and visitors to the US who see their own currencies stretch further.

The advance of gold early in the 21st Century was unprecedented. In December 2005 it reached US$500 per troy ounce. In 2008, after a wait of 28 years, it once again hit US$873 per troy ounce. By September 2009 gold had hit the magical level of US$1,000 dollar per troy ounce Adjusted for inflation the current gold price is still below the levels reached 30 years ago. Most experts anticipate that golds increase in value, which has lasted for nine consecutive years, has yet to reach its end.

Figure 3 Gold price rises in dollars and euros between September 2004 and September 2008

Like many other currencies the dollar has fallen 79 percent in real value over the last 10 years in comparison with gold. In 1909 you could buy 50 troy ounces of gold for US$1,000. But today US$1,000 would only get you 0.83 ounces. Research shows that over the past hundred years the dollar has lost 98.3 percent of its value in comparison to gold. This means a dollar is now only worth 1.7 percent of its value of a hundred years ago. The price of gold maybe volatile, but its eternal value should not be underestimated and it cannot be printed. Gold is unique because there is no credit risk. Nobody can be held liable. There is no risk that a stock or promissory note will not be honoured, which can be the case with securities and stocks, or when a company goes bust. Unlike the worlds currencies, the value of gold is not influenced by the economic policy of the country of issue, nor can it be undermined by inflation in any particular nation. Moreover, the liquidity risk of gold is extremely low. It is a commodity that can be traded 24 hours a day, by the many and buyers of gold, ranging from figures in the jewellery industry to financial institutions and producers of industrial products. Gold does what it has always done; maintains its value while all currencies lose theirs. Financial markets can only function with a Gold Standard*. History has shown that monetary stability is guaranteed under the power of a Golden Standard. Fiat money (the value no longer covered by its value as a utility good), leads solely to short term revivals of financial markets and national economies. The end result is inflation and embezzlement of savings at the expense of hard working people, pensioners and the poor. Who are not capable of protecting themselves against this continuous fraud. Money should, therefore, not be based on faith and trust, nor on the policies of governments. Money should only be based on what people of their own free will choose to be trustworthy: gold! Former banker Ferdinand Lips in Gold Wars, The Battle Against Sound Money as Seen from a Swiss Perspective.

Gold has a fixed value

*Gold Standard: a monetary system in which the basic unit of currency eg. the dollar or pound is equal in value to, and exchangeable for a specified amount of gold.

Summary

Weakening US dollar rate causes worldwide rush for gold

At the end of the Second World War, 44 countries agreed to link the value of their national currencies to the US dollar. The Greenback was in turn linked to gold and set at a fixed middle rate. The US dollar was almighty and this Gold Standard was sovereign, as long as the participating countries vested their trust in the monetary policy of the United States. It was a trust betrayed once President Nixons Federal Government decided unilaterally to print more dollars to help pay for the costly Vietnam War. This policy shift led to a surplus in dollars and a huge US trade balance deficit. This ultimately led to a strong depreciation of gold, leading many nations to trade their dollars for gold, which had a huge impact on the bullion depository of Fort Knox. This increasing inflation and the oil crises of 1973 and 1979 pushed up the price of gold. After 9/11, the Greenback plunged in value once again as the Federal Banks presses returned to printing more money to pay for the on-going and increasingly expensive war against Saddam Husseins Iraq. The dollar suffered a fatal blow when the financial system collapsed inward in October 2008. Last year the American budget deficit was the biggest in over 60 years. There was no longer trust in the US currency and so investors and institutions moved swiftly to gold. In September 2009 the gold price crossed the magic boundary of US$1,000 per troy ounce. A comparative analysis of gold and the US dollar reveals that since the year 2000, the dollar has fallen by 79 percent in value! If we adjust the price of gold to inflation, the true price of gold would now stand at US$2,300 per troy ounce.

The way in which the world economy restores, depends on how fast the demand will pick up from the consumer market and the industry. This also applies to the speed in which governments end fiscal and financial stimuli. If they act too fast, the recovery might be cut short. If they wait too long, the financial bubbles, that preceded the crisis, might re-appear. Andrew Burns, author of the World Bank report Global Prospects 2010: Crisis, Finance, and Growth, January 2010.

[2] Fear for inflation raises gold price

How would people view the economic recession if gold was legal tender? The price of goods would be stated in gold. In reality the gold price is determined mainly by investors and inflation. If there is too much distrust in the market, investors look for security. Gold is a safe harbour. The worlds gold reserve is relatively stable.

The purchasing power

The value of gold, (expressed in the purchasing power of utility goods and services), has been stable for a long time. In 1900, the gold price was 20.67 dollar per troy ounce (31.10 grams). Today that would equate to US$503 per troy ounce. Between 2003 and 2008 the average gold price was US$606 per troy ounce, confirming that the real gold price has not changed much in the 21st Century. Despite times of uncertainty and turmoil, it remains a precious metal that has maintained its purchasing power. Conversely, over the same period the purchasing power of most currencies has fallen. In Europe and the US, inflation measured in euros and dollars is almost zero. But if we calculate in gold, you realise that fiat money has become more valuable, not less. The purchasing power of gold has gone up tremendously; economists call this situation deflation. The situation is being skewed because of the amount of fiat money central banks have pumped into the bankrupt financial system over the past two years. The fear of inflation becomes a reality if the purchasing power of gold weakens, because at this point the scale of monetary inflation becomes visible. The rising gold price is caused partly by market insecurity. Investors do not gamble on one horse, so gold as well as stocks and shares rise in value. This is also a clear sign that there is, in fact, inflation. The weakened dollar makes imports more expensive, not just consumer goods, but also commodities like oil. Another important conclusion is that inflation on a global scale is becoming more consistent. In the report Global Inflation 2007, two economists compared the inflation of 30 members of the OECD (Organisation for Economic Co-operation and Development) over the past 45 years. It appears that the inflation figures of industrialised nations have merged. The effects of globalisation determine 70 percent of a nations inflation rate. In particular, the central banks of emerging markets, such as Russia, India and China, are flooding the world with money. These institutions are not independent and cannot resist the pressure of their politicians to print a lot of money.

Graph 1 The dollar has devaluated between 1960 and 2000, the amount of money that circulates has increased.

The money market can be restricted. Central banks can lower interest rates and limit the availability of credit handed out. But this would contradict the philosophy that central banks must stimulate the economy. The option of ending the flush of extra money into the world economy remains an option. Nations budget deficits continue to rise, and the problems in the financial world are not over yet. The US government continues to invest more money in its determination to get the worlds largest economy running smoothly again. Officially US$1,000 billion have been earmarked to reach this goal. The US stock market is rising because of the hundreds of billions of dollars that are being pumped into the system. An exception occurred in November 2009 when the US Dollar Index, (an index that compares the dollar with six other important trade currencies), rose for the first time in 12 months at 5 percent (see Graph 2). The optimism driving this was the hope that the US economy was recovering. However, with unemployment at 10 percent, it is still too early to conclude that the US economy is reviving. It is in the interests of the Federal Reserve, the US central bank, to create extra money. This policy keeps the short term interest rate low, while the long term rate is much higher. It eats debts, but the consequence is that the US dollar is heading for hyperinflation. The likelihood of this scenario occurring increases daily and so the demand for bonds is shrinking. This is driven by the reality that consumers do not want to borrow money from banks when interest is low and inflation expectancy high. The credit markets are currently the responsibility of the banks; so why would they be interested in handing out loans to companies?
Graph 2 US dollar Index compared to six important trade currencies

Stimulate the economy

Many people run into trouble with rising interest rates. During the past few years, the average household has acquired more debt. Consumer spending isnt growing, and the value of their properties has dropped sharply. This formidable combination prompts private individuals and companies to become interested in gold. When the interest rate rises, the demand from consumers will surely decrease. Companies will go bankrupt. There will even come a time when central banks will lose their battles against upward pressures on interest rates. Governments and central banks are scared of this scenario and want to prevent it at all costs. As long as banks offer low interest rates on savings, and borrowing money is very cheap, gold is attractive. Over the last ten years, gold has been increasingly embraced by investors and institutions adding the commodity to their portfolio to spread risk. Investment institutions such as hedge funds, who strive for maximum profit, are now placing considerable investment in, even during interest rate decreases. Since 2003, investments have been the largest source of growth in the demand market, having risen in value until the end of 2008 by approximately 412 percent. The investments resulted in a net influx of gold worth US$32 billion. At present, US$900 billion worth of gold is in private hands and used for investment opportunities. This amounts to approximately 0.7% of financial activity worldwide. If the amount of available gold doubled, the gold price would rise.

Gold is big business

Graph 3 Goldprice January 2010 - June 2010 The rising price of gold is still prominent in the media and with good cause. Gold has been on the rise for quite some time. In the last five years, the price of gold has more than trebled. In the twelve months from June 07 to June 08 it grew by 37.1%, then in the following twelve months between then and June 2010 it grew 27.7% and now to June 2010 it has added a further 44.6%. In fact in just 2010 so far it has grown 20.9% (to August). So while interest rates on savings have been languishing at or below 1%, and the values of currencies fall, gold has continued its overall upward trend*.
* Source: World Gold Council average monthly price of gold in GBP (pounds Sterling), January 2001 to June 2010

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Graph 4 The value of gold in billions of dollars

The gold price has risen 50 percent since 2005 to more than US$1100 per troy ounce. In 2009 alone the value increased by 23 percent. The expectation was that gold would become less popular following the recovery of the stock markets and the world economy in the autumn of 2009. Gold sales in the jewellery industry dropped, another result of the crisis. Even so, investors remain loyal to gold. They are afraid that the money injected by national banks will accelerate the pace of inflation. The interest rates on savings are diminishing, which in turn makes gold an attractive proposition for private investors. Gold doesnt provide interest or dividends, but with low interest rates, this difference is fractional.

Investors remain faithful

One final note: The rise in the value of gold since 2001 has happened without the active participation of most investors. The real value of gold remains a well kept secret. It is expected that over the next couple of years we will see a real run on gold. The recent revival of the US dollar and relative stability can also be an illusion. It is possible that the currency crashes if the inflation rate increases, or when the economy deteriorates. In the knowledge that the American economy will be at an all time low for the next number of years, causing inflation to rise, then it is logical that the weak position of the dollar remains the same. Financial commentator Daniel Gross in Newsweek, January 2010 Summary The global gold stock is relatively stable. In 1900, gold traded at US$20.67 equal today to US$503. The purchasing power of most currencies has declined significantly, while the purchasing power of gold has strongly increased. The real purchasing power of gold is in fact much higher than the present rate of US$1100 (March 2010, RPB). Central banks are to blame, since they have been pumping enormous amounts of paper money into the global financial system. And its not only the Federal Reserve who plays a role. According to the authoritative World Bank report Global Inflation 2007, central banks from emerging markets like Russia, India and China also flooding the world with money. Central banks can restrict the money market, but this policy goes against the philosophy that they are in charge of stimulating the world economy. The common practice of pumping extra money into the economy will not end in the foreseeable future. National debt the world over is still rising, and the problems in the financial world are far from being fixed. The American government has reserves of US$1 trillion (one followed by 12 zeros) to stimulate the economy. By creating this extra cash flow, the short-term interest rates remain low. This policy is sure to reduce debt. The end result is that the US economy will reach the phase of hyperinflation. This prospect becomes more evident every day. The demand for state bonds is shrinking at a steady pace. This all makes gold very attractive for consumers, investors, and institutions.

Fear for hyperinflation boosts the gold price

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In the official sector, we expect to see a continuing trend of central banks diversifying their dollar exposure in favour of the proven store of value represented by gold. Chief Executive Officer Aram Shishmanian of the World Gold Council in his report Q3 09 Gold Demand Trends.

