x Abu Dhabi, UAEMonday 22 January 2018

Little risk that gold will lose its allure or value

Each year, some 2,500 tonnes is mined globally - China is now the world's largest gold producer, having overtaken South Africa in 2007.

China has become the largest producer of gold in the world, overtaking South Africa in 2007.
China has become the largest producer of gold in the world, overtaking South Africa in 2007.

How much gold is there in the world? The best estimate is that something like 165,000 tonnes of the metal has been mined in human history. This figure includes the metal on show in museums around the world, as well as the 30,000 tonnes that is reckoned to be sitting in the vaults of the world's central banks. Each year, some 2,500 tonnes is mined globally - China is now the world's largest gold producer, having overtaken South Africa in 2007.

Eighty per cent of the gold that is brought to the surface has traditionally ended up as jewellery, although what is pure adornment as opposed to an investment is rather blurred, with the remainder being used up by dentistry and electronics. Since gold is rarely destroyed - its value and characteristics mean that much of it is recycled - we are adding to the available stock every day. In a traditional commodity market, much of the analysis centres on supply and demand, often in terms of days remaining of supply - simply taking available stocks and dividing that by consumption. Trying to apply that to gold makes a total nonsense of the data.

The first problem is: what counts as the stockpile? Is it simply what comes out of the mines each year plus scrap sales? What about central bank holdings? Clearly, no one is going to contemplate melting down Tutankhamen's sarcophagus just because the price of gold has gone up, but they might do for a bracelet that is no longer worn; so what is the available balance of metal? Unfortunately there is no generally agreed figure for this - except that it is normally accepted that it is many years worth of demand. So with the supply increasing, are there limits to the amount of gold that people want? What happens when all consumers are satiated in their desire for gold? Indeed, if gold behaved purely as a commodity, its price would be minimal and likely to drop each year as more of the metal came to the market.

However, gold is not a traditional commodity. Generally, traders like myself pay scant attention to stories that more gold is being dug out of the ground, or that demand has fallen in a particular centre. It may help back up the rationale for a position, but in terms of basing a trading decision, it is given little more than cursory attention. The exception to this, of course, is when a large purchase or disposal of the metal takes place - such as the announcement last November that the Reserve Bank of India had acquired 200 tonnes of gold from the IMF. Instead, gold is viewed and analysed much more as a currency.

The other feature that sets gold apart from other commodities and currencies is the role that sentiment plays. Clearly it is important in all markets - the ability of traders to ignore bad news and focus only on positive features that reinforce an already-held view. However, in gold, this is taken to new levels. Why should a piece of metal be a hedge against inflation? Why should it be seen as a store of value? Is it desirable because it represents no one else's debt? But then again, the same is true for a lump of coal. The reason that gold has these attributes is that we believe that it does. It has been embedded in human psychology and reinforced over the millennia.

The lure of gold is even an integral part of our culture (competing for gold medals at the Olympic Games) and language ("silence is golden" and "the Midas touch"). So the lure of gold has very little to do with supply and demand, but a great deal to do with how we connect with it. If we believe that it has become debased and is of little value against an alternative - paper bank notes, for example - there is little impact that decreasing mine supply will have on the price. Alternatively, in an environment where even sovereign debt is no longer regarded as entirely safe, a growing global stock of the metal is no threat to its value.

Indeed, the current situation - in which we find ourselves with lingering concerns over the health of the global economy, the strength of financial institutions and the ability of monetary authorities to effectively create stable, long-term growth without creating asset bubbles - will continue to underpin the lure of gold. While the price appreciation may not be as dramatic as we witnessed last year, this year will possibly signal that the events of the last 20 or 30 years were an aberration and that the metal that was used as money for thousands of years will once more take a central role in financial markets.

Jonathan Spall is the director of commodities at Barclays Capital and is based in London