Gold may gain as physical purchases increase and as investors buy the metal as a means of protecting wealth, a survey found.
Source:Gold Set to Advance on Sustained Physical, Investment Demand, Survey Shows
Silver Investment points to the early stages of re-monetization for this truly "monetary metal"…
WE RECENTLY SHOWED how silver had been systematically de-monetized by governments worldwide over the past 150 years or so, writes Greg Canavan of Sound Money, Sound Investments.
(You can read Part I of Greg’s in-depth analysis here…)
These actions have seen the Gold/Silver Ratio move from its long term historical average of around 15:1 to 66:1 today. In other words, one ounce of gold is now equivalent to 66 ounces of silver.
So here, we’ll show you why silver could potentially be one of the cheapest assets in the world right now. The silver market is not at all analyzed by mainstream investors. For this reason, Silver Investment remains very much overlooked as an opportunity.
As proponents of sound money, we believe precious metals, most notably Gold Bullion, will have an increasing role to play as the current unsustainable system evolves to a more stable footing. But if gold’s role as money becomes increasingly recognized, then Silver Investment will also come into the picture. Because as economist Milton Friedman noted, "The major monetary metal in history is silver, not gold." This fact hasn’t been forgotten.
Investment demand for silver is beginning to grow very strongly and conditions are primed for this growth to continue. If this occurs, silver will effectively be ‘re-monetized’. As such we expect to see the gold/silver ratio to move heavily back in silver’s favor in the years ahead. To understand why this may be the case you first need to consider the fundamentals of the silver market. That is, the supply and demand factors.
Let’s look at supply first…
In 2009, 80%, of the world’s supply of silver, or 709.6 million ounces, came from mine production. Peru was the largest producer of silver with 123.9m ounces, followed by Mexico (104.7m) China (89.1m) and Australia (52.6m). (Nearly all of Australia’s silver production comes from BHP’s Cannington Mine in North West Queensland. Cannington is one of the world’s largest silver/lead mines. Pure silver mines are rare in Australia – most of the output is as a by-product of gold or base metal production.)
Supplies of scrap silver accounted for 19% of global supply in 2009, or 165.7 million ounces, while government sales represented just 1%. Notably, supplies from both of these sources fell heavily in 2009 compared to 2008.
Silver demand is a more interesting and complex story. The chart below, taken from the Silver Institute, shows the various sources of demand for silver.
By far the largest source of demand is ‘Industrial Applications’. A funny thing happened to silver soon after its demonetization process got underway; new technologies resulted in a massive increase in its usefulness for industry.
As a conductor of heat and electricity, silver’s qualities are unrivalled. Because it doesn’t corrode or overheat (and therefore cause fires) it is used for switches, contacts and fuses in nearly all electrical appliances, from households to industry. In addition, silver is used in computers, mobile phones and cars.
Silver also has anti-bacterial qualities. Thousands of years ago, water and wine were transported in silver vessels to ward off contamination. Now, the medical industry uses silver in a range of applications to speed healing and avoid infections.
Silver has many other industrial uses, including advanced technology, however we think you get the gist. Silver plays a critically important role in the modern economy.
As you can see from the chart, industrial applications account for a large portion of silver demand. In 2009, it represented 48% of total demand, or 352.2 million ounces. This represented a sharp fall from 2008 as the global recession took its toll. But as you can see, this didn’t really impact overall demand. We’ll look at the reason for that in a moment.
Other major areas of demand include jewelry, which is fairly constant (22% of 2009 total demand) and photography (11%). Silver nitrate was first used in the photographic industry in the 1800s and it became a major user of the metal throughout the 1900s. However, with the advent of digital photography demand from this field has waned over the past decade.
Silverware demand (as in, plates, cutlery etc) has been fairly steady over the past few years while demand for coins (representing 11% of 2009 total demand) has increased strongly. In 2006 coin demand soaked up 39.8m ounces of supply. In 2009 coins accounted for 78.7m ounces – a near doubling in 3 years.
