3 POWERFUL TRENDS DRIVING GOLD PRICES HIGHER
UniCredit has upgraded their target price for gold from $1,250 to $1,600 by the end of 2012. The reason for the upgrade is based on three powerful trends: the fear over “money printing” at the Fed (QE), the idea that the Euro sovereign debt crisis represents a condemnation of fiat money and increasing demand for gold from China.
UniCredit invokes the always frightening sounding “debt monetization” term in their latest report. Of course, the Fed has not monetized anything (as it is operationally impossible) and they certainly aren’t causing inflation, however, I am certainly in the minority in believing this reality. Quantitative easing has already proven to be a monetary non-event yet market participants continue to believe this will somehow magically cause severe inflation. There is no doubt, however, that inflation fears are rampant due to the Fed’s actions and in the market expectations can be just as important as reality:
“The Fed’s decision to reinvest the proceeds from maturing and prepaid agency debt and MBS in longer-term Treasuries and to continue rolling over its holdings of Treasury securities as they mature has eliminated the slight tightening bias of US monetary policy. Thus far, it is not yet clear whether this will now also result in a lengthening of the Fed balance sheet. In the past, however, the gold market reacted extremely positively to a monetization of government debt.”
The second major trend is the Euro sovereign debt crisis. Gold demand has surged as fears in Europe have continued to roil the markets. I’ve previously explained why I think the market has this incorrect (the Euro is in fact a single currency system much like the gold standard), however, my opinion matters little in the grand scheme of things. What matters is how people perceive the current environment and right now they see the European sovereign debt crisis as another flaw in fiat money. Demand for gold is subsequently surging as Euro fears continue:
“In the second quarter of 2010, demand for gold measured in tons increased by 34% yoy. On a USD basis, a new record was even posted for the quarter. The reason for this is the surge in investor demand triggered by the Fed decision and the renewed widening of CDS spreads in Europe.”
I think the previous two trends are largely unfounded (though that doesn’t mean they won’t persist), however, the third trend is very real. UniCredit cites China’s surging demand for gold:
“The Chinese government has encouraged consumers to invest in gold, and with great success. In the last 12 months, demand for gold totaled 532 tons. While jewelry demand is merely stagnating, investors are increasingly discovering the gold market. While as recently as 2008 only 17 tons of gold were purchased, in 2009 the figure was already 73 tons. In the last 12 months, demand was even 143 tons! Although China has evolved into the world’s largest gold producer in recent years, the annual production of most recently 330 tons is by no means sufficient to satisfy this demand.
China announced important gold market reforms at the beginning of August. Foreign companies are now permitted to offer their gold coins at the Shanghai Exchange, more banks are permitted to import gold from abroad, and more domestic, gold-based investment products are to be developed. As a result, demand of Chinese investors will increasingly be felt on the global market. But the Chinese government also has an ever greater interest in gold imports. In April 2009, China had reported an increase in its gold reserves from 19.29mn to 33.89mn troy ounces. Nevertheless, they are still at a very low 1.7% of the entire foreign exchange reserves. If China is targeting a gold reserve of, for example, 10%, it would have to purchase 6,130 tons of gold or 2.4 times global annual production. If China were to meet the demand only from domestic producers, it would take 19 years to achieve this objective. Since the gold market is per se only a very small market, further increases in the price of gold are pre-programmed.”
These are indeed powerful trends even if I believe some of them are unfounded. I think one thing that can be concluded from all of this is that demand for gold is likely to remain strong so long as the Euro crisis continues, the balance sheet recession in the USA continues and China remains the primary driver of the global economy. These look like pretty good bets to me.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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39 Comments
I would like to point to what happened in India. Foodprices in India are going through the roof and that forces people to sell their gold in order to be able to buy food. They seem to have become net sellers of gold.
Reports coming out of China suggest that the harvest is going to be poor and that as a result foodprices could be going through the roof over there as well. So, I expect chinese demand to weaken or demand could even disappear.
QE is a crock. The only thing is does in the current situation is pushing T-bondyields lower. And in the end it – IMO – will blow the FED sky high.
Gold is a safe haven because it’s no one’s liability. And that’s why it’s so popular.
