As moths to a flame, investors are attracted to any asset class that is going up in price. Gold, which has returned an incredible 17.5 percent (average annual compounded return in US dollar terms) over the past decade, is not an exception to the herd-like behaviour of investors. The prospectus for the SPDR Gold Trust (GLD) (available here) includes a summary of world gold supply and demand data for the 2000 to 2009 period. The table clearly shows that demand for gold as an investment vehicle is exploding.

Jewellery remains the primary source of gold demand but the level of demand has fallen sharply in recent years. In 2000, jewellery accounted for 3,205 tonnes of gold demand but by 2009, it had fallen to 1,759 tonnes — a drop of almost half. Gold demand in industrial applications such as electronics and dentistry has remained fairly stable over the past ten years.

Investors can invest in gold either in physical form such as coins and bars or through exchange-traded funds (ETFs) such as the aforementioned SPDR Gold Trust (GLD). Demand for both sources are exploding — demand for coins and bars has increased from 166 tonnes in 2001 to 703 tonnes in 2009 and demand for gold ETFs have grown from zero to 617 tonnes.

[Investment demand for gold is exploding]

Update: You can find a linear gold demand chart here.

This article has 19 comments

  1. I think now is a good time as any to take Warren Buffett’s famous adage into account, and start to get a little fearful when others are greedy. I do think that PMs have their place, but I wouldn’t recommend anyone to just dump a lump sum at today’s prices. Those who got in at $300 and $700 on the other hand are doing quite well, indeed.

  2. P.S. Do they have a linear chart? I think it might make more sense for this data.

  3. Wow, that’s a really bad chart! I’ve never seen a Y axis with that kind of scale!

  4. @Invest It Wisely: I was looking at some gift purchases that I had made in June 2006. Two 1/4 ounce maple leafs for a total of $393. J and M is quoting a bid of $363 on *one* 1/4 ounce maple leaf today. So, yes investors who loaded up on gold at those prices will be very happy indeed.

    @Chris: That’s a log chart that best shows exponential growth. If you want to see a linear chart, I’ll upload it shortly.

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  6. thank goodness i got married a few years ago. I remember working with our jeweler/diamond guy and pricing out our gold wedding bands and engagement ring.

    If gold was $1400 back then, I don’t think I would be married to my wife today 😉

  7. A part of me wants to short gold… but that part has been there for several months now, and would have been wrong all the way up. I figure that just because I can’t come up with a good reason for an asset to go up doesn’t make for a good reason for it to go down. Guess I’ll just continue to watch from the sidelines for now.

  8. As the price of gold continues to rise, the incentive to find better ways to extract it from the earth and oceans increases. It would be interesting to see what would happen if the gold supply started rising at an unprecedented rate. But, this wouldn’t be interesting enough for me to want it to happen — the economic upheaval might be significant. Thanks for the mention.

  9. @Michael James

    I’ve had the same thoughts. In the long-term, we might need to shift to some other units of accounting, such as energy or a digital currency. Problem with energy is that it’s not really something you can carry around in your pocket, and digital currency would be decentralized fiat which means currency by convention; if the encryption was somehow broken or a flaw found in the algorithm, that could be highly destabilizing as well. I don’t think we should be enforcing standards top down; we should instead allow private currencies to compete from the bottom up. The economy is too complex to centrally plan (let alone the moral issues involved in assigning power since we are all human and are all fallible), including money itself.

  10. Wow! At this rate I’ll have to ask for handouts from my wife at retirement. I think she has a ton of the stuff!

  11. I only own a little gold, indirectly through a small allocation to a resources fund, and have generally done so through the run-up.

    Thus far I don’t fee like a “moth attracted to a flame”.

    When and if the party ends, I should still be able to book a sizable profit, even after any quasi-drastic drop.

    Momentum investing doesn’t always pay off so handsomely; but, barring a total collapse, most gold momentum “chasers” will have profited handsomel, especially if they have the discipline to take some profits.

  12. to correct my earlier post. I also own some gold mining stocks in my broad Canadian ETFs. I guess we are all winners untill the music stops.

  13. If you think gold is rising in price too fast then you should look at palladium. Over the past three months PALL is up about 43% whereas GLD is up about 15%. Even copper is up more than gold over the past three months.

    Now, if you think palladium is rising in price too fast then you should look at sugar. SGG is up about 82% over the past three months.

  14. @Sampson: I bet a lot of jewellery buyers are saying the same thing. High gold prices are affecting demand for bling.

    @Potato: I’ve never shorted anything so far. One reason is I remember how dot-coms with no earnings or sometimes even no sales increased 5x to 10x in prices in one year back in those crazy days. Markets can remain insane for longer than we think possible.

    @Michael: It takes time to develop a mine and start producing gold. Mine output is more or less flat over the past 10 years. But gold is a special case. Because most of the gold extracted out of the ground still exists, scrap supply has been increasing sharply… up from 619 tonnes in 2000 to 1674 tonnes in 2009. All those cash-for-gold offers must be resulting in a flood of supply.

    @Sean: Same here but I don’t think my wife will ever part with her jewellery.

    @Dr. Dale: I’m sure you are diligent about taking profits but I’m talking here about average investors who are always late to the party and left standing when the music stops.

    @Fred: Agree. Today’s Globe has a nice graphic on how commodities are soaring. Palladium and Silver have twice as much gains as gold and Platinum a little bit less.

    @Rob: I haven’t seen these articles about GLD and SLV reserves. Thanks for the reading material.

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  16. Investors are preparing for doomsday. It is the only “safe” investment at whatever price. When things really get turned upside down I wonder how good (expensive) gold will taste to hungry investors.

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