Which brings us to one of the increasingly important aspects silver demand – Silver Investment demand. (Note that investment demand and coin demand are counted separately). Here’s where things get interesting. The Silver Institute tracks global silver supply and demand and you can find this data (going back to 2000) on their website. GFMS compiles the data. And as you have seen, mine production and scrap sales dominate the supply side, while ‘fabrication’ (which includes the uses discussed above) dominates the demand side of the equation.
But these two sources do not equal out. GFMS have therefore created a category, ‘implied’ investment, to balance out global supply and demand. From 2008 to 2009 this implied investment demand increased by a whopping 184%, from 48.2m ounces to 136.9m ounces. The creation of silver ETFs in 2006 is considered the primary reason behind the increase in Silver Investment demand.
But even a cursory glance at the numbers compiled by GFMS leads you to think that these numbers may be understated, perhaps significantly.
Why?
Well, the GMFS 2010 World Silver Survey shows that the total holdings of the world’s three largest silver ETFs were 385.8m ounces in April 2010. The first ETF, the US based ishares Silver Trust, trading under the symbol of SLV, started in 2006 while the other two kicked off about a year later.
So we can safely say these ETFs have created new silver demand of nearly 400m ounces since 2006. But if we look at the implied investment figures from 2006 (inclusive) investment demand totals only 271.1m ounces. That leaves a 100m plus ounce discrepancy and we haven’t even factored in sources of Silver Investment demand outside of the three big ETFs.
Now you might not think that this discrepancy is a big deal until you consider another piece of information. Do you remember how Bear Stearns collapsed in 2008 and the Federal Reserve helped finance its takeover by J.P.Morgan?
It turns out that Bear Stearns held a massive short position in silver futures at the time. Being ’short’ a commodity or stock means you are betting on a fall in price. When prices rise, you lose. When they fall, you win. Now, the Silver Price was rising strongly at the same time as Bear Stearns was going down the gurgler (Feb/March 2008). Perhaps Bear was covering its shorts in an effort to stem losses? (Short covering can produce very strong price increases). But J.P.Morgan soon took over Bear Stearns and assumed Bear’s short silver position. This did not become apparent until months later when newly released data showed that J.P.Morgan held the largest silver short position in the market.
At the time, prominent silver market analyst Ted Butler pointed out that one or two US banks (J.P.Morgan being one) were short a massive 169m ounces of silver. This constituted an unprecedented concentrated short position. It will come as no surprise then to see that the Silver Price collapsed as soon as J.P.Morgan took over the short position.
Is it possible that some investment banks are making up the difference between actual Silver Investment demand and available supply by taking short positions on the futures market? We think it is, especially if the silver ETFs don’t actually have all the physical metal they say they do and are instead gaining exposure via the futures market.
The physical and futures precious metals markets (gold and silver) are a byzantine world and one we don’t pretend to understand in full. But examining simple supply and demand data, it is hard to ignore that the recent increase in physical demand for silver, if sustained, could be very bullish for the price over the next few years.
Along with the big jump in demand for silver coins, the increase in investment demand suggests that silver is in the formative stages of being re-monetized. A global population suspicious of what governments will do to the value of their money in coming years is the driving force behind this remonetization.
As we pointed out last week, silver’s role as money declined in the 19th century not because people decided voluntarily against using it, but because government’s around the world virtually took it out of circulation.
If this trend towards silver as money continues, and we think it will, the gold/silver ratio should improve in favor of silver. However it is a tad optimistic to think the ratio will get back to its historical norm of 15:1.
There is one other bullish aspect to the silver story – its price. If silver really was just an industrial metal and not in the process of re-monetization, would it be trading close to its all time highs? No other industrial metal is.
Silver’s recent price-high occurred in early 2008 (as Bear Stearns was crumbling). From there it fell heavily. It is difficult to put this circa 50% fall entirely down to the global deleveraging cycle because the majority of it occurred a few months before the panic of 2008 set in. Something else was driving the price down.