[3] Who owns the worlds gold?

Currently 18 percent of all mined gold is carefully stored in the safes of central banks as gold bars. The United States owns the largest share of the bullion. Worldwide, demand for gold is growing. In 2008, 70 percent of demand came from East Asia, the Indian subcontinent and the Middle East. Half of the demand (55%) comes from just five countries: India, Italy, Turkey, the US and China.

Gold owners

Over the last 100 years Central banks have been the dominant owners of gold. It is likely that they will retain large quantities in the future. Together with the International Monetary Fund (IMF), the monetary authorities of central governments keep one fifth of the above-ground stocks in reserve. That is almost 30,000 tons of gold, spread across 110 organisations. In the last 10 years many central banks have acquired more stocks of gold. As a whole, since 1989 the sector has been a net seller, supplying 447 tons between 2004 - 2008 to the open market.

The US government owns 8,133 tons, the Euro-zone 10,800 tons and the IMF approximately 3,000 tons. Globally, governments own 30,000 tons of gold. Since 1999, the bulk of gold sales have been monitored by the Central Bank Gold Agreement (CBGA). This controls sales by any of the 15 biggest owners of gold in the world. Over the last 10 years, the maximum sale amount agreed was 400-500 tons on a yearly basis. In September 2009, this agreement was extended until 2013. As the 21st Century gold rush becomes increasingly apparent, governments have lost their desire to sell their nations gold. It is significant that gold sales from the official resources sector have decreased over the last couple of years. Recently the central banks net turnover was only 246 tons. Apparently they want to retain a strategic stock. Officially, central banks have confirmed that gold will remain an important reserve currency. On average governments hold 10 percent of their official foreign reserves in gold, although the ratio differs from country to country. Conversely, central banks of emerging markets buy gold on a massive scale. Many of these countries, who currently possess small gold reserves, are the largest buyers of bullion, including the Asian tiger economies like China, India, Russia, Japan, Singapore, Brazil and South Korea. China is the largest saver in the world, with US$2.27 trillion in foreign reserves, doubling its gold stock in the first half of 2009. Under its soil China has an estimated 1,054 tons of gold waiting to be mined, surpassing South Africa as the largest gold producer. In November 2009 the Bank of India bought 200 tons of gold from the IMF, valued at US$6.7 billion at US$1,045 per troy ounce. Now the proud owner of 577.7 tons of bullion, India is just behind Russia with the 11th highest gold ownership. The gold market can continue to profit from the growing appetite for gold from the worlds economies. Central banks are not capricious or inconsistent investors, but steadfast institutions who follow tight policy lines. Furthermore, they benefit from spreading their sales, in order to temper gold fever. They want to control the tempo of the price of gold in order to keep it affordable and maintain the value of their dollar reserves. Alan Greenspan, the former chairman of the Federal Reserve, stated back in 1998 that central banks are ready to lend enough gold, if the gold price will rise strongly. This remark points to the fact that the gold price has been kept artificially low for some time, by actively pushing gold loans.

How central banks operate

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In the 2006 report Remonetisation of Gold: Start Hoarding by the French bank Credit Agricole an assertion made initially by the American action group Gold Anti-Trust Action Committee (GATA) was confirmed. GATA asserts that the gold price has been underperforming because central banks have structurally dumped gold on the open market. This practice was officially sanctioned in order to close the gap between growing demand and global quantities of gold produced. The yearly demand for gold is approximately 4,000 tons, while production currently peaks at almost 2,500 tons. The gold price would have soared long ago if central banks had not agreed to make extra gold loans. Gold was simply borrowed, while the IMF agreed that these gold quantities could remain on the books. So in reality, one third of the total gold supply (10-15,000 tons) was unofficially sold to other institutions. GATA states that the IMF is an accomplice in the deal, which helps central banks keep all their gold reserves on the balance sheet, while cleverly cooking the books. Since this gold has been sold, they claim it is in fact double counting. In other words, fraud. Most analysts agree that in fact western banks only own half of the gold reserves they say they do. With the gold price rising for nine consecutive years, more and more banks are reluctant to want to lend gold. Some of them have even tried to claim their gold back. According to Crdit Agricole this growing discontent will ultimately lead to a fast rise in the gold price, possibly above US$2,000 rate per troy ounce. The Financial Times calculated in a publication in May 2009, that if you add up the gold reserves of the central banks, they have in fact lost US$40 billion, as a result of a decision made by the Bank of England, back in May 1999. That month, Her Majestys monetary institution parted with a certain amount of its gold reserves in exchange for securities with a higher interest rate. This action was the foundation stone of the anti-gold sentiment among European central banks at that time. Many central banks, among them the Netherlands, Portugal, France and Spain, also decided to sell their gold. Twelve years ago, the gold price was at an all time low of US$280 per troy ounce, one fifth of the current price. All European central banks sold 3,800 tons of gold between 1999 and 2010. The Financial Times calculated that at current exchange rates they lost US$52 billion. But money that was released after selling the gold was invested in safe state securities, yielding approximately US$12 billion, making the estimated final loss US$40 billion. The resultant loss was estimated at US$40 billion. Switzerland dumped the most at 1,550 tons, losing US$19 billion. The European central banks thought they had acted wisely, reducing the volatility of their portfolios in the short term and leveraging their profits in the long run by putting their money into securities. Even after these sales, the proportion of European gold reserves is huge (60%). Germany and Italy are the only two large European economies that havent sold their gold reserves. The global percentage of gold reserves as a proportion of the total foreign reserves is only 10.5 percent.

Selling gold at a loss

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The premier league of the largest owners of gold in the world is officially monitored by the IMF. It estimates that there is now 24,258 tons of gold, which equals 855 million troy ounces. At the current gold price rate, this gold would be worth 804.35 billion, representing 15.4 percent of all the gold that ever has been produced in the history of mankind. The list of the 10 largest gold owners is measured in tons of gold. 1. United States of America The US is the fourth largest gold producer (240 tons in 2007) and second largest buyer of gold in the world. The worlds largest economy owns the largest portion of gold. Its 8,133 tons are valued at 269.67 billion. That is almost one ounce for every US citizen. The gold equals 78.3 percent of the total foreign currency reserve. 2. Germany The Deutsche Bundesbank is the most influential member of the European Central Bank. Its gold reserve is 3,412 tons, valued at US$113.2 billion. The German gold equals 69.5 percent of the total reserve of the 4th largest economy in the world. 3. International Monetary Fund The IMF controls the global financial system of its 185 member states. Its goal is to stabilise international exchange rates, and leverage progress by extending loans to underdeveloped nations. The total gold reserves of 3,217 tons are used to stabilise international markets and help national economies. In 2008, the institution decided to sell 1/8th of its stock 403 tons of gold. The reason being that fewer countries ask the IMF for loans. In December 2009, half was sold to the Bank of India. China is in line to buy the remaining gold. 4. Italy The Banca dItalia owns 2,451 tons of Italian companies, which would amount to 66.5 percent of the foreign exchange currency reserves of the seventh largest economy in the world. The value is 81.3 billion. 5. France The Banque de France takes care of the gold belonging to French companies. The total amount is estimated at 2,450 tons of gold, valued at 81.3 billion, or 72.6 percent of the reserves of the fifth largest economy in the world. 6. China The most densely populated country in the world owns 1,054 tons. The total value is almost US$35 billion, which would equal US$26 per Chinese citizen. The Chinese gold is only 1.8 percent of its total foreign currency reserves. 7. Switzerland The Swiss National Bank owns 1040.1 tons. The gold equals 37.1 percent of the reserves. Valued at US$34.5 billion. 8. Japan The second largest economy in the world, Japan has 765.2 tons of gold, which is only 2.1 percent of its foreign currency reserves. The gold is valued at US$25.4 billion. 9. The Netherlands De Nederlandsche Bank has 612.5 tons (more than US$20 billion), which is approximately 61.4 percent of its foreign currency reserves. Originally the Dutch possessed 1,753 tons of gold. After 40 years, less than half this amount is still in the vaults.

Top 10 gold owners

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10. Russia With 598.4 tons in gold (US$20 billion), this stock represents 43 percent of the total foreign currency reserves. Russia planned to sell between 20 and 50 tons on the open market, in order to decrease its budget deficit, however, instead it decided to buy an extra 30 tons from its own gold production. An amount that equals 16 percent of the yearly gold production of 189 tons of gold. Finally, it is interesting to note that there is a fund which owns more gold than Russia and the Netherlands combined. SPDR Gold Shares is a so-called ETF (Exchange Traded Fund). It is one of the fastest growers in the market. As well as the New York Stock Exchange it also trades at the Singapore Stock Exchange and the Tokyo Stock Exchange. The investment goal is to follow as closely as possible the stock index or another mix of shares. All the trusts gold is monitored by the Custodian, in this case the American HSBC Bank. It has 1,120 tons of gold in the depository in London. It has two sub-custodians, the most well known being the Bank of England Summary At present, 18 percent of the worlds gold lies in the vaults of central banks. The United States still owns most of the worlds gold. The demand for gold is increasing on a daily base. In 2008, 70 percent of the demand came from East Asia, the Indian subcontinent and the Middle East. For more than 100 years central banks have been the predominant owners of gold. If you add the stocks of global organisations such as the International Monetary Fund (IMF) the percentage would reach 20 percent of world gold reserves. Since 1989, the central banks and the IMF have sold approximately 447,000 kilos of bullion. As long as the rush on gold continues, the desire to sell gold decreases. Meanwhile, central banks of the emerging markets continue to buy gold. China, India, Russia, Japan, Singapore, Brazil and South Korea are the largest buyers. With US$2,200 billion in foreign reserves, China is by far the largest saver in the world. In the first half of 2009 its gold reserves almost doubled in size. Russia has also been buying gold at a steady pace for many years. In November of last year, the Bank of India bought 200,000 kilos of gold. These types of demand have a significant effect on the price of gold.

SPDR Gold Shares

Central banks of emerging markets buy gold on a massive scale

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As a result of recent improvements and of large-scale operations, deposits of low-grade ores, which under earlier methods could not be worked at a profit, are now being made to yield large returns. It is largely from these deposits of low-grade ores operated on a strictly scientific and business basis that the great increase in the supply of gold and silver in recent years has come. An extract from Money and Banking, by John Thom Holdsworth.

[4] The worlds gold fits in a cube 22 metres squared

The most optimistic predications indicate that for the past 5,000 years people have mined a total volume of 158,000 tons of gold. Currently one metric ton is worth approximately US$35 million ($1,100 x 32,000 oz). All this gold would fit into a cube measuring just 22 metres squared - smaller than Big Ben, the Eiffel Tower or the Brandenburg Gate. Sixty five percent of the worlds gold has been produced over the last 60 years. Considering the fact that gold is virtually indestructible, all the gold that has ever been mined still exists. Thats a blessing, because the annual gold production is not even 1 percent of the existing gold reserves. This amounts to approximately US$90 billion US.

What is gold?

Gold is a natural material that originated under enormous pressure in the deeper layers of the earth crust. Gold is one of the heaviest metals on earth; with a specific gravity of 19.3 kilograms per cubic decimetre (1 litre of gold weighs 19.3 kilograms). Gold can be found everywhere in the earths crust, but often in very small concentrations. This makes commercial mining not very profitable. The highest concentrations are found in South Africa, the United States, Canada, Australia and parts of South America.

