According to data from the World Gold Council (WGC), global demand for gold in 2011 was 4,067 tonnes, worth $205bn. By comparison, in 2000, world demand was 3,281 tonnes, valued at $29bn at the then prevailing average price of $279/oz. Investor demand for gold has grown 24 per cent in volume terms since 2000 and in value terms, demand for gold has grown sevenfold.
Where the demand originated has also changed dramatically over the last eleven years. Last year’s WGC stats saw jewellery accounting for 48 per cent or 1,963 tonnes of total demand a dramatic decrease since 2000 (88 per cent). In 2011 investors bought 1,641 tonnes, 40 per cent of the total, compared with only 379 tonnes (11.5 per cent) in 2000.
It is interesting to note that mine supply has increased only a modest 9 per cent during the period, 2,573 tonnes in 2000, growing to 2,809 tonnes by 2011. The difference between mine supply and total demand is typically met by recycling and adjusting stocks. Investment demand grew over four times in volume terms during these eleven years of rising gold prices but, in value terms, investors bought $98bn worth of gold in 2011, about 30 times greater than the $3.3bn they invested in 2000. These statistics make clear that investment demand has been driving the gold price higher for eleven years and is likely to continue to do so until the world’s problems are resolved.
According to our research, the price to book multiple of the gold mining sector now stands at 1.5 times; it has not been this cheap since 2009, right after the global financial crisis. In 2006 this ratio had reached 4.5 times.
With this in mind and the increase in the gold price trend likely to continue, it is surprising that investors still remain averse to owning gold mining companies.
In our view, mining shares have not kept up with gold bullion due to investors’ concerns about rising costs, stagnant gold production and lack of capital discipline. Nevertheless, at today’s gold price some producing companies trade at 3-4 times annual cash flow. If a careful investor screens the mining sector, there are some exceptional opportunities to acquire growing operations with exploration and development prospects at historically low prices.
Angelos Damaskos is chief executive of Sector Investment Managers and fund adviser of the Junior Gold fund