Gold – A Niche Investment

Gold is a scarce natural resource and its scarcity helps keep it valuable. Unlike paper money gold cannot be printed to order. In the turmoil of today’s financial markets currency is being generated from nothing in the trillions but historically currencies which are not backed by precious metals have a tendency of being worth less over the years. Typically these currencies end up being worth nothing. For example the US dollar lost 98% of its purchasing power in the twentieth century.
Looking back over thousands of years the erosion of currency is nothing new. Kings, Queens, and Emperors introduced coins as substitutes for precious metals. It did not take long before those monarchies and governments started to water down the precious metal content of the coins. The idea that the coins and coinage were convenient for the people was really a smoke screen as the real beneficiary was the state and the profit garnered from holding onto the precious metals themselves.

Today gold offers a small niche investing opportunity that has a $2 trillion pool of financial assets. Over the last few thousands of years 150 000 tonnes of gold has been mined which exists as jewellery, bullion, artefacts or scrap. If all the gold in the world was smelted into stackable bars each side would just about be the length of a tennis court. At today’s prices this cube of gold would be worth $4 trillion.

Gold is at an incredibly appealing price point which is attracting a lot more of it to appear back onto the market. This includes gold in storage vaults, central banks, gold funds, personal jewellery and ornaments, gold in safety deposit boxes and no doubt gold under the mattresses. This gold accounts for half the world’s gold or about $2 trillion.

Regardless of how high the price of gold climbs the other $2 trillion of gold, the remaining half of the worlds reserve, will not find its way back onto the markets. This includes national treasures, artistic treasures, masterpieces of jewellery, heirlooms, valued personal possessions, and religious artifacts. This amount of gold accounts for 1% of all financial assets.

Arguably financial assets grow around 7% per annum and mining only adds between 2% to 2.5% a year to the world’s global reserve of gold. In stands to reason then that there will continue to be a widening gap between the value of global financial assets and the worlds gold reserves. Thus gold continues to represent a fantastic niche investment opportunity.