Home' Australian Resources and Investment : March 2015 Contents Volume 9 Number 1 • Australian Resources and Investment • 91
As you can see, despite the correction
of the past couple of years, gold has
comfortably outperformed traditional
assets, especially over the last 10 years.
Conventional theory would have it
that the kind of appreciation in the gold
price we’ve seen since the turn of the
century can and would only happen in a
period of soaring inflation.
Yet, this is not what has happened at
all. Indeed, over the past 15 years, we’ve
seen overall inflation rates decrease
substantially. Back in 2000, the
inflation reading at the end of December
was 5.8 per cent for the year. By the end
of 2014, inflation had dropped to just
1.7 per cent for the year.
Indeed, if official inflation figures
are to be believed, the entirety
of the new millennium has seen
uncharacteristically low inflation.
Over this 15-year period, inflation has
averaged just three per cent annually.
The average inflation rate from 1970
through to the year 2000 was more than
double that, coming in at 6.9 per cent
This is not just an Australian story,
either. United States inflation rates
came in at 3.4 per cent back in 2000.
The country has only ever had one
reading higher than this in the past 15
years, and by 2014, it had dropped to
less than half of what it was in the year
2000, closing out last year at just
1.6 per cent.
If gold were merely just an ‘inflation
hedge’, then it makes no sense that
we’ve seen prices more than quadruple
and outperform all major asset classes
on the planet, in what has been not only
a historically low inflation, but also one
that is falling.
Instead, what the past 15 years tells
us is that there are a number of other
drivers that impact gold prices.
3 Hedge against market volatility:
Demand has typically risen in the
face of elevated market risk, of
which there has been no shortage of
the past 15 years (NASDAQ crash,
subprime, global financial crisis
(GFC), United States debt ceiling,
Euro ‘break up’ fears).
3 Safe haven demand: Gold prices
have been supported over this
period by heightened geopolitical
uncertainty (September 11, Iraq War,
Arab Spring, Crimea, et cetera).
3 Procyclical consumer demand from
Asia: As it stands today, the better
part of 70 per cent of annual physical
gold demand comes from Asia and
the Middle East, with China and
India the two major drivers.
3 Central bank demand: After more
than 20 years as net sellers of gold,
central banks turned net buyers in
the aftermath of the GFC.
When we look at the drivers above,
we actually come to the conclusion that
the potential for higher Western world
inflation should be seen as merely the
icing on the cake in terms of driving gold
prices higher in the coming years.
Central bank demand should stay
robust for years to come, with emerging
market banks needing to diversify at
least a portion of their foreign exchange
reserve holdings away from their almost
complete reliance on United States and
European sovereign debt.
Individual demand from Asia,
India and the Middle East can also
be expected to strengthen further.
India has some of the most favourable
demographics on the planet, while
in China, 24-carat gold jewellery in
particular is seen as a highly desirable
consumer good. Surveys constantly
indicate that Chinese citizens are more
likely to buy gold jewellery than they are
designer watches, handbags, shoes, and
so on. Several hundred million people
entering the middle class over the next
few years creates a major tailwind.
Underpinning all of this, of course,
period of low interest rates and central
bank money printing for years to come.
While the market obsesses over whether
or not the Fed will make just one interest
rate hike of 0.25 per cent, we’re seeing
stimulatory central bank policy the world
over as 2015 gets underway.
At least 17 central banks have eased
policy so far this year, with the Reserve
Bank of Australia joining the list in early
February, when it pushed the cash rate
to a record low of just 2.25 per cent.
It will be below two per cent almost
certainly by the end of 2015 at the rate we
are going, something we forecast early last
year when most were calling for hikes.
All of this stimulus bodes well for
considerably higher gold prices between
now and the end of the decade, even
though the short-term outlook is still a
With the two other traditional safe
haven asset classes – government bonds
and cash – already offering negative real
returns in most of the developed world,
gold will increasingly be the refuge of
choice for prudent investors.
And while we haven’t seen official
inflation rear its ugly head in the
Western world just yet, history and
common sense would suggest that it is
just a matter of time.
With that in mind, while the last 15
years tell us that gold is much more
than an inflation hedge, we are left with
one final thought that should excite gold
bulls: if gold can quadruple in an era of
low and declining inflation, then imagine
how much higher it can go when
inflation finally does take off.
International Shares (hedged)
Australian Listed Property
Gold (in AUD)
Links Archive December 2014 June 2015 Navigation Previous Page Next Page