Investment Research Group
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The medium-term factors that favour it are:
- The US dollar is likely to fall. One influence on the price of gold and most other resources is the US$, the official currency in which most global commerce is conducted.
If the US$ rises, it takes fewer of them to buy an ounce of gold or a bushel of wheat and the comparative price of the item falls.
The US dollar has been strong lately because it is still seen as a safe haven during times of trouble and money tends to flood in - to the extent where US treasury stock is currently trading at a zero interest rate!
Many believe the massive amount of new borrowing being indulged in by the US government will push up interest rates, slow down the economy, undermine the USA's AAA credit rating and ultimately weaken the US dollar.
- Gold demand is rising. Independent research company GFMS notes that demand for gold reached an all-time quarterly record of US$32bn in the third quarter of 2008.
Tonnage demand was 18% higher. Demand for gold through exchange traded funds (ETFs), and wholesale purchases of bars and coins amounted to US$10.7bn (382 tonnes), double that of a year earlier.
Retail investment demand rose 121% to 232 tonnes with strong bar and coin buying in Swiss, German and US markets. GFMS also reported gold shortages among bullion dealers globally as retail demand escalated.
- Central banks are buying again. Having sold gold massively over the past couple of decades, some central banks and government are now buying again. Recent news items reflect this. China's central bank is considering raising its gold reserve by 4,000 metric tons from 600 tons now to diversify risks from the country's huge foreign exchange reserves. Saudi gold purchases in two weeks totalled US$3.5b. Iran has converted financial reserves into gold to "avoid future problems".
- Gold has been sold down for short-term reasons. It appears that during the past quarter hedge funds have been forced to liquidate their investment positions in gold to raise cash, and institutional investors reduced their exposure to commodity index investments, which of course include gold. This explains why the gold price has not performed better in the face of very strong demand.
- Gold production is down. Total global gold production fell by 0.4% last year, to an 11-year low. In the past four months, several companies have announced that they are curtailing production or delaying projects, and all companies are at least reviewing their spending plans
- The macro trend is up. Resources tend to move in very extended cycles, with most in the past 300 years lasting 13 - 18 years. Prices fell for many years during the boom years of the 1980s and 1990s but began to rise following the bursting of the dot.com bubble and can be expected to rise over time.
- Inflation is likely to rise. Those who predict deflation are overlooking the capacity and evident desire by central banks to create as many dollars out of thin air as they need to in order to stimulate their economies.
Under such conditions deflation appears highly unlikely and its reverse, severe or even hyper-inflation, cannot be ruled out. Gold, of course, gains value in periods of high inflation.
