Central Bankers Rub Gold Bugs the Right Way

February 17, 2012 at 13:57

truthing

Fondlers, as Warren Buffett might call them, now wander the corridors of the world’s central banks. Show them some love, gold bugs.

The identity of who buys gold has changed radically, as the latest report from the World Gold Council confirms. Just five years ago, jewelry accounted for two-thirds of gold demand. Last year, it represented less than half. Yet gold demand increased 13 percent overall in that time, and the price more than doubled.

Beyond dental crowns and those fancy cables that electronics retailers are always pushing on you, gold’s utility is limited largely, paraphrasing the Oracle of Omaha, to fondling. As an investment, it yields nothing.

But if bridegrooms and rappers aren’t buying, then who is? Fearful investors are one critical group. Between 2009 and 2011 demand for physical gold and exchange-traded funds jumped by 9.4 million troy ounces, more than offsetting the 6.6-million-ounce drop in jewelry consumption.

Most of that surge in investment demand happened in 2009, however. Flows into ETFs, in metal terms, slumped in 2011.

Increasingly, central banks, especially in emerging markets, have been the marginal buyers of gold. In 2011, an incremental 6.2 million ounces of supply came from miners and recycling. Demand for jewelry and industrial and dental applications, however, dropped by 1.8 million ounces.

Investors bought just 2.4 million ounces extra — enough to offset the drop in demand elsewhere, but nowhere near enough to absorb growing supply. Enter the central bankers, who purchased an extra 11.7 million ounces. Having bolstered gold by debasing the paper money they print, they now help by buying the metal itself.

For gold bugs used to vilifying central bankers, it must be discomfiting to rely on them for support. And given how central-bank buying masks the impact of weak jewelry demand, slowing increases in investment flows, and higher supply, it probably should.