Ten years after the black swan event of 9/11, the gold bull market continues. The day before 9/11, gold closed at $271.50. Ten years later, it hit a record high of $1,895 on September 5, meaning the price of gold has increased almost 700% since the hijacked planes crashed in New York City, Pennsylvania and the Pentagon.
Then we had the Great Recession of 2008, which some say still hasn't ended. Since gold has always been considered a safe haven for investors in uncertain economic times, it's no surprise investor demand for gold has increased and thus the price of gold as well.
There are four types of investors driving this demand:
1. Americans, Europeans and others who have renewed their interest in gold as a secure investment. In fact, the amount of gold being purchased as an investment from 2001 to 2011 is more than twice what it was from 1974 to 2001, according to Jeff Christian of CPM Group.
2. China and India, neither of which ever lost faith in the tarnish-resistant metal. China has a rich tradition of adoring and holding gold. With a population of 1.3 billion, the country's recent economic growth and new upwardly mobile population has spurred an even greater appetite for it. In 1949, Chaing Kai Shek forbid Chinese citizens from owning gold but that's changed. Today, some banks have been given regulatory permission to sell gold shares and bars and the government is encouraging a 5% gold savings among its citizens.
India, population 1.1 million, has traditionally been, and continues to be, the world's largest consumer of gold for both jewelry and as a financial asset. Gold holds religious significance and November's Diwali festival makes up the bulk of demand for that quarter.
3. Central Banks have once again become net buyers of gold after shunning the repository metal for four decades. The last vestiges of the Gold Standard ended in 1971 when Nixon abrogated the Bretton Woods Accord, leaving gold to float on its own. As the U.S. dollar became the world's reserve currency, the U.S. Federal Reserve (Fed) dumped gold and monitored money systems with less hard assets.
Since 2008, the Fed has in effect lowered the short-term interest rates to zero. It carried out two rounds of quantitative easing (QE) as well as a recent QE twist. Essentially, this means that the Fed is diluting the money supply and, as a result, commodities such as gold, metals, sugar and oil become more expensive because the dollar is worth less.
It's important to watch World Central Bank Gold Holdings as its actions lend insights into the behavior of Central Bankers. After years of selling gold, they are finally buying gold. According to the World Gold Council, Central Banks purchased 69.4 tons of gold during Q2 2011 and are likely to remain net purchasers of gold now that it's reclaimed its favorable position as a hard commodity asset.
4. Gold Electronically Transferred Funds (GETF) purchase and store gold bullion in bank vaults for large institutional and wealthy investors (for instance, George Soros and John Paulson). These funds have developed into major "corrosion-proof" vehicles since their inception in 2003. The largest GETF in the world is SPDR Gold Shares, ticker number GLD. Opened in 2004, it's now valued at $67.9 billion.
Gold has reclaimed its universal appeal as a safe haven in an uncertain political world. Looking ahead, no one knows for sure where the gold market is headed. Gold may continue to rise or the bubble may pop. Only time will tell.
John Maguire, BS, BA, is President and Owner of Maguire Refining, Inc. A lecturer since 2007, he has been in the precious metal industry since 1972 and serves on the Boards of both the Midwest Dental Laboratory Association and the International Precious Metals Institute. He can be reached at 800-486-2858, 763-786-2858 or www.maguireref.com.