After bottoming at around US$9 in late 2008, the Silver Price has rebounded strongly and is now trading just below US$19. If silver can sustain a break through the US$19 area, we reckon it will go on and record new highs in a matter of months.
There are no guarantees in investing. There are only probabilities. Weighing all the evidence though, we think it is probable that silver prices will move to the upside in the months ahead. We therefore recommend that subscribers to Sound Money, Sound Investments take a small position in physical Silver Bullion (we will allocate 2% of ‘Our Portfolio’) and add to this on a sustained break above the US$19 area.
Our advice for how to go about acquiring physical silver is the same as for gold. We are not keen on ETFs and instead recommend you check out www.bullionvault.com or www.goldmoney.com as relatively simple and cost effective options to get access to physical silver. Both companies provide secure, audited vaulting services. In other words, you know that your money is there.
Disclosure: Sound Money, Sound Investments does not receive any commission for recommending the use of BullionVault and Goldmoney. The author has used BullionVault services to buy gold previously.
The addition of silver to ‘Our Portfolio’ continues our strategy to build a position of around 20% in precious metals and precious metal companies. Silver’s story as a monetary metal is not well understood by the market and we think it makes for a compelling long-term investment.
Investing in silver via the equity market is much more difficult in Australia. Nearly all silver production here is as a by-product. However there are a couple of interesting investment options and we will take a look at these in the weeks to come.
Buying Silver for investment today? Make it simple, secure and cost-effective at world #1, BullionVault…
Diversification is key to making the right size of Gold Investment…
LAST YEAR was great for gold and gold investors, but it will shine more brightly still in 2010 according to the World Gold Council.
The non-profit, mining-backed research and marketing body believes Gold Investment demand in particular has much further to go.
Here Jason Toussaint, the WGC’s New York managing director of Exchange Traded Gold – which manages and promotes the World Gold Council-backed exchange-traded gold products worldwide, including the world’s second-largest ETF product, the GLD Gold Shares Trust – speaks to Hard Assets Investor about why.
Hard Asset Investor: In your most recent report on Gold Demand Trends, the World Gold Council identifies two key drivers of the gold market in 2010: higher Gold Investment demand out of the US and Europe, and higher jewelry demand out of India and China. Which of these two factors is the stronger influence on today’s market?
Jason Toussaint: If we look at historical figures, we see that jewelry consumption leads all sectors, in terms of tonnage of demand. That will continue going forward, and jewelry would have the higher impact.
That said, it might be worth noting that when we speak about the jewelry market in the non-US or the non-Western markets, the differentiation between a jewelry purchase for adornment and for investment is very great. It’s very difficult to say that someone in the Indian gold market who’s purchased gold jewelry is doing so exclusively for the jewelry aspect and not for investment, because there’s a very liquid two-way market in that around the world.
The bottom line is, and the common thread here is, gold is seen as a long-term store of wealth, which is keenly important in today’s markets.
HAI: We’ve heard a lot about China and India’s appetite for gold jewelry. But are we also seeing any recovery in jewelry demand in the US and Europe?
Jason Toussaint: Absolutely. I think the larger impact on jewelry demand is generally volatility and the pace of change in the Gold Price, and not necessarily the notional figure at that point in time. In other words, we typically see when there’s a steep run-up in the Gold Price, that tends to suppress jewelry demand. And when we have a leveling out, or a less rapid increase in the Gold Price – as we enjoyed in the first quarter – jewelry demand tends to come back. And that’s absolutely what we saw this past quarter.
HAI: We’ve seen much weaker Gold ETF buying this quarter on a year-over-year basis. Granted, 2009 was an exceptional year, where investors rushed to ETFs in record numbers. So is that the only reason we’re seeing a decline in Q1 2010? Or are there more factors at play here?
Jason Toussaint: Well, it’s very difficult to point to one factor and say that that is the exclusive factor behind gold ETF demand. But I think we did see somewhat of a slowing of interest. And what could have happened is rebalancing activity. A lot of investors rebalance on a tax-efficient basis by selling gains and offsetting them with positions that have losses, and gold was a very strong performer in 2009.
