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Investment climate
The biggest difference between investors in 2004 and investors
during the 1990s is that today’s investors have been through
the Internet bubble. Although some people seem born to repeat
error, “Once burned, twice shy” is the more common
reaction to financial disappointment. Even many investors who
are once again putting money into tech stocks see the wisdom
of diversifying a portion of their portfolios into tangible assets.
As a result, investor demand for gold, the ultimate “hard
asset,” has increased, contributing to the rise in the
price of the metal. Many financial advisors who only a few years
ago pooh-poohed the idea of owning gold are now recommending
(sometimes only when asked) that their clients include gold in
their investment portfolios. The world supply of gold in 2003
was $53 billion, an infinitesimal sum compared to the trillions
of dollars invested in stocks and bonds. A tiny change in allocation
toward gold would send the price of gold rocketing.
The boom in housing prices triggered by interest rate reductions
has at least one parallel with the Internet bubble. Many buyers
are basing their decisions largely on the belief that no matter
how high the price is today, it will be higher tomorrow. We have
learned from experience that such thinking is true — until
suddenly it isn’t. The sharp rise in stock prices in 2003
has made many investors happy — and worried. The stock
market has climbed higher and faster than the underlying economy.
The average price/earnings ratio of the S&P500 was at about
29 at the end of 2003. Prior to the boom-boom 1990s, investors
considered 15 a reasonable P/E ratio. Many tech stocks, among
others, have P/E ratios reminiscent of the Bubble days. The average
P/E ratio of the companies on the Dow Jones Technology Index
was 52.12 on Feb. 18, 2004. The bull market for gold has continued
despite the real estate boom and 2003’s stock market gains.
A contraction in real estate, equities, or both, is likely and
would make gold even more attractive to many investors.
Regardless of changes in the US real estate and stock markets,
global demand for gold is likely to accelerate, particularly
in Asia, where the concept of gold as a safe haven is deeply
entrenched throughout the continent. Japan’s financial
condition is if anything worse than that of the US. Real estate
values continue to sag and the precarious solvency of Japanese
banks undermines recovery from over a decade of recession. Japanese
citizens nevertheless save money at a far higher rate than in
the US, typically depositing their money into extremely low-interest
or even zero-interest savings accounts. These accounts, though,
had been guaranteed against loss by the Japanese government,
like FDIC guaranteed accounts in the US. In 2002, Japan passed
a law reducing the guarantees. That triggered the “Japanese
Gold Rush,” the purchase in 2002 of a national record 98.1
tons of gold, which contributed to the global bull market in
gold. A phase of the new law that provides full protection only
for zero-interest accounts (and not even all of those) becomes
effective April 2005. That prospect is expected to drive up Japanese
demand for gold in 2004 beyond the 2002 record, with further
record purchases in 2005 and beyond.
The entire world supply of physical gold (as opposed to futures
contracts, which may be bought and sold many times) for 2003
was 4,133 tonnes. A tonne is a metric ton, equal to 2,204 lbs.,
or 35,264 oz. The average price per oz. during 2003 was $363.38.
Multiply it all out: world gold sales for 2003 totaled (rounded
off) $53 billion. As of June 2003 the accumulated savings of
Japanese households was the equivalent of $11.4 trillion. A fraction
of 1% of those funds used to buy gold would have an enormous
upward effect on the price of gold.
Economic growth in China, a country of 1.2 billion people, is
creating a middle class larger than the entire population of
the United States. A new law allows Chinese citizens, for the
first time since 1949, to invest in gold. With their local currency
pegged to the declining US dollar, Chinese savers have a special
incentive to buy gold. According to the China
Daily (Sep. 25,
2003), about 20% of respondents to a national survey said they
were willing to convert 10 to 30% of their savings in gold. Individual
bank savings in China total over $1.3 trillion. Less than 1%
of that sum would substantially increase global demand for gold.
A tiny change in allocation toward gold by individual and institutional
investors in US stocks and bonds would propel the price of gold
upward even more powerfully than similar reallocations in Japan
or China. Investors hold approximately $11.1 trillion in US stocks
and $24.4 trillion in bonds issued by entities within the US.
Taken together, that’s $35.5 trillion. Half of one percent
of $35.5 trillion is $177.5 billion: over three times the value
of all the gold sold in 2003. (The stock estimate is from multiplying
$3.7 billion by 3,000. $3.7 billion is the average market capitalization
of the companies in the Russell 3000® Index, which encompasses
98% of the market capitalization of US stocks. 3,000, of course,
is the number of companies in the Index. Those figures are for
March 2004. The bond estimate is from adding credit-market debt
of US domestic non-financial sectors, minus household debt, to
credit-market debt of US financial sectors. That data, from March
2003, comes from economagic.com.)
In March 2003, in response to investor demand, the world’s
first gold bullion security was registered on the Australian
Stock Exchange. Investors can buy shares, each of which is backed
by approximately 1/10 of an ounce of gold bullion. In December
2003 a similar security was registered on the London Stock Exchange,
and a New York Stock Exchange listing is in the works. While
GoldNewsToday recommends that you own physical gold rather than
paper assets representing gold such as these securities or shares
in mining companies, there is no question that the increasing
popularity of exchange-traded securities will contribute to raising
demand for physical gold. That will be one more factor propelling
the metal to a higher price.
Eighty percent of the physical gold sold in the world is used
to manufacture jewelry (especially in Asia gold jewelry is also
thought of as an investment). Despite the 60% increase in the
price of gold since April 2001, global demand for gold jewelry
has remained high. A smaller amount of gold is also required
in the manufacture of automobiles, PCs, and other consumer, medical,
and industrial electronic equipment. Rapid increase in purchases
of consumer products in China has raised global demand for virtually
every industrial commodity, including gold.
Bottom line: The idea of putting a portion of their assets into
gold is becoming more and more attractive to investors throughout
the world. Investors who were burned by the Internet bubble see
the wisdom of diversifying into tangible assets, and increasingly
wealthy segments of the population in Asia grew up on the idea
that gold is a safe haven in turbulent times and can now legally
buy gold. Increasing investor demand, along with jewelry and
industrial demand, will continue to drive up the price of gold.
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