What you stated here regarding China and India is far from fact.
it takes 900$/oz to break even on a new gold mine with no debt service or dividends (per blackrock on CNBC this morning) for the balance sheet readers….i would buy krytonite if it was appreciating
oh yeah,—its idolitrus and evil….i think they would have me buy Citi or Goldman …..no pain outta them for the workin stiffs lately…….or maybe BMW….nevermind they made war machines n worse in WW2
or maybe i could invest with soros….now there is a upstanding straight shooter with no history….no skeletons in his closet, not for the ostriches anyway.
spare me the indignation
spare me the indignation the boatman
I’m not indignant; just amused that this is what our so-called capitalism leads to, worshiping a shiny metal.
who said anything about worship.
i don’t worship Apple either.
its just buying something whose value to others i believe will go up.
Who cares, isn’t this a generational bull market! Who could argue with 10 straight years of increases, I’m in until this thing really goes berserk and pops.
“It’s A Bull Market, You Know!”
Reminiscences of a Stock Operator, Edwin Lefevre.
This presentation from Hinde is interesting:
http://www.planbeconomics.com/2010/09/13/gold-wars-by-ben-davies-ceo-of-hinde-capital/
So you have a presentation from a guy that runs a gold fund, with advertisements for gold companies all over his page, and you think that it’s unbiased?
a) I said the report was interesting – it’s a far better report than the typical “gold is REAL money!” arguments. It actually makes some more solid (a-hem) points than the typical gold rant, thus the link.
b) The site I linked to is in no way a “pro-gold” site. Actually, it’s more an investing site with an environmental angle. But hey, make snap judgments if that’s all you’re capable of. Opinions without merit are the norm in the investment world.
c) The ads of the site I link to are controlled by Google (notice the ‘Ads by Google’ note? No? Too wrapped up in an anti-gold rage?). Maybe you should be accusing Google of being unbiased gold bugs. You see, due to the fact that gold is discussed on the page, Google puts a gold ad on the page. It has nothing, in this case, to do with this site or its owner. Welcome to how the world works.
Disclosure: no personal position in gold. I just like to think and consider things, and recommend better written documents on particular subjects.
I read the entire report. Did you? It was from a guy that was selling his gold fund.
In fact, like the last several pages of the report were a sales pitch for his fund.
If you consider a report from a person that is selling an investment to be a “better written document” then I have a report about how the Brooklyn Bridge is about to skyrocket in value that you should read.
Disclosure: I will also sell you that Brooklyn Bridge.
One more thing, if you have no position in gold, then why is your entire post full of things that are obviously biased toward it?
Blah blah blah, anti-gold rage, blah blah.
All I said was that the guy was selling investments in a gold fund, so of course you should expect him to be bullish.
True – some people talk their books.
But wouldn’t you be suspicious of someone who was bullish on something but didn’t actually act on his convictions (i.e. invest in it)?
I think your argument works both ways.
Great link, by the way.
One could say the presentation is ‘biased’ as the other poster mentioned, but one could also say the guy who wrote the presentation has ‘put his money where his mouth is’.
Anyone who is bullish on an asset class is going to be invested. The trick is to distinguish between those who are invested because they have to be and those who are invested because they truly believe in the asset class.
She’s ripping now…
This is a crazy move today. What’s the reason?
No news, it’s a breakout!
Rumors of Fed QE2 in November, 1T treasury purchase. Actually it is not rumor or even news to me. I will not be surprised to see a real gold bubble by then.
“Of course, the Fed has not monetized anything (as it is operationally impossible)”
What does this mean?
If the FED has previously created the money for the asset swap “ex nihilo” then this is monetizing isn’t it?
If the FED did not create the money for the swap “ex nihilo” then where did it come from?
Deficit spending creates net private sector financial assets. This is merely an accounting identity. The idea of monetization is not applicable to a modern monetary system. The issuance of bonds merely represents the reserve drain. Reserves are swapped for bonds. So what? It did not change the private sector financial situation. Nothing was “monetized”. It’s a gold standard term to imply that new money is being created and that inflation will result.
Where did the govt bond come from? It came from nowhere. Just like those dollars that are in your pockets came from nowhere. They were printed up on some stupid machine in Washington DC or credited to the banking system by Treasury. They did not come from somewhere.
If you want to say that deficit spending is some form of monetization then that’s accurate, however, the textbook definition is not applicable to our world. Monetization is a term that refers to the US govts purchases of gold with new money. They were actually creating new money to buy the gold. We don’t do that any longer. That ended when Nixon shut the gold window. When you read that the Fed has monetized the debt on various websites or in various books you should recognize that the person writing this does not understand how our monetary system works (and generally explains why their thesis for hyperinflation has been so remarkably wrong).
