Financial Crisis 2009 vs. Gold

THE FINANCIAL CRISIS now spilling into 2009 has already driven many thousands of people to buy gold.

Indeed, gold investment demand last year leapt by almost one-third from 2007 as the financial crisis worsened.

Latest data from trade-body the World Gold Council (WGC) showed such strength, in fact, that its page-and-a-half press release had to use the word "record" ten times! But does this surge of gold demand now mean gold is "over-bought" and thus over-priced in 2009 as the financial crisis unfolds?

Given that this financial crisis is apparently the very worst since the 1930s or earlier (depending on which central banker, politician or newspaper pundit is speaking), one way to measure this possibility in 2009 is to compare the outstanding value of gold against all other investment prices.

Back in 1980, for example – when the Iranian hostage crisis and the Soviet invasion of Afghanistan famously drove gold to its previous peak of $850 an ounce – "the $1.6 trillion invested in gold exceeded the market value of $1.4 trillion in US stocks," writes Peter Bernstein in his book, The Power of Gold.

US stocks are currently valued nearer $13 trillion, down by one-third from this time last year. Whereas gold is currently trading at pretty much the same price as in 1980, giving it plenty of room to rise before it challenges the NYSE, Amex and Nasdaq amid the 2009 financial crisis.

Today's financial crisis is global, of course. So global data may act as a clearer guide. And here at the start of 2009, all the gold ever mined in history – some 165,000 tonnes – is worth just less than 6% of the world's stock and bond markets combined.

Include the notional value of traded derivatives, now put above $596 trillion as 2009 begins, and the value of all gold in the world (jewelry plus bars, coins, teeth fillings, bonding wire and micro-chip coating) stands well below 0.7%.

That's even after the financial crisis starting 18 months ago knocked securities markets sharply lower, pushed gold investment higher, and set about destroying confidence in derivatized assets.

The financial crises of both 1934 and 1982, in contrast – "when investor stress reached extreme readings" as John Hathaway at Tocqueville Asset Management puts it – saw the valuation of all the gold then above-ground reach between 20% and 25% of the value of total world investment assets.

So once again, 2009 could still see gold rise very sharply before its shares of investable wealth signals a top in this financial crisis.