Maybe people and investors said, "We’re done. We want to see what happens." But particularly toward the end of the first quarter, and certainly very recently, there was another dramatic uptick in demand for Gold ETFs.
So I think we’re seeing a large paradigm shift in the view of gold by investors from what used to be a strictly safe-haven view, and using it as a short-term tactical portfolio tool, to a much more longer-term focus on portfolio diversification and wealth diversification. Investors are generally holding their gold for very long periods of time. We hear from the investment advisory community that most advisers who have recommended gold for their clients are recommending a 5% allocation. Now as an organization, we don’t recommend gold in any percentages; this is simply what we’re hearing from the marketplace.
HAI: But what happens when the global economic picture starts to improve substantially? Do you think people will still view gold as that long-term portfolio asset, or will investors switch back to a tactical view once the markets appear to improve?
Jason Toussaint: I think that it will be continuously viewed as a strategic asset. It’s not as if it’s a binary question. Gold is generally viewed now as a buy-and-hold type of investment asset. And I think what lends the biggest backdrop to that is the events of 2008. Investors were caught so off guard, and there was such a huge cyclical decline across all markets – but gold was one of two asset classes among all of them that had positive returns that year. The key message is, if you get it wrong, and risk hits you on the downside, then gold is there to preserve at least a portion of your portfolio’s wealth.
I like to tell investors that when gold is your No.1 portfolio asset, that’s the time when you need it to be. When was the last time you assembled a portfolio and said, "Every one of these positions is my No.1 performing asset"? It doesn’t work that way. The concept of diversification is still key.
So I think if we look at the peak in mid-2007, there was a general laissez-faire approach to market risk, because we had it good for so long. In the seven-year equity bull market from 2000, there was a tendency to take portfolio risk for granted, and to not understand that returns are generally normally distributed.
HAI: Do you think investors, as a whole, have reset their expectations of risk and return as a result of the crisis?
Jason Toussaint: Absolutely, and particularly on the institutional side. What is the fundamental purpose for defined benefits plans? It’s to ensure that they have assets to fund future liabilities. And gold, in particular, has a great way of protecting wealth in periods of negative surprise.
Gold is the type of portfolio asset where you set it and forget it. I like to say, the time to buy insurance is not when your kitchen is on fire. That’s the important point. If we went long when assets are rising, and then went back to cash or some short-term holdings while they fell – unfortunately, most investors don’t have the luxury of day-trading their portfolios. Certainly pension funds don’t.
So from a strategic, long-term asset allocation perspective, think of it as a policy benchmark for a pension fund or an institutional investor. Gold Investment does have a place in there.
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Source:Gold Investment Strategy
Gold Investment demand is surging. But what about gold supplies…?NEVER BEFORE has Gold Investment demand been so high, writes Julian Phillips at GoldForecaster, and it is likely to rise still further.
Normally, when a commodity is in high demand, supply is accelerated and holders of that commodity often take profits, thereby increasing supply as well.
Economic history tells us the same. Rising prices and high demand should result in rising supply. But when it comes to gold, all rules have to be re-written. That’s because gold is only part commodity.
It typically takes around five years from the raising of finance for a mine to the start of Gold Mining production. That’s assuming there is a gold resource available to mine in a gold-mining supportive country of sufficient size to make the mine worthwhile. During the last 15 years of last century, support to such ventures from central banks through bullion banks was so strong that the mines would be loaned the gold they were going to produce. They then sold it forward to the time when the mine would produce and often even further out.
This allowed the mine to earn a higher Gold Price (as the price was dropping) and earn interest on that gold until delivery. Then, from production, they repaid the bullion bank (and thus the central bank source) the amount of gold they had borrowed.
While wise at the time, it did quickly exhaust the easily mined deposits of gold, leaving us with a situation today where good gold deposits are getting increasingly rare and difficult to mine. Add to this the propensity of governments to wait until the mines do really well then hit them with heavy taxation. This is deterring new investment in Gold Mining.