Graph 1 The annual gold production 1970-2010

Although gold was first discovered in river beds, it is now mostly mined underground. After China, South Africa is the largest producer, where mining to a depth of 3,000 metres is not uncommon. To extract a few grams of pure gold, approximately one thousand kilograms of rock needs to be excavated and chemicals such as cyanide and mercury are used. Gold mining produces a lot of waste and is undertaken in difficult, dangerous and labour-intensive circumstances. Pure gold is a relatively soft metal and therefore unusable in its purest form. To strengthen it, gold is often mixed with metals like silver, nickel or copper. Pure gold is often referred to as 24 carat. In the Western markets gold jewels usually contain 14 carat gold (which equals 58.3 percent); the rest is made up of other metals. Gold has unique properties: it is corrosion resistant, it transmits perfectly. Wherever you go, people continue to be mesmerised by its beauty, as has been the case for thousands of years. Gold coins, that have spend centuries at the bottom of the ocean tend to look as good as new.

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Until 1850, gold was considered a very rare metal. The total amount of gold mined at that point is estimated at 5,000 tons. The turning point came after the start of the Gold Rushes in the United States and South Africa in the second half of the 19th Century. The above-ground stock doubled in only 10 years. In the 20th Century, yearly mine production increased, due to the use of new techniques. Between 1980 and 2004, the annual mine production climbed gradually from 1,100 tons to 2,600 tons. The most common combinations to be found in nature are gold with quartz, pyrite and other minerals. Gold cannot be consumed, but used and often re-used. No traces of gold disappear in the production process. Every gram adds to the vast mountain of gold. In 2008, the above-ground global stock amounted to 45 times the demand for gold. The gold price is therefore more stable than the prices of other commodities. But it is difficult to respond to a sudden surge in demand for gold. An additional advantage is the fact that gold, contrary to oil and platinum, can be mined in all the worlds continents, except Antarctica. This geographical spread reduces the risk of supply shortages and price rises due to natural disasters or conflict. The African continent can no longer claim to be the worlds largest gold producer, even though it is estimated that it has two thirds of the worlds remaining gold to be mined. Asia is now the leading producer, which reflects the huge demand from that continent for gold. The biggest demand for consumer gold comes from China, followed by India and the Middle East. Far behind come the United States and Turkey. All the other nations demand less gold than China and India combined.
Graph 2 Gold mining output versus Gold price.

Every gram counts

Experts claim that there is now more above-stock gold than underground. Studies have shown that gold is also found in most seas and oceans; however scientists have yet to extract gold from seawater successfully. For the time being only classical gold mines can provide supplies. The mines are not yet exhausted, but many require new methods to dig ever deeper and it usually takes up to 10 years before new mines can produce gold. During the past nine years, which have been significant for the price of gold, it has been almost impossible for mine owners to anticipate the rise. As a result, mine producers are to blame for the current crisis in the trade. Due to the low gold price between 1999 and 2003, they invested little in searching for new gold veins. They are still paying the price; production in South Africa is at its lowest level for 80 years; excavation costs continue to rise and mining ever deeper means mining more dangerously. The cost price for the production of a troy ounce (31.10 grams) of gold has gone up from US$280 in 2002, to US$450 in 2005. (These are the most recent figures). A blessing in disguise is the large supply of so-called recycled or secondary gold. This offers the security that there is enough gold in stock to meet the demand, allowing the gold price to remain stable. The rising value of gold makes it economically viable to separate gold from most means of use. It can be melted, re-refined and re-used. Between 2004 and 2008, 28 percent of annual gold production was in recycled gold.

Recycled gold offers security

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The fact that less and less gold is being produced is no news. In 1999, annual production was 2,603 tons peaking in 2001 at 2,645 tons. Since then production has slowly decreased, reaching its lowest point in 2008 with only 2,407 tons of gold produced. Globally, only a few hundred goldmines are active, excluding clandestine mines where gold is extracted on a very small scale using traditional methods. New mines replace old mines. The problem is that one has to dig deeper. Experts think it wont be long before there is not enough gold produced to fulfil demand, ultimately raising the gold price.

The current economic climate makes gold particularly popular in society. Gold fever has grown in 2010 to such proportions that people are willing to have their gold teeth removed to cash them for euros or dollars. Depending on its size, a gold filling can be worth 20 to 200 euros.

Graph 3 Growth annually recycled gold versus new gold

Summary Over the past 5,000 years, a total of 158,000 tons (8,000m) of gold have been mined. The worlds gold would create a cube measuring 22 metres high, 22 metres wide and 22 metres in depth. This cube would seem small placed next to Big Ben, Brandenburg Gate, the Eiffel Tower or the Great Pyramid of Giza. Furthermore, 65 percent of all the gold has been mined during the past 60 years. Yearly production currently equals only one percent of the worlds gold reserves. The best performing gold production sites can no longer be found on the African continent. They are situated in Asia, which also has the largest global demand for gold. Experts claim there is more gold above the ground then underneath it. Provided the right technology is developed, it is very likely that one day gold will be mined from the oceans. It is just a matter of time and money. Production in South-Africa is at its lowest level in 80 years this is bad news. Back in 2001, annual global production was 2,645 tons of gold. In 2008, this figure had dropped to only 2,407 tons. Worldwide, there are still a few hundred goldmines in production, with new mines slowly replacing old ones, but mining companies are having to dig deeper to find gold ore. Expectations are that at the current gold price, there soon wont be enough gold in circulation to satisfy increasing demand. This will surely raise the price of gold.

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From one ton of mobile phones it is possible to gain 20 times more gold than from one ton of gold ore. Moreover the process is much more environmentally friendly. It saves commodities and reduces the total amount of waste. A student of Artificial Intelligence, Free University of Amsterdam.

[5] All that glitters is gold

Worldwide, more than half of the total volume of gold (158,000 tons) is processed into jewellery. In the 12 months to December 2008 the demand for gold jewellery was US$61 billion, making it one of the biggest consumer goods. In terms of retail value, the United States is the biggest market for gold jewellery, while India was the largest consumer market in terms of sales volume (24 percent of total demand in 2008). Consumer demand for jewellery is being driven by a combination of affordability and lust. Demand rises during periods when prices are stable or rise gradually. Demand slows when price volatility is high. A gradual price rise increases the intrinsic value of gold jewellery. The consumption of jewellery in developing countries has been booming, after a period of decline. The economic crisis, followed by the pressure of a recession over the past three years has considerably dampened the demand. This is especially the case in western markets. Nations like China, India and Saudi-Arabia remain important growth markets. Sixteen percent of the worlds gold is used as an investment. It is difficult to measure the volume, since much investment is conducted through intermediaries. There is no doubt, however, that the investment demand for gold has increased over the past few years. Since 2003, investments have been the largest source of growth in the demand for gold. The value rose until 2009 by approximately 412 percent. In 2008, investments attracted a net influx of circa US$32 billion. For example, gold coins and gold bars are currently seen as the perfect crisis purchase. Production has increased enormously. The volume of gold coins increased from 128.9 tons in 2006 to 197.7 tons in 2008. The production of gold bars was estimated in 2006 at 235.2 tons, rising in 2008 to 378.3 tons.

Investments

Graph 1 The demand for gold

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Twelve percent of the worlds gold reserves are used in electronics, space technology and the medical industry. Between 2004 2008 these markets used an average of 440 tons of gold annually. Gold is being used in electrical circuits, but also in coatings for satellites and the windows of planes and buildings. It makes sense. Gold reflects the suns ultraviolet radiation. Half the industrial demand comes from its use in electrical components. This can be explained by the high thermic and electrical conduction of gold, and the high resistance against corrosion. Gold is used in smart cards, car electronics, sensors and battery contacts in mobile phones. In the medical sector, gold is used for medical implants and for decades it has been used in dental alloys for crowns and fillings. On average, a crown of 2.5 grams consists of 2.5 grams of gold. Until 2003, 80 percent of crowns produced consisted of gold, the rest being ceramics. Today this combination has been reversed and gold is being used much less; the price stability of gold being the most important reason. In the future, gold will be used as a catalyst in various chemical processes. Currently the use of gold in these instances is relatively limited. Its high price weighs against the numerous advantages. The will is there to use gold for new applications, such as its use as a catalyst in fuel cells, in chemical processing and to fight pollution. Scientists remain enthusiastic about the prospect of using nano parts of gold for advanced electronics, glass coatings and for the treatment of cancer. Almost 30 percent of the worlds produced gold is processed from recycled gold. There is no doubt that this amount will increase. The biggest threat in the 21st Century is not climate change, but the lack of commodities. Across the world, the detritus of modern life including mobile phones, computers, electronics and catalysts is being mined for almost 20 different metals: lead copper, silver, platinum, rhodium, ruthenium, iridium, palladium and of course gold. Lots of mobile phones contain a gold coating. A ton of mobiles contains 300 grams of gold, while the gold ores produced in South Africa mines contain only five grams in every ton. Most gold produced annually will be stripped from consumer society in the developed nations. Gold from scrap is the future. Mobiles yield seven euros per kilo, excluding the battery. Currently only one or two percent of all the mobiles in the world are used for recycling. Two thirds go directly to Africa, where mobiles are being re-used by the local population. The market potential is therefore much greater. These are golden times for suppliers of gold and gold jewellery. The higher the prices of precious metals rise, the more recycling will be seen in the worlds furnaces. Every gram of gold is sacred. One gram of pure gold is the equivalent of an expensive lunch. One ounce could fund a months cost of living. It is no wonder therefore that a high gold price during an economic crisis leads to queues at the doors of those buying gold. Of all the gold in the world, only two percent is unaccounted for. Included in this category is gold produced for human consumption for example in the recipes of desserts, flakes and lollies. It is even possible to have a glass of white wine mixed with gold. After dessert one can enjoy a cigar with gold wrapped inside the tobacco leaves. It sounds extremely decadent and expensive and it is! These expensive applications prove how versatile gold is, and the extreme lengths people go to, to use this precious metal.

Industrial applications

Gold from scrap is the future

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Summary

The biggest problem for the 21st Century a lack of raw materials

Gold can be applied endlessly. Every day, new ideas are thought of to make efficient use of this precious metal. More than 50 percent of the total volume of the worlds gold (158,000 tons) is processed into jewellery. Only 16 percent of all the gold in the world is held as an investment. This quota has increased between 2003 and 2008 by 412 percent. Between 2006 and 2008, the production of gold coins increased from 128.9 tons to 197.7 tons. The production of gold bars increased in that same period from 235.2 tons to 378.3 tons. Currently 12 percent of the gold reserve is used in electronics, space technology and medical applications ranging from smart cards and car electronics to gold teeth and battery contacts in mobile phones. This gold often disappears; currently only two percent of the 2.7 billion active mobiles in the world are recycled. One ton of mobile phones contains 300 grams of pure gold which is; a considerable amount bearing in mind that one ton of gold ore from a South African goldmine contains only five grams of gold. Two percent of the worlds gold reserve is used for human consumption. People continue to eat expensive desserts, flakes and white wine, containing gold. The truly decadent can even enjoy a facial treatment containing 24-carat gold leaf. The applications are unlimited, even though gold production is slowing.

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Gold was money in ancient Greece. The Greeks mined for gold throughout the Mediterranean and Middle East regions by 550 BC. Both Plato and Aristotle wrote about gold and had theories about its origins. Gold was associated with water (logical, since most of it was found in streams), and supposedly gold was a particularly dense combination of water and sunlight. Richard L. Smith, author of OnlyGold.com.

[6] As rich as Croesus gold through the ages

Humankind has cherished gold for more than 5,000 years. It was traditionally used to produce ornaments, not just for decorative purposes, but also to symbolise wealth and power. The first pure gold coins were minted by King Croesus of Mermnadae, the last King of Lydia (570-546 B.C.). Lydia (present day Turkey) amassed a huge hoard of gold. Since then, gold coins have been used as legal tender by many nations. The first applications of gold were probably decorative. The gloss and durability were recognised by the earliest civilisations as unique assets to honour the gods and notables. Gold was a means to stand out; it has always been a symbol of power and eternity. Many cultures associate gold with gods and immortality; it was the ideal commodity to honour the elite and higher beings. The Incas referred to gold as the tears of the Sun. Greek poet Homer (9th Century BC), renowned author of The Iliad and the Odyssey, writes about gold as being used to honour and glorify the immortal gods. In Genesis, the river Pison is mentioned as the land of Havilah, where gold is found and where the gold of that land is good. Further back in history, around 3100 BC, there are traces of valuing gold and silver through the Code of Menes. Menes was the founder of the first Egyptian dynasty. This code stipulated that a part of gold is worth as much as 2.5 parts of silver. This is the oldest reference to the existence of a relation between gold and silver.

