Why Gold?

Home Page   Why Gold ?   SSL Buy Gold SSL Sell Gold SSL Exchange Gold Fees Payment Options FAQ SSL Contact us About us Disclaimer Privacy Policy   A picture worth a thouzand words: The table above shows Gold prices versus Market Indexes price evolutions over the last 7 years. Indexes have been divided as indicated, in order to show all data on the same scale.   There are many reasons for investors to really start looking into Gold these days. As you will be able to appreciate in these pages, many aspects about Gold are widely unknown. We have tried to bring you as many as possible of those aspects, so that you can appreciate for yourself the true potential of Gold, and how it could help you protect your assets against ever devaluating fiat currencies, or even generate very substantial capital gains in a foreseeable future. All in all, Gold is a very rare, scarce, and unique commodity. Much more so than most people realize.   Table of Content Facts about Gold: Annual Production / Market Demand Mining / World Gold Reserves Gold Physical Characteristics Fundamentals about Gold: Supply / Demand Global Gold Shortage Effects of Hedging Why Gold over Gold Stocks? The Hedge risks Volatility Other factors Why Digital Gold? Convenience Safety Privacy Is Gold now overvalued? Past exhuberance Gold Price in Constant Dollars   Facts about Gold:          Gold Physical Characteristics: - Density: - Size of a Metric Ton: - Chemical symbol: - Melting point: 19.32 Cube of 37.27 Cm sides (1' 3") Au (from Latin Aurum) 1,064° centigrade (1,947° Fahrenheit)          Gold Mining / Market Demand: - World Annual Mine Production: - World Annual Market demand: +/- 2,200 Metric Tons (declining) +/- 3,700 Tons (2005) (Annual Production Deficits being covered by Gold from Central Banks: Read below)          Gold Production / Reserves: - Total amount of Gold ever produced: - Total Gold reserves left (not mined) - Total volume of Gold ever produced: 152,000 Metric Tons (est. as of 2006)   93,050 Metric Tons (est. as of 2006) 412.09 Cubic Meters (14,552.8 Cubic Feet)          Monetary Gold Reserves: - 2001 World Central Banks Reserves:(*) - 2001 US Gold Reserves:(*) 32,988 Tons ($567.8 Billion at 12/05 Prices) 8,149 Tons ($140.3 Billion at 12/05 Prices) * It is estimated that about 15,000 Tons of these "Central Banks Gold Reserves" are now in fact "paper gold", owed to Central Banks by the Bullion Banks. Click Here to see How, and Why. Back to Top Gold Fundamentals Things in perspective: Before we get into further details, in order for you to realize how small the Gold market really is, a few things should be put in perspective: - Total Gold Mines Annual productions are at about 2,200 metric tons, after having peaked at about 2,500 tons in year 2000. These figures are ridiculously small compared to other metals: - Copper mine production was 15 Million metric Tons in 2006. That was 6,800 times more than gold! (in weight terms) Copper having 2.15 times less density than Gold (8.96, vs 19.32), there was 14,659 times more copper than gold mined worldwide in 2006 (in volume terms). - World Steel production was over 1,200 Million metric Tons in 2006. That was 545,500 times (over half a million times) more than Gold! In other words, for each metric Ton (2,200 pounds) of steel produced in 2006, there were only 1.83 grams of Gold produced (0.059 Ounce)!!. - In volume terms, the comparison is even worse: With a density of only about 8, steel is less than half the density of Gold (19.32). Therefore, for each cubic foot of Gold that was mined in 2006, there were over 1.3 million cubic feet of steel produced by steel mills. To sum this up, in 2006 the Gold production was about 15,000 times smaller than Copper, and 1.3 Million times smaller than Steel in volume terms. So, you can see how incredibly small the Gold Market is compared to other metal commodities.   Gold Mining / Reserves: The chart below shows that the amount of Gold that has ever been produced (mined) is now much larger than the World Gold (unmined) Reserves. At current annual demand rates (about 3,600 tons), world Gold reserves will dry out completely in about 25 years. - 84% of the Gold ever produced by humanity has been mined since 1900. - 60% of the Gold ever produced has been mined since 1950, at an accelerating pace. Market demand breakdown: Most of the demand for gold over the years has come from Jewellery, with over 81% of total consumption (3,000 tons+ a year). Retail Investment has started to grow, and is now in #2 position, with 9% (335 Tons), ahead of Industry (7.7%, 284 Tons) and dental (1.8%, 68 Tons)   Geographical Market demand breakdown: (Tons / % of Total per year)   Back to Top Supply / Demand: Supply does not satisfy demand As seen in Facts about Gold above, annual Demand for Gold (about 3,700 Tons a year, on the rise) has been increasingly and significantly higher than mining production (about 2,400 Tons a year, and decreasing). The chart below shows annual market demand compared to mining production, and the resulting annual Gold production deficits from 1986 to 2006. During the last 20 years, mining production has only satistied an ever decreasing part of the market demand. The trend has now started to worsen, as overall demand is on the rise again, with Bullion Banks having to start covering their short Gold positions to repay Central Banks. According to statistics from the World Gold Council, and GMFS, world demand for