The result is that from now on, gold mining companies will be hard pressed to replace the resources they have exhausted. Consequently, newly mined gold production is set to decline from 2010 onwards, irrespective of what the gold price is.
As for central bank sales, from 1985 until 1999 the gold markets sat under the cloud of potential “official sector” sales. Central banks across the globe encouraged an atmosphere that expected unrestrained gold sales. Naturally the Gold Price fell, down from its $850 high of Jan. 1980 to $275 in mid-1999.
Then the “Washington Agreement” was signed, capping European sales at 400 tonnes a year. The gold market breathed a sigh of relief and the Gold Price finally turned up. Sales under this agreement and the next (which ended and was then renewed on 26 Sept. 2009) did at first reach the ceilings levels that were set, right up until the last two years of the second agreement. Amid the global financial crisis, however, they then petered out, with hardly any sales in the last half of the last year of the Agreement.
Since then, no significant European central bank sales have taken place. A total of 1 tonne of gold has been sold to date from the inception of the Third Agreement, nine months ago. It can then reasonably be concluded that European central banks sales have dried up. In their place have come Asian central-bank purchases of 400 tonnes a year.
As we said at the beginning of this article, private Gold Investment demand is now very high. Both Western jewelry and Indian demand had been low until recently, but both of these markets have eventually accepted the current record price levels as being sustainable. Demand from these two sources has now begun to rise again, and it’s clear that today’s strong global gold demand comes without the usual froth that accompanies peak demand. This combination of peak demand and restricted supply leaves only one potential source of supply – and a capricious one at that – gold scrap supply.
With no other source of supply, markets usually take prices to a level where holders of a commodity sell and take profits, in the belief that such prices are not sustainable and will soon fall. Since gold hit the high of $1215 for the first time, prices did fall, with many forecasting a low price of $850 an ounce.
This didn’t happen, however. Instead, a low of $1050 was seen, before the Gold Price began to climb again. During that time (and until recently), apparently ‘weak holders’ of gold in India did sell, and were the main suppliers of that market, in particular. Now they too have accepted current prices as a new ‘floor’.
Most Western consumers have now seen or heard of adverts for ‘gold parties’, rather like the Tupperware parties of the 1960s and ’70s, where housewives now get together and sell old, unwanted gold jewelry that’s lain in dressing-table drawers for years. The initial surge of scrap supply from this relatively new source has largely run its course, however, and such supplies are drying up. Once these sellers have sold out, that supply too will dry up too. This source of scrap is not important to the supply side of the gold market.
The next potential source of scrap gold is from the current Gold Investment holders, those people who bought solely to make an eventual profit. Once they believe prices are as high as they will go, they will sell. These can be termed ‘weak holders’ in the gold market, for long-term investors from central banks, to institutions, to individuals hold gold to preserve wealth, in a world where it is threatened. Such investors hold gold simply to be prudent in the face of uncertainty and instability in the financial world. They may only hold a small proportion of their portfolios in gold. But be sure that they won’t sell until certainty and stability are likely to return to the financial world.
A look at what’s going on now in that world tells us that we may see a squadron of pigs circling the White House at the same time.
Looking to Buy Gold today…?
Source:Gold: Global Supply Outlook
Gold Investment in China is booming as a store of wealth and form of saving…
EMERGING MARKETS have revolutionized the demand-side equation for dozens of commodities, writes Index Universe managing editor Olivier Ludwig for Hard Assets Investor.
Nowhere has the change been followed quite so closely as in the gold market. China and India have had a taste for gold jewelry for decades, but evolving income distributions and a tumbling US Dollar have turned gold into an attractive financial investment for the first time for millions of new buyers.
The trend shows no signs of slowing anytime soon, says Jeff Nichols, managing director of American Precious Metals Advisors and senior economic advisor to retail Gold Dealer Rosland Capital. Nichols is a widely recognized expert in precious metals and global economics, and has worked with several mining companies on financing and investor relations.