The first gold mines

The Egyptians were heavy users of gold. Around 1,320 BC, the first gold map was drawn. The map depicts gold mines, mineworkers and a network of roads. For centuries adventurers looked for the locations of these mines. It is most probably a depiction of the Wadi Fawakhir area, where the El Sid goldmine is located. When the stocks dried up, Egyptians turned their attention to Asia Minor to find gold.

The myth of Jason and the Argonauts originates from 1,200 BC and tells the story of the search for the Golden Fleece. This references the first gold diggers who used sheepskin to collect gold from rivers. They allowed water to flow through the sheepskins and, once dry, the gold diggers softly beat the skins, knocking the gold nuggets out of the fleece. It was a very primitive but efficient way of hydraulic mining, which continued to be until the Californian Gold Rush in the 1850s. The oldest record of gold being used as currency dates to 700 BC. Tradesmen from the legendary kingdom of Lydia in Asia Minor, (western Anatolia in present day Turkey), minted the first gold coins. These were a combination of 63 percent gold and 27 percent silver, known as electrum. Under the rule of Alvattes II and then his son Croesus, the empire became one of the most powerful states of its time. It had enormous wealth, which it owed to a moderate climate and the huge reservoir of gold flowing through its rivers. For the ancient Greeks, Lydia was the symbol of abundance and wealth. The Greek coastal cities Milete and Ephesus, who traded with Lydia, copied this revolutionary idea of minting gold coins.

As rich as Croesus

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In the 21st Century we are still familiar with the expression As rich as Croesus to describe unprecedented wealth. Gold coins have been popular ever since. Not surprisingly, since old gold has a unique density. No other precious metal, apart from platinum, is so heavy and yet still so easy to melt, shape and measure. Gold created the concept of money portable, personalised and permanent. In ancient Greece, gold was the perfect tender. In 550 BC, the Greeks owned gold mines from the Mediterranean all the way to the Middle East. The great philosophers Plato and Aristotle mentioned gold and its origins in their writings. They associated gold with water, as it was found in the rivers. They presumed that it originated from a combination of water and sunlight. In those days, the scientific knowledge of gold was limited, but the Greeks learned quickly how to find it. At the time of the death of Emperor Alexander the Great (322 BC), the Greeks were mining gold from Gibraltar all the way to Asia Minor and Egypt. Some of these mines were state owned; others were in private hands, their owners paying an annual tax to the treasury. The Roman Empire went even further afield to look for gold in their greed for expansion. They experimented with underground mining, and used a waterwheel to produce gold. Gold mining became a real science. Aiding this development was the enormous reservoir of slaves and prisoners of war who were exploited to find gold. The Romans saw the trade advantages of introducing a gold standard. This was the catalyst for the first global economy, which helped the regions to trade among each other. During the Roman reign, herbs were traded with India, and silk with China, in exchange for gold and silver. At its very height, the Roman Empire (98-160 AD) conducted the trade in gold and silver from Great Britain to North Africa and Egypt. Gold coins had a special meaning in Rome. The minting of new gold coins was executed under strict rules. The minting process was personally overseen by the emperor, who explicitly gave his permission. This enabled the Romans to know precisely how many coins were circulating.

Gold as a standard for money

The Treasure of Montezuma

When the Spaniards discovered America, they found huge gold reserves there. The Spanish conqueror Hernando Cortez entered Mexico in 1518 with an army of six hundred men. Cortez reached Tenochtitlan (now Mexico City) in 1519 and was received by Montezuma, the Aztec emperor. After setting up his headquarters, he had Montezuma executed. Cortez then shipped an astonishing amount of gold from the Aztecs to Spain. Another Spanish conquistador, Francisco Pizarro, conquered the Inca Empire in Peru. After taking the Inca emperor Atahualpa hostage in 1532, he demanded a ransom. It consisted of filling one room where the emperor was held captive, with gold, and two rooms with silver. The Incas were forced to melt all their gold artefacts into bars. Despite meeting these demands the emperor was executed. After conquering the Aztec and Inca empires, Spain owned enormous amounts of new with which gold to mint coins.

The primary Spanish gold coin was the escudo, and the basic piece of money was the Dobln (also known as a Doubloon), a piece of 8 escudos that was originally fixed at 27.468 grams of 22 carat gold , which stood for 16 times the equal weight in silver. The amount of gold passing through the Antilles enabled the islands, in 1704, to use gold as the only legal tender. In fact the circulation of Spanish coins would ultimately lead to the creation of the dollar as a standard unit for the United States the dollar was based on the Spanish silver real. The US Mint was set up in Philadelphia specifically to trade in Spanish colonial coins. In 2010, as gold coins are now mostly minted for collectors, the value of old gold coins will continue to rise, as they become increasingly rare.

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The rise of the Gold Standard

In the 18th Century, British bankers were looking for a way to usher in the introduction of paper money into Europe. As gold coins were already in circulation it seemed that the best way to gain acceptance for banknotes would be to offer a guarantee that they could be converted to gold at any time. By expressing a currency in terms of how much gold was worth, it also became easier for nations to trade with each other. The introduction of this era of currencies pegged to the Gold Standard coincided with a period of great discovery of gold (through the Gold Rushes) and an era of strong growth in trade and international banking.

The Gold Standard operated by having the price of gold fixed at an agreed level and each nations currency issue, whether in gold coins or bank notes, covered by the gold they held on reserve (and so could be exchanged for gold). Internationally, this situation led to the free import and export of gold. Shortages and surpluses on the current account of trade balances were resolved by moving gold from one nation to another. It was argued that this would act as a disciplinary measure: a drop in the gold reserve would mean a decrease of the basic amount of money, leading to a drop in prices. This in effect would make the export products of a nation competitive, resulting in a re-establishment of the current account. In hindsight, the gold standard was less functional as it relied on the physical movement of gold. Central banks preferred to use interest rates and the total volume of paper money in circulation as their main financial tools. Most nations went off the Gold Standard in the early 1930s and it was entirely abandoned by 1944. Since then, the price of gold has been allowed to fluctuate according to demand, and the value of national currencies are expressed in terms of each other.

Graph 1 The rate of the gold price between 1791 and 2010

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The discovery of gold nuggets

Man has always been deeply fascinated by gold. In 1848 American John Sulter and his assistant James Marshall discovered nuggets of gold in among river gravel as they were building a saw mill. This fluke discovery not only changed the course of American history, it had a major impact on the price of gold and resulted in 40,000 prospectors from all parts of the United States and Europe joining the desperate search for their fortunes. The pattern was repeated when gold was discovered in 1896 in the Canadian town of Klondike.

The classic gold rush in 19th Century Western Australia has been repeated in the 21st Century as a direct result of nine years of rising gold prices. North of Melbourne, where 150 years ago the largest gold nugget (the Hand of Faith) was found, the area is once again awash with gold diggers. In exchange for a permit and an electronic metal detector, anyone can hunt for gold nuggets. The art of gold prospecting has turned into a lively subculture in the Australian Outback. Enthusiasts produce their own magazine, are organised and go to meetings, debates, conferences, and run websites and offer courses for starters in the business. Summary Gold has been cherished by mankind for centuries and used by the earliest civilisations to venerate gods and notables. Gold was a synonym for strength and eternity. In many cultures it is associated with gods and immortality. The Incas described gold as the tears of the Sun. In the 9th Century BC Homer wrote of the glorification of gods who never die. Further back in history, around 3100 BC, the value of gold and silver was measured in the Code of Menes, named after the founder of the first royal dynasty in Egypt. The earliest traces of gold as legal tender date back to 700 BC, when tradesmen in the ancient kingdom of Lydia (present day Western Turkey) minted the first gold coins. In ancient Greece gold was primarily used as an official currency. The Greeks were large-scale consumers, owning gold mines from Gibraltar to Asia Minor and Egypt. Ten years after the beginning of the second Millennium nothing has changed. People are still prospecting for gold. Almost everyone wants to be able to afford a gold ornament or give gold jewellery as a gift. In 2010 there is a new gold rush underway attracting thousands of prospectors to an area north of Melbourne.

Gold is no fad; it has been much loved for over 5,000 years

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The United States is printing dollars on such a large scale, that from an economic point of view there is no doubt that the value of the dollar will decrease. Gold is therefore a better choice. Li Lianzhong, chief of the department for economic research of the Chinese Communist Party.

[7] Golden countries

Many people place more faith in gold than in currencies. The two most populated nations on earth, where disposable income grows fastest, love gold. China and India are driving the price of gold to new heights. Nowhere in the world can women be seen wearing so much gold as in India. Farmers buy gold as a means of banking their harvest profits. In China, solid wealth management without risks is also an everyday theme. India trades US dollars for gold on a large scale, indicating that it has no faith in the American currency. China takes the same view about the status of the Greenback as the worlds reserve currency. In India so many families have invested in gold that the rising price on the open market has made part of the population rich. Gold is now so expensive, that in the West the consumer demand is diminishing. In India there are still more buyers than sellers. This means, in effect, that a small rise of consumption will lead to huge absolute increase in demand. It is true that the global demand for gold jewellery decreased in the third quarter of 2009 by 42 percent, in comparison to the same period in 2008. Nonetheless, 111.6 tons of gold is still a lot of gold. There is no correlation between the firm drop in demand and the interest for gold. The extreme drought in India during the summer of 2009 had a direct impact on the income of farmers. Nevertheless, the demand for jewels increased in the second half of 2009. 60 percent of the retail turnover for gold is attributable to consumers trading old gold jewellery for new. This trend indicates that consumers remain loyal to gold and prefer to actively trade in the commodity.

Graph 1 Indias annual gold import

Traditions

Like their Chinese neighbours, Indians love traditions. No wedding in India, (which accounts for 20 percent of the global demand), is complete without a bride decked with gold. At the birth of a child and other celebrations, Indians give each other presents made of gold. Until 2008, China was second only to India as the largest importer of gold. Here the start of a new calendar year in February is the best moment for its citizens to treat each other to gold. The worlds largest demand for gold in China was reported in 2009, due to the celebrations of the 60th birthday of the Peoples Republic in October last year. In only the third quarter, the measured consumer share in gold was 120 tons - a twelve percent rise in comparison to the same period in 2008. The demand for jewellery rose by eight percent to 93.5 tons.

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The Chinese government owns huge foreign reserves estimated at US$2.27 trillion, due to its position as the worlds leading exporters. The Peoples Bank of China used to invest her reserves in US treasuries. This policy has altered, now China is set to take over Japan as the second largest world economy. Those billions of dollars are to be well spent. On the one hand, the Chinese use their strong position to fuel the debate about the status of the dollar as the worlds reserve currency. The Chinese yuan is not ready yet to become the new reserve currency of the globe, so gold remains a solid alternative.

