- Aug 20, 2000
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Is there any historical examples of what happens when a commodity nears the point where it is purchased more to hold it than to actually use it? Purchasing gold purely on speculation of how much other people will want it - as opposed to how often it is consumed for industrial purposes - seems a rather risky endeavour.
Economist.com - Gold: Store of value
Economist.com - Gold: Store of value
The seemingly insatiable demand of mainly Western investors, drawn to gold as a store of value rather than as an adornment, has driven the price from less than $700 an ounce in 2007 to more than $1,200 since May this year. Last month it reached its highest-ever point in nominal terms, $1,264.90. It has eased a little since, sliding below $1,200 this week.
After adjusting for inflation (measured using American consumer prices), in recent weeks the gold price has been at its highest for 30 yearsalthough only just over half its all-time high (see chart 1).
At the root of this debate about the durability of the gold-price rally are different beliefs about the future path of demand and supply.
Start with the demand side (see chart 2, top panel), which has two main parts: demand for gold as jewellery, and demand for gold as an investment. (Some is also used in industry and dentistry.) Jewellery has conventionally accounted for the lions share, but it has been declining in both absolute and proportional terms. Between 2000 and 2007 global gold-jewellery demand slid from 3,205 tonnes to 2,417 tonnes; as a share of the total demand for gold, it declined from nearly 80% to just over 60%.
The fall was precipitate in the Western world. Demand in India, the biggest jewellery market, was little affected until last year. Demand in China, the next biggest, has continued to rise.
As jewellery demand went down, investment demand went up: for gold in the form of coins or bars, for gold exchange-traded funds (ETFs) and for the services of online companies that allow investors to buy small amounts of pure bullion, stored in underground vaults.
Buyers of jewellery might be put off by a rising price; investors are more likely to see it as a sign that the price will increase further still. Annual identifiable investment, as the World Gold Council puts it, was 611 tonnes in 2004-07, a little more than twice the average for the four previous years. That just about offset the fall in jewellery demand.
Since then, however, investment demand has accelerated and jewellery demand has collapsed. Last year, indeed, was the first in which investment demand exceeded jewellery demand. Purchases of gold for jewellery dropped to 2,193 tonnes in 2008 and then to 1,758 tonnes in 2009.
Meanwhile, the signs of surging investment have been everywhere. This has more than made up for the slump in the jewellery trade: total demand in 2009 was the highest since at least 2000.