Recently, I chatted with Nichols about his thoughts on the global gold markets, including what’s really driving Chinese and Indian demand, why South Americans aren’t buying and why he thinks gold could go to $2000 an ounce – or higher – soon.
HAI: So what’s your sense of the gold market in general at this time?
Jeff Nichols: I think the Gold Price is going to go much higher over the next few years based on a variety of forces at play currently or in the near future. What’s really important, apart from US inflation, are the fundamentals as they’re being affected by things going on in India and China, and elsewhere in Asia. Those are trends that will simply overwhelm the gold market in the next few years.
HAI: Are you talking about these countries increasingly turning to gold to park their reserves? Or are you talking about growing industrial demand?
Jeff Nichols: Both. Most important is the nature and size of investment demand in India and China and the potential that demand has to affect the world market for gold.
China, for example, legalized private Gold Investment only about two and a half years ago. For many decades during the Communist era, private citizens were prohibited from investing in gold. That doesn’t mean they didn’t Buy Gold jewelry and consider that an investment. But there was no real investment market. About 2 1/2 years ago, the government changed all of that and subsequently went so far actually as to endorse private Gold Investment. I think the government sees gold accumulation by its citizens as a form of national wealth.
In the last couple of years in China, we’ve seen the development of what I call a Gold Investment infrastructure. There were no outlets for gold a couple of years ago. If you wanted to buy a gold bar, there wasn’t a mechanism in China for somebody to do that. But now, a Chinese individual can go into a bank across the country and buy a small gold bar or a gold coin. Or the working-class person with not a lot of funds can open up a passbook- or a savings-type account denominated in gold and make very small contributions or deposits into that virtually of any size. You might find somebody adding a few grams every month.
HAI: Are Chinese buyers purchasing gold because they perceive it to be a better investment or a better way to preserve wealth?
Jeff Nichols: Part of it is the cultural phenomena in which gold has for centuries been perceived as a store of wealth and a form of saving. So if income is rising in China, and savings are increasing, then I think there’s a natural inclination for some portion of that savings to find its way into gold. It may not be necessarily that Chinese are concerned about hyperinflation or political upheaval. It’s simply a natural thing for them to do.
HAI: How does the gold culture in India differ?
Jeff Nichols: For many years, India has been a sponge for gold. But what’s happening is that the Indian market was very fragmented and sort of nonrational, until changes begun in the last few years have modernized and Westernized the market.
Still most of the investment demand in India is for gold jewelry at high caratage, often 22 or 24 carat gold. So it’s pure gold, but in the form of bangles and bracelets and chains and necklaces and the like. And it’s been culturally the custom to give dowries in gold or as a gift on the birth of a child or a wedding or some other important event. It’s considered propitious. To have gold is considered to be not only a symbol of wealth but something that brings good luck.
HAI: Is that phenomenon spreading?
Jeff Nichols: Incomes are rising for more and more people. So, as in China where rising incomes find their way into gold, so does it in India. But in India, what we also have is the market going from a sort of archaic form where you would go into a bazaar and stop at a jewelry shop to Buy Gold jewelry, to the popularization of investment products that might be more common in the United States or Western Europe. In Mumbai there’s now a gold ETF, and gold is now being offered not just in jewelry shops, but by brokerage firms and insurance companies and over the internet.
Also, small Gold Coins are now being sold through the postal service. In many of the rural and agrarian areas of India, it’s really more like a Third World country than a newly industrialized country. In some of these areas, there are no banks or financial service firms. So the postal service is offering gold throughout the country, particularly in these areas that are not serviced by other providers.
HAI: All this spells very real Physical Gold demand?
Jeff Nichols: Right. And that’s very important that we speak of it as being physical demand. It means that there is real off-take from the market. Much of this will never come back, at least never in the next few years to come. When an Indian buys gold, or, more importantly, when the Chinese gold buyer accumulates gold, they have a much different view. They’re not buying it in order to sell it next week or next month or even next year at a higher price.
