There are many reasons people buy gold. Some invest in the precious metal to protect against inflation, even though one of the common myths about investing in gold is that it can outpace inflation. Others buy it because of a cultural tradition or because they think gold is a safe investment. Meanwhile, some buy it on the speculation that its price will continue to rise. No matter the reason, the core thought driving this buying is that gold is valuable and will become even more so in the future due to the many factors that influence the price of gold.
We'll explore the many motivations behind investing in gold by looking at some of the worlds biggest gold investors.
How much gold is in the world?
According to an estimate by the Word Gold Congress, humans have pulled 187,200 tons of gold from the earth. To put that into perspective, if we melted the gold down and formed it into a cube, it would fit comfortably in the middle of a baseball diamond, which is 90 feet from base to base on each side. While relatively small in size, that cube would be worth a whopping $8 trillion at gold's recent price of around $1,340 an ounce.
To further illustrate how rare and valuable gold is, the U.S. Geological Survey estimates that there are about 57,000 tons still in the ground to mine. Dig it up and melt it together, and the cube of additionally available gold would only stand as tall as an adult giraffe.
Each year the mining industry digs out a little less than 3,500 tons of gold, or roughly 112 million ounces, with the largest supply coming from Barrick Gold at 5.53 million ounces. Meanwhile, another 1,300 tons get recycled each year. That puts the gold market at roughly $170 billion per year, which, for perspective, pales in comparison to the more than $1.7 trillion oil market.
While there is some minor industrial demand for this gold, the bulk of it goes toward jewelry and investment in the form of coins and bars, with the latter often held by gold ETFs as well as the official sector like governments.
The biggest gold investor in the world
The largest single owner of gold on the planet is the U.S. government. At last count, Uncle Sam had 8,133.5 tons of gold (260 million ounces) stashed in vaults around the country like Fort Knox, which holds 147.3 million ounces. With gold currently around $1,340 an ounce, the country's holdings are worth $350 billion. While that sounds like a lot of money, it would barely put a dent in the $21 trillion national debt, let alone help with the $3.8 trillion annual budget. In fact, liquidating the country's gold stash would barely pay more than a year's worth of interest on the national debt, which was about $230 billion in 2015.
Overall, the U.S. holds about 5% of the world's gold. That stockpile is more than those of the next three largest gold-holding countries (Germany, Italy, and France) combined.
A top gold investor worth noting
While the U.S. has the biggest government-controlled gold stash, the largest nongovernment holder of gold is the International Monetary Fund (IMF), which is a group of 189 countries that work together to foster monetary cooperation. The IMF currently holds 2,184 ounces of gold, which puts it between Germany and Italy on the world scale. The IMF has acquired its gold stockpile in several ways. Upon its founding in 1944, the IMF received 25% of its initial quota substitutions in the form of gold and required members to pay a quarter of all subsequent quota increases in gold. In addition to that, member countries can pay interest charges and credit owed to the IMF in gold as well as sell their gold to the organization to acquire the currency of another member.
The golden culture
While central banks and other government-related agencies are the largest investors in gold, the majority of the of the precious metal gets transformed into jewelry each year. That industry uses an average of more than 2,000 tons of gold each year, or about $85 billion worth. While Americans have an affinity for gold, their demand pales in comparison to the gold-buying habits of the nation of India. According to several estimates, Indian people collectively hold the greatest amount of gold in the world, calculated at 26,500 tons, or about 850 million ounces, worth roughly $1.1 trillion.
Two factors may drive all that gold buying: Diwali and weddings. Diwali is the most important of the Hindu holidays. (According to the most recent census, almost 80% of the Indian population are Hindus.) The five-day Diwali festival often features buying gold, which many Indians see as a status symbol for wealth. Because Indians highly value gold, it is also often a key feature in weddings. Because of these two factors, Indians typically invest more than 8% of their annual income to buy gold each year.
Going for the gold
While Indians collectively own the most gold in the world, Germans investors have emerged as the biggest buyers of gold in recent years. Gold demand in the country surged from an average of around 17 tons per year from 1995 to 2007 to more than 100 tons in 2016. Germans started ramping up their gold buying in the aftermath of the financial crisis but have stepped up their gold-buying habits since then due to concerns over the devaluation of the Euro. Because of that, more German retail investors own gold (22%) than bonds (13% corporate and 5% government).
The gold standard in gold investments
While Indians tend to buy gold in the form of jewelry and Germans in the way of coins and bars, a growing number of other investors have chosen to invest the precious metal via an ETF, the largest of which is the SPDR Gold Trust (NYSEMKT:GLD).
This ETF provides a cost-effective, liquid, transparent, secure, and flexible way for investors to hold gold as opposed to buying, storing, and insuring the physical metal. That's why big-name investors like George Soros and John Paulson have used this vehicle in the past to make bullish gold bets. Paulson's hedge fund once owned more than $1.5 billion of gold via this ETF and mining stocks.
One thing investors should know about the SPDR Gold Trust is that it does own physical gold bullion, stored primarily in the London vault of HSBC Bank. As of April 18, 2018, it held 69,300 total gold bars weighing roughly 27.8 million ounces (953 tons), worth about $37 billion.
The SPDR Gold Trust is one of several ETFs that hold physical gold in vaults for investors to provide them with an easy, low-cost way to invest in the precious metal. The next largest is iShares Gold Trust (NYSEMKT:IAU) which held roughly $11.6 billion in gold, spread in vaults around the world. What's different about this ETF other than size and the location of its gold are the fees it charges investors, which are 0.25% per year versus 0.40% for the SPDR Gold Trust. Because of those lower fees, the iShares Gold Trust ETF's price has more closely mirrored that of gold over the years:
So, while it might not be the biggest investor in the gold market, it appears to be the better option for longer-term investors to consider.
What do most of the world's biggest gold investors have in common?
We can broadly group gold investors into two camps: Those holding it to store value and those speculating on its price movement. Gold buyers in India and counties with immense gold reserves fall into the first group. They hold gold because it holds value. Indians invest a significant portion of their income into buying it each year to boost their wealth. Most counties, as well as German investors, hold gold as a security blanket to help protect against currency and stock market fluctuations.
The other group of gold buyers wants to profit off the movement in its price. This type includes hedge funds like Paulson's that typically buy ETFs like the SPDR Gold Trust since they can quickly get in and out of that vehicle. That ease of use is why at one point it was the most valuable ETF in the world because speculators poured into the fund as the price of gold rose in hopes of profiting from that momentum. Now, it's not even in the top 10 because gold's shine has diminished as its price has come off the peak.
Should you invest in gold?
The decision to buy gold is often a deeply personal one. Many do so because of the belief that it will hold its value better than a government-backed currency in the coming years due to inflationary fears or other concerns. Others will invest in gold because they believe that it's a sign of wealth. Then there are those who want to speculate that the price of the precious metal will move higher due to any number of catalysts.
Because people invest in gold for different reasons, it's important first to know why you want to buy it. If buying gold will help you sleep more soundly at night or fulfill a deep cultural or personal desire, then, by all means, feel free to buy it. Meanwhile, if you see catalysts on the horizon that should send its price higher, then a gold ETF is worth considering. However, if you're looking for an investment that will grow your wealth over the long term, gold probably isn't the best option.