Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Gold 2011: "Old Normal" Returns

Commodities / Gold and Silver 2011 Dec 30, 2010 - 06:23 AM GMT

By: Adrian_Ash

Commodities

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.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in