8/4/2010
By Conley Turner, Research Analyst

The ubiquitous television advertisements and proliferation of new store fronts everywhere all point to the fact that the word is out about gold.  From individual households to sovereign governments, there appears to be a worldwide drive to acquire as much of the commodity as possible.  Typically, these are all indicators that a bubble in any asset class is developing.  Yet, despite the solid gains recorded in commodity's price over the past few years, there appears to be yet more upside.

Investors are currently seeking ways to protect and preserve wealth from the uncertainties brought upon by the global economic crisis.  A significant amount of concern abounds as governments all over the world print paper money at a torrid pace in order to provide liquidity in a relatively restrictive credit environment.  As a result, the underlying values of many currencies are being severely eroded.  Gold has historically been recognized as a store of value and a safe haven in times of uncertainty.  This perspective is being embraced in this environment.

The Zimbabwe Model

A poignant example of what occurs with the out of control printing of money is the case of Zimbabwe. For a number of years, that country's leaders did just that without consideration of the consequences.   Things got to such an extreme that at one point, the central bank was producing trillion dollar currency notes which were for all intents and purposes, worthless.  Eventually that situation proved to be unsustainable and the country was forced to resort to using gold and the U.S. dollar as trusted mediums of exchange.  While it is unlikely that many countries will follow this tortuous path, it is important to recognize that paper currencies are not completely reliable stores of value.

The fact is that with all the printing of money that is occurring, the specter of inflation looms large for many countries.  This is an important consideration as inflation undermines the foundation of an economy.  Financial transactions are typically based on the value of a particular currency.  When the value of that currency is put into question due to the ravaged of inflation, then it leads to all sorts of problems.  In the Zimbabwe case, a billion dollar note was hardly sufficient a buy a loaf of bread. It is interesting to point out that the US dollar and the British pound have been two of the most successful currencies in the history of the world.  Yet, over the past century or so, these currencies have both lost most of their underlying value.
Sovereign Interest

More than a few countries have been taking aggressive steps in order to increase their exposure to gold. In the past year alone, the central banks of India, the Philippines, Kazakhstan and Russia among others have been major buyers. China has been a standout in this regard also as the county has more than doubled its gold reserves over the past five years or so.  To underscore its position in the market, the government recently announced its intention to develop the country's gold industry.  The move was driven largely by the improving competitiveness of the country's financial markets.

The Common Man

Individuals and households are an important aspect of the gold trade. During the 2010 first quarter, demand for gold in China increased  by approximately 11 percent year on year to 105.2 tons.  Similarly, the propensity of the Indian population to buy gold in the form of jewelry remained impressive with total consumer demand rising by 698 percent to 193.5 tons versus the same period a year earlier.  The continuation of this gold consumption trend is likely to be sustained given the significant GDP growth occurring in these two economies.

All in all, there appears to be a fundamental shift in the broad appeal of gold.   As such, there is increased visibility for additional price increases especially given the limited supply and the rising demand. One industry official has estimated that the total amount of gold currently available above ground in the world today is only able to fill two Olympic sized swimming pools.  Yet, demand for the yellow metal keeps growing. 

Conley Turner
Wall Street Strategies