Gold went through USD1,300 in September as poor US economic
data led to a mini panic and people fleeing to safer havens as the fear of
deflation reared its ugly head again as it looks as though the Fed will revert
to that wonderful phrase of Quantitative Easing, a.k.a. printing money like it
has gone out of fashion.
The yellow metal was also helped by the fact that the
consumer is not a happy chappie at the moment and is the unhappiest he/she has
been for over a year. This is good for gold as unhappy people look for what they
deem to be a safe haven.
In its latest report, HSBC states that, “Currency
intervention … by the Bank of Japan, political pressure on China from US to
allow more exchange-rate flexibility, declines in consumer sentiment, and data
showing significant wealth destruction make a powerful cocktail of reasons for
gold to go higher. Prices may correct, we believe, if the 21 September Fed
meeting does not usher in QE, but we see no reversal of the long running gold
rally.”
There are other reasons to look to gold. As I inferred in the
first paragraph, the West has taken on huge amounts of debt to try and keep
their economies afloat. This problem has not gone away, as can be seen by what
has happened in America. It has spent trillions of dollars in trying to
stimulate the economy and the job market is getting no better.
We should also take into account central banks. They are not
selling at the moment but buying it in ever increasing amounts. India bought 200
metric tons from the International Monetary Fund at the end of last year which
is only a start apparently.
Ten years ago, China had less than 400 metric tons of gold.
It now has over 1,000. This is a percentage increase of over 160% in ten years.
It is head and shoulders above most countries when it comes to importing gold.
Last year China was said to have gold reserves of nearly 34 million troy ounces.
This may seem a lot but the Chinese are still at a very small 1.7% of the entire
foreign exchange reserves. To put this into perspective, if China wants a gold
reserve of say ten percent then it would have to buy well over 6,000 tons of
gold or almost two and a half times the total worldwide annual productions of
the precious metal. It has to import because if it just relied on its domestic
mining facilities then it would take two decades to achieve.
On top of this, the Chinese government has actively
encouraged people to invest in gold directly. Over the last year, the demand for
gold was over 530 tons. This is not just due to demand by jewelers but, more
importantly, investment. Compare this with what happened just a couple of years
ago when only 17 tons were purchased.
Also, in August, China brought in major reforms for the gold
market. Foreign coins can now offer their gold coins at the Shanghai Exchange
and more banks are being allowed to bring in gold from overseas whilst, at the
same time, more domestic gold based investment products are being brought into
the marketplace. Because of all this the demands of Chinese investors will be
felt all over the world.
But it is not just the Chinese and Indians who are buying
gold. The global foreign exchange reserves have increased greatly over the last
few years and, as of a few months ago, were at over USD8 trillion whilst the
gold reserve ratio has gone down significantly over the last thirty years. As
Dr. Martin Murenbeeld, chief economist for Dundee Wealth Economics has pointed
out, “Investment demand in the second quarter of 2010 more than doubled compared
to the same period in 2009, and accounted for more than half of total global
demand. Investors bought the most gold since the first quarter of 2009, at the
depths of the Great Recession.”
The gold bull market has been a slow and steady one and,
therefore, there is no sign of a bubble. Apart from a couple of instances there
have been no massive price spikes that are typical with ‘bubble’ scenarios.
Also, there is a big factor which has not been relevant before and that is we
are now seeing a lot more people in the developing markets being able to
actually afford gold as a middle and affluent class is growing all the time. In
the past, people in these countries have usually reverted to gold to store their
wealth.
As regular readers of this column know, I am a great believer
in history and economic cycles. If we go back over the last couple of hundred
years then the shortest gold cycle has been ten years. This present gold bull
market started in 2001.
Another reason for gold increasing in value is that the
world’s mine production is around 2,500 metric tons. This is about twenty five
percent more than it was twenty years ago but the net mine supply is less than
it was in 1990. Poor Research and Development over the last couple of decades
means that supply will continue to be hampered. This is also due to the fact
there has been an increase in scrap supply and lower quality discoveries along
with higher replacement costs. Over the last twelve months the demand for gold
has gone up 36% but supply has increased by only seventeen percent.
The world’s economic and political situation is not helping
either. Gold usually performs well in times of trouble and we certainly have
this now with the euro teetering on the brink of disaster, the US dollar not far
behind. Without doubt it has benefitted from the woes of other countries over
the last few years but it has to be remembered that over USD10 trillion is
expected to be added to the American debt burden over the next ten years and the
country’s trade imbalances are massive. These problems do not do the US dollar
any favours and support the safe haven status of gold over the long term.
Finally, do not forget the continued wars in Iraq and
Afghanistan. On top of this you have the possibility of Iran and North Korea
developing their own nuclear weapons.
Gold loves these conditions and people love gold. Make sure
you do too.
The above data and research was compiled from sources
believed to be reliable. However, neither MBMG International Ltd nor its
officers can accept any liability for any errors or omissions in the above
article nor bear any responsibility for any losses achieved as a result of any
actions taken or not taken as a consequence of reading the above article. For
more information please contact Graham Macdonald on [email protected]
|