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A perception
has grown that says that, in a recovering global economy and in particular a
growing developed world economy, the gold and silver prices will fall because
right now their prices reflect economic uncertainty and fear. Any recovery
will therefore remove that uncertainty and fear, so gold and silver prices
should then fall. This article looks at that concept and its validity. Gold
and silver (because silver's price follows the gold price) are driven by a
diverse range of factors from all over the world. The tendency to use simple
links like this can prove an expensive mistake. It's imperative that
investors understand not just individual 'links' but in what proportion they
affect the gold price. It's that overall perspective that affects the price and
investors' success.
Current Gold, Silver Price Influences
Monetary
For the last
few years, Silver has followed the gold price, rising and falling, further
and faster than gold. In so doing it has shown that the monetary influences
on precious metals are more of an influence than the fundamental demand and
supply factors. The fundamental supply and demand factors show a strong
demand, based on electronics and on its various medical applications. In
following gold so closely silver has seen investment demand dominate the
price moves. While silver is not considered a monetary metal by central or
commercial bankers, the general investing public sees silver as having the
wealth-preserving qualities that a monetary metal needs to have to qualify as
such. This explains why silver follows gold so closely.
Gold on the
other hand is most certainly a monetary metal and considered as such by
bankers in general and in particular central bankers. In the reserves of the
U.S. it comprises 70% of those reserves. For the purposes of this article we
will therefore consider silver moving as a monetary metal. When gold does
become visible as a monetary metal in banker's hands (and this may become
particularly so at the start of 2013) only then will we see a separation of
the two metal's price behaviour.
Please note
that both gold and silver monetarily-influenced price movements have
absolutely no link to economic growth. It has everything to do with the
structural condition of the developed and emerging world's monetary system's
condition and structure.
Economic
The developed
world is currently experiencing flat economic growth or recession. Many feel
the U.S. could enter recession next year. The gold price on the surface
appears to be reflecting this as it sits around $300 below its peak at
present. Some traders see stronger U.S. economic growth as undermining the
'safe-haven' value of gold and silver. But do the facts bear that out and
does history do so?
The gold
price experienced its greatest rises from 2005 to mid-2007, from $300 to
$1,200. It then slipped back to $1,000 when general 'investor stress' forced
investors to sell almost everything to lessen their leverage and
indebtedness. Once this was out of the way, gold resumed its rise, reaching
$1,900+ in 2011 before correcting again to current levels. During 2005 to
2007 economic growth was robust in the developed world. The rise from $1,000
to $1,900 coincided with a stumbling recovery, whereas the current period of
falling gold and silver prices has coincided with flat to falling growth in
the developed world. So, just looking at the developed world during the last
7 years shows that gold and silver rise while the developed world is growing
economically.
But is this a
valid link? As the developed world grows, do people buy gold because they
have more disposable income? We think not. The advent of the gold Exchange
Traded funds in the developed world saw gold investors choose that route over
investments in gold mining shares, simply because it was the first time they
could buy an investment simply and unequivocally linked to the gold price
itself and having the ability to influence the gold price directly. This
accounted for not far short of 2,000 tonnes of
investments into gold. Again economic growth was not a factor. It was a
structural change in the gold market.
To see a
direct link between economic growth and the gold and silver prices, we look
across at the emerging world. In Asia, i.e. China, India the
Philippines and other emerging lands, economic growth has enriched poor
people on a broad front. People emerging from poverty are keenly aware of the
need for savings to shield them against returning to poverty. They are not
convinced that banks are the place to keep ones cash savings as inflation has
whittled away its buying power over time in every country and,
intermittently, currencies have been swallowed up in war and runaway
inflation.
Therefore,
gold the time-trusted, investment, free of human interference, in itself has
been where individuals have placed their savings. In China this has been with
the encouragement of the government. In India the government is unhappy with
so much of GDP being absorbed by gold, but because of distrust in government
and its officials, the Indian investor favours gold
as protection against Indian institutions and inflation and always buys gold
and silver, over time. The rise in disposable income in Asia has led to a
steady and growing investment in gold and silver. So here, economic growth
triggers investment in gold.
So, yes, gold
and silver investments can be directly linked to economic growth in Asia
and contribute to gold demand and rising gold prices.
Central, Commercial Bank
Will more
central bank reserves find their way into gold in times of economic growth?
Again, we have to separate developed world from emerging world central bank
activity.
In the developed
world, central bankers stopped selling gold as a component of reserves in
2009. Since then they have not added gold to their reserves. But the issue is
now very firmly on the table amongst the banks. Both in the U.S. and in
Europe, bankers are deciding whether to treat gold as a Tier I asset up from
the current Tier II level, where banks can only add 50% of its value as an
asset on their balance sheets. Under a Tier I definition this will rise to
100%. As we saw in the credit crunch and in the Eurozone debt crisis, banks
will unload asset from the Tier II category in favour
of Tier I assets -such as U.S. Treasuries--to boost their creditworthiness.
If (in the
U.S. and through the Basel discussions in Europe) gold is re-defined as a
Tier I asset, then it will serve the commercial banks to switch into gold
from other Tier II assets in times of credit stress. With a prudent
diversification in mind, it will also serve to place some of the emphasis
they now place on U.S. Treasuries onto gold. After all, even a central bank
as august as the Bundesbank, has the opinion that
"gold is a counter to the swings in the dollar".
The impetus
this will give to gold demand will be significant to the gold price and by
extension to the silver price.
In the
emerging world, the rise of both central and commercial bank reserves has,
for the first time, given the central banks levels of reserves that need to
be diversified. It's clear that the emerging world is unhappy with its
concentration in the U.S. dollar and needs to have a wider spread of
investments to counter not just the uncertainties facing their own countries
but the countries of the reserves they hold.
Over the last
couple of years we have seen emerging world central banks buying significant
amounts of gold both from local production and in the open market to raise
the percentage of gold they hold in reserves. At the moment, the percentage
of gold in their reserves is nowhere near the levels seen in the developed
world's central banks. It's this shortfall that's prompting their interest in
gold now.
In total,
central bank demand is a very significant contributor to gold demand and will
continue to be so for the foreseeable future. In this case then, economic
growth has a direct link to the gold price. With the emerging world's demand
for gold accounting for around 60% of total gold demand, on this demand alone
we have to say that, yes, gold and silver prices will continue to rise in a
growing global economy.
While the
conclusion of this article has to agree that gold and silver prices will
continue to rise in a growing global economy there is also a very strong case
to be made for them rising in an increasingly debt-distressed developed
world. How so?
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