Gold increased 15.96% in the First 3 Quarters of 2005 compared to the same period in 2004 (2,772 tons vs 2,391). At the same time. Gold production declined by 114 tonnes in 2004, the greatest annual fall in tonnage terms since World War II (GFMS Publication of Gold Survey 2004) In 2005, South Africa, the largest Gold producing country is reporting a 7% decline in its Gold production. April 3 2007 (Bloomberg) -- Peru's gold production fell to a four-year low in February because of declining output at Newmont Gold Corp.'s Yanacocha mine. Production fell for an eighth straight month, dropping 25 percent from a year earlier to 12,522 kilograms (27,606 pounds), the Energy and Mines Ministry said an e-mailed statement. Yanacocha, the world's second-largest gold mine, expects output to drop 39 percent this year to 1.6 million ounces on falling ore grades. Global gold output fell to 10-yr low in 2006 By: Mariaan Olivier Published: 4 Apr 07 Global gold production had fallen to a ten-year low last year, when output registered a “substantial” 3% decline of 79 t, a survey released on Wednesday showed. Precious metals consultancy firm GFMS, which launched Gold Survey 2007 in Johannesburg, senior supply-side analyst Bruce Alway explained that Asia, North America and Africa were the main contributors to the decline in production. In Asia, production fell by 46 t, while North America and Africa’s output declined by 26 t and 17 t, respectively. “In Africa, Mali and Ghana did much, but not quite enough to undo the more than 20 t of lost output reported in South Africa,” the consultancy said. South Africa’s gold production dropped to an 84-year low in 2006, registering a 7,5% year-on-year decline. Oceania's production fell by 21 t last year. Although total Annual Gold production has gone up from 1,500 tonnes in the late 70's to 2,500 tons in year 2000, market demand for Gold has increased faster than mining output was ever able to deliver during the last 20 years. Additionally, with Gold mining operations nearing the end of their lives and reduction in exploration and development expenditure over the past years, analysts suggest that global production WILL to drop further over the next few years. Recent and future higher Gold prices are expected to intice exploration companies into investing in exploration again. However, should they be successfull, it will take another 5 years after new gold discoveries will be made before additional production output could kick in, because of the huge financing / work involved in starting new Gold mine operations. On the Demand side, the situation is not expected to help production deficits either: - India, which has historically been THE largest Gold consumer (by far), eating up over 25% of total Gold World annual demand by itself, enjoys one of the highest economic gross rates: Mumbai, September 22, 2007: India imported around 664 tonnes of gold in January-August, up 86.5 percent from a year ago, a World Gold Council official said on Saturday. - China has recently authorized the trade of Gold again (2003). - Asian Central Banks: - Russian, Chinese, Taiwanese, and Japanese Central Banks (among a few others) now want to increase the percentage of their Gold reserves, to protect themselves against having too many US Dollars / Euros reserves. - Bullion Banks, who have huge Short Gold positions, are now starting to buy back physical Gold to cover their short positions, in an attempt to minimise the huge potential losses on their books. (read below)   Fundamentals about Gold Price prospects   Gold Lending   Global Gold Shortage We have seen above that the total amount of Gold ever produced (now over 150,000 Tons) exceeds the estimated World Gold reserves (less than 95,000 Tons). At current average annual world Gold mines production levels, total Gold reserves would only cover for less than 40 years of Gold production. At current Annual Market demand levels, total World Gold reserves will only cover for about 20 to 25 years! As for any other commodity becoming scarce, this will result in sharp price increases. Barrick CEO sees $800 gold by year-end DENVER, Sept 26, 2007 (Reuters) - Gold prices should top $800 per ounce by the end of the year, and supply and demand dynamics favor continued gains, Barrick Gold Corp chief executive Greg Wilkins said on Wednesday. "I think before the end of the year we'll see $800," he told reporters at the Denver Gold Forum. He said supply will be pinched by several global gold projects that may have more difficulty getting developed than the market thinks. Barrick is the world's largest gold producer...   Besides the existing, and increasing crunch in physical gold due to Supply / Demand chronical imbalances, there is now a huge (additional) crunch coming from Gold derivatives: Gold Lending Since the mid 1980's, Central Banks have been "lending" part of their gold reserves to Bullion Banks, in order to generate some revenues from their "sleeping gold assets". It worked like this: Central Banks lent Gold bars from their inventory to Bullion Banks for a small interest (less than 1%, see Gold Lease Rates on Kitco.com ). Bullion Banks have sold the Gold on the market, and used the proceeds to buy Treasury Bills paying much higher returns. Bullion Banks were making a profit: T. Bills revenues (4.5 to 7%, depending on period), minus their small cost for the lease of Gold). This compensated for the Gold production deficits, and has put