TPC,
if (paraphrasing) “deficit spending is monetization”, rather than the purchase of treasuries by the fed which is “just accounting”, and if the purchase of treasuries by the Fed follows from the deficit spending (by order of Congress), then it is pure semantics to argue that the fed is not monetizing. if A=B and B=C then A=C
I understand your argument, but I think where you leave the reader “cold” is that your words imply there are no consequences to deficit spending, i.e. monetization. And if there are consequences, then lets talk about those rather than having this semantic debate.
What say you??
From a very technical perspective the term monetization is not even applicable.
This term is used to imply that the govt is printing money and recklessly issuing bank notes. That’s just not true. Deficit spending is not inherently inflationary. Running high deficits does not = inflation. The only way we get inflation is if spending outstrips capacity. Could the high deficit cause this? Sure, but it’s not happening currently and hasn’t occurred over the last two years despite record deficits.
So no, I don’t think it’s a semantic argument at all.
TPC,
Thank you. What I meant by semantics is that what people fear is the outcome – inflation – which they fear would result from monetization. OK, they use an incorrect word and the input they should fear (which potentially yields that outcome) is deficit spending.
so lets help people understand (including me) why I should not fear inflation (if only longer term) from all of the deficit spending, here and forecast.
with the 10Y near all time lows (minimal inflation)and gold near all time highs (high inflation) it is fair to say that one of those markets is FUNDAMENTALLY wrong?
Personally, I think there is a huge premium built into gold that is essentially voting on the failure of fiat money.
You probably know where I lie on that one. This is not to say that there aren’t good fundamentals in gold, but there is a fear premium being built in here that is unsustainable and likely to end in heart ache one day.
What would happen if Peak Oil caused the supermajor oilfields to decline, and then OPEC and Russia took advantage by denominating the price of oil in gold?
Gee gold has done well for the isolationists so have many other hard asset plays, unfortunately TPC bases results strictly on what the (totally manipulated by governments) bond market does.
Andy,
I look at many broad measures of inflation. You probably think the PCE, CPI, PPI, capacity utilization, etc are flawed measures of inflation. That’s fine. But what I can guarantee you is that gold and silver are not measures of inflation. They have no impact on the average family balance sheet. The price of gold and silver merely represent a future belief that inflation will take hold. They have nothing to do with a family’s every day costs.
What about beef and cotton and wheat……
Its funny that from the March SP 666 lows EVERYTHING has advanced higher but you insist you are correct in your deflation call yet inflationists have been WRONG.
I don’t want to get all technical on you or be a dilettante or something but……..
Inflation = Prices Up
Deflation = Prices Down
Heres a chart, I could supply many
http://finance.yahoo.com/echarts?s=^GSPC+Interactive#chart3:symbol=^gspc;range=2y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
Notice the Upwardness of the chart post March
You were doing good pre March but not very good after
No Andy. Let’s get technical. You keep cherry picking assets and timeframes and I keep shooting massive holes in your arguments. This time, you chose food and the March 9th low.
Okay, let’s look at the food and beverage index:
2009-03-01 218.746
2009-04-01 218.499
2009-05-01 218.142
2009-06-01 218.158
2009-07-01 217.710
2009-08-01 217.784
2009-09-01 217.672
2009-10-01 217.777
2009-11-01 217.952
2009-12-01 218.253
2010-01-01 218.731
2010-02-01 218.838
2010-03-01 219.338
2010-04-01 219.680
2010-05-01 219.764
2010-06-01 219.696
2010-07-01 219.641
That’s a whopping 0.4% inflation in food and beverage prices since your cherry picked market bottom. What is that an annualized rate of 0.25% or so? If you want to go screaming down the streets about that sort of inflation then please be my guest.
ALL ASSET CLASSES
You say that inflation has been a bad trade over the last two years, yet I could post countless trades from equities to commodities to PM’s to foreign markets that all went UP
So you were right for awhile but currently you have been wrong for awhile,
All asset classes? Again, you’re wrong.
