"What if every Indian and Chinese wanted to own 10-grams of gold?"

Nov 2009

I read an interesting article by Jeff Clark that said, "What if everyone wanted a one ounce gold coin?"

Hmm, that is an interesting thought.

Well, I am not so sure if the Europeans and Americans will always want their one ounce gold coin, but it set me thinking: what would happen if every Indian and Chinese - who traditionally love gold - wanted a 10 gram cold coin?

Let us do some simple math calculations to find out how much gold that would amount to:
India’s Population: 1,166,079,217
China’s Population: 1,338,612,968
Combined Population of India and China: 2,504,692,185

If each individual owns 10 grams of gold, it would be 25,046,921,850 grams of gold.

Converted to tonnes, (since 1,000,000 grams is 1 tonne) it amounts to 25,047 tonnes of gold.

So, does this mean that the amount of gold needed if every Indian and Chinese wanted to own 10 grams of gold is 25,047 tonnes of gold?

No, not really - because some Indians and some Chinese already own some gold.

India has been the largest consumer of gold since decades and China has also been buying gold more recently. It was illegal for Chinese to own gold after the Maoist revolution; so for much of the past 60 years most of the Chinese have been shut out of the gold market.

There is an estimated 19,000 tonnes of gold privately held by the citizens of India and China, combined.

Therefore, the additional demand would be 25,047 - 19,000 = 6,047 tonnes of gold.
That is not a small amount.

The annual mine supply of gold is only about 2,500 tonnes.

Therefore, by this calculation, if each individual in India and China is to own 10 grams of gold, this additional demand would take away more than 2.4 years of the entire annually mined output.

Needless to say, if the entire annual production gets absorbed only by India and China, impact on prices would be profound. The Russians like their gold, too. And many Canadians, Americans, and Europeans would also like to have some gold - just in case to hedge their portfolios from a decline in equity markets or to protect from looming inflation threat or an insurance from any uncertain event risk or disaster.

Can’t they buy above-ground gold?
But, wait a minute!
Why should the Indians and Chinese only buy newly-mined gold?

The total above-ground stock of gold is 165,200 tons.
An additional demand of 7,047 tonnes comparatively looks very small, only 4.3% of the total.

Let us analyze the 165,200 tonnes of the above ground gold:

Chart 1: Above ground gold stocks

About 51% is on peoples fingers, round their necks etc i.e. used as a piece of jewelry.

18% is held in official reserves who have lately become reluctant sellers.
While the IMF is selling, the central banks of China, India, and Russia are keen to buy.
So the intra-official reserves may not find their way to the free market.
Rather, given China’s aggression, this category is turning on the demand side of the equation on a net basis.

12% found its way to industrial and dental applications.

16% comprises the privately held stock for investment purposes.

If you carefully look at each of the categories, you will find that very little of the above 165,200 tonnes would actually come to the market in a hurry.
It may - but at a price.
And that price may have to be a lot more than the current USD 1,050 per ounce of gold.
Or the world needs to look a lot saner so that people stop looking for shelter in gold!

The fact is that we are in a situation where more and more people are willingly buying gold for various known reasons.
There are actually very few willing sellers available today.
This leaves us to rely mainly on the fresh production coming out of mines to satisfy the demand of the Chinese and Indians who do not yet own their 10 grams of gold.
And may not even have the money to buy it, as yet.

So many buyers, Are we in a gold bubble?
No...

As seen in the Chart 2 below, gold investment stock comprises only 0.58% of total assets. In most of the portfolio’s it’s yet to reach the optimum level of 10-15% allocation.

Chart 2: Gold remains under-owned

Gold is still too far from reaching that frenzy stage when people are falling over each other to buy gold.

How can an asset that is so under-owned be in a bubble?
I agree with Jeff that many investors will be late in realizing the adverse consequences of money printing and dollar debasement and also in reacting towards sharp increase in price levels.

When they realize this, gold prices would have already increased significantly. Their panic buying - at that later stage - would cause gold prices to rise further as available supplies would be scarce and these investors would be rushing in to buy gold at any cost.

So buy gold now before the millions of Indians and Chinese have enough money to buy their 10 gram gold or just as a defensive, play-it-safe measure.

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Disclaimer:

The views expressed in this article are the personal views of the Fund Manager of Quantum Gold Fund. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purpose only and is not meant to serve as a professional guide/investment advice for the readers. This article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments.

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