Rising wealth, particularly in India and China, is the
fundamental driver of gold price strength and with the gift giving
season imminent we're in for an exciting period.
Frank Holmes
www.mineweb.com
SAN ANTONIO
The ongoing debate in Washington prompted increased Fear Trade
activity in gold this week. The issue over raising the federal borrowing
limit caused the yellow metal to remain around its all-time high.
Gold has now increased for 124 months straight, says Deutsche Bank.
The rally is in its 11th year, lasting nearly three times as long as
other historical rallies going back to 1971. If the metal rose to $2,100
an ounce, it would represent the most powerful percentage increase in
history, according to Deutsche Bank.
I believe what's happening in the market today is a short-term driver
of gold prices spurred by ETF investments. While Deutsche Bank believes
a "market friendly resolution to the U.S. debt ceiling may trigger a
short-term correction in the gold price," fundamentals seem to be in
place to keep gold prices elevated over the long run. Even in many
economic scenarios today, Deutsche Bank believes gold prices "appear
irreversible."
A more important driver that will keep gold prices elevated over a
longer time period is the Love Trade. Marcus Grubb, managing director of
investment at the World Gold Council (WGC), highlighted the significant
aspects of this trend in his interview with Andrew Bell on the Business
News Network (BNN). He says investors need to consider the issues
outside of the euro zone, the debt-ridden countries and fiscal deficits.
More important to him is what he calls the "transfer of wealth from
west to east" and the accumulation of wealth, particularly in China and
India. This is what is driving the longer term strength in the gold
price.
He states that the demand for gold is particularly strong in China:
The country has a $3 trillion surplus, with some of it in gold, and he
estimates that household wealth will most likely rise by five times.
China and India also share a strong cultural affinity for gold as an
investment and jewelry. For these reasons, Grubb believes this will
drive gold demand.
Merrill Lynch has found that there is a positive correlation between
gold jewelry demand and rising prices with increasing wealth. The chart
above shows that as the GDP per capita rises so does demand for gold.
September has traditionally been the beginning of the gift-giving
season for gold. This is the time of year when gold jewelers are the
busiest. The Muslim holy month of Ramadan begins in August and concludes
with generous gift-giving in early September. Then it's Diwali, known
as "the festival of lights" in India, Christmas in the U.S., and Chinese
New Year. The key to this seasonal strength over the past few years has
been demand from China and India.
The spending spree has already begun in East Asia. In the WGC's
second quarter report, physical gold delivered at the Shanghai Gold
Exchange was 14.65 percent higher than the previous year. Gold purchases
also remained strong across East Asia, with tourists from mainland
China buying gold in Hong Kong. In India, coin stocks, symbols of good
fortune, were running low during the Akshaya Tritiya annual holiday in
May.
Immediately following Marcus Grubb's interview, I spoke with BNN's
Andrew Bell and expanded on the Love Trade season. We also discussed how
today's financial worries in the market place have caused a selloff in
many equities and gold stocks. I talked about how many of these gold
stocks are becoming extremely undervalued relative to the price of gold.
With approximately fifty percent of the world's population controlling the Love Trade, we're in for an exciting period.
Frank Holmes is CEO and Chief Investment Officer, U.S. Global Investors. - www.usfunds.com
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