Gold: Fools Rush In?

1925: The Gold Rush - Charlie Chaplin

The World Gold Council has just published its third quarter data for 2011. I'm one of those people that find this sort of stuff interesting, which is presumably a good thing if you are a client. Anyway, demand for gold increased by 6% on a year-on-year basis. Investment demand for gold as a "safe haven" is driving demand and altering the shape of the gold market. Way back in 1970, when the world was clearly a different place, Jewellery accounted for about 70% of gold market with investment and technology roughly sharing the balance of the market equally. Scroll forward to 2010 and investment gold now makes up about 40% of the market, with jewellery squeezed to 50%.

What is also interesting in the report is that nearly 80% of gold production mines were in Africa in 1970 (the bulk being in South Africa) with 10% based in the US and the rest of the world accounting for only 10%. Today, or rather in 2010, there is a completely different picture, East Asia now has the biggest distribution of mines, but by an large there is an even spread across the US, Latin America, Middle East, Oceanic and Africa, Europe by comparison has virtually no significant input into the numbers. Of course since 1970, South Africa in particular has changed dramatically.

My concern is primarily that gold has become such a significant holding within portfolios that the price is perhaps unnaturally high due to the demand. It is clear that gold is a traditional "safe" asset, but the volatility in the price of gold would suggest that as with other asset classes, timing is everything and is of course very difficult to get right consistently. The economic environment leads investors to seek safety, but I am beginning to wonder whether we are gradually getting to the bottom of the mine that we have dug for ourselves. By the time characters like "the little tramp" (nothing to lose) are gold speculators, it is time to get out.

DT