The decade-long rally that has taken the price of gold from $255 an ounce all the way up to almost $2,000 is not finished.
Holding gold as an asset is nothing new. Over the course of history, this shiny, yellow metal has intoxicated many.
Even though gold went out of vogue in the 1980s and 1990s, it has now reasserted itself as the premier currency in a world of paper nothingness.
The Big British Folly
Sometime prior to 1999, the United Kingdom decided that gold was a relic.
The U.K. held about 700 tons of the precious metal in 1999. Today it holds around 310 tons. Gordon Brown, the former Prime Minister and then the Chancellor of the Exchequer, was responsible for selling 60% of the country’s gold reserves at an average price of $275 per ounce between 1999 and 2002.
In February 2001, gold traded at a low of $255 and traders in the gold market appropriately dubbed the low as the “Brown Bottom.”
No sooner did the U.K. stop the gold selloff than the market began to surge.
The U.K. was pretty much alone when it came to selling off its reserve asset and ultimate store of wealth. As it turns out, the UK left more than $19 billion on the table, at the last count, by deciding to sell the bulk of its gold reserves.[adcode]
True Value of Paper Money Exposed
The value of a fiat currency – money that gets its value from government laws or regulations; i.e. money without intrinsic value – depends on the full faith and credit of the country that prints it.
Today, given the enormous levels of debt, the US and the European Union are printing more and more paper currency. The process of adding liquidity to the system has created a farce.
By any conventional accounting standards, these countries are so indebted that their paper currencies are worth only the value of the paper they are printed on – which is why gold has moved higher for a decade and why it will continue to appreciate.
It is not that the intrinsic value of gold has gone up – it is the intrinsic value of currency that has been unmasked.
Governments Now Realize the Value of Gold
Central banks no longer sell in the gold market. If there is any government out there that wishes to follow Gordon Brown’s example, there are scores of buyers that will gladly take the gold off their hands.
In fact in 2011, central banks and governments around the world purchased a staggering 450 tons of the yellow metal.
Indeed, 18% of all of the gold mined in 2011 found its way into central bank vaults. Central banks now realize that owning gold as a reserve asset beats low-yielding US dollars or debt-riddled euros any day.
The central bank of Korea, the world’s eighth largest holder of foreign reserves, bought 15 tons of gold in November after snapping up 25 tons in June and July.
And, Korea is not alone. In 2011, China, Russia, Kazakhstan, Colombia, Belarus and Mexico, among others, have all added to their gold reserves and have plenty of room to add more.
Demand is still growing
The pace with which central banks and government are buying is not slowing down.
Swiss banking and financial giant UBS two weeks ago noted: “Purchases of as much as 450 tons in 2011 may be repeated next year as Asian nations and emerging economies diversify their reserves.”
That’s at least 450 reasons why the price of gold will continue to climb.
The demand for gold from individuals and investors is also rising.
Chinese jewelry demand alone is around 13% higher year-on-year at some 131 tons.
China’s growing appetite for gold as a means of investment saw demand for gold bars and coins expand by 24% from year earlier levels to 60.2 tons. And, all this as the price of gold rose to new highs.
The Bottom Line
The demand for the shiny yellow metal continues unabated in the current global economic environment.
The bottom line is this: Gold is in demand and that promises to continue through the coming months and years – primarily because it remains the most stable asset and currency in the world.
Gold is the closest asset to a sure thing that exists today, and its price is nowhere near the top.
Happy trade hunting…
Editor, Trade Hunter & Commodity Trend Alert
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