160 years since the first global gold bullion rush, the industry is braced for a second. As demand continues to outstrip supply, could things get just as messy for the average prospector?
To a typical gold bullion investor today, the date January 24, 1848 may not mean a great deal. But this was the day on which gold was first discovered in Coloma, California, bringing an estimated 300,000 flocking from as far as China and Australia to join in the hunt for the yellow metal. Today, the global gold market is very different. Mining produces relatively little of the world’s supply, and instead of risking life and limb, investors can buy at the click of a computer mouse. But despite the illusion of stability, the gold market is teetering on the brink of something very big. Supply is dwindling, and if demand increases as insiders predict, the next gold rush could dwarf those events with a global population dreaming not of fortunes, but of simply not being left behind. So how well should the average investor know their history lesson, and how much time is there left?
One thing is certain, gold demand is going up. Bullion traders are advertising heavily, buyers even more so. Governments all over the world – like Venezuela and Russia, to name just two – are purchasing in massive quantities, and mints are selling coins like their going out of fashion. But they’re not going out of fashion, they’re simply running out.
Supply has been significantly constrained of late, with mine production falling across the world. Economic instability has also played its part, more directly than most realise.
When the Greek economy wobbled dramatically earlier this year, mints as far away as the U.S. suffered outages, and instead of providing a steady supply, central banks have been holding on tight to what they’ve got. European central banks released just 1.8 tonnes at the beginning of 2010, defying a trend that has lasted almost a quarter of a century.
It’s a trickle that could in the blink of an eye become a torrent. More and more commentators are asking the question ‘what happens if demand goes up?’ And the response more often than not is ‘It’s not if, but when’.
So what will happen? Only 5% of the world’s population are invested in gold at present. All it takes is a nudge for the demand to rocket, and as increasing numbers of investors see the importance of gold in the long term, that nudge seems to be creeping ever closer.
But surely high demand is a good thing, for current investors at least?
Going, going, gone
While mine supply is falling, scrap supply is filling the gap. In fact the total volume of gold available to trade changes very little, the problem is that – as history has shown us rather more recently, 1980 to be precise – under high inflation, hoarding and bulk buying are inevitable, and those without it seek to own it. This kind of mania buying can be worsened by short-term influxes of supply as all kinds of people flog every last ounce of coinage or jewellery they can find.
But scrap simply can’t keep up with the demand we’re already seeing. Central banks aren’t selling, they supplied only 7 million ounces last year, a drop of over half. In fact the era of the central bank as a reliable source is more than likely over for good.
This kind of shock to the system can create desperate acts, this in turn having repercussions down the line.
Many investors will be delighted with these conditions, but a bullish gold price is all very well if you can acquire enough gold to make a profit. Gold has for centuries been a highly desirable long term investment, resisting all manner of depreciative forces that can affect other investments. The phrase Golden Egg is no accident. It’s the perfect investment to sit on, possibly for generations. And in a pessimistic global environment, with 95% of the world’s population capable at any moment to decide to make gold their long-term financial future, supply is looking fragile to say the least.
Recent years have seen some truly extraordinary behaviour in the gold market. The U.S. Mint has been unreliable to the point of running out. The Royal Canadian Mint was almost cleaned out in 24 hours when the market took a turn for the worst, by two German banks. In Australia, and South Africa, similar mass buying has occurred with mints and single shops alike forced to virtually hang a ‘sold out’ sign on the front door.
There is simply no reselling at present, and without a secondary market availability can simply cease to exist. So much so that anyone serious about making a gold investment in the near future needs to start to outweigh the price against the number of ounces they can lay their hands on at all.
So what’s the rush?
Ultimately, the climate of the next 6 months in the gold markets is not clear. But its hyper-sensitivity to seemingly unrelated economic factors anywhere in the world makes it liable to a shift at any moment. Another gold rush is almost guaranteed, though the scale, duration and tone are for now obscure.
Being able to make the most if your current investment means reading the signals, and when you get mints making radical decisions, as they have been recently, you can be certain something is definitely up. A century and a half ago, nobody knew just how much gold California had to offer. It turned out to be enormous – worth billions in today’s money – but as the mining became more sophisticated, and technology and corporate financing took over from individual miners, only a few enjoyed the wealth all the 49ers must have dreamed of. Many began the long journey home with little more than they had to begin with, a lesson that is well worth considering by new and small-scale investors today. Get in while the going’s good, because eventually the big boys will take over. And when they do, there might not be anything left for a very long time.
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