You Can Always Go to Gold

While the bull raged for stock and bond investors, investors allocated to gold received permanent disappointment. Gold was so out of favor and despised, that by the year 2000, the disgust with which most every professional investor viewed gold was palpable. There is a tried and true saying: Buy, only after all the willing, and unwilling sellers, have sold. This was the case with equities in 1979, with gold in 1999, and with gold stocks in 2001. You can see dramatic example of the relationship between gold and stocks in the chart further below.

Today, as the financial and developed world sit at the precipice of the Great Depression 2.0 while global deleveraging, deflation and recession cloud the headlines, gold investors are left wondering, is the gold bull market long in the tooth? I don't think so. Let's take a look at the supply and demand equation.

The fundamentals for gold are solid. Supply is decreasing as mining companies are still feeling the effects of 20 years of underinvestment that occurred from roughly 1985 until 2004.

In 2007, demand exceeded production by 1,074 metric tons. Total demand was 3,518 tons, while production was 2,444 tons. The imbalance between production supply and gold demand is filled by central bank sales.

The following table shows the top central bank gold holdings, measured in tons. The second number represents gold's share of each central banks' total foreign reserves. For a complete list of central bank gold holdings, click here.

World Official Gold Holdings (December 2007)
Ranking	Country	Tonnes	Gold's % share of reserves
1	United States	8,133.5	75.3%
2	Germany	3,417.4	62.9%
3	IMF	3,217.3	(1)
4	France	2,622.3	52.6%
5	Italy	2,451.8	64.8%
6	Switzerland	1,166.3	37.7%
7	Japan	765.2	1.8%
8	Netherlands	624.5	57.6%
9	ECB	604.7	23.4%
10	China	600.0	0.9%
11	Russia	438.2	2.2%
12	Taiwan	423.3	3.3%
13	Portugal	382.6	90.9%
14	India	357.7	3.0%
15	Venezuela	356.8	26.8%
16	United Kingdom	310.3	12.6%
17	Spain	286.8	31.8%
18	Lebanon	310.3	35.3%
19	Austria	286.8	37.9%
20	Belgium	227.6	33.4%

It's interesting to note that gold represents just 2% of Japan and Russia and less than 1% of Chinese total foreign reserve assets. It will definitely bullish for gold if the central banks of China, Russia or Japan decide to materially increase accumulated bullion reserves.