Investing in Gold PDF Print E-mail

By Mark Lisnyansky


Is now the right time for investing in gold? Will gold investment outperform other types of investments and steadily appreciate in value?

By analyzing global economic trends, one can arrive at an educated decision as to whether buying gold is a proposition with a high degree of certainty for above average returns over the long term for years to come.

Emerging Markets such as China and India Rapidly Increasing Gold Consumption

It is well known that China, India, and other emerging markets currently represent the engine of the world economy. Economists expect that household incomes in these emerging markets will continue increasing at a double-digit pace. Precious metals rank high on the list of favored purchases and investments among these large and growing populations with newly available disposable income.

The population of India is approaching 1.2 billion, and Indians have always been among the leading consumers of jewelry – thus driving demand for gold products. The Central Bank of Indian central bank has been buying gold to increase its share of national reserves. It has recently purchased 200 metric tons from the IMF and plans to continue investing in gold.

The Chinese economy is a prime indicator of prevailing economic trends. In 2010, 40 million Chinese households will earn more than 48000 renminbi (US$7000) per year, equivalent to US$27000 in terms of purchasing power and enough to qualify a household as middle class by U.S. standards.

The number of Chinese with at least US$1 million in assets has reached 400000 and is increasing daily. Meanwhile, the number of U.S. households with a net worth of US$1 million or more, not including first homes, is back to over 7 million.

China's booming growth in the coming years will undoubtedly have profound effect on gold valuation and the performance of gold investments. The Chinese, cherish gold as the premier symbol of wealth and store of value and are buying gold for this same reason as the middle class of India, Indonesia, Malaysia, etc. Gold consumption in China, relative to the country's GDP, is about five times higher than in the U.S. Importantly, this robust demand is rising at over about 25% per year as more and more people there are buying gold products.

But the real driver and trend setter for future gold demand is China's central bank, along with Indians and a number of others.

Chinese Economists Urging Gold Reserve Increase

Chinese economists are urging their government to quadruple the nations gold reserves. China's foreign reserves now stand at nearly US$3 trillion. And they have been growing at a remarkable rate, doubling every two or so years.

Over two-thirds of that sum has been until now allocated to U.S. treasuries. The prospect of inflationary pressures is very real and quite negative for the future value of the dollar, so diversification into buying gold and commodities is a must. Meanwhile, China holds only 1% or so of its reserves in gold, which equates to approximately 1000 metric tons. By comparison, the U.S. holds nearly 70% of its reserves in gold. China has little choice but to be investing in gold in order to balance its growing portfolio with stronger assets than the U. S. dollar.

For the past seven years China has been quietly buying gold, somewhat boosting its holdings of the metal. But even at 1000 tons, which is a gold investment of approximately US$ 35 billion (at $1100 per ounce), these initiatives thus far bring gold holdings to less than 1.5% of China's total foreign reserves.

To match the gold reserves of the Eurozone and the U.S. (11 and 8 thousand tons respectively), China would need to be buying gold to the extent of at least US$ 300 billion -- thus bringing its gold investment to a 10% allocation of its total foreign reserves. Such massive quantity will inevitably attract the attention of the markets and will significantly affect the future value of a gold investment.

The continuing and increasing gold investment by the high-growth economies and these countries growing middle class populations do irrevocably predetermine the supply/demand equation. Buying gold at $1500 per ounce may be the new norm in by 2011 – but one should not expect the price to stop there.


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Last Updated on Wednesday, 06 January 2016 08:23