Chinas reserves

Graph 2 The demand from China is rising despite the high gold prices

Iran and Saudi-Arabia

Oil is not the only commodity which makes the Middle East tick. Iran is the sixth biggest gold market in the world. The gold consumption rose between 2002 and 2004 from 109 to 139 tons. The total jewellery consumption for 2004 was 118 tons, placing Iran in the same league as nations like Saudi-Arabia, Turkey, China, India and the United States. The growing demand for gold has in part to do with internal economic factors. The economy of Iran grew, on average, five to seven percent during the last three years, while inflation hovered around 14 to 17 percent. The Rial, the Iranian currency, decreased 25 percent in value against the dollar. Furthermore, Iran has a very large black economy, and there is a lack of alternative investment opportunities. People can only put their savings in gold or land. There is also a national feeling of insecurity caused by the apparent threat of an attack by the United States. The government has taken measures to reduce the heavy taxes for owning gold, and is trying to organise and regulate the gold market. These are all factors that support the demand for gold. In neighbouring Saudi Arabia, there is a big market for gold and jewellery. There are several thousand jewellery shops in the oil nation selling simple jewellery for investment purposes. These jewels are made from recycled gold. Jewellery shops are opening businesses in new shopping centres, offering western style jewellery, with and without precious stones. Most gold is sold during important Muslim religious festivities, like Ramadan and the annual Hajj. The largest gold production centres can be found around the cities of Jeddah, Riyadh and Dammam. A large part of the market demand is met by importing gold from Malaysia, Singapore, Bahrain (21 carat) and Italy (18 carat).

Graph 3 China versus Japan, who is bigger?

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China will become the most important nation in the world. The 21st Century will be Chinas. Nothing will stop this emerging market. It is a misconception that the Chinese dont excel in capitalism. They are the best capitalists in the world. They save more than a quarter of their income. In the US its less than two percent! Investment guru Jim Rogers, the worlds first adventure capitalist aka the Indiana Jones of Finance. Summary

The gold culture in India and China and huge foreign reserves

Many people place more trust in gold than in currencies. The worlds two most populated countries are particularly fond of it. The people of India and China are keen to buy gold. Globally the fastest growing economies have a major impact on the strong surge of the gold price. Nowhere on earth do so many women wear gold jewellery. Nowhere else do families save so much gold. A small percentage increase in consumption automatically leads to an enormous boost in the demand. No wedding is complete without a bride being decked with gold. Gold is a gift for births. And in China the New Year in February is the perfect moment for people to treat each other with gold. In 2009 China experienced a record demand for gold, given the 60th birthday of the Peoples Republic. In only the third quarter of last year, consumer consumption of gold was a hefty 20 tons, an increase of 12 percent on 2008. Concurrently the demand for jewellery increased by eight percent to 93.5 tons. India now exchanges US dollars for gold, displaying a clear vote of no confidence. The Chinese government has enormous foreign reserves worth US$2.27 trillion! Gold is currently the best alternative to maintain the value of these huge reserves.

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The US economy has shifted from a consumption economy to an economy which is based on the budget deficit. In the coming years inflation could become a problem. Paul A. Volcker, between 1979 and 1987 chairman of the Fed. Currently he advises President Obama on the state of the economy.

[8] Golden opportunities

Since 2003, investments have been the largest source of growth in the demand for gold. The increase in value rose until 2009 by 412 percent. The investments attracted a net increase in 2008 of US$32 billion. There are many reasons and motivations for private individuals and institutions to invest in gold. The positive price expectancy is strengthened by the fact that the demand exceeds supply. This is a solid base for investment. There are two main drivers for owning gold: the ability for gold to act as a guarantee against instability; and protection against risk.
Above-ground stock 2007 (total:161,000 t) Industrial 12% (19,165 t) Investment 16% (26,500 t) Jewellery 52% (82,700 t) Unspecified 2% Central Bank 18% (29,000 t)

Flow of demand over 5 years (2003-2007)

The gold market was dominated by gold bugs in the 20th Century. For the past 10 years, the gold market has been the domain of investors. The difference between both groups is that investors speculate by predicting the future. Investors try to sell their assets in time, gold bugs simply believe in gold. Investments in gold can have various forms, and some investors prefer to be flexible, and combine two or more forms. The difference is not always clear, between buying physical gold and simply betting against movements in the gold price. One of the reasons is that it is possible to invest in gold, without actually owning it as a commodity. There are a variety of investment products that service the private and institutional investor. Investors can buy coins, bars or certificates, trade in options or invest in mine production companies. Gold coins and bars of melted gold are seen currently as the best crisis investment. The growth in the demand for investments is being mirrored by trends in methods of investments. Now there is a wide range of products to comply with the needs of private and institutional investors. Gold coins and small bars offer private investors an attractive means to invest in relatively small quantities of gold. In many countries, including the European Union, gold that has been bought for investment reasons, is exempt from taxes.

Investors versus gold bugs

Investment 19% (703 t) Jewellery 68% (2,497 t)

Industrial 13% (474 t)

Coins and small bars

Flow of supply over 5 years (2003-2007)

Recycled Gold 26% (952 t)

Sales Central Bank 14% (515 t)

Mining Production* 60% (2,209 t)

Graph 1 Aboveground stocks, flow of the demand and flow of the supply. Source: World Gold Council

*netto hedging

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Investors can choose from a wide variety of gold investment coins minted by governments across the world. These particular coins, which are legal tender in the country of issue, are based on their nominal value, not on the base of their value in gold. The market value of coins for investment opportunities is determined by the value of pure gold, excluding a premium or trade commission that varies from coin to coin, and from trader to trader. The premium is usually higher for smaller weights. Gold investment coins vary in size between 1/20 ounce to 1,000 grams. The most commonly used weights in troy ounces or dollar weight are 1/20, 1/10, and 1 ounce. It is important not to mix up investment coins with remembrance or numismatic coins. The value depends more on their limited availability, design and finish, and not so much on the gold weight. Most traders sell both types of coins. Gold bars can be bought in a large number of weights and sizes, varying from one gram to 400 troy ounces, which is the size of the internationally traded London Good Delivery bar. Small bars are defined as weighing 1,000 grams or less. According to industry specialist Gold Bars Worldwide, there are 94 accredited producers of gold bars, spread over 26 countries and producing more than 400 types of standard gold bars. Gold bars consist normally of 99.5% percent fine gold. Gold is being traded as stock on the exchanges of Australia, France, Hong Kong, Japan, Mexico, Singapore, South Africa, Switzerland, Turkey, the United Kingdom and the United States. These securitised gold investments (securitising means trading debts as a security) are often dubbed as Exchange Traded Commodities or Exchange Traded Funds. These regulated financial products strictly follow the gold price. Contrary to derivates, securities are covered 100 percent by physical gold. These securities have a large influence on the gold market, which adds up to a yearly average of 32 percent of the identifiable investments and 6.5 percent of the total physical demand between 2003 - 2009. Gold futures contracts are fixed liabilities to deliver a specified amount and purity of gold, at a certain date against a fixed price. The initial margin or cash deposit paid to a trader- is only a fraction of the gold that underlies the contract. This means that investors can reach a nominal ownership of the gold value, which is considerably higher than the original cash deposit. Even though this leveraging effect can be the key to significant trade profits, it can also lead to even more considerable losses if the gold price falls. The prices of futures are determined by the perception in the market of what the carrying cost should be including the cost of interest in lending gold, plus costs for insurance and storage. The futures price is usually higher than the spot market price for gold. Futures contracts are traded on regulated stock markets for commodities. The largest being the New York Mercantile Exchange Comex Division (recently dubbed CME Globex after the merger with the Chicago Mercantile Exchange and NYMEX), the Chicago Board of Trade (part of the CME) and the Tokyo Commodity Exchange. Gold futures are being traded in India and Dubai. Gold options give the holder the right (not the obligation) to buy (call-option) or to sell (put-option) a specified amount of gold, at a fixed price, on an agreed date. The costs of this option depend on the current spot market price, the price both parties agreed upon (the strike price), the interest rates, the planned volatility (the degree of pass liability) of the gold price and the time remaining until the agreed time. The higher the strike price, the cheaper a call option is, and the more expensive a put option. Just like futures, buying gold options can offer the holder a considerable leverage effect. If the strike price is not reached, there is no reason to exercise the option. The loss of the holder is limited to the original premium, paid for the option. Like stocks, futures and options can be traded through traders.

Golden investment coins

Small bars

Securities covered by gold

Gold futures

Gold options

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Warrants

In the past, warrants were usually linked to the stocks of gold mining companies. Now they are often used by leading investment banks. They give the buyer the right to buy gold at a specific price on a specified day in the future. The buyer pays a premium for this right. Like futures, warrants are usually provided with a leverage credit, valued at the underlying commodity (in this case gold). But the leverage effect can also take place on a one for one basis.

Allocated account

Effectively like keeping gold in a safety deposit box, this is the most secure form of investment in physical gold. The gold is stored in a vault owned and managed by a recognised bullion dealer or depository. Specific bars (or coins, where appropriate), which are numbered and identified by hallmark, weight and fineness, are allocated to each particular investor, who pays the custodian for storage and insurance. The holder of gold in an allocated account has full ownership, and the bullion dealer or depository that owns the vault where the gold is stored may not trade, lease or lend the bars except on the specific instructions of the account holder. Investors do not have specific bars allotted to them (unless they take delivery of their gold, which they can usually do within two working days). Traditionally, one advantage of unallocated accounts has been the lack of any storage and insurance charges, because the bank reserves the right to lease the gold out. Now that the gold lease rate is negative in real terms, some banks have begun to introduce charges even on unallocated accounts. Investors are exposed to the creditworthiness of the bank or dealer providing the service in the same way as they would be with any other kind of account. As a general rule, bullion banks do not deal in quantities under 1,000 ounces - their customers are institutional investors, private banks acting on behalf of their clients, central banks and gold market participants wishing to buy or borrow large quantities of gold. Other opportunities for smaller investors include:

Unallocated account

There are alternatives for investors wishing to open gold accounts holding less than 1,000 ounces. For instance, in Gold Pool Accounts - where you have a defined interest in a Gold accounts pool of gold - you can invest as little as one ounce. There are also electronic currencies available - linked to gold bullion in allocated storage - which offer a simple and cost-effective way of buying and selling gold, and using it as money. Any amount of gold can be purchased, and these currencies allow gold to be used to send online payments worldwide. Gold Accumulation Plans (GAPs) are similar to conventional savings plans in that they are based on the principle of putting aside a fixed sum of money every month. What makes GAPs different from ordinary savings plans is that the fixed sum is invested in gold. A fixed sum of money is withdrawn automatically from an investors bank account every month and is used to buy gold every trading day in that month. The fixed monthly sums can be small, and purchases are not subject to the premium normally charged on small bars or coins. Because small amounts of gold are bought over a long period of time, there is less risk of investing a large sum of money at the wrong time. At any time during the contract term (usually a minimum of a year), or when the account is closed, investors can get their gold in the form of bullion bars or coins, and sometimes even in the form of jewellery. Should they choose to sell their gold, they can also get cash.

Gold pool accounts

Electronic currencies

Gold Accumulation Plans

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Historically, gold certificates were issued by the US Treasury (from the Civil War until 1933). Denominated in dollars, these certificates were used as part of the gold standard, and could be exchanged for an equal value of gold. These US Treasury gold certificates have been out of circulation for many years, and have become collectibles. They were initially replaced by silver certificates and, later, by Federal Reserve notes. Nowadays, gold certificates offer investors a method of holding gold without taking physical delivery. Issued by individual banks, particularly in countries like Germany and Switzerland, they confirm an individuals ownership while the bank holds the metal on the clients behalf. The client thus saves on storage and personal security issues, and gains liquidity in terms of being able to sell portions of the holdings (if need be) by simply telephoning the custodian. The Perth Mint also runs a certificate programme that is guaranteed by the government of Western Australia and is distributed in a number of countries. A number of collective investment vehicles specialise in investing in the shares of gold mining companies. The term collective investment vehicles as used here should be taken to include mutual funds, open-ended investment companies (OEICs), closed-end funds, unit trusts, and any similar structures. A wide range of such funds exist and they are domiciled in a number of different countries. These funds are regulated financial products and, as such, it is not possible here to provide details on any specific funds. Funds are likely to differ in their structure - some may invest simply in the shares of gold mining companies, some in companies that mine other minerals, some in futures as well as mining equities and some may invest partly in mining equities and partly in the underlying metal(s). It would be misleading to equate investment in a gold mining equity with direct investment in gold bullion, as there are some significant differences. The appreciation potential of a gold mining company share depends on market expectations of the future price of gold, the costs of mining it, the likelihood of additional gold discoveries and several other factors. To a degree, therefore, the success of the investment depends on the future earnings and growth potential of the company. Most gold mining equities tend to be more volatile than the gold price. While they are subject to the same risk factors that influence the prices of most other equities there are additional risks linked to the mining industry in general and to individual mining companies specifically. The market for structured products is dominated by institutional investors - or, in the case of forwards, by gold market professionals - because the minimum investment can be high. The following is a general overview of what these products are like and how they work.

