Executive Summary
Gold is one of the rarest elements in the Earth's crust - 20 times rarer than silver and 15,000 times rarer than copper. Gold has a number of other atttractive features:
- As Arisitotle pointed out: it is Durable, Divisible, Convenient, Consistant and has Intrinsic Value.
- If you buried a ton of gold and left for your great grandson to open on his 21st birthday a map of its whereabouts, you may be confident he will be able to buy something substantial with it. What other asset may be so hidden from the taxman and give you the same confidence?
- It is the ultimate store of value.
- It is noone else's liability.
- It is not born with an equal and opposite debt.
- It is it is not correlated with most other assets. This is because the gold price is not driven by the same factors that drive the performance of other assets.
Despite centuries’ worth of fascination with gold, investor interest in gold was until recently relatively muted. However, gold has since seen a dramatic reversal of fortune. [1]
Historical Background
The gold standard has been the basis of many monetary systems (where the currency is backed by gold, and allows currency holders to convert their currency into gold). The U.S. went off the gold standard in 1971. Since then, money supply growth has been considerable.
Since the end of the gold standard era over thirty years ago, some 75% of gold purchased has been in the form of jewellery.
Key Drivers
- Limited supply - Almost all the gold ever mined (approximately 5 Billion Oz) is still owned and coveted. (it would fill one tennis court 20 meters high)
- Inflation/ Deflation
- Indian demand.
- Central Bank manipulation.
Key Issues
- The profitability of low grade gold deposits is especially dependent on the Gold/Oil ratio. In a Peak Oil enviroment high grade deposits are desirable.
- Low stock prices make under-capitalised explorers very vulnerable to extreme dilution in any rights issues.
- Juniors with great deposits but without the capital to develop them will find banks unwilling to lend where once they would. These stocks may well be subject to a consolidation at prices more favourabke to buyers than sellers.
Consequences
A number of people argue that a return to the Gold Standard is inevitable on the basis that there is no period of history where adventures away from sound money have ended well. (Look…
