Much ado about gold: Is there still a shiny future?

Moreover, ever since the US Fed started QE, inflation in the US and globally has been quite moderate, contrary to investors’ prior expectation.  Moreover, Cyprus’s recent announcement that it was planning to sell most of its gold reserves has also had an impact on the price of gold. An earlier assessment by the European Commission says Cyprus must sell about 400 million euros worth of gold. Cyprus’s total bullion reserves stood at 13.9 tonnes at the end of February, according to data from the World Gold Council. 

At current prices, 400 million euros worth of gold amounts to about 10.36 tonnes of metal. If reports of a sale are correct, it would be the biggest bullion sale by a euro-zone central bank since France sold 17.4 tonnes in the first half of 2009. To make matters worse for gold, some analysts now fear that other weak euro-zone economies such as Portugal, Italy and Spain will follow Cyprus’s lead and sell some of their gold stocks, adding further supply to weakening demand.  

Portugal holds 382.5 tonnes of gold, worth some 14.76 billion euros at current prices, while Spain’s holdings stand at 281.6 tonnes, worth 10.8 billion euros. Italy is the world’s fourth-largest gold holder, with 2,451.8 tonnes, worth 94.6 billion euros. The trigger point also follows bad economic news from China that its economy expanded by “only” 7.7 per cent in the first quarter of 2013, lower than forecast and below the pace of growth in recent years. Another drag on prices has come from India, the world’s biggest buyer of gold bullion, which introduced a 50-per cent import tax that has triggered a 24-per cent fall in the amount of gold brought into the country in the first quarter of this year

Much public interest has been given to gold investment. Throughout history people have been awed by this metal. What makes it so precious? I put forth a simple answer: rarity. Warren Buffett, one of the world’s richest investors, says the total amount of gold in the world – the gold above ground, that is – could fit into a cube just 20 metres square. I think Buffet bases his estimation on a widely-used figure from Thomson Reuters GFMS, which produces an annual gold survey. Their latest figure for all the gold in the world is 171,300 tonnes.  

Put in a spatial context, a cube made of 171,300 tonnes of gold would be about 20.7 metres on each side and reach 9.8 metres in height. Moreover, Thomson Reuters GFMS estimates that there are just 52,000 tonnes of gold left in the earth’s crust to be mined. Another interesting story is that scientists think that the core of the earth may hold about 1.6 quadrillion tonnes of gold.  This may sound like a lot, but it is only a tiny percentage of the core’s overall mass – about one part per million. To put this amount into perspective, there is enough gold in the earth’s core to coat its surface in 1.5 feet of gold. 

Now, let’s come back to reality about gold investing. In Thailand, we now see long queues of people buying at gold shops. It is interesting that lots of Thais are buying gold at a time when market consensus seems to be on a pessimistic tone, expecting gold to decline further to $1,250 per ounce; some even expect it to fall to $800 per ounce. I am not speculating on the direction of gold prices, but I would like to caution that the gold price (inflation adjusted) peaked at $2,358 (at 2009 prices) in early 1980 before falling to $315 in 2001. Thus, based on recent history, it is not without precedent for the long-term decline in gold prices. So I guess the lesson to be learnt for gold investors is to exercise greater caution investing in gold at this time.   

Another macro issue that policy-makers may be interested in is the implication of falling gold prices on the Thai economy. I would venture to say, not much! Based on the official Thai household survey, Thai households have less than 2 per cent of their assets in cash, gold and jewellery. Despite all the gold buying, Thai households have minimal exposure in gold in their overall assets. Needless to say, residential and commercial real estate is the biggest asset of Thai householders, at 72 per cent.  

Finally, in terms of the economic impact of falling gold prices, I would like to refer to the Bank of Thailand’s “Wealth Effects and Consumption in Thailand” of 2011, which estimates that the elasticity of consumption with respect to wealth is only 0.06 (interpreted as: a 1-per cent decline in wealth leads to only a 0.06-per cent decline in consumption), while the estimated income elasticity is 0.60.  

This finding says that “income” rather than “wealth” is the bigger determinant (by 10 times) of consumer spending in Thailand. The report also says that physical assets such as housing matter more for consumption than financial assets (i.e. gold), with the elasticity being about five-fold larger.  

The only point of concern I have in terms of possible economic impact would be the deterioration of our trade balance as Thailand tends to import more gold when gold prices decline. But this may not be a major issue as gold may be deemed an “asset” that can be exported in the future and Thailand’s external position (international reserve holding) is quite strong for dealing with trade deficit scenarios at this time.  

To conclude, I would say that Thai gold buyers should be cautious when buying gold in the coming months, given its price volatility, while in terms of the direct economic impact of falling gold prices, I would be less concerned.         

Dr Chodechai Suwanaporn is executive vice president, economics and energy policy, PTT Public Company Limited. [email protected]