And that’s truer of China than it is of India. There’s always been an important, secondary supply coming from India, with jewelry trading to some extent. So, if prices jump up, you’ll see some gold coming back into the market – profit taking, if you will – or if economic circumstances are poor, there may be selling of gold. But these tend to be temporary phenomena rather than people exiting the market permanently.
HAI: But it’s not just China and India that matter when we talk about the emerging markets, right?
Jeff Nichols: Given the size of the populations, they’re important. But what I’ve said is equally true for Thailand, Vietnam, Indonesia, Malaysia and Singapore. These countries are all seeing the same sort of rising Gold Investment span that was in China. Even Vietnam has an important Gold Investment interest.
HAI: What about in the Americas, like Brazil, Chile, Mexico? Any significant shift as it relates to the demand pull on Physical Gold?
Jeff Nichols: Not in the sense that it really is a big deal. I’d have to guess that there are people in these countries that are buying more, because their economies are doing well and incomes are rising. But it’s not anything that compares to what’s going on in Asia.
HAI: What about the supply side in gold? How does that fit in?
Jeff Nichols: That’s another building block for the bullish outlook. Mine supply has been decreasing gradually for the last 20 years or so. And even though there was a little hiccup last year and maybe again this year, the trend remains down, at least for the next five years.
Beyond the next five years, there may be a recovery in mine production, prompted by higher prices, affordable deeper mines or more expensive mines. Also, China, which is now the world’s largest gold mining country, still has about half the country which has never been explored.
Over the next 10 years and beyond, other countries like Russia are growing in importance as Gold Mining countries and have great prospects for a very long time. But it takes a long time to explore, develop, finance and bring a significant mine that really makes a difference in terms of supply.
So, even though prices have been rising and may rise rapidly in the next couple of years, the consequences of all that is still further out. In the meantime, we have rather limited new supply that is not elastic in the short term, short term being measured in a few years.
HAI: So do you think this run in prices has a good half-decade left in it, at least?
Jeff Nichols: The supply constraints contributing to higher prices now and in the next few years are not going to be overcome, at least for five years, hopefully longer.
The other bullish building block that’s quite important is central bank attitudes towards gold. Last year was the first year in a couple of decades that central banks as a group were net acquirers of gold. For the last 20 years prior to last year, they sold on average about 400 tons of gold a year.
In the aggregate, central banks will be acquiring gold over the next several years, in part because of their fears about Dollar devaluation. They hold their reserves in Dollars principally, and so they’re worried about the Dollar. To the extent that they can diversify, they will.
HAI: Given all these variables around the globe, where does it all take us?
Jeff Nichols: I think gold can go to great heights, even without the United States seeing double-digit inflation and the Dollar falling through the floor, simply on the basis of rising demand in these foreign markets.
Now, that said, I think we’re going to have a significant rise in inflation over the next few years. I think the economy could best be described as moving towards a stagflationary type of scenario, in which economic growth in real terms remains very low and unemployment remains high for an extended period. And inflation is a problem. I don’t know that we’re going to see double-digit inflation. Maybe we will, maybe we won’t. But it is certainly going to be inflation that is a problem. When I look at the growth in money supply over the last couple of years as measured by monetary base, it just leads me to believe there’s no way we’re not going to have higher inflation.
HAI: How much higher do you think gold could go?
Jeff Nichols: Conservatively, I think in the next few years that certainly $2000 an ounce is very likely.
HAI: On the basis of the demand issue alone?
Jeff Nichols: Yes. Gold has not kept up with inflation over the last few decades, measured from the cyclical price of $870 or $875 per ounce that we saw in January 1980. If you extrapolate that price and adjust it for inflation each year since then, the price of gold today would be approximately $2,400. And, if you believe as I do that actual inflation is higher than the reported statistics, that price today of $875 adjusted for what might be a truer measure of inflation would be several thousand Dollars higher than that.
I’m not suggesting that gold is necessarily going to go to $6000 or $7000 or $8000, but I’m just trying to demonstrate with these numbers that to think of gold at $2000 or $3000 a few years from now is not a crazy idea.
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