Always believe in gold

Last year marked a record year for gold. At $65bn, consumers and investors spent more money on gold around the world than ever before


Gold supply each year comes from main three sources – mine production, which has remained largely static in recent years, central bank sales, which are regulated by the Central Bank Gold Agreement, and scrap supply, which represented approximately 30 percent of total supply in 2006.

The members of the World Gold Council, which include leading gold mining companies AngloGold Ashanti, Barrick, Goldcorp, Gold Fields, Kinross and Newmont, together contribute 40 percent of global gold production. In a geographic sense, the world’s top six gold producing countries at the end of 2006 were South Africa, the United States, Australia, China, Peru and Russia.

Gold supply feeds three main global markets – jewellery, which represents 67 percent of demand, investment which represents 19 percent and industrial use, which represents 14 percent. Jewellery demand is largest in India, China, the Middle East, and the United States and it is in these regions that WGC centres its jewellery marketing efforts, and has successfully fought off stiff competition from the likes of electronics, spa weekends and other luxury consumer products.

There is no doubt, however, that in recent years, identifiable investment demand in gold has increased very robustly. Since 2003 the investment sector has represented the strongest source of growth in demand, with a year on year increase in value terms of 45 percent by the end of 2006, and a five year increase of around 300 percent. 2006 attracted net inflows of approximately $13bn.

Gold investment
The benefits of a long term strategic investment in gold are well known. Gold is a great portfolio diversifier, preserver of wealth and mitigator of risk. However, many people still remain relatively ignorant as to how to invest in gold. There are a number of ways of buying gold for investment purposes including the purchase of small coins and bars, or by investing in exchange traded gold, gold accounts, gold certificates, gold-oriented funds and structured products.

With the gold jewellery market strong and investor interest in gold surging following the launch of the gold Exchange Traded Funds products in recent years, it is easy to overlook the important role for gold arising from its unique technical properties, and it is here that the rest of this article will focus. Gold, like other important industrial metals, has many unique physical and chemical attributes that mean it is the best, indeed the only, material for certain industrial applications.

Industrial demand for gold hit record levels of 458 tonnes in 2006, largely due to rises in demand for electrical products which use gold in their circuitry. In recent years over 400 tonnes of gold has been used each year in vital industrial uses.

This demand for gold is generated from a myriad of important practical uses. Car air bags, mobile telephones, laptop computers, aero engine brazing alloys, and many other things we consider indispensable to today’s society would not function without the use of gold. Almost all electronic consumer items, contain a small amount of gold, which is critical to the reliable and efficient functioning of the equipment. The chips and contacts found in a car’s ABS anti-lock braking system all contain gold, as do smoke detectors, routinely used in millions of households to protect against fire, which contain a gold alloy placed between layers of another metal.

Golden history
Up to 70 tonnes of gold are used every year in dental restorations including bridges and crowns. Gold is the oldest dental restorative material, having been used for dental repairs for more than 4,000 years and is considered by most experts to be the best available material. Gold-alloys used in dental work are proven to be durable and long-lasting. Most importantly, gold has excellent biocompatibility (it is non-toxic), so allergic reactions to a gold-based dental implant are extremely rare. There are also a number of direct applications of gold in pharmaceuticals (gold has long been used in the treatment of arthritis), medical devices and even in medical testing kits.

Many of the potential new applications for gold are based on the developing markets for nanotechnology. The word nanotechnology (a nanometre is a billionth of a metre) is something of a catch-all term for techniques that permit material of this size to be manufactured and used. A one gram piece of gold will have very different properties to one gram of gold nanoparticles, and these ‘new’ properties may mean gold nanoparticles become essential for uses within applications in the electronics, catalyst and biomedical industries.

Without the use of gold in all these products, they would be much less efficient and reliable than they are now.

Gold technology
In all industries, markets change and develop over time and we are currently seeing some important changes in the end-use industrial markets for gold. In the electronics industry, manufacturers of electronic goods and equipment are demanding smaller and cheaper microchips and circuit boards and this means the amount of gold used in each application continues to be reduced (or ‘thrifted’) with the emergence of each new generation of technology. In the dental industry demand for gold restorations has been severely hit in markets such as Germany, where Government financial support for precious metal restorations has been dramatically reduced.

At the moment, the buoyancy of the electronics industry is creating very healthy industrial demand for gold, but it is an unavoidable fact that the most important end-use markets for gold (electronics and dental) are gradually reducing their traditional reliance on the metal. For participants in the gold industry, particularly mining companies and refiners, the challenge is to uncover, develop and promote important new industrial uses for gold that will provide the foundations for industrial gold demand in the coming years. Thankfully, with the support of the industry, an exciting array of research is being undertaken around the world, looking at new uses for gold in advanced applications. Significant new industrial offtake could be generated over the coming decade as these new industrial applications grow.