The formerly precious metal is in a slump, but could top $2000 over the next decade with Asia’s boom.
Gold should be ashamed of calling itself a precious metal these days. Since it peaked near $1,889 a troy ounce in August 2011, the price of gold has fallen almost 40% into a perennial bear market. This year alone, gold has underperformed stocks in China, Japan, Hong Kong, Taiwan, Korea, Australia, the U.S., Russia, Switzerland, Italy, Portugal, Ireland, Germany, Poland and Israel; government bonds of countries from China to Russia; the dollar, Swiss Francs, Picassos, Warhols, Rothkos, Manhattan real estate, cocoa, eggs, cotton, silver and – gasp – even lead! Like frankincense and myrrh, gold has been relegated to the heap of has-beens, overlooked by fast money chasing momentarily hotter assets.
So why is now the time to take a new shine to the old metal? Let us count the ways:
1) Once a hedge against market turmoil and inflation, gold has lost its calling in a world where stocks keep rising and inflation stays maddeningly meek. But Asia’s surging stock markets represent the last big reflation trade – where money managers snap up risky assets in anticipation of central bank easing, and which had paid off in markets including the U.S., Europe, Japan and China. But this popular playbook is now running out of pages, and if the volatility that has lately plagued currencies and bonds starts spilling over into stocks, then watch out.
2) Stocks have been a big – and logical – beneficiary of the trillions printed by global central banks, but valuations cannot climb indefinitely. How many indexes across the planet are already pushing record highs, even while economic growth remains middling? The MSCI World Index, for instance, already commands a price nearly 18.6 times what its components earned, while the Russell 2000 index of small U.S. stocks fetched 44 times.
3) While gold has gone nowhere over the past four years, the formerly precious metal seems to have found a floor near $1,200, with buyers stepping in each time prices slide below this threshold.
In addition, gold is a famously expensive metal to mine, and producers are unlikely to increase new supply until gold prices rally well above $1,200. All this helps limits the downside risk of adding gold at current levels, near $1,174.
4) Rising wages and purchasing power across Asia will improve the demand for gold, especially in tightly-regulated economies with under-developed financial systems where gold is still a store of wealth.
ANZ chief economist Warren Hogan and commodity strategist Victor Thianpiriya reckon that average gold demand amounts to just 0.70 grams per person among Asia’s emerging economies – half the per capita consumption of more developed countries. “Per capita gold demand in emerging economies of the Asia 10 has the potential to double as these countries become richer and more industrialized,” wrote Hogan and Thianpiriya, who expect gold demand among individuals and institutions to reach 5,000 tonnes per year by 2030, up from 2,500 tonnes recently. They see gold prices rising gradually and breaking through the $2,000 level within the next decade.
China, in particular, not only wants to establish the yuan as a global reserve currency, it wants to build Shanghai into a global hub for gold trading. Having supplanted South Africa as the biggest gold-producing nation, China is also the biggest importer of gold. Yet its share of global gold trading is still modest. Don’t be surprised if China’s central bank is buying up the country’s own domestic production, while also amassing gold from abroad.
6) Already, sentiment toward gold couldn’t get much worse. Once upon a time, gold bugs were as loud and as legion as Benedict Cumberbatch’s teenage fans. But Barron’s latest “Big Money Poll” showed a whopping 71% of money managers who said they’ve become bearish about gold, while the huddle of bulls shrank to just 29%.
Meanwhile, Newmont Mining ( NEM ), which mines the unloved and allegedly precious metal, quietly became the fourth best performing stock in the Standard & Poor’s 500, and has shimmied up 41% this year.
7) Of course, rising U.S. interest rates threatens to siphon money from assets including gold. But the prospect of rising real rates has become one of the longest drum rolls heard in the financial markets, and may already be amply factored into current prices.
Nearly 83% of the planet’s stock market cap recently is supported by zero interest rate policies, and more than half of all global government bonds still yield less than 1%, according to BofA Merrill Lynch. Even if U.S. rates were to climb spiritedly – a big “if” given the fragile state of global growth – rates from Europe to Japan won’t necessarily join the party.
8) Central bank largesse, quite arguably, has become the biggest driver of asset prices in recent years, but the bill for all this wanton money-printing will one day come due. Either central banks will eventually succeed in inflating prices, or the surplus liquidity and leverage will suck money from the economy’s productive sectors into its more speculative fads, and central banks will then have to wean us from the lavish stimuli. In either scenarios, gold benefits. And when that happens, some of what glitters just might be gold.