2011-SEP-24
For years, the mainstream investment community has snubbed gold. Warren Buffett – perhaps the most famous investor in the world, and one of the richest – famously dissed gold 13 years ago with the line: “It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”In similar fashion, on May 9 1999, two days after the UK Treasury announced that the Bank of England was going to start auctioning of more than half of its gold reserves (415 tonnes), the Financial Times commented in its Lex Column:
“It is entirely rational for the UK to seek to maximise the value of Britain’s gold, currently an unjustifiable 43 per cent of net reserves… It is odd that the UK is keeping 300 tonnes. At 18 per cent of net reserves, it will represent a heavy position in a low-returning commodity that has proved to be a lousy investment in recent years, even if it may still serve as a partial store of value in [times of] global crises. So having already unnerved the markets, the Treasury might as well have gone the whole hog and planned to sell the lot.”
A year earlier, The Motley Fool argued against buying gold in one of their investment guides, stating that “If the world’s central banks want to put their faith in them good ol’ boys in the US government (by buying US Treasuries instead of holding gold) rather than an off-yellow metal of indeterminate value, then we’d be fools to argue.”
They were fools all right, but fools not to argue. The gold price stood at under $300 per ounce in 1998, while the Bank of England sales from 1999 to 2002 were at an average price of just $275.60 per ounce. If the Bank had followed the FT’s advice and sold all of its stock, the average price realised on its sales would have been even lower.
But of course, there will come a time when it will make sense to favour other assets – be they stocks, bonds or real estate – over precious metals.
So what should people look out for in deciding whether or not owning gold is a good idea?
When everyone else in the room owns the same asset as you, very often that’s a good indicator that it’s overvalued.
Is gold overvalued, or “over-owned” today? To answer this question we need to look at the ownership of gold and gold related-assets as a percentage of investors’ portfolios. We also need to examine the inflation-adjusted gold price over recent decades. And last but not least, we should compare the stock of US dollars with the value of the US government's gold reserves. One could run similar assessments of money stocks versus gold reserves in other countries, but for the sake of brevity, we'll stick solely with the US example – Uncle Sam does after all remain the issuer of the world's only reserve currency.
Gold ownership among investors
So what are the gold ownership trends among investors? Surely, with the price having soared from under $300 per ounce a decade ago to record-peaks at over $1,900, investors are piling into gold?
Yet as analysis published earlier this year by Sprott Asset Management shows, gold assets remain a meager percentage of investor assets. In their Gold Yearbook 2010, CPM Group noted that in 1968, gold held by individuals for investment purposes represented roughly 5% of global financial assets. By 1980 this figure had fallen to 3%. By 1990 it stood at 0.6%, and by 2000 it had fallen to just 0.2%.
And today? CPM Group notes the figure rose to a mere 0.6% by 2009. Sprott calculates that in 2010, it would have risen by another 0.1% to 0.7%. So despite the big run-up in the gold price over the last 10 years, gold as a percentage of investor assets remains at essentially the same level it was at two decades ago... continued
