Gold… You’re So Money…

Back in 2011 at a Humphrey-Hawkins meeting, House member Ron Paul asked Fed Chair Ben Bernanke “Do you think gold is money?” The answer was “No… It’s a precious metal.”

Paul, undeterred, followed up: “Why do central banks hold it?” Bernanke’s answer: “Well, it’s a form of reserves.” That wasn’t good enough for the member from Texas. He had a fair point… The US holds 8.1 million metric tons of gold, for example, worth $345 billion or just over $1,000 for every American. Why not diamonds, Paul asked…

“Well, it’s tradition. Long term tradition…” was Bernanke’s last word on the topic.

That exchange highlights the Rorschach Test-nature of gold: everyone sees something slightly different in the yellow metal. Most economists think of it as the vestigial tail of earlier monetary systems, long obsolete but still visible. Jewelry shoppers simply value its eternally tarnish-free shine. Electrical engineers prize its superior conductivity. And anyone who wants some of their assets to reside outside the current financial system keep a few gold coins in the family safe or housed in an ETF.

In the end, we think of gold like any other commodity. There is supply, both from miners and recyclers. There is demand, ranging from the world’s central banks to an Indian family preparing a dowry. Wherever those two lines meet sits the fair price.

Every year around this time we get the World Gold Council’s Q4 and Full Year Demand Trend report, and it just came out today. While it is a backward-looking review, it also highlights current supply-demand fundamentals in an easy to use format. Here is a brief summary of the WGC’s report:

  • Their headline: “Annual gold demand gained 4% on highest central bank buying in 50 years.” The only prior similar period was 1971, when President Nixon ended US dollar convertibility and the world’s central banks bought gold to hedge their dollar holdings. 

    The Russian central bank led the field here in 2018, selling US Treasuries to buy 274 tons of gold. Turkey held the #2 spot, adding 52 tons, and Kazakhstan rounds out the top 3 buying 50 tons. Chinese purchasing was minimal – just 10 tons.
  • Annual jewelry demand was flat. The WGC reports “Gains in China, the US and Russia broadly offset losses in the Middle East”. Indian demand – an important global market for physical gold – was stable.
  • ETFs and similar investment products added 69 tons to their holdings, but this was far lower than 2017’s level of +206 tons.
  • Retail investment in gold bars and coins grew by 4%. Global gold coin demand saw 5-year highs, but bar demand was flat.
  • Gold saw the Q4 slowdown in demand for technology products just like chip and handset makers. After “healthy gains” in Q1-Q3, Q4 posted a 5% decline in demand from this sector.
  • More data here from the WGC: https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-full-year-2018

As for where we stand on gold, our take on the inkblot is this: 2019 demand will look a lot like 2018, with the swing factor being global economic growth.Gold prices have gone nowhere for the last 5 years because of oversupply created by industry expansion during the 2011 – 2013 price spike. Last year’s small price decline (-2.7%) combined with 4% demand growth shows a market close to equilibrium. Should global growth improve due to a US/China trade deal and easier monetary policy, gold should do just fine.

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