2008-07-01 219.964
2008-08-01 219.086
2008-09-01 218.783
2008-10-01 216.573
2008-11-01 212.425
2008-12-01 210.228
2009-01-01 211.143
2009-02-01 212.193
2009-03-01 212.709
2009-04-01 213.240
2009-05-01 213.856
2009-06-01 215.693
2009-07-01 215.351
2009-08-01 215.834
2009-09-01 215.969
2009-10-01 216.177
2009-11-01 216.330
2009-12-01 215.949
2010-01-01 216.687
2010-02-01 216.741
2010-03-01 217.631
2010-04-01 218.009
2010-05-01 218.178
2010-06-01 217.965
2010-07-01 218.011
Commodities are reflected in these prices. If you want to cherry pick the equity bottom and argue that that is a sign of inflation then that’s your call. Equities reflect a claim on future corporate earnings. While inflation plays a part in this it is not correct to say that equities are an accurate measure of inflation.
There is both inflation and deflation going on. Health insurance, education costs are still going up. Though gas prices are below the highs from 2008, the bottomline is, despite the deflationary collapse of 2008, I’m still paying much higher gas prices compared to a few years ago. Or go to any fast food place. There’s certainly no deflation going on there. I wish there were. Even the cost of stamps continue rise.
On the other hand, the prices of stuff I don’t need continue to drop. So what if the price of a car goes down. It’s not like you really need to buy a new car every few years. Or who cares if the cost of a television or computer goes down. It’s not like you need to buy a new one every year. I would rather have these prices rise and have my health insurance, food, and gas prices go down. You would think that with the greatest deflationary collapse since the Depression, that prices would actually be collapsing with it. I sure wish it were. I’d love to be paying less for food and insurance. Instead, there’s benign or “contained” inflation if you want to call it that. All I know is, my cost of living is actually UP since 2008. If it’s still rising while we’re still in a deflationary period, I’d hate to see what would happen when inflation actually comes back.
Very true.
Consider nearly 50% American live pay check by pay check, some reports say 70%. Inflation policy will drive many working class into poverty soon after a few booms and busts.
US is only good if you are super rich, which is on the receiving end of this policy. If you are not, but you have skill and want to build wealth by working hard and save, this is not place to stay.
Ok thanks.
These are the bits I have trouble with.
“The idea of monetization is not applicable to a modern monetary system.”
“Monetization is a term that refers to the US govts purchases of gold with new money.”
Where does this definition come from?
Monetization is generally understood as “The process of converting or establishing something into legal tender.”
http://en.wikipedia.org/wiki/Monetization
Therefore creating legal tender ex nihilo and swapping it for debt is “monetizing” debt – is it not?
monetization implies that something has been converted into money. In most cases it is the idea that the Fed buys debt directly from the Treasury and the Treasury then goes out and spends it. But that’s not how the system actually works. It’s a total misnomer. The govt never monetizes anything. When they spend they simply spend. They credit private sector bank accounts. They dont call China first and ask for a loan. They don’t make sure the private sector is willing to lend them fund first.
If you want to call deficit spending inflationary then fine, but don’t call it monetization. That is not what it is. It might sound like a semantic argument, but to the trained eye it is in fact a very technical argument and an incredibly important one.
The issuance of bonds does not change the composition of private sector financial assets. Much of this goes back to the whole idea of the monetary base being money. You’ve probably seen people relentlessly point to the size of the Fed’s balance sheet and conclude that inflation will ensue. That displays a vast misunderstanding of the process of money creation.
Ok, that makes it clear, thanks.
Monetization may also be refer to exchanging central bank securities for currency that is like exchanging nothing for nothing and why a 1975 nickel is now worth one cent. Vertical money creation is realy sufisticated Ponzinomics.
I hear many say “no matter what the economy does, it’s bullish for gold”. It is that “nothing can stop this bull market” mentality that will crumble as soon as euphoria stops. Can’t wait for the change in trend, but it could be a while.
The Fed could monetize assets if there was an emergency. For example, if the major banks were allowed to fail, the FDIC would take possession of the assets, and the Fed could buy the real estate portfolio so that the FDIC could pay off the depositors. Of course the FDIC could just borrow from the Treasury to pay the depositors, but political disputes over the Federal Debt Limit might make it more expedient for the Fed to simply monetize the FDIC’s assets. Money created by the Fed to purchase assets does not count against the government’s official debt limit.
The economy is in bad shape. Some say it is worse than any time since the Great Depression. I believe it is actually worse than the Great Depression because of the level of debt. At the time of the Depression, neither governments nor individuals were deeply in debt. We were a nation of savers. Now we are a nation of spenders, living beyond our means. Individuals and governments at all levels are over their heads in debt, some literally drowning.