I’ve been following gold
professionally for some 40 years, ever since joining Citibank as an
international economist back in 1973. One of my early assignments was
to write a report for senior management on the future role of gold in the
world monetary system. Gold had already risen from $35 an ounce in
August 1971, when President Nixon ended the U.S. dollar’s official convertibility
into gold, to $120 an ounce in mid-1973 when I joined Citibank as one of the
most junior economists.
Though I thought the
price of gold could rise, if only because its price had been suppressed and
private demand quashed since the 1930s, I saw no return to anything that
might resemble a gold-based world monetary system.
At the time, few
mainstream investors, and even fewer economists, imagined gold would rise so
spectacularly, as it did, to $875 an ounce, if only briefly, by January
1980. Since then, gold has continued its roller-coaster ride, reaching
$1,924 in September 2011 and subsequently falling back to the $1,650 to
$1,750 range in the past year.
My views today are quite
similar to what I wrote in 1973: I see gold prices continuing to rise . . . but
little chance the yellow metal will resume its former role as the lynchpin of
the world monetary system.
Today, gold is still
considered by an “alternative” investment, out of the mainstream, by many
individual and institutional investors – and by many in the mainstream media
as well. Over the past decade, gold has moved higher, much to the
surprise of many in the investment community who still continue to hold the
yellow metal in low esteem.
As a result, most
investors are today still underweighted in gold – and many own none at
all. This is true, not only among private investors, but also
importantly among central banks. While the U.S. and many European
central banks retain large official holdings – and seem loath to sell any –
many of the newly industrial and emerging-economy nations remain grossly
underweighted in gold. Even those who have been substantial buyers of
gold in the past few years – including China, Russia, Saudi Arabia, Mexico,
and India to name a few – hold only a very small portion of their total
official reserves.
This underweighting of
gold in both private portfolios and official reserves bodes well for
gold-price prospects in the years ahead – and is one of the key factors
suggesting that the price of gold could easily double by the end of this
decade.
Don’t be distracted or
disappointed by gold’s recent setbacks. The price decline from its
all-time high in September 2011 owes much to short selling by a relatively
small number of institutional speculators and short-term traders out to make
a quick profit operating in gold derivative (or paper) markets where little
physical gold actually changes hands.
The resulting price
weakness has masked the continued tightening of gold’s own physical market
fundamentals – and the movement of metal into relatively stronger hands,
owners who are unlikely to sell anytime soon, perhaps for decades if not
longer.
This is certainly the
case with most of the central-bank buying the past three years. Central
banks – eager to increase their holdings of gold and decrease their holdings
of paper currencies (U.S. dollars, euros, British pounds, etc.) – are
unlikely to part with newly acquired gold anytime soon, probably not for
decades or longer. Instead, the official sector is likely to
demand a significantly more physical gold as it becomes available in the
world market.
Similarly, in some countries – most significantly the People’s Republic of
China and other East Asian nations with relatively healthy economies –
private-sector jewelry and investment/savings demand will remain an powerful
bullish gold-price driver as personal incomes and household wealth rise, the
middle and wealthy classes continue to expand, stock markets and real-estate
investments look overvalued, and as inflation concerns remain ever present.
It’s no accident that I’ve not mentioned the fiscal cliff, or the overhang
of public and private debt or central-bank monetary policies in the United
States and Europe. Nor have I mentioned the likely growth in retail and
institutional investment interest in gold in the United States and European
economies. Although I believe these factors – especially the continued
easing of monetary policies – will become increasingly bullish for gold in
the months ahead, they are not prerequisites for the resumption and
continuation of gold’s long-term bull market during 2013 and beyond.
