With Japan all set to become the sole owner of Japanese government bonds and equity ETFs and with ECB officials explicitly promising to print euros until the market finally gives up and submits to “monetary dominance,” the utility of owning a barbarous yellow relic may be less clear as it appears that the path to eternal prosperity runs parallel to the road where printing worthless paper to buy other worthless paper somehow doesn’t dead end at the intersection of “absolutely broke” and “massive bubble.”
Be that as it may, there are still some analysts out there who believe owning an asset that can’t be printed by central planners is probably not a bad idea in an era where the CBs of the world have driven the idea of a “market” to the edge of extinction. When you couple that with EM CB demand and cultural dynamics in Asia, you’ve got the recipe for surging prices. Here’s more, via Bloomberg:
Gold demand in Asia is set to double by 2030 and boost prices to a record as investment and jewelry purchases climb, according to Australia & New Zealand Banking Group Ltd.
Demand from retail and institutional investors will jump to almost 5,000 metric tons a year by 2030 from 2,500 tons, analysts including Warren Hogan and Victor Thianpiriya said in a report. Prices may rise to more than $2,000 an ounce by 2025 and to $2,400 by 2030, they said. The bank says it supplied more than 20 percent of China’s gold imports last year.
“The bedrock, the anchor of our views of increasing demand for physical gold will come from rising incomes in Asia,” Hogan, chief economist at ANZ, said by phone from Sydney on Wednesday. “Gold is going to have that investment role and it’s going to become more prominent.”
While the bank has a short-term target of $1,100, prices will increase through 2030 on growing wealth in Asia, rising investment by money managers and expanding holdings at emerging-market central banks, the bank said. If China’s shift to a more open economy is bumpy and global financial instability continues, the price may surge to $3,230, it said.
Rising incomes in Asia will increase gold demand as people purchase more jewelry and continue to channel savings into gold for cultural reasons, according to the ANZ report.
And here's more from ANZ:
Under our central case, gold prices are likely to rise gradually, eventually breaking through the USD2,000/oz level within the next decade. This is the most likely outcome, to which we assign a 45% probability. This expectation reflects our core economic and financial views for the broader global economy. We expect the global economy to experience moderate growth over the next decade of around 3% to 4% annually which will lead to rising real interest rates. This should provide positive, though modest, returns to equity and fixed income markets, creating a headwind for gold prices.
...and even though central banks are by definition enamored with fiat money, EM CB demand will drive price gains…
The reaction of central banks, a key driver of the physical gold market, will be crucial to the long-term outlook. Under our central case, emerging market central banks will continue to accumulate physical gold, bringing their allocations more in line with developed markets. This should see central banks remain net buyers of gold at an average of 75 tonnes per year.
...and ultimately, there’s always a China angle…
Currently, the bulk of commodity trading on organised exchanges takes place in the US and Europe. Gold is no exception. The vast majority of the world’s gold is traded through the London OTC (Over the Counter) market, with an estimated turnover in 2013 of over 500,000 tonnes. This is equivalent to around 170 times the global annual mine supply, accounting for 75% of gold traded. While this market dominates price discovery, gold futures traded on the US-based Comex amounted to around 147,000 tonnes, making up 20% of global turnover in traded gold. Meanwhile, China’s onshore gold market accounted for around 40,000 tonnes or 4% of turnover in 2013.
China’s rapid industrialisation over the past two decades has seen it become an increasingly important trading hub for physical commodities. This reflects its status as the world’s largest consumer of bulk commodities, base metals, precious metals, and numerous other agricultural commodities.
This has led to a natural rise in China’s role as a centre for price discovery in relation to some commodities, which will be further enhanced as the Chinese financial markets grow to be the largest in the world. The development of onshore exchange contracts for commodities in China have supported this trend, and have witnessed a significant increase in traded volumes over the past decade. For example, Chinese onshore markets now set the global prices of coal and iron ore.
Despite China’s position as both the largest consumer and producer of gold, its share of global gold trading is currently relatively modest. Two factors which explain China’s present gold-trading position are that gold contracts are a relatively recent addition to the Chinese exchanges, and regulations presently constrain international participation in the Chinese financial markets. Despite this, the Chinese gold futures market has grown in size, and we are likely to see the further development of a market for options and other derivatives in the near future.
