The desire of gold is not for gold. It is for the means of freedom and benefit.
~ Ralph Waldo Emerson

Before I get on to this week´s topic, I first want to take this opportunity to thank those of you who wrote to me with feedback on my MV update from last week. Although I may not be able to answer all of the emails personally and in detail, I certainly welcomed the response. I really value our Mountain Vision Updates and communications as a means for informing our readers and clients about our Big Picture…and sometimes on our ‘Small Picture´ view as well. While on one hand it serves as a way for Mountaineers to learn more about our historical assessments, present evaluations and future expectations, it also gives us a chance to hear more from you, the reader, as well. This communication working both ways is critical.

The week started with the news of a “Decision day for second Greek bailout despite financing gaps”. It didn´t take long before we knew the results. Don´t you find it astonishing how Greece, a country with a population of approximately 11 million and a GDP that makes up less than 2% of the GDP of the entire European Union – a GDP that is only twice as much as that of the city of Berlin – has been able to keep the world for more than two years on a tether? If the relatively small country of Greece makes these kind of waves, can you imagine what would happen if another European country would have similar problems – maybe the likes of a Spain, Italy, UK, or even France – where shares are closer to 10-15% of the GDP of the European Union? Or how about a country like the US, where GDP is close to that of the GDP of the entire European Union?

But I don´t want to spend this Update getting into our expectations of what might happen here, nor do I want to speculate on the “what if´s”. Instead, what I would like to do is share some information that underlines and reinforces our conclusions on gold.

With today´s media, it is getting harder and harder to find good, independent investigative journalism any longer. It´s seems to be more about the short and shallow eye-catching article without any in-depth analysis. The analysis instead is based on opinions, rumours and a general copy-n-paste of a very few news monopolists. In this environment, it is important to not fall away from or forget what still lies at the heart of reporting and even asset management: the facts.

And this is what I want to do today in evaluating if now is the time to plan for an exit-strategy for gold: take a step back, forget about much of the ‘noise´, and focus on THE FACTS.

To do this, I´m including a series of charts providing you with information on the 3 key drivers behind gold supply and demand from the past 11 years. All data comes from the World Gold Council and was just released – ‘hot off of the presses´, so to speak. After reviewing the facts, we´ll determine if now is indeed the time to start planning an exit strategy for gold. I think you´ll see that the old adage is true: a picture (or in this case, a graph) speaks a thousand words.

The gold price has risen from USD 278 at the beginning of 2002 to USD 1561 at the end of 2011; a clear and pronounced increase of 462%.

Let´s first dive into the supply side of gold…

The overall gold supply grew from 3,557 tonnes in 2002 to 3,994 tonnes in 2011; an increase of 12 %.

The overall supply in 2011 was composed of 64% in mining and 36% in recycled, with recycled gold including anything from industrial gold to individuals turning in that old jewelry they no longer want to keep around the house. There was no net gold supply from the official sector, i.e. central banks, as they purchased more than they sold.

The mining supply grew from 2,177 tonnes in 2002 to 2,822 tonnes in 2011; an increase of 30%.

On the supply side, and particularly in the past 3 years, we have seen a pronounced increase from mining. For the short term, mining supply cannot be increased drastically, simply due to the nature of mining taking time to produce. Also, the easily-mined gold has already been tapped into over the past few decades. Thus, newly mined gold generally comes at a higher cost, which puts a relatively high price floor underneath new production.

The gold supply by recycled gold grew from 835 tonnes in 2002 to 1,612 tonnes in 2011; an increase of 93%. However, recycled gold supply has decreased for a second consecutive year.

The gold supply by official sector sales fell from 545 tonnes in 2002 to a negative 440 tonnes in 2011. Thus, in 2011, the official sector was contributing to the demand side instead of adding to the supply side.

Official sector demand overtook official sector supply in 2010. For many years now, central banks in the West have been the ‘sellers´ whereas Asian, Eastern European and Middle-Eastern central banks have been the ‘buyers´. The official sector demand rose some 363 tonnes from 2010 to 2011 whereas the mining supply rose only 222 tonnes during the same time.

This chart shows a combined overview of the three gold supply forces: mining, official sector sales, and recycled gold.

Having reviewed supply, now let´s take a look at the facts behind gold demand…
The overall gold demand grew from 3,374 tonnes in 2002 to 4,067 tonnes in 2011; an increase of 21%.

The overall gold demand in 2011 was comprised of 48% from gold jewelry, 40% from investment, and 12% in technology.

The gold jewelry demand fell from 2,662 tonnes in 2002 to 1,963 tonnes in 2011; a decrease of 26%.

Gold jewelry demand decreased during the last decade. Higher gold prices seemed to have discouraged jewelry purchasers, or they are just simply unable to afford it any longer. Rising demand from Asian regions could possibly put a floor underneath gold jewelry demand.

Gold investment demand grew from 352 tonnes in 2002 to 1,641 tonnes in 2011; an increase of 366%.

Gold investment demand has changed the most over the past 11 years, both in absolute and relative terms. It changed from 352 tonnes in 2002 to 1´641 tonnes in 2011; an increase of 1´289 tonnes, and it changed from 10% of the total demand in 2002 to 40% of total demand in 2011; an increase of 30 percentage points.

The gold technology demand grew from 358 tonnes in 2002 to 464 tonnes in 2011; an increase of 30%.

The demand for gold technology increased over the last decade due to a positive demographic development…a trend we most likely continue to see. However, corrections will occur at times of slower or negative economic growth.

Combined overview of the three gold demand forces: technology, jewelry and investment.

So what does this all tell us? To summarize the facts we provided here, the gold supply/demand situation has mainly been influenced by gold investment demand including official sector demand. With all other variables, they are relatively stable compared to that of the gold investment demand. In any attempt to predict the development of the future gold price, it is important to understand this gold investment component.

Because the past decade was characterized more strongly by deflation fear than inflation fear, one might assume that investors didn´t buy gold as an inflation-hedge, what gold is actually famous most-known for. People bought precious metals as a hedge against all sorts of crises: political, financial, economic, currency, geo-political, etc. If one assumes that these crisis scenarios are still in place and that none of these crises has been solved – or if one even assumes that these crisis scenarios have even grown closer, bigger, or more numerous – and the reasons for having a crisis hedge are becoming more convincing every day, then one might expect that gold investment demand will increase and will drive prices higher.

Which brings us to the answer of our question: Is it time to sell your gold, and if not yet, then when? Of course nothing goes straight up or down, but the decade-old trend is apparently entrenched in place. The exit strategy for gold owners should be to sell their metals only if there is no reason for having it anymore. That sounds simple, but for most investors it means selling their gold only if the causes for the assumed potential crises have been seriously and properly addressed.

In a world long on potential crises and short on any sustainable solutions, it means we probably have to stick to our gold, and, for that matter, have to continue to buy more gold for quite some time to come.

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