I recently had an interesting conversation with a representative of the World Gold Council.
We were talking about the role of gold as a strategic asset – how holding gold can help you survive and thrive in the current spate of economic turbulence.
Most people don’t understand the first thing about the gold market. They think of gold as something only “the rich” own in private banks or governments keep locked up in vaults as reserves.
But the reality couldn’t be further from the truth.
There are about 166,600 tons of gold above ground. The rest is still deep under the Earth’s surface in hard to reach ores.
Half of the world’s entire above ground stock of gold – 84,200 tons of the stuff – is in the form of jewelry. Another roughly 18% is in private hands in the form of bars and coins. And governments and central banks own another roughly 17%.
So, gold jewelry owners hold one in two of every ounce of gold ever mined. And collectively they’re twice as important in terms of demand for gold than either private investors or governments and central banks.
“Chindia” – Where Real Gold Demand Is Coming From
And when you dig a bit further you find that about half of gold jewelry demand comes from one of two places: China and India, two of the world’s most powerful emerging markets.
According to World Gold Council figures, India accounted for about one-third of all gold jewelry demand last year. And China accounted for another quarter of demand.
In the case of India, that’s about six times more demand than the next largest gold jewelry buying nation, the U.S. And in the case of China, it’s about four times the demand of the U.S.
And jewelry buying in India and China is by no means the preserve of the wealthy. Gold jewelry is popular across all sections of society. (Although, wealthy Chinese and Indians can of course afford higher quality and quantities of gold jewelry).
This turns the received wisdom about gold on its head. Because it reveals the fundamental demand driver for gold is the exploding emerging market consumer class.
The fact is that as India and China get richer, their appetite for gold increases. And this is a big factor in the rise of the price of gold on the world’s commodities markets.
Take India. Demand there for gold, as measured in rupees, went from Rs 300 billion in 1998 to Rs 1,800 billion last year. That’s a 500% increase in just 12 years.
And in China, the world’s largest gold producer, demand now far outstrips supply. Last year, there was a total supply shortfall – including jewelry, bars and coins – of about 90 tons.
And this direct demand is only part of the story. Another misconception about gold is that it has no real use. Again, people of got this plain wrong.
In the first quarter of this year alone almost 120 tons of gold were used up in electronics, dentistry and other industrial products.
And what do emerging middle class consumers spend their money on? For one, better dental care. And also fancy consumer gadgets.
Emerging Market Central Banks Play Catch-Up
Emerging market central banks are net buyers too.
The U.S. has 74.6% of its central bank’s reserves in gold. Germany’s central bank holds 70.8% of its reserves in gold. Even bankrupt Portugal’s central bank has 81% of its reserves in gold.
But China has only 1.6% of its central bank reserves in gold. And India has only 8.2% of its reserves in gold.
The point being that emerging market central banks have a long way to go before they catch up with developed world’s central bank gold holdings.
And as these emerging market central banks play catch-up, they will add another big demand driver to the gold market.
I have been recommending you hold gold since we first launched International Living Investor. And I continue to believe gold should be a core holding of any global investment portfolio.
Seen from a supply and demand standpoint, gold is a great way to play emerging market growth.
If you haven’t already, consider buying shares in a gold ETF such as the SPDR Gold Trust (NYSE:GLD) or the ETFs Gold Trust (NYSE:SGOL).
GLD charges yearly fees of 0.40% and SGOL charges yearly fees of 0.39%. Both are relatively inexpensive ways of holding gold.