artificial downward pressure on gold prices. As a result, Bullion Banks now owe the physical Gold to the Central Banks, and that (large) part of the Official «Central Banks Gold Reserves» is now in fact in «paper format», NOT physical Gold anymore. Wake up time... With Gold prices now having gone up significantly, Bullion Banks will have a VERY hard time buying the Gold back for paying their debts... In the mean time, all the Gold that was sold on the market by Bullion Banks for the last 20 years covered for the chronic Gold mine production deficits, and basically nobody noticed the real shortage that was happening in the Gold sector, and people thought that Gold prices had been going down due to "normal" market conditions. Hedging In order to try and cover some of their short positions, Bullion Banks hedged their gold price risk, going Long on forward gold market (from gold producers and speculators) to try & offset part of their huge physical Gold short positions. This was possible at some point, as Gold producers were forward selling their future Gold productions, in an attempt to stabilize their annual revenues. Until late 1999, producers typically added to their gold hedges (short positions) every year. However, there has been a few spectacular corporate financial crisis for large producers with heavy hedged (short) positions as gold prices rose sharply in mid 1999. Ashanti, Cambior, and Centaur mining companies were hit real hard, as they had to cover their shorts with expensive Gold bought from the Market... at market prices!. This has seriously dampened Gold producers enthusiasm to add to their hedge books on gold price rallies and the overall producer hedge positions have since declined substancially, putting pressure back on the Bullion Bank's short positions. The big crunch It is estimated that about 16,000 Tons of Gold have been lent to Bullion Banks by Central Banks,. Some people claim this not to be true. However, it does not take a rocket scientist to figure out the fact that the gold that has been needed to cover for the 20 years of Gold mining production deficits to satisfy market demand (see Supply/Demand above), at a rate of 1,000 to 1,500 tons a year adds up to... over 16,000 Tons! That quantity of Gold could not possibly have come out of anything but Central Banks Gold reserves, leased to Bullion Banks, which sold it on the Market, as most of the Gold demand (81%) is used up by jewelry, and therefore not recoverable for further sales as bullion. Tehcnically, The Central Banks still «own» the Gold (it is owed to them by Bullion Banks), and they present their gold reserves in public books as «Gold in the central Bank's vaults».... However, Bullion Banks do not own, nor do they hold that gold anymore either, as they have sold it on the market. (which covered for the Gold Production deficits) This means that in order to cover their short positions, the Bullion Banks, (hedged) producers, and speculators will have to buy back the same amount of Gold on the markets in order to cover their short positions (as there is no way the mining sector could possibly satisfy their demand, being already unable to satisfy "normal" market demand for Gold). At current (April 2006) Gold prices, this represents total short positions on Gold for $324 Billion, as opposed to $131 Billion at early April 2001 prices... Worse: The simple fact that short positions coverings must now start to happen will (has already) put additional pressure (up) on Gold prices, as demand will exceed supply even more than before: Not only is "lent" gold drying up (which will not cover for Gold annual production deficits anymore), but the buying back of Gold on the markets for short positions coverings by Bullion Banks will put an ever increasing pressure on Gold demand, and therefore Gold market prices. New policies by some major Central Banks Russian, Japanese, Chinese, and Taiwanese Central Banks have recently (Fall 2005) decided to increase their Gold holdings, and Middle East Central Banks are expected to follow suit. This is also expected to have a significant effect on Gold prices, as it will bring very large / deep pocketed new players into the (relatively) tiny Gold market. China Urged to Quadruple Gold Reserves, Reuters Report 2006-05-09 11:13 (New York) By Danielle Rossingh May 9, 2006 (Bloomberg) -- The Chinese government was urged by economists to quadruple gold reserves to 2,500 tons from 600 tons, Reuters said, citing an official industry newspaper. Gold should comprise between 3 percent and 5 percent of China's foreign-exchange holdings, from 1.3 percent now, Liu Shanen, an expert at the Beijing Gold Economy Development Research Centre, told a conference, Reuters quoted the China Gold newspaper as saying. China should increase its gold holdings given the strength of its economy and the size of its foreign trade, Shanen said. China's gold reserves have remained stable since December 2002, Reuters said All in all, Gold prices will have nowhere to go but sharply UP.   