Gold certificates

Gold orientated funds

Structured products

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Like futures, forward contracts are agreements to exchange an underlying asset - in this case, gold - at an agreed price at some future date. They can therefore be used either to manage risk or for speculative purposes. But there are important differences between forwards and options traded in the over-the-counter (OTC) gold market and futures and options traded on one of the exchanges: a forward contract (or OTC option) is negotiated directly between counterparties and is therefore tailormade, whereas futures contracts are standardised agreements that are traded on an exchange although forward contracts offer a greater flexibility and are private agreements, there is a degree of counterparty risk, whereas futures contracts are guaranteed by the exchange on which they are traded futures contracts can be sold to third parties at any point before maturity, they are more liquid than forward contracts (whose obligations cannot be transferred).

Forwards

Gold-linked bonds are available from the worlds largest bullion dealers and investment banks. Their products provide investors with some combination of: exposure to gold price fluctuations a yield principal protection. Structured notes tend to allocate part of the sum invested to purchasing put/call options (depending on whether the product is designed for gold bulls or bears). The balance is invested in traditional fixed income products, such as the money market, to generate a yield. They can be structured to provide capital protection and a varying degree of participation in any price appreciations depending on market conditions and investor preferences. Today, a different class entirely is powering golds rise: mainstream investors and money managers who once shunned it. E.S Browning, A new standard? Worried investors are flocking to gold. Wall Street Journal Europe, 2 March 2008. Summary: For the past seven years, a growth in investments has driven the demand for gold. Between 2003 and 2008 the value of these investments went up approximately 412 percent. In 2008 the investments attracted a net influx of US$32 billion. There are many reasons to invest in gold. The main reason must be the ability of gold to act as a guarantee against volatile markets and spread risk; and a positive price expectation if demand outstrips supply. This offers a solid foundation for investments. Investing in gold is really easy. This can be done by buying bullion coins and small gold bars, which are exempt from taxes. Other options are gold-backed securities, gold futures, warrants, gold accounts, gold certificates, gold orientated funds, forwards and gold-linked bonds and structured notes. New investors are attracted by the growing number of gold products and the ease with which one can invest in gold. This will stimulate the demand for gold, which in return has an upward pressure on the gold price.

Gold-linked bonds and structured notes

Increasing opportunities to invest in gold

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Technically speaking, short sellers should inform in advance long term buyers, whether they will offer physical gold on the stock exchange. In reality, sellers rule the game. They control the amount of gold that is being delivered. They demand the delivery of physical gold, by holding on to short term contracts way beyond the expiry date. Avery Goodman, lawyer and investor, website See Alpha A.

[9] Gold on paper drives speculation and fear

Over the past few years gold has become more appreciated by traditional investors and financial managers. By having gold in their portfolio, they believe they are better protected from rises in inflation, possible recession, the weak US dollar and volatile stock markets. This behaviour indicates a fundamental change in attitude towards precious metals, and explains the large growth in paper, or semi physical gold markets. Physical gold has a number of important advantages that fund managers and financial managers see as disadvantages: Gold has no credit risk, it is easy stored, nobody can be made liable if the gold price drops, it cannot be printed, and the economic value of gold cannot be influenced by an institute. Gold is more or less an insurance product. In fact, the rise of the gold price since 1999 occurred without an active participation or intervention of traditional investors. Dynamics and volume is what these investors got with the rise of the paper or semi physical gold markets in the 21st Century. The most well known paper gold market goes by the name of the CME Globex, traders use its original name COMEX and COMEX gold. It is in fact an Exchange Traded Fund (ETF), which follows the stock market index as closely as possible. The biggest difference with a traditional fund is the fact that the fund manager can act independently. With the help of automated trade computers, an ETF follows exactly the index of a group of shares that counts as the objective measure aka the benchmark. The aim of the ETF is not to get a better return. A traditional fund tries to get a maximum return by active management. Its aim is to beat the benchmark Specific instruments, which follow the value of gold, make it much easier for financial managers to invest money in a commodity which was once too complex to possess. In the past investors had to buy gold bars, coins and shares in gold mines, or acquire a secondary product like a future. A future is a financial commitment between two parties to trade a fixed amount of gold at a specified timeslot against a price which has been determined in advance. At present buying gold is just as easy as buying a block of shares.
Graph 1 Gold prices of COMEX, and Open Interest and Gold Futures and Options Period 1996-2005

Regulated commodity markets

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Optimists claim that the gold value is a sleeping giant, implying that the real rush on gold will start over the next couple of years. Rumours are being driven by the story that in the US the CME Globex, the dominant paper gold market, will collapse in the near future. The most important reason is that COMEX Gold is not real gold, but unallocated gold. Secondly, the fund pretends misleadingly to be the price determiner of real gold. In other words, the gold price is artificially suppressed. COMEX Gold is a debt form. Party A promises party B to deliver a specified amount of gold (money) in the future. As with all forms of debt, a COMEX future contract is just as good as the counterparty behind the contract. The biggest sellers of contracts are financial institutions. The fear is that these parties, many of who suffered considerably in the credit crunch, cannot meet their delivery obligations and might possibly go bankrupt. Experts cite strange things are happening on the gold market. One rumour claims that there are several ETFs using the same bar numbers. The reason they claim, is that exchange traded funds and the whole financial world for that matter, have been fabricated to prevent people from trading in physical gold. Trust in paper or semi physical gold is strained. People want to see and feel gold. They dont want a piece of paper with the nominal value. It is a sign of the times that securities are becoming less popular. That is the reason that gold prices on the CME Globex keep falling. At the same time, real gold is slowly disappearing from the market. Due to the scarcity, real gold is traded against enormous amounts of money, up to 50 percent higher than the official COMEX gold price. In January 2010 the gold price of February Gold (the benchmark) noted 1083.60 dollar per troy ounce (31.10 grams). The value of physical gold lay above US$1600 per troy ounce. The likely result of this extra premium is that a large number of contract owners will decide to exchange their paper contract for the real thing. When this happens, the market perception of gold will change rapidly. The run for physical gold will lead to an enormous shortage. Observers predict that the gold price could become two to three times higher in value within a couple of days. This will lead to new bankruptcies in the financial world. If this scenario evolves, the dollar could collapse. Of course this is pure speculation, but the reality is that there seems to be little political will to prevent the dollar from collapsing, mainly because nobody believes this could become a reality. The consequences are simply too big. A near crash almost occurred on the CME Globex in spring 2009. On a usual trade day, one percent of contract holders normally decide not to extend their short term contract. This means they exchange their paper for physical gold. These so-called short sellers speculate on a depreciation of the rate, by selling stocks they borrowed in the hope of buying them later at a lower price. On 30 March 2009 all hell broke loose. Suddenly there were more than 27,000 contract holders, (15 percent of the April Gold Futures), determined to sell their paper contracts in exchange for real gold, much to the detriment of the short term sellers, who almost never have to come up with physical gold in the casino world of the CME Globex. Now they had to. Much to everyones surprise, the Deutsche Bank put up more than 240,550 million grams of gold (850,000 million ounces against 850,000 gold contracts) for sale. On the same day, the European Central Bank sold 35.5 tons of gold, without mentioning who the buyer was. It is suspected that the ECB saved the German central bank that day, preventing it from a major disaster.

Real gold

Near crash

Graph 2 Open interest on COMEX Gold, 27 January 2009 until 16 June 2009

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There is not enough gold to pay all contract holders. It seems that physical gold is favoured, against paper gold. This means that an enormous price shift is looking us straight in the eye. Bill Fleckenstein of Fleckenstein Capital Management from Seattle. Summary For some years the number of traditional investors and financial managers with a keen interest in gold has grown. Their interest is that gold will protect their portfolio more effectively against inflation increases, the recession, the weak US dollar and volatile stock quotes. This explains the enormous growth of paper or quasi physical gold markets called ETFs (Exchange Traded Funds). For example the CME Globex is a merger between the New York Mercantile Exchange Comex Division and the Chicago Mercantile Exchange in New York. This is a negotiable investment fund, which gives investors the ability to invest in gold without having to keep actual gold bars or coins in stock. Today acquiring gold is as simple as buying stocks. Securities are becoming increasingly unpopular. People dont want paper with the nominal worth of COMEX gold printed on it. They prefer to touch the real thing. This explains why the price of COMEX gold keeps on falling; its value is now 50 percent below that of physical gold. This trend can lead to a scenario of investors wanting to exchange their paper gold for real gold. Such a scenario would lead to shortages, resulting in large rises in the gold price.

Implosion of the paper gold market can lead to rush on real gold.

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The American Federal Reserve cannot be held accountable. It has no budget and nobody is monitoring it. The case against the Fed. Murray Rothbard (Ludwig Von Mises Institute, 1994)

[10] Banks ignore gold

Money secured by gold doesnt exist anywhere in the world. All 185 member states of the International Monetary Fund are strictly forbidden to link their currency to gold. The world economy floats on unsecured money, whereby the value is largely determined by faith, hope and trust. For (central) banks it is of eminent importance to downplay the role of gold, and to enlarge the faith in paper (money, stocks and bonds) and virtual money. Gold is the enemy of banks, but they cannot prevent the gold feast from lifting of. In 2010 the gold price will rise to US$1,300 per troy ounce. Within three years it will advance to US$2,000 and after that it will double. This is the prediction of the well known Dutch gold trader Willem Middelkoop, author of the bestselling non fiction book When the dollar falls. The former financial journalist is disgruntled by the fact that banks never talk about the value of gold. Over the last 10 years the best investment category was precious metals. It performed better than the stock index. The gold expert claims that the financial press is primarily interested in publishing the investment advice of banks. In the 4th quarter of 2009 banks advised their customers to add more risk to their equity portfolio: their prediction was that the stock markets would restore themselves and the fear of a crash of the financial system had started to subside. The private banking unit of ABN AMRO, in its report Quarterly Outlook Q4 2009 Investment Advisory Strategy commented that Investors again dare to look ahead. The fear of losing capital has transformed into a renewed focus on capital growth. The global economy is recovering. The ABN AMRO report stated At the start of this year (2009), faith started to accumulate, and in the past months the signs indicate an economic recovery. These positive indicators are based on a change in the stock cycle, a better functioning of credit mechanisms and the measures taken by governments and central banks to stimulate the economy. The recovery trend will persist over the coming quarters. Still, we are not yet out of the danger zone. Some factors, which support the recovery, are temporary and the process of debt reduction has not been completed. We are positively optimistic that the global economy will develop enough the dynamics for a sustainable recovery. We do expect the economic growth to be lower than before the crisis started. Strangely enough, the bank doesnt mention gold.

