Published:
April 11, 2009
Let's face it.
When it comes to treasure, few of us
picture stock certificates and bond
coupons. Instead, we usually conjure
up images of gold bars stacked high
in Fort Knox or glittering gold
coins strewn about sunken galleons.
Over the ages, countless empires and
kingdoms have risen and fallen in
the shadow of gold. From the ancient
Egyptians to the European explorers,
gold has been an enduring symbol of
wealth and power. We have bartered
with it, waged bloody wars for it,
and even worshipped it.
And today, gold is just as coveted
as it has been for the past 5,000
years. Fortunately, you don't need
to be a pharaoh to own it these days
-- just a simple ETF shareholder.
One of a Kind
Gold is unlike any other commodity.
While oil and gas are consumed as
quickly as they are produced, gold
is virtually indestructible. It has
been estimated that roughly 160,000
tons (give or take) have been pulled
from the ground since the metal was
first discovered -- and most of that
is still around in some form today.
Still, gold prices are subject to
the same immutable laws of supply
and demand.
There are currently 400 commercial
mines producing about 2,500 tons of
gold per year, and that total has
been dwindling since 2001.
Meanwhile, the world uses about
3,500 tons per year. Much of the
shortfall is covered by recycled,
melted down scrap and the release of
gold from the world's central banks.
Jewelry (which accounts for about
70% of the world's demand) and
dentistry are the most obvious uses
-- but gold is prized for much more
than its aesthetic value. The metal
is highly malleable and ductile, a
superior conductor of heat and
electricity, and utterly resistant
to corrosion. As a result, it's
widely found in electrical,
biomedical and even aerospace
applications.
So while it's sometimes said that
gold has no utility, that's far from
true.
As you might expect, orders from
jewelers and industrial customers
have softened lately due to
deteriorating economic conditions.
Ironically, though, those same
conditions have created a tidal wave
of demand from investors. According
to precious metals research firm
GFMS, investment demand for gold
spiked +64% last year.
Much of that buying came from retail
investors interested in holding
physical gold -- demand for coins
and bars shot up almost +90%.
Meanwhile, heavy cash inflows caused
precious metals ETFs to deposit an
additional 10.2 million ounces of
gold in their vaults during the
year.
Overall, global demand crossed the
$100 billion mark for the first time
in 2008. So in what will go down as
one of the worst years on record for
stocks, bonds, real estate and even
many commodities, gold shined
brighter than ever and traded at an
average price of $872 per ounce --
about +25% above 2007 levels.
Gold Doesn't Lose its Luster
To understand why gold is so
appealing to investors in times of
economic and/or political
uncertainty, you have to go back to
around 700 B.C. That's about the
time a Lydian king named Croesus
first minted gold coins as a medium
of exchange for merchants.
Ever since, gold has been a
universal currency that is spoken in
any language. The Florin, Ducat,
Krugerrand and a slew of other gold
coins would later follow. Of course,
governments switched from the gold
standard to fiat money long ago --
but that doesn't mean that gold is
no longer a recognized store of
value.
You've probably heard the expression
that certain currencies aren't worth
the paper they are printed on. This
is a common occurrence during
periods of hyperinflation. For
example, in the early 1990s
Yugoslavia's currency was devalued
to the point where it had to issue a
500 billion dinar note. More
recently, Zimbabwe has been printing
200 million dollar bills -- which
are still worth less than the
equivalent of $10 dollars.
Of course, I'm not saying the U.S.
is headed down that path. But
interest in gold picks up any time
there is even a whiff of inflation
or macroeconomic instability. And
given the unprecedented turmoil and
systemic breakdown of the financial
system, it comes as no surprise that
millions of everyday investors are
turning to gold as a safe-haven
hedge against the unknown.
Even in what has been a relatively
benign period for inflation, the
dollar has still lost about half of
its purchasing power since 1981. If
you've bought a gallon of milk or a
postage stamp lately, you're
probably well aware of this steady
erosion. And with the government
spending freely, there is little
doubt that recent monetary
stimulation will reignite inflation
-- it's just a matter of when.
Of course, you could choose to store
your assets in milk rather than
dollars, but gold has a longer shelf
life and is far more negotiable.
Don't fall for Fool's Gold
As the chart below shows, gold
prices have more than tripled over
the past decade, while stocks have
gone nowhere.
And if the recent surge in demand is
any indication, this rally is far
from over.
Just last month, a consortium of
Saudi investors closed one of the
biggest deals ever, shelling out
over $3.5 billion for a pile of
gold. And they weren't alone. In
fact, the World Gold Council
estimates that retail investment
demand for gold jumped to 304 tons
last quarter, up from 61 tons during
the fourth quarter of 2007. That's a
surge of nearly +400%.
In Europe, purchases of gold coins
and bars skyrocketed +1,170% on a
year-over-year basis.
And keep in mind, even at prices
approaching $1,000 an ounce, gold is
still sitting at just half the level
reached during the last boom in the
early 1980s -- when it spiked to
$2,186 in today's dollars.
But there's a key difference. Back
then, people couldn't sell their
jewelry and other gold fast enough.
This time around, it's just the
opposite; buying is so brisk that
widespread retail shortages have
been reported. Fortunately, the ETF
world has given investors a number
of ways to join the party.
Good Investing,
Nathan Slaughter
Editor
The ETF Authority
About
The ETF Authority
The mission of The ETF Authority
is to help our readers identify today's most profitable ETFs and closed-end
funds. (Learn
More)
About Nathan Slaughter
Nathan Slaughter has developed a long and successful track
record over the years by investing in both exchange-traded funds (ETFs) and
deeply discounted value securities. When it comes to ETFs, Nathan has
created a proprietary ranking system that helps him zero in on today's most
promising funds.
Nathan's previous experience includes a long tenure at
AXA/Equitable Advisors, where he provided comprehensive investment advisory
services to small businesses and high net-worth clients. He also honed his
research skills at Morgan Keegan, where he performed asset allocation,
retirement planning, and consultative portfolio management services.
Several years ago Nathan switched gears and decided to devote
his time exclusively to financial analysis and writing. He has since published
hundreds of articles for a variety of prominent online and print publications,
and he now writes exclusively for StreetAuthority.com.
Nathan's educational background includes NASD series 6, 7, 63,
& 65 certifications, as well as a degree in Finance/Investment Management.
He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley.
To learn more about Nathan Slaughter's premium investing newsletter -- The
ETF Authority -- please
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