Back to Top Long Term Gold Price Prospects Puting things back in perpective: Gold in Constant Dollars Even at $730 an ounce, Gold is nowhere near a point where it is overevaluated. A look at the Gold Prices peaks during the last 30 years in constant dollars (i.e. adjusted for inflation) shows that Gold Prices have a long way to go:   Date Price Top 2006 Value Dec 1979 $512 $1,378 Jan 1980 $850 $2,015   Besides, in the late 1970's, early 80's: - US government accumulated Debt, and growing US Trade deficits were nowhere near as bad as they are today. - Foreign central Banks reserves were not as over-saturated with US Dollars as they are today. - Chinese, Indians, and other (fast) developping countries had nowhere near the buying power they have today. - Past economic history does have something to say: It shows that the last time the US economy and financial system was so overextended was back in the last half of 1929 when the US total debts to GDP ratio stood at about 269 % of GDP. - Today, the US total debt to GDP ratio stands above 400 % of current US GDP. - Further, there were no unfunded liabilities in 1929. Today, US unfunded liabilities stand at $US 57 TRILLION. - In a report published recently, JP Morgan believes the gold market outlook continues to improve, with demand continuing to strengthen, whereas this stronger demand is not met by higher supply because of declining production from South Africa in particular. JP Morgan also believes demand could increase further if there continues to be concerns over the future direction of the US dollar, as a weaker US Dollar is often associated with higher gold buying as investors (and other central banks) chase a safe haven. Back to Top Why Gold over Gold Stocks? Trading Gold stocks is a lot more risky than trading actual Gold! The Hedge risk First of all, as we've seen above, most Gold producers are short on Gold price, by having sold their future productions through (fixed price) advance sales, in an attempt to stabilize their annual revenues. As spot Gold price increase, they are at risk, as they have to deliver the gold at the set price, regardless of the current gold price at the time of delivery. Back in 1999, Ashanti, Cambior, and Centaur Mining companies were hit very hard by spot Gold price increases and fell into deep financial trouble. Moreover, with advance sales at fixed prices, Gold producers do not benefit from market Gold price increases and their respective stock do not benefit from it, because investors know that current Gold prices have little effect on Gold producers annual revenues (and therefore profits). It is estimated that about 2,700 Tons of gold have been hedged by Gold producers alone. That is more Gold than the total world mining production for a full year! Volatility Volatility of individual Gold mine stocks is a lot higher than the Gold price itself. Some insiders may be able to benefit from the «Buy low, Sell High» game, but it is usually not the case for average investor, as he has next to no way of knowing where individual stocks are at. Other factors Not only gold stock prices are based on current / expected value of spot Gold prices but also on many other factors next to impossible to evaluate or even appreciate by the individual investor. Exploration and Production costs, actual gold reserves of individual mines compared to estimated, Hedge position, company management, local political & tax issues, etc. All in all, considering the potential capital gains on Gold itself (compared to gold mine stocks), based on simple fundamental, verifiable issues related to Gold, there is little incentive for individual investor get into the trouble - and risks - of selecting (stock picking) individual gold stocks, or even Gold indices, as demonstrated above, over Gold itself.   Back to Top Why Digital over Physical Gold? Convenience Gold Backed Currencies (GBC) or Digital Gold Currencies (DGC) are a lot easier and safer to trade than physical Gold. In fact, DGC's offer the best of both worlds, as they can be bought, sold or exchanged in any quantity from any computer connected to the Internet, any time, anywhere in the world. Actual Gold Unlike options and other gold derivatives, so called "Gold Pools", etc, DGC's are a set quantity of physical, stored, allocated physical Gold bars and bullions. However, unlike Gold bars, coins or bullions, which can only be traded for the whole bar, coin, or bullion price, thanks to DGC's, physical / allocated Gold can be bought in any dollar amount, as the amount of Gold traded is in fact the exact weight equivalent (in grams and milligrams) of the dollar (or Euros, GBP, Yen, etc) amount purchased at the time the trade takes place. Therefore, accumulating, or selling Gold in any quantities at a time is not at all a problem for DGCs. Likewise, selling Gold can happen for any quantity, anytime, anywhere. Safety Safety of the DGC is not an issue to the individual investor, as the Gold bars backing your gold are kept in secure vaults by the DGC provider for you. Storage fees for DGC's are also minimal (1/12th of 1% per Month or less). Mobility Mobility of assets is paramount. With DGC's you can buy Gold from one place and sell it at any other, for any currency. You can even redeem your DGC to physical Gold and have it delivered to you in bars, coins or bullions anywhere you want! Privacy Privacy is an other very important issue as well: «Digital Gold» can be traded discreetly as DGC's have very strict privacy policies.   Additional Links about Gold: History of Gold (Gold-eagle) World Gold Council Gold historical Charts (Kitco) The Privateer Gold Pages GATA (Gold Anti Trust Action Committee) LeMetropoleCaféCyberspace Cafe for Investors Back to Top   AnyGoldNow is operated independently and is not affiliated with e-gold, G&SR, c-gold, etc. Copyright © 2001-2007 AnyGoldNow. All rights reserved .