Stock market

Graph 1 Non-gold reserves: industrial versus developing countries

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In 2010 it is virtually impossible to buy gold or silver at a bank. Even most of the private banks dont buy physical gold for their clients. You can open a gold account at a private bank, but this is in fact paper gold. This gold is not kept in a vault, but is unallocated gold, a claim to a specific amount of gold. Claiming a specific gold bar, carrying your name, is impossible. If a bankruptcy occurs, the owner of a gold account is just one of the many creditors of the bank. Since the abolition of the Gold Standard, the world revolves around fiat money, the value is no longer secured by the value it would have as a consumable. The value of fiat money is determined by the government who involuntarily obligates its people to accept it as legal tender.

Money system

Money availability; credit to private sector.

Share price, domicile price.

Under the rule of the Gold Standard, the free market used commodity money. (Money which had a value as an ordinary commodity, and was valued as a generally accepted means of exchange). The price of commodity money was determined by the market. This factor, combined with the fact that the gold price normally grew relatively slowly meant that the price of gold and its purchasing power was relatively stable. For practical reasons, physical gold was stocked in the banks vaults. They handed people a voucher (bank note, cheque, account), which helped them to make payments. Providing the system of commodity money remained active, you could take your 100 euro note to the bank and demand a specific amount of physical gold. During the last 100 years, banks have severed the links between bank notes, cheques, accounts and gold. The Gold Standard functioned until 1971 as a major obstacle for expansion of the money reserves. A bank was not allowed to hand out more bank notes or other securities, than the amount of gold stored in its vaults. If a customer deposited 500 grams of gold at his bank, the bank was not allowed to hand out bank notes worth 5,000 grams of gold to other customers. If the bank did so it would be fraud as it would be giving a customer a voucher for gold that it didnt have in its vaults. If for whatever reason customers en masse suddenly demanded their money back the bank would have to sue for bankruptcy. However, ultimately the temptation to commit fraud proved to be too attractive for banks safe in the knowledge that a run on any bank by a large number of customers was highly unusual. In short, holding on to a 100 percent reserve was deemed unnecessary. The extra money this created gave banks the chance to lend it against interest, or to invest it to make more income. Selling (read lending) money, stocks and bonds is 10 times more profitable than selling gold. Governments made it legally possible for banks to keep a fractionally small reserve of the money in stock. Banks could legally commit fraud.

Graph 2 United States 1991 until 2006

Fraud with banks

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A government can use its central bank to come to the aid of retail banks, investment bankers and commercial banks by extending emergency credits during a bank run. In fact in many countries, investors are not allowed to take their money out in the form of gold; they can only withdraw paper money, which is created from nothing by the (central) banks. It is usually the case that central banks like the Fed or the European Central Bank are the only parties in a country that can hand out paper money. Private bankers are not allowed to print their own bank notes; they must ask the central bank should they need more cash. Making payments in gold is not allowed by law. This is because governments are afraid that their own flat (printed) money will lose out to the competition of gold money. That is why it is legally binding for companies and private individuals to accept fiat money as tender for transactions. Having read the above, it is easy to understand why it has slowly become a taboo in the banking world to mention the rate of gold. Often banks state that gold is a speculative investment, since the demand of investors drives up the gold price. Whats the reason for this resistance? One of the causes is the introduction in 2003 of the so-called Gold Tracker by the Australian company LyxOR Gold Bullion Securities. The speculative instrument, which solely plays with the gold price, has increased year after year as part of the total gold demand. In 2008, trackers consumed 321 tons of gold, and in 2009 its appetite grew ever larger. Central banks of emerging economies, with small gold reserves are lining up to buy more gold. In 2009, the International Monetary Fund sold 450 tons to China, 200 tons to India and 120 tons to Russia. This renewed demand more than compensates for the major drop in gold consumption by the jewellery sector and industry.

Gold is a taboo

Graph 3 Growth of gold versus currencies between 1999 and 2009

In 2008, central banks sold 42 percent less gold than the previous year, based on the gold sale agreement. Mining production fell by three percent to 2,325 tons. With a low gold price, economics dictated that mining companies were only able to excavate the richest gold ores within easy reach of the surface. Now, as the price continues its upward trend, much deeper and more geologically complex seams are to be exploited. The most striking example is in South Africa, where production levels have fallen in recent years by 41 percent. The credit crisis has resulted in an extensive cut in exploration budgets. It is safe to predict that the annual gold production will continue to fall, bearing in mind the average 10 year period between striking gold and actually mining it. This situation has resulted in the gold price in US dollars going up for the eighth consecutive year. When the central banks completely stop selling gold, the gold price will really start to take off. For now, it is clear that the gold price is kept artificially low. The recent decision by the European Central Bank to lower its annual sale to 155 tons of gold is significant. Since 1999, the annual gold sale was between 400 and 500 tons. This drastic downward revision has raised the appetite of the central banks, which has led to a significant rise of the gold price. The fact that central bankers go for gold, has led to a counter reaction. Many nations hold on to the policy of keeping a large part of their foreign reserves in gold.
Graph 4 The total market capitalization of the goldmining sector is small

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Gold must not be based on the trust and promises, made by governments. Gold should only be based on what people decide out of their own free choice what is reliable: gold! Swiss former banker Ferdinand Lips in his book Gold Wars. Summary

The gold price is artificially surpressed by the banks

In the 21st Century, no currency is secured by gold. All 185 member states of the International Monetary Fund (IMF) are forbidden to tie their national currency to gold. The world economy floats on unsecured money, whereby the nominal value is based on faith, hope and trust. For the (central) banks it is of great importance to diminish the role of gold, in order to enlarge the trust in paper (money, stocks, bonds) and virtual money. Gold is in fact the enemy of the banks. Over the past ten years precious metals have been, and still are, the best asset class. This segment has performed better than the stock market. Still the financial press is primarily interested in publishing news stories, which are based on investment advice from banks. Financial institutions dont mention gold. The reason why is simple. Since the Gold Standard abolition in 1971, the world has revolved around fiat money the value of money decreed by government is not covered by the value of a utility good (like gold). The practice of selling (read lending) money, stocks and bonds is ten times more profitable for banks than selling gold. Banks need to keep the gold price artificially low. The question is how long this strategy can be sustained.

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Gold has proven itself since the time of Alexander the Great. If something can retain its value for more than 2,000 years, then I dont believe its a case of bias or a misrepresentation of facts. Bernard M. Baruch (1870-1965), businessman, politician and financial advisor to six US presidents.

[11] The last Gold Standard and the era of the gold reserves
65 years ago, gold once again became an anchor in the international monetary system. The Gold Standard of Bretton Woods has largely contributed to the reconstruction of Europe, and the post war wealth of western nations. In 1971 the Gold Standard was abolished. In the aftermath, the gold price continued to rise until central banks started selling their gold reserves from 1989 onwards. Ever since, governments have tried to keep the gold price artificially low, but gold is becoming increasingly popular. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states. The architects had conceived a system wherein exchange rate stability was a prime goal. Yet, in an era of more involved economic policy, governments did not seriously consider permanently fixed rates on the model of the classical Gold Standard of the nineteenth century. Gold production was not even sufficient to meet the demands of growing international trade and investment. The only currency strong enough to meet the rising demands for international currency transactions was the US dollar. The strength of the US economy, the fixed relationship of the dollar to gold (US$35 an ounce), and the commitment of the US government to convert dollars into gold at that price made the dollar as good as gold. In fact, the dollar was even better than gold: it earned interest and it was more flexible. One of the chief features of this new Gold Standard was an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed valueplus or minus one percentin terms of gold and the ability of the newly established International Monetary Fund (IMF) to bridge temporary imbalances of payments. Bretton Woods established a system of payments in which all currencies were defined in relation to the dollar, itself convertible into gold, and above all, as good as gold. The US currency was now effectively the world currency, the standard to which every other currency was pegged. As the worlds key currency, most international transactions were denominated in US dollars. The rules further sought to encourage an open system by committing members to the convertibility of their respective currencies into other currencies, and to free trade. What emerged was the pegged rate currency regime. Members were required to establish a parity of their national currencies in terms of gold (a peg) and to maintain exchange rates within plus or minus one percent of parity (a band) by intervening in their foreign exchange markets (that is, buying or selling foreign money).

Bretton Woods

Graph 1 Currencies set against the US dollar, 1950-1980

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Then, on August 15, 1971 the United States unilaterally terminated convertibility of the dollar to gold. This action created the situation whereby the United States dollar became the sole backing of currencies and a reserve currency for the member states. In the face of increasing financial strain, the system collapsed in 1971. After the fall of the Gold Standard, gold played no major role in the international monetary system. Central banks started to think about what to do with their enormous gold reserves. A large part of assets on the balance sheet was fixed to gold. Apart from a rise in valuation, gold doesnt make profit. The significance of an appreciation is only relative, since it cannot be realised en masse. The total gold market is small in size (only 158,000 tons of gold), especially when you realise the central banks own one fifth of that amount (30,000 tons). The gold price had risen so strongly in the early 1980s because central banks, kept large amounts of gold in their portfolios. It was a typical case of cold feet; central banks knew they had to act very carefully. In Western Europe the national bank of Belgium was the first to sell large amounts of gold in exchange for bonds and other interest-bearing assets in 1989. In 1997, the Reserve Bank of Australia surprised the market, with the announcement that it had sold pretty much all of its gold. Australian gold mining companies were very critical about this sale, but the central bank did what gold miners had been doing for decades, putting up its own gold for sale. The nervousness of further sales by central banks motivated many gold producers to sell large parts of their future production under a mechanism called hedging. Since these gold futures immediately led to an offer on the cash market, future production quotas were available at a faster rate. This put pressure on the gold price. This insecurity reached its height in May 1999 when the British authorities announced that they would sell a large part of the British gold reserves through auctions. Two months later, the gold price reached its lowest point of US$253 per troy ounce or 240 euros.

Interest-bearing assets.

Washington Agreement
In the summer of 1999, the central banks of the Eurozone, Sweden, Switzerland and the United Kingdom, came to the conclusion that the market, especially gold producers, had to be transparent about any plans that central banks had to sell gold. The rumours had to be stopped. At the annual meeting of the IMF, the president of the European Central Bank stated on behalf of 15 central banks that for the next five years they would sell no more than 2,000 tons of gold - on average, 400 tons annually. This agreement is known as the Washington Agreement; officially the undersigned called it the Central Bank Gold Agreement. The statement came as a complete surprise, the responses were mostly positive and the gold price went up. In March 2004, the agreement was extended for another period of five years. The undersigned (now with Greece but without the UK) announced that they would sell 500 tons of gold annually, with a maximum of 2500 tons. These quotas were not met. For the third time the Central Bank Gold Agreement has been extended for another five years. Until 2014, the target is set at a maximum of 2,000 tons.
Graph 2 Overview of the sales under the Washington Agreement (1999-2009)

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Gold loan market

Over the past thirty years, a substantial gold loan market has developed. This made it possible for central banks to offer a gold loan facility at a low interest rate. Part of the deal is that the receiving party receives the gold physically. The party extending the loan can make a claim in gold.

