COMMODITIES:THE GOLD price had a large fall recently, partly as a result of the CME, the US's biggest futures exchange, increasing margin requirements by 27 per cent.
After a parabolic rise, a setback was inevitable, but my view is unchanged – gold is still in a powerful bull market.
Gold has a special place in the human psyche. Unlike flat currencies, which have always failed, gold has endured as a protection of wealth for more than 6,000 years.
The arguments for buying have never been stronger. Gold is increasingly accepted as a currency and haven. Unlike other currencies, gold has no debt. Central banks have switched from being net sellers to large buyers. During the first half of this year they purchased more gold than in the whole of 2010. Also, gold mining companies have reduced their hedging programmes.
Exchange traded funds and very low interest rates are other helpful factors, making it much easier and less costly for private investors to own gold. For years, the Chinese government has been encouraging its population to buy gold as part of their personal savings programmes. In 2010 China imported five times as much gold as in 2009.
As the world’s reserve currency, the dollar should be the bedrock of the international monetary system. Unfortunately its collapse is inevitable. US national debt has risen to $14,000 billion and the unfunded liabilities of social security and Medicare combined are now more than $100,000 billion. How can this be financed without further devaluation?
Fiscal policy throughout the world is very uncertain – always good for gold. The sovereign debt crisis especially in Europe hangs over the market. With QE1 and QE2, a lot more money has been printed and pumped into the global economy. More may be on the way.
Although demand is growing fast, the supply from mines is flat. Most of the world’s easy high-grade ore has already been mined. Gold is not in a bubble – it represents under 1 per cent of global financial assets. Remarkably few people own gold coins. The total market capitalisation of all of the world’s gold stocks is only a little more than the capitalisation of ExxonMobil and Apple combined. – (Copyright The Financial Times Limited 2011)
US markets closed for Labor Day bank holiday.
