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ยป Gold bubble fears unwarranted
Date published: 28/09/2011
Gold bubble fears unwarranted
THE scary aspect from my perspective is that the resolution of the debt ceiling issue will not address the critical underlying issue of the US economy.
Wild spending by government will likely continue, with the maintenance of ultra-low interest rates. The message to US citizens is to borrow cheaply and to spend, spend, spend.
It’s the same approach that created the mess in the first place. Dating back to President Bush Sr, the US has systematically trashed its fiscal position, with an ever escalating level of debt. Both sides of politics have been party to the act. The rise of gold since 2000 has coincided with investor acknowledgement of the scale of debasement of the US dollar.
Despite gold's recent run up to new historic highs, I firmly believe the gold market has a long way to go – both in terms of price appreciation and also timing. Prices of $US2000 per ounce over the next 12-24 months are certainly within reach, but this is likely to be just part of the journey as the price continues to strengthen over the coming years.
Despite many commentators opining that the strength in the gold market has taken it to “bubble” proportions, I strongly disagree. Bubbles are typically characterised by exponential price growth, endure for a relatively short space of time and are also commonly associated with high levels of leverage. In the case of the gold bull run, there’s been none of these characteristics.
First of all, the chart above shows that there has been a steady increase in the price of gold since 2000, rather than a parabolic rise. You could draw a beautifully steady line under the gold price appreciation above.
Secondly, the increase has taken place over an 11-year period; hardly a bubble-like overnight phenomenon. Thirdly, the increase in gold demand has been built on very sound foundations, ie mum and dad investors voting with their feet and acquiring physical metal and the like.
Right now, there is no evidence of a buying frenzy to suggest we are anywhere near a long-term top, but there are various sound fundamentals that suggest the market is extremely healthy, with plenty of room to move higher. Moreover, the world economic and geopolitical environment remains very supportive – and seems likely to remain pro-gold for years to come.
What we can expect is further market and price volatility, which all adds up to the perfect environment for gold. We will see further sharp price corrections, but these will merely prove additional buy-in opportunities. That’s what we’ve seen for the past 11 years, with many sceptics routinely and consistently calling an end to gold’s run, based on short-term price corrections.
The rise in the price of gold since 2000 has coincided with the gradual decline of the US dollar. The key point is that the economic malaise that has enveloped the US economy is not a new phenomenon. It dates back to the 1990s, when US growth was bankrolled by easy credit and a lending-fuelled housing boom.
The reality today is that the US has not taken its economic medicine. Perversely, the remedy promoted by the Fed is more of the same stuff that drove the US economy into the mire in the first place, culminating with the GFC. Unlike politicians in Europe, the US has so far steadfastly opposed any measures that might be considered even mildly unpopular; to help cut the gap between spending and revenue.
Unsurprisingly, investors have cried “enough” as they stampede away from the world’s major currencies, driving gold prices to record levels, especially in US dollar terms. The world’s most indebted nations have debased their currencies to such a degree that permanent damage is being done to their collective international reputation.
Certainly Asian investors are well and truly cognisant of the risks and are preparing accordingly. Gold fever has gripped Asian investors and in all likelihood will spread to central banks.
Asian giants India and China, the world's two biggest consumers of gold, expect to see demand continue to climb for the rest of the year, as growing wealth and stubbornly high inflation make bullion an attractive asset. India and China together made up 57% of first-quarter global consumer demand for gold, according to the World Gold Council.
According to Antaike, a state-backed metals consultancy based in Beijing, China's gold demand is expected to rise by around 20% to nearly 700 tonnes this year, from 570 tonnes in 2010. In India, the wedding season in mid-August is expected to drive up sales of gold, a fixture in dowry and gifts.
During 2010 central banks became net buyers of gold for the first time in 21 years, as developed nations of Western Europe and North America reduced selling in the wake of the global financial crisis while emerging economies tried to diversify their holdings of foreign currencies, especially the US dollar.
China has the world's biggest foreign reserves, standing at $3.2 trillion at the end of June. Gold holdings of 1054.1 tonnes make up just 1.6% of its reserves, though China ranks sixth among the world's top official holders of gold.
The People's Bank of China plans to sell 500,000 1-ounce gold coins, or 66% more than its earlier target of 300,000. It also tripled sales targets for half-ounce, quarter-ounce, 1/10-ounce and 1/20-ounce gold coins to 600,000 each from 200,000 earlier. The increase in sales of these coins alone will represent a rise of 560,000 ounces in gold demand, or 17 tonnes.
This is why I remain convinced of the strong upside with respect to the gold price and I have confidence that the price can comfortably reach the $US2000 per ounce mark over the next 12-24 months.
For more information, or to discuss your specific situation, please contact me directly.
Gavin Wendt
Founding Director & Senior Resource Analyst
MineLife Pty Ltd
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