Investment in gold covers
a broad spectrum from the purchase of a single gold
coin by an individual to speculative positions by hedge
funds to portfolio holdings by a government investment institution which may
amount to 100 tonnes (3 million ounces) or more.
Investment attitudes also
vary considerably from region to region. In Asia it may be physically hoarded,
in Europe simply held on metal account, or as part of a portfolio in a private
bank. But of one thing there can be no doubt- since gold’s last official link
with the dollar and the concept of a fixed price was broken in 1971, it is investment
demand which has provided the catalyst, the driving force to propel the gold
price to new heights.
The more conventional underlying
physical demand for jewellery and industry provides, at best, a floor to the price;
the appetite or lack of appetite of investors propels it up and down. And its
appeal to them has been enhanced because, for the first time in its history, the
price of gold is mobile, no longer fixed.
So one can, in theory, invest in gold as a way of making money and not just, as
was the traditional case, as a hedge or insurance
against losing it.
The decade of the 1970s, beset
by oil shocks, inflation and a weak US dollar, seemed to show investors how gold
could perform. The compound annual rate of return on gold in the ten years to
1980 was 31.6 per cent, compared with 7.5 per cent for stocks and 6.4 per cent
for bonds. Only the performance of Saudi Arabian light oil matched gold.
The years since have told a
different story. Gold was $850 an ounce in
January 1980 and under $280 over 20 years later in mid-2001. Consequently, investment
in the last years of the 20th century and into the 21st has been different.
First, the concept of physical
gold coin or bars held or hoarded
by an older generation of Europeans, notably in France and Germany, has disappeared.
The political and economic uncertainty of two world wars that made them hold gold
has gone. The collapse of the Berlin Wall in 1989 signalled that clearly. In
recent years this has led to a rising trend of disinvestment in several European
countries, notably France, Switzerland and Belgium, with Germany and Austria also
joining the net sellers' club in 2000. Indeed, GFMS estimate that net disinvestment
in Europe amounted to between 105 and 145 tonnes (3.4 to 4.7 million oz) in that
year.
Second, the classic portfolio
advice of private Swiss banks that up to ten per cent of a portfolio should be
invested in physical gold is long gone. Sales of bullion
coins have declined overall (although a rally occurred, in the United States
particularly, in the last years of the century due to fears of international financial
problems as the new millennium dawned. These proved unfounded and the selling
back was dramatic in 2000).
Gold
funds in Europe and North America also largely hold gold shares rather than
metal. Indeed, the expansion of the gold mining industry has given investors a
fresh opportunity for ‘hedging’ gold by simply buying the shares, diverting much
money that might have gone into the metal a decade earlier. Gold bonds
and warrants were also variations of options
on gold.
For a while physical investment
in gold shifted to Asia, where first Taiwan and Japan saw substantial buying and
then Thailand, Vietnam and China joined in as a signal of new found prosperity.
However, although gold investment may be popular in the early years of growth,
when there are often not many alternative investments (access to dollars may be
restricted, as in China and Vietnam), once other opportunities occur then gold
is less favoured (the lack of price performance has not helped either). From peak
years of 1988 and 1989 when physical bar hoarding
in East Asia (including Japan) was over 370 tonnes (12 million ounces) according
to GFMS, the situation reversed to one of net dishoarding
of almost 14 tonnes (0.4 million ounces) in 1998.
A rally to 136 tonnes (4 million
ounces) the following year was largely due to growth in Japanese demand due to
the low yen gold price. Japan has remained the most consistent buyer, helped by
the development of gold accumulation plans (GAPs)
by several banks and also momentarily by the great earthquake of 1995 when many
people lost banknotes when their homes were destroyed, but heard that gold coins
survived so rushed out to buy.
These are exceptions or special
cases. Across the board, gold has found little favour with investors in recent
years and many, despairing of price improvement have simply sold back. The investor
who remains interested in gold has become, if anything, a short-term speculator,
trading in and out to profit from a sudden price rise or, by going short, a price
fall.
The impact of this trading
has been magnified by the growing power of the large hedge funds and the Commodity
Trading Advisors (CTAs) in the United States, who have the resources to move
the price of gold, or any other commodity, that may be in favour. George Soros’s
Quantum Fund is largely credited with helping the gold price rise from $330 to
$400 in 1993. That is the key to the investor approach, now that so much money
is under management. Investors still like the idea of benefiting from a price
rise but they no longer need to have the metal at home under the bed; just call
a fund manager or CTA.