The market for gold loans is a demand-driven market, but what drives it? The first source is the gold processing industry, especially jewellery producers. To determine the price, they look at the daily price in gold, determined at the time the jewellery is delivered. When a producer buys the gold at the start of the production process, it runs a price risk on the commodity for whole production process. To exclude this risk, gold is borrowed at the start of the process. Only when the end product is ready to be sold, is gold bought to redeem the loan. Another good reason to do this is that the tariff for gold loans is normally much lower than that of money loans. In the 1980s, gold producers were looking for an instrument to guarantee the income from future mine production, in order to reduce their high interest rate costs. Back then it was difficult to attract equity to finance mining. A solution was to lend gold on a large-scale to specialised banks, that in turn, made loans to central banks. The borrowed gold was sold and the yield made it possible to finance the development and production of gold mines. Years later they redeemed their loan with the gold proceeds from the mines. In this way, mining companies were able to negotiate relatively cheap finances, which also covered the price risk. In later years, banks eased their restrictions on handing out credits, but this meant mining companies had to secure the credits, by selling gold futures in order to cover a part of their price risk. The mechanism works the same as on the currency market. Banks selling gold futures dont want to run any risk which is why they sell the specified amounts of gold directly on the market for cash money. In order to meet the cash supply obligation, banks borrow gold from central banks. After a gold producer delivers the gold at the end of a forward contract (also known as an over-the-counter option), the banker uses this to redeem the loan. Since the interest on dollars is usually higher than the gold interest, the future price on gold is usually higher than the price for cash money. In the gold market the positive difference between the cash price and the future price is called contango, in the currency market they call it agio. Gradually, the volume of the future sales by mining companies determined the course of the gold interest.

Gold producers

Fear for gold sales

Central banks all over the world offer gold loans with only a fraction coming from private investors. When gold mining companies executed large future sale programmes, temporarily the interest rate could rise significantly. The market quickly corrected this. Selling future gold quotas, also known as hedging, increased the demand for gold loans. The peak came in 1999 at a level of 500 tons. Producers expected that the gold price would rise after the Central Bank Gold Agreement, which is why many mining companies stopped their future sales. They even reversed previous future transactions. This resulted in mining companies actually asking for gold from 2000 onwards. Since many producers followed this route, the additional demand drove the price, whereas in 1998 and 1999 the price had fallen because of the accelerated supply from gold producers.

The first Central Bank Gold Agreement of 1999 was a watershed for the gold loan market. After the announcement the improved prospects for the gold price forced gold producers to review their ongoing future sales. They realised that the gold price rate in the Nineties was kept low mainly because of their own future sales. A stable or even higher gold price and a lower dollar interest, made future sales no longer attractive.

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A secondary effect was that the mines shareholders started to take notice. Since many mines had sold future production quotas, the rate of the stocks no longer profited from the higher gold price. In an effort to meet the shareholders half way, many mines tried to terminate previous future sales. This in effect decreased the demand for gold loans. Since the offer remained more or less stable, the gold interest rate lowered. In the second half of the 1990s, the three month gold interest rate stood mainly above 1.5 percent, with occasional sharp peaks upwards. After the demand from gold producers dropped in 2002 and 2003, while the offer was stable, the gold interest rate went down to zero for maturities up to 12 months. From 1989 until 2003, the annual demand for gold increased from more than 3,000 tons to more than 4,100. The demand from central banks remains fairly constant. Other banks have also sold gold since 1999 besides the signatory parties of the Central Bank Gold Agreement. As above-ground stocks have increased, so the re-use of gold is also increasing. Between 1999 and 2003 the demand for old gold (also known as recycled gold) for re-use increased by 50 percent to more than 900 tons. The private sector is the largest provider of gold from existing stocks, followed by the central banks. On the demand side, the jewellery industry is the largest recipient of gold. After the internet bubble burst in 2000 and particularly post 9/11, the demand for gold jewellery plummeted everywhere in the world. The use of gold for industrial purposes remains stable at an annual rate of 500600 tons.

Graph 3 Gold production in tons between 1840 until 2009

Paper money will eventually return to its intrinsic value: zero. French writer and philosopher Voltaire in 1729. Summary It has been 65 years since gold became the anchor of the international monetary system. The last Gold Standard contributed hugely to the enormous reconstruction of post war Europe and the wealth of western nations. In 1971, the system collapsed. In the aftermath, the gold price has continued to rise over for the next ten years because central banks refuse to sell their gold reserves. From 1989 onwards they started selling large quantities of gold in exchange for interest-bearing assets. Now literally thousands of tons of gold are being shipped all over the globe. This approved casino game was a reason for many gold mining companies to secure their income by selling large parts of their future production within a specified future period. In effect new gold came more rapidly on the open market, which put the pressure on the gold price. The turning point was the Central Gold Bank Agreement in 1999, which made it compulsory for the 15 signatory parties to sell no more than 400 tons of gold per year. In September 2009, this treaty was re-confirmed for another five years; its third incarnation.

Gold, from standard currency to casino game

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We expect investor support for gold in 2010 to remain solid. The search by investors and asset managers for portfolio diversification is expected to continue and on a more tactical note, the high levels of economic, inflation and exchange rate uncertainty are unlikely to disappear anytime soon. Furthermore, as global economic conditions improve, jewellery and industrial demand are likely to continue to recover. Gold demand trends, Outlook for 2010, World Gold Council, 27 February 2010.

[12] Executive summary: Gold rules the 21st Century

The reputation of gold has weathered storms for centuries. Gold contributes to the wealth and happiness of many people. Five thousand years after its discovery, this indestructible precious metal is still a standard in the global financial markets. This commodity of the 21st Century is the Intel inside of the world economy. The varied industrial and medical applications of gold ensure that a world without it is almost unimaginable. It keeps holding consumers in its grip. Gold does not only owe its magic to its physical qualities, but also to the solid assurance it gives private individuals, investors and governments in an ever more complex world. Paper money is rapidly losing its value. The market capitalisation of all the gold in the world, based on financial standards, is not the best indicator to understand the importance of gold. Without a doubt, the 21st Century will be the era of gold. Demand keeps growing while supply is slowly decreasing. Less and less newly mined gold is offered on the open market, even though it is widely known that there is more than enough gold under the earths crust in its seas. Mining gold is becoming more expensive, more complex and more dangerous. The growing demand for gold in industry and within the jewellery sector is forcing institutions and companies to become more inventive. Gold recycling is one of the most fascinating developments in the gold market. The biggest problem of the 21st Century is a shortage of commodities. The huge amounts of everyday consumables produced by developed nations and subsequently sent to landfill is literally a waste of gold. Now ever more sophisticated methods are being developed to extract precious metals from waste. Recycled gold now has a 30 percent share of the total supply market, and the market potential of recycling is huge. Western nations and the financial markets are fully aware of the power of gold. They have an interest in downplaying its importance because the world economy floats on the unbridled faith in paper currencies. But more people are realising that the monetary system, based on faith, hope and trust, is actually one built on quicksand. The best proof is the credit crisis of recent years, which makes a strong case to rethink the financial markets business model. So-called fiat money (where the value is determined by governments) leads solely to short-lived financial and economic revival. The end result is inflation and diminishing. True, the price of gold is variable, but it has a unique quality and it cannot be debased by printing presses. Golds appeal to both investors and central banks has hinged on its role as an alternative monetary asset. There is no credit risk, nobody is liable for gold. There is no risk that payment obligations through a voucher or reimbursement cannot be met. This is not the case with bonds, stocks, or when a company files for bankruptcy. Contrary to currencies, the value of gold cannot be affected by the monetary policy of the nation of issue; neither can it be undermined by inflation in its country of origin. The liquidity risk is very low, because gold is traded 24 hours a day and has various investment opportunities and buyers. Gold simply performs like it has done for thousands of years it retains its value, while all monetary currencies lose theirs.

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The financial markets of rich countries, including the western central banks, dont like gold. Gold is complex. Everyday buying gold is becoming more expensive, it doesnt reap profits and it undermines trust in paper money, shares and securities. Thats why, until recently, central banks have been net sellers of gold. That is why paper gold funds have been created to keep the gold price artificially low. This standing practice is undermined by emerging market economies. Russia, China and India hold opposite views about the precious metal. The claim that gold will rule the 21st Century has in a large part to do with the ability of China, the largest gold producer, set to overtake the United States within 20 years as the worlds largest economy. The resistance of western nations against gold is a rearguard fight. The gold price will, for sure, not drop below the US$1,000 level. The gold price will gradually rise. This is an instrument that offers investors independence against the erratic behaviour of stock markets and the US economy, which is still in bad shape. The victory march of gold has just begun. The expression Money rules the world doesnt apply to those who recognise the value of gold for what it is worth. Aurum potestas est gold is power. The weakness in the US dollar has been an ongoing theme. While the focus of the media and many analysts has been on the dollar, one shouldnt forget that several other major economies face similar problems to the US (namely economic uncertainty and very high debt levels), including Japan and the UK, resulting in a very uncertain currency environment that extends beyond just the dollar. We expect investor support for gold in 2010 to remain solid. The search by investors and asset managers for portfolio diversification is expected to continue and on a more tactical note, the high levels of economic, inflation and exchange rate uncertainty are unlikely to disappear anytime soon. Furthermore, as global economic conditions improve, jewellery and industrial demand are likely to continue to recover. Gold demand trends, Outlook for 2010, World Gold Council, 27 February 2010.

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Sources
Publication, title, author, year, publisher Focus, Goldene Sicherheit, Bernd Johann + Andreas Korner, 40 2009 Focus Money, special Mythos Gold, 50 90 FEM Business & Finance magazine, interview Paul A. Volcker by Edin Mujagic, 51/52 2009 MunzenRevue, Gold & Munzen, 2008 Verlag Johannes Muller Bern, Freiheit durch Gold, Prof dr. Hans J. Bocker, 2009 FinanzBuch Verlag, Alles, was sie uber Gold wissen mussen, Christoph Eibl, Kopp, Das geheime wissen der goldanleger, Bruno Bandulet FinanzBuch Verlag, Gold, silber, platin Die sichere zukunft fur privatanleger, Beate Sander Kopp, Ferdinand Lips, Die Gold Verschworung, Ferdinand Lipps Wiley Trading, The traders great gold rush, James DiGeorgia Rosendale Press, The Gold Companion, Timothy Green, Wall Street Journal, A new standard? Worried investors are flocking into gold, 3 February 2008 Goldman Sachs Global Economics, Commodities and Strategy Research, Precious metals: US Fed on hold leaves gold room to run, 3 December 2009 JP Morgan Chase Bank, Precious metals: Liquidity, liquidity, and central bank interest. 10 December 2009 Newsweek, 14 January 2009, Weak Dollar Obamas Fault BBC News, China Economy sees strong growth, 21 January 2010 Royal Bank of Scotland, Outlook commodities 2010 World Gold Council, Gold Price Chronology 1971-2007 The Ascent of Money: A Financial History of the World, professor Naill Ferguson World Bank, Global Economic Prospects 2010: Crisis, Finance, and Growth, Andrew Burns, January 2010 OESO, Global Inflation, 2007 World Gold Council, Q4 09 Gold Demand Trends and Outlook 2010, 27 February 2010 Credit Agricole, Remonetization of Gold: Start Hoarding, 2006 Wall Street Journal, A new standard? Worried investors are flocking to gold, E.S. Browning, 2 March 2008 Ludwig Von Mises Institute, The Case against the Fed, Murray Rothbard, 1994 ABN AMRO Private Banking, Quarterly Outlook Q4 2009 Investment Advisory Strategy

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The worlds gold would fit into a cube 22 metres squared

Gold possesses an original quality, dating back to primeval times. The precious metal speaks to peoples imagination, and has done so for thousands of years. Gold is the answer to all global problems. No matter what. Be it wars or social instabilities. A weakened faith in public authorities, political leaders and financial institutions will trigger a flight into gold for sure. It is not surprising that we are now experiencing the biggest gold rush of modern times. The first universal one of its kind. Over the past two years the financial system has been brought to its knees, budget

deficits are much bigger than before. More importantly trust in governments, banks and the US dollar has been heavily undermined. Currently there are few other reliable options to invest in other than precious metals, with gold at the forefront. This commodity cannot be reprinted, unlike paper money. Another crucial difference is that the value of gold cannot be influenced by inflation or the economic policies of the countries of issue. Gold does what it has always done for 5,000 years: it retains its value in a world where all currencies continue to lose theirs.