ARAM SHISHMANIAN

"Gold is entering a new era of relevance. In almost every area the fundamentals driving increased demand are strong."

Aram Shishmanian
Chief Executive Officer, World Gold Council

The last ten years has seen gold attain new prominence. Whilst for some this prominence is best illustrated by the significant rise in the gold price over this period, its growing importance is in fact a reflection of the role gold is playing, and will continue to play, in a series of global trends that will shape the world for many decades to come. 

The last decade was characterised by demographic shifts, the unstoppable rise of emerging economies, geopolitical uncertainty and economic crisis, technological advancements in healthcare provision and energy efficiency. If the last ten years saw gold attain new prominence, the next ten years will see gold taking on increasing relevance.  As the impact of these megatrends becomes more pronounced, gold will play a continuing role in influencing their direction and offering a solution.

Demand for gold comes from four distinct actors; central banks, which utilise gold as part of reserve asset management strategies, individuals purchasing gold as jewellery, companies using gold in technology and as a wealth preservation asset. In each of these areas gold is able to provide solutions to the challenges the world is going to face in the future.

From an investment perspective gold has many attributes - as a hedge against inflation or movements in the dollar for example - but its core benefit lies in its long term wealth preservation qualities.  Significant demographic change combined with improvements in standards of healthcare mean that longer living will require individuals and governments to take more responsibility for pensions in old age.  Periods of wealth destruction such as those we have seen in the past decade will become less tolerable and less affordable.  Gold will become fundamental to preserving wealth by offering investors the security and confidence to invest in riskier assets that can deliver the returns required for a more comfortable and financially secure later life.

The same is true for central banks. National economic and financial security has always been characterised by an inherent and necessarily risk-averse approach by central banks. Central banks are the largest single holders of gold and yet only towards the end of the last decade did they once again become net buyers.  This is a fundamental change in policy driven by a lasting trend toward increasing caution and a focus on macro-economic stability that we can expect to continue.

Notwithstanding the recent purchases, the central banks of emerging countries remain underweight in their holdings of gold. These central banks are likely to continue to increase their gold as a means of preserving national wealth and promoting greater financial market stability.  Central banks remain committed to the importance of gold and its relevance in maintaining stability and confidence - just as they have been for hundreds of years.

Additionally, gold is becoming part of the fabric of financial products and instruments and this trend will continue. For example, there is growing market demand for gold to be used as a high quality liquid asset and as collateral. In late 2010, ICE Clear Europe, a leading European derivatives clearing house, became the first clearing house in Europe to accept gold as collateral. In February 2011, JP Morgan became the first bank to accept gold bullion as collateral and exchanges across the world, such as Chicago Mercantile Exchange, are now accepting gold as collateral for certain trades. 

Further, gold based savings products are increasingly being sought by individual investors. ICBC established a gold based savings account for its retail customers last year and within three months over one million customers had subscribed to the product. In addition, the explosive growth of gold traded alongside other financial assets on stock exchanges around the world in the form of ETFs has established gold as a distinct asset class.

Gold's technological qualities have been known for millennia. Gold was used in dentistry in the 7^th century BC and today its applications are already all around us.  Highly conductive and corrosion resistant, the metal is an essential component in everyday electronic devices. In many ways, gold is the 'hidden element', quietly playing a crucial role in the functioning of things we take for granted as vital tools in everyday life. But the really exciting opportunity lies ahead of us - particularly in the fields of medical applications, environmental control and renewable energy. From cancer detection to cleaner water and improved automobile emission control, gold is set to play a key role in a safer, healthier, more environmentally-friendly future. 

Central to gold's ability to fulfil other roles, and what sets it apart from any other precious metal, is individual demand for gold as jewellery. Some expect demand for gold jewellery to decline as the price of gold increases but this would be to ignore the enormous wealth creation taking place in gold's cultural heartlands.  Over 15% of the entire world's gold jewellery is given to celebrate Indian marriages alone, and in China this year 6.6 million brides will receive gold at the centre of their rituals. These are two of the fastest growing economies in the world, with rapidly increasing middle classes who have an affinity to gold that should not be underestimated, as together with other rapidly growing emerging countries, they will be driving the gold market.

Further, the rise in price has, in many areas, strengthened this natural affinity to gold, due to the blurred lines in these countries between wealth and adornment and the price elasticity of demand is low. Gold jewellery has always been beautiful but, with the rising price, it has taken on a new level of 'preciousness' and its symbolic qualities of success, power, and love are stronger than ever.   

For these reasons I believe gold is entering a new era of relevance. In almost every area the fundamentals driving increased demand are strong. These fundamentals are driven not only by gold's well documented historical role, but also for its emerging importance to many of the major themes that will dictate the course of the world in future decades. Gold is well placed to help shape and support all of our futures.