Secular bullish gold trends intact When it comes to gold many investors first think about inflation. Gold and other precious/industrial metals make good inflation hedges and are safe harbor investments. In times of crisis investors flee into safe assets such as gold in order to preserve their capital. The financial crisis contributed to investment gold demand as uncertainty peaked. A number of reasons suggest that the underlying supply/demand fundamentals for the gold industry are intact. Portfolio construction motivations also add to future gold demand: 1. Gold supply is limited. In the 1990s large new deposits were either discovered or were coming straight to market. Since then new discoveries of large supplies have become increasingly scarce which will have a favorable long-term effect on gold prices. 2. Demand remains high. Generally, gold demand is driven by three categories: Investment demand (such as from ETFs), physical demand from the jewelry-, technology and dental industry as well as central bank activity. Jewelry demand in Asia, particularly in China and India, is one of the most important physical drivers of the gold price. Both countries dominate the worlds jewelry and coin markets. Higher demand from Chindia is driven by increasing wealth in those economies and represents tailwinds for rising prices in the future. 3. Investment demand is often highly impacted by crises situations such as wars, economic uncertainty, geopolitical instability, terrorist attacks etc. The student of market and economic history knows that the human race regularly produces one of those events. Gold is and remains a safe harbor investment that investors gravitate to when they experience a confidence meltdown. 4. Gold provides inflation protection. 5. Gold and other precious metals are considered a separate asset class which reacts differently to macroeconomic developments (interest rates, inflation, trade and capital flows etc.) and provides diversification benefits. Bottom line Despite short-term gold price declines that may be impacted by the prospects of tapering, the long-term fundamentals remain intact and support an investment in gold producers.
Posted on: Mon, 21 Oct 2013 12:36:43 +0000
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