The debate is on-going as to whether we are entering a period where demand for commodities will fall in price or not. The reports are there that the Chinese government will slow the Chinese economy down to the point where their hunger for resources will slow and commodity prices fall. If they do fall will the world's appetite for gold fall to? And will the gold price fall?
Chinese demand
This week saw China report a 48% rise in its exports in May. A 32% rise was expected, but this jump was a surprise. Just about anything coming from China is a surprise today. When analysts look at China they cannot help but relate the activities there, to the structures in the developed world. But China is completely different to the West. In the first place the Chinese government has a tight control over the economy there and what it wants happens, quickly. In the second place this country has gained traction on a self-sufficient and growing economy, where massive infrastructural development that is larger than the world has seen since World War 11. China is developing basic infrastructure for 1.4 billion people, which is twice the size of the States and Europe put together. The hunger for resources that this can produce far outweighs the impact of a gentle policy of restraint to calm growth from 11% to 8%. China is keenly aware that it will need resources for decades and has a policy of buying foreign resource producing assets to feed that hunger for the long haul. So we would be surprised is the upward trend in commodities would be slackened by cooling economic policies.
Falling prices of commodities
What we have been seeing is a street smart China acting in markets to cool speculation and not allowing it to drive up prices they will have to pay. Instead, strategically standing back when prices roar and waiting for pullbacks and greater quantities being offered by sellers is paying dividends in the form of lowering the cost of commodities. This, we expect, will continue to be their policies regarding commodities now and going forward.
Is Gold a Commodity?
That is the real question in the context of today. By this we mean, is its price subject to the same type of consumption demand as any commodity? The answer is simply - No! Its price action over the last decade has little to do with jewelry or industrial demand or commemorative coin demand. Instead, since the turn of the century, central banks have emphasized that it is considered by them an important reserve asset. Other investors are now seeing the evidence of why this is so.
The major fund community will confirm now that it is a long-term investment that they will not use, but keep as a 'counter' to the potentially bad news expected from other markets. Indeed, these investors believe the gold price will rise as other markets fall.
In the Indian sub-continent, gold has been and will be considered as financial security for families. In China the same beliefs are held. In China, with limited investment options available and a relatively unsophisticated investment community [although a perspicacious one], gold appeals to this nation of savers and to the strong primal needs that accompany a people used to difficult times. So, no, gold is not a commodity, as such.
Will the gold price fall if the commodity trend turns down?
We have no need of giving what might be considered an emotional, biased answer. We simply need to look back to when deflation really hit, as the credit crunch struck in mid-2007. At that time, there was an investor implosion as their wealth was decimated by falling asset values and markets. It was not the inherent value that their investments contained that failed, but their capacity to keep ownership of them that failed. One Power plant owner borrowed against his part-ownership of his company, to buy a stake that gave him a big majority. Once the share price dropped below the value of his loan, he lost all his shareholding. In essence, that's what hit most markets then. And what happened to gold? Yes it did fall, at first, but not by that much [20%], as leveraged investors in gold were replaced by new investors in gold, driven there by fear and uncertainty from other markets.
The growth of the gold Exchange Traded Funds during those days is a testament to the gold price's ability to hold or rise in deflation and collapsing markets. The gold price held its value then, before it started to break upwards amidst a new wave of instability. In reality, gold survived the worst and was seen and is seen as a safe-haven for wealth.
It is fear of uncertainty and instabilities in global financial markets that is driving the gold price up today. For those who keep insisting that gold rises in inflation, we say this is a myopic view ignoring today's gold price, which has a nearly zero inflation factor in it. It's fear in Europe, expecting a potential € collapse and a need for more financial security in the East of the globe that's lifting the gold price upward.
So no, we do not believe that the gold price will fall even if commodity prices fall. In fact the question is far too simple a question to give credit to what will happen to gold. Investors in gold should research far more deeply than at present, to see what has driven the world's desire for gold in the past. You can be sure that they were not barbarians. Today the same factors that made gold so attractive in past eras is doing so now. We expand on this in future issues of the Gold Forecaster - Global Watch.
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