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What Gold Bubble?
April 22, 2010
Gold is getting a lot of attention these days. It’s all over the media, the backlog to purchase gold coins from the U.S. Mint is years long, and one gold exchange company even ponied up for a Super Bowl ad.
Many point to this and shout “Bubble!” Gold has risen too far too fast, they say, and soon the euphoria will give way to despair. We’ve been hearing this since February of last year, when gold was trading around $900. That’s more than 25 percent below where it is today.
Why didn’t the gold “bubble” burst? It could be because there isn’t a gold bubble.
The chart below compares the price performance of gold bullion during the 1970s bull market (green line) to the current price trend (red). As you can see, the price line since the start of 1999, when gold was trading just under $300, has been far less volatile than during the earlier period.
Gold remains as a safe haven during times of economic uncertainty – in the 1970s, double-digit inflation rapidly eroded wealth, and these days there is a lingering fear of higher inflation as the federal government piles more debt onto its already groaning balance sheets.
But a key difference is that gold has gained stature as a legitimate asset class for investors. During the 1970s runup, investment demand peaked around 27 million ounces, about half of what it is today. Contributing to this demand are new investment vehicles, including gold-oriented mutual funds and bullion-backed ETFs, both of which have made it easier for investors to allocate a portion of their portfolios to the yellow metal.
We also have greater affluence in the developing world, where people have traditionally turned to gold to store their wealth. Central banks in these countries, most notably China and India, have built up their gold holdings as a way to diversify their foreign reserves away from the dollar and other paper currencies.
The 1990s dot-com era was a bubble, and likewise the 2000s housing market. But gold? We don’t think so.
Investments in natural resources, emerging markets and infrastructure are subject to distinct risks as described in the funds’ prospectus.
Chart of the Week: Gold’s Breakout
April 13, 2010
We continue to be encouraged by the price action of gold in the face of a strengthening U.S. dollar. Typically, gold and the dollar move in opposite directions, but so far this year gold is up more than 6 percent, reaching a year-to-date high on Monday. At the same time the dollar has appreciated about 4 percent.
Gold has also been appreciating against other major currencies in the developed world, as the chart above shows. The eurozone, Britain and Japan are all struggling with rising fiscal deficits and the after-effects of the global financial crisis.
In fact, the price of gold in euros made another record high last week as the worry of a sovereign debt default by Greece and other indebted countries in Europe continues to threaten the stability of the continent’s primary currency.
In our view, this gold breakout against the world’s primary paper currencies highlights gold’s growing allure as a store of value against further currency debasement caused by governments spending with little restraint. Gold appears to be reassuming its role as an alternative currency unencumbered by political liabilities.
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All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
China’s Appetite for Gold
March 30, 2010
What would happen to the price of gold if China’s annual consumption went up tenfold?
That’s the high-end demand case laid out by the World Gold Council (WGC) in its new report “Gold in the Year of the Tiger,” which focuses on China.
The WGC says China’s gold consumption of 423 tonnes in 2009 works out to about one-quarter of a gram per person, which is lower than other Asian countries with cultural affinity for gold (chart). The Saudis consume more than three grams per person, and in Hong Kong, it’s more than two grams.
“If gold were consumed in China at the same rate per capita as in India, Hong Kong or Saudi Arabia, annual Chinese demand could increase by at least 100 tonnes to as much as 4,000 tonnes in the jewelry sector alone,” the WGC writes.
OK, 4,000 tonnes (128.6 million troy ounces) looks pretty extreme, even for the most enthusiastic gold devotees. The WGC offers a more reasonable but nonetheless bullish outlook: China’s gold demand has nearly doubled over the past five years (13 percent growth per year), so it would not be a huge stretch for a doubling to roughly 850 tonnes per year in the next decade.
Gold demand is rising as China’s middle class expands, and while the nation is the world’s largest producer, domestic supply falls short of demand by some 100 tonnes per year and that gap will almost certainly widen with rising demand.
As more foreign gold is diverted to the Chinese market, the impact on world prices could be significant.
Deflation Risk: Good for Gold
February 19, 2010
Massive sovereign debt loads, yawning budget deficits and high unemployment in the developed world raise the chances of deflation in 2010. If deflation were to occur, it could be good for gold.
I have written about deflation in the past, but it’s such an important theme that it warrants a revisit. I see it as a key risk to the global economy — a far greater risk than inflation in the near term.
Deflation is especially risky because, once under way, it’s a cycle that’s hard to break. In the U.S., for example, slow economic activity and high joblessness (currently around 10 percent) can drive down prices, which leads people to delay spending because they think prices will keep falling. This further slows economic activity, which leads to more joblessness, and around and around it goes.
The competitive effects of globalization add to the deflation risk. Labor is getting ever cheaper in a worldwide jobs market, and excess global capacity continues to lower production costs.
An article from the Federal Reserve Bank of San Francisco offers an excellent discussion of deflation risk based on studies of the Great Depression and the late 1990s in Japan. According to an analysis detailed in that article, there’s an 85 percent chance of deflation in the U.S. this year.
Governments are keeping capital cheap — interest rates are near zero and will be for a long time. U.S. banks have a lot of money to lend, but we don’t see that happening based on measures of money velocity. And given the enormity of government debt loads, future fiscal and monetary options are limited — not that the White House and Congress won’t be tempted to provide desperation stimulus as the 2010 midterm elections draw closer.
In the face of low or no domestic growth, the U.S. and other countries can be expected to engage in a competitive spiral of currency devaluation to increase exports. This race to the bottom stands to lift gold as investors seek to store their wealth in an asset with tangible value.
*By clicking the link, you will be redirected to FRBSF.org. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns. #10-118
Peak Gold Production
February 01, 2010
From the latest Weekly Investor Alert, a publication of U.S. Global Investors:
Research from Cormark Securities shows that global gold production peaked in 2001 at 2,600 metric tons (chart below). World output has been steadily declining from that point because of lower grades and higher capital costs that are making it uneconomic for producers to bring new gold onto the market.
The China Gold Association said China’s gold output jumped 11.3 percent to a record of 314 metric tons in 2009 (a little over 10 million troy ounces), securing its position as the world’s largest gold producer for the third straight year.
Investment demand for gold continued to be robust in late 2009. The World Gold Council said investors bought 30 metric tons via exchange-traded funds in the fourth quarter of 2009, contributing to an overall total of 1,762 metric tons (56.6 million troy ounces) of ETF holdings for the year.
India started the year on a positive note by importing 35 to 40 metric tons of gold during the first 27 days of January, up from 9.8 metric tons last January. Stable prices have given 2010 a good start to gold demand, the Bombay Bullion Association said.
The Weekly Investor Alert, compiled by the Investment team at U.S. Global Investors, provides timely and insightful coverage of gold, commodities and emerging markets. Click here to sign up for this valuable investing resource.
Net Asset Value
as of 09/08/2010
- Global Resources Fund
PSPFX $8.78 +0.05 - Gold and Precious Metals Fund
USERX $17.44 +0.03 - World Precious Minerals Fund
UNWPX $20.18 -0.01 - China Region Fund
USCOX $8.61 -0.02 - Eastern European Fund
EUROX $9.11 +0.13 - Global Emerging Markets Fund
GEMFX $8.17 +0.08 - Global MegaTrends Fund
MEGAX $7.71 +0.04 - All American Equity Fund
GBTFX $20.02 +0.09 - Holmes Growth Fund
ACBGX $16.04 +0.15 - Tax Free Fund
USUTX $12.58 -0.01 - Near-Term Tax Free Fund
NEARX $2.26 -0.01 - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change