Gold 2011: 'Old Normal' Returns
This year marked a step-change in the nature of gold investment demand...
MOST PEOPLE rightly think of gold bullion as an inflation hedge. But it's only now, ten years into this bull market, that this "old normal" so clearly applies.
After the interlude of the banking crisis - when debt-free gold, as an alternative to unsecured savings accounts, offered an immediate haven - gold has reverted to its more historic role: a refuge from excessive government debts, and from the inflation and currency crises they threaten to spawn.
That's why 2010 marked a step-change for this bull market in gold- a switch to steadier growth in investment demand, rather than short-term crisis buying, fed by a broadening awareness of just how deep and long-lived fiscal deficits have become.
This blunt fact looks set to continue driving new gold investment demand in 2011. Short of an utter reversal in US fiscal policy or such unlikely (and ironic) events as a new "economic miracle" in over-spent states like Ireland, the global impact on gold prices will play out in four ways...
#1. Risk Free' Means 'Guaranteed Loss'
When the return on savings is less than the rate of inflation it doesn't matter
that gold doesn't provide you with an income. Tightly supplied and indestructible,
it offers a natural and obvious alternative to cash. Inflation expectations
in Anglo-America are rising as 2011 begins, but the Bank of England and US
central bank look highly unlikely to raise rates this year, and not even
the 'hawks' (Thomas Hoenig at the Federal Reserve, Andrew Sentance in London)
are talking about raising rates anywhere near high enough to pay savers a
decent real return on their cash.
#2. Political Risk Hits the Euro
In Europe, it's the Eurozone debt crisis driving strong growth in gold demand.
The fear, especially in Germany, is that 2011 will see either inflation,
debt default, the end of the Euro, or all three at once. This is also a growing
worry for central-bank reserve managers, who tried to diversify away from
the US Dollar over the last 10 years, only to find political risk added to
the money-supply inflation they were suffering in the US currency.
#3. The World's Fastest-Growing Gold Buyers
After the 60% increase in gold reserves reported in early 2009, many analysts
wonder when the People's Bank of China will next announce a further sharp
increase. But the real gold story from China - the world's fastest-growing
economy - remains private household demand. Chinese consumers bought more
gold in the last two-and-a-half years than Beijing's central bank owns altogether.
With cash deposit rates in China now barely half the official rate of consumer-price inflation (2.25% vs. 5.5%), demand for inflation-proof gold has risen by 14% year-on-year by volume since 2005, averaging 38% annual growth by value. Beijing is loathe to raise interest rates, fearing a flood of 'hot money' from Western markets desperate for a real return. The net result, with Chinese price-inflation already at 28-month highs, is continued erosion of cash values to domestic savers.
#4. Supply - the Easy Gold's Gone
It took gold mining output
eight years to respond to rising prices, finally expanding by 6.4% in 2009
after a tripling of Dollar prices. Despite huge growth in exploration spending,
it still lagged the peaks of 1998-2003, and major new discoveries remain absent.
Scrap supplies from existing gold owners picked up the slack during the financial
crisis, but just as Indian households (still the world's top buyers) have steadily
adapted to rising prices to maintain their demand, so scrap sellers are starting
to demand fresh record high prices. More urgently, the 'easy gold' from new
gold-selling households in the West has already been tapped. So where former
world No.1 mining nation South Africa is now digging 4 kilometres below ground
to extract ore, more closely-held bracelets and earrings will demand much higher
prices before returning to market.
Looking ahead, the only serious challenge to continued growth in global gold demand remains sharply higher real rates of interest. But with Western governments desperate to keep rates low so they can finance their record peace-time deficits - and with emerging economies led by China desperate to avoid 'hot money' inflows as a result - a grinding loss of purchasing power for cash savers looks assured in 2011. Gold (and also silver) will remain the obvious alternative. And with fiscal and monetary failure only becoming more obvious to a broadening section of the public, gold looks set to become increasingly popular too.
Tweet
Circle Us