By David Lew
Bullion and precious metals lovers and investors will remember and relish 2009 for all the good and bad things that made Gold the hottest darling of investing public, traders, market manipulators and speculators across the world.

Good things that they would relish: gold prices hit a record of $1227 per ounce; gold rush is on by mining countries across the world and nations are scrambling to amass gold reserves.

Bad things that they pray that should happen in 2010: further collapse of the US dollar, wild stock market fluctuations and crashes that make gold a safe haven asset, and real estate bottoming down so that people rush to buy gold and Silver as family assets!

Having said this, one particular characteristic that stands out in 2009 as far as gold market is concerned was the rush by almost every nation and every Central Bank to build up gold reserves. Central Banks have been chalking out plans to buy gold from open market, mining firms and the International Monetary Fund (IMF) to mop up the yellow metal reserves so that their foreign exchange reserves are stacked with gold in place of the weakening US dollar and uninspiring bonds.

The United States is the undisputed leader in gold reserves in the world with 8139 tonnes of gold under its custody. China made news on gold in 2009 when it declared that the dragon country will build at least 10,000 tonnes of gold reserves in the next 10 years. China is currently the fifth biggest holder of gold reserves with 1054 tonnes.

Then, India—the largest consumer and importer of the precious yellow metal—made the biggest news on gold in November when its central bank, the Reserve Bank of India (RBI), bought 200 tonnes of gold from IMF for a high price of $1045 per ounce. This singular action from India took the gold market to an unprecedented bull run, taking the yellow metal prices to a historic high of $1227 per ounce in November. Gold prices have since then come down, but the golden ripple effect that India’s IMF gold buy still reverberates across the bullion markets in the world.

The point I am trying to argue is that nations are in a rush to buy and own more and more gold. Gold supplies from mines are declining. I read recently that the cost of producing per ounce of gold is around $600. With decreasing output and increasing demand for the precious metal, it is quite natural that gold prices are set for a big boom in the coming years. 2009 was just the beginning. And as global commodities investor Jim Rogers says gold prices may be headed for $2,000 or more per ounce in the next one decade.

As central banks scramble to stack up more gold reserves, it would be worthwhile to study how much gold is there in the global market.

Here are some interesting details on the global gold reserves, culled from galmarley.com:

How much gold is there?
In the world there are currently somewhere between 120,000 and 140,000 tonnes of gold ‘above ground’. To visualise this imagine a single solid gold cube with edges of about 19 metres (about three metres short of the length of a tennis court). That's all that has ever been produced.

Divided amongst the population of the world there are about 23 grams per person, about 1.2 cubic centimetres each. This equates to about $250 - $350 worth per person on Earth, depending on the current price.

What's it worth ?
The value of that short tennis court sized cube is about $1.8 trillion. This compares to the US government’s sovereign debt of $6.9 trillion, which until 1971 was part-backed by gold. The US Gold Reserve is just over 8,000 tonnes - which is about 6% of the total gold ever mined. It is worth about $100 billion, or 1.5% of the US national debt.

$1.8 trillion is about one fourteenth of the paper based international bond markets, which themselves, at about $26 trillion, are about two thirds composed of western government sovereign debt almost all of which has appeared, co-incidentally, since 1971 and the declared supremacy of paper money, which was what allowed governments to borrow without caution.

The total gold content of the world would pay - at current values - about 7% of the international bond market's sovereign debt. But of course 75% of the world's Gold is not available to governments - being held privately as jewellery, bullion and coin. In fact only about 30,000 tonnes, about 1% of the world's sovereign debt is what is held in central bank gold reserves.

Meanwhile the entire gold stock of the world - including the privately held bulk - is much less than one half of one percent of the underwritten risk in the global financial derivatives markets.

The world has placed absolute trust in paper currency denominated assets. Investors have shunned gold for about twenty years while the notional value of paper based financial assets has exploded.

Who owns the gold ?
About 30,000 tonnes of the world’s gold [20-25% of above ground inventory] is held in central bank vaults.
Major Central Bank Reserves (2000)
Nations & institutions Reserves (Tonnes)
USA (8139)
Germany (3469)
IMF (3217)
France (3025)
Switzerland (2590)
Italy (2452)

The totals for other central banks tail off rapidly after these main holders. Most only hold a few hundred tonnes, and together they make up a bit over 30,000 tonnes in all.

The rest is held by individuals in the form of gold jewellery [approx 70,000 - 80,000 tonnes], coin and privately held bullion [combined at 20,000 tonnes].

90% of the gold above ground has been mined since the start of the California gold rush in 1848. Modern power machinery and chemicals have steadily lowered the price at which gold can be extracted. The average production cost of the world's biggest producer - South Africa - is about $238 per troy ounce. 1997 industry estimates by the Federal Reserve Board suggested an average production cost worldwide of $300 per ounce.

Gold still underground
Where it is known about with reasonable confidence, and can be extracted economically, un-mined gold appears on the books of mining companies as ‘reserves’. There remains as reserves about 40% of the total of gold above ground - i.e about 50,000 tonnes. South Africa has 50% of the world's known stock of un-mined gold.

Inelastic supply
Gold is difficult to find in commercial quantities. It also takes time, typically 5 years, and plenty of money to bring mines into production. In this sense the supply side of the gold equation is relatively constant.

One of the features of this is that boom times encourage investment which takes a considerable time to work through to production and - eventually - to worked out mines. After a boom, when investment decisions may be made on over-inflated expectations of ultimately achievable prices, there is a tendency to subsequent overproduction and poor prices for a considerable period.

The gold price boom of 1979/80 resulted in steadily increasing production all over the world from a stable base of 1200 tonnes annually to a peak of above 2600 tonnes in 1999. All major producing countries except South Africa substantially increased production in this period.

Production then levelled out and started to dip slightly, as mines were exhausted and poorer mines shut. Also the uninspiring gold market encouraged a decrease in exploration which now means there are a lower number of new mines coming into production than is expected to be required by the market.

Inflation of the gold supply
Nonetheless for the time being gold is still being mined and refined at the rate of almost 2,600 tonnes per year. Thus the world supply of above ground gold is increasing - or inflating - at just over 2% annually. At current rates the gold supply is growing the under-sized tennis court cube at about 12 centimetres a year. It will reach a full tennis court sized cube in about 20 years time.

Let all the gold bugs relish 2009 as the golden year of the decade. Let all the anti-gold activists continue to spit fire accusing of Comex, speculators and bullion manipulators for blowing up gold prices. Let humble investors hope that gold will continue to boom and glitter in 2010, too as the yellow metal did in 2009.

Relish Your Happy Golden Year 2009!

David Lew is a Precious Metals Commentator with Commodity Online. You can contact him at info@commodityonline.com

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