04-May (USAGOLD) — Gold is maintaining a mildly corrective stance, dipping to new lows on the week in overseas trading before rebounding within the day’s range. A second day of dollar gains may be temporarily impeding a sustained move in the yellow metal above $1300.
However, the tepid growth, low/no inflation, and hence easy monetary policy scenario continues to dominate. As growth and inflation prospects erode, the world’s central banks are forced to pile on ever-more extraordinary accommodations in an effort to stop the bleeding; even though there seems to be no evidence that these measures are achieving their goals.
“These increasingly aggressive and counterproductive monetary policies are bullish for gold,” says Greenlight Capital’s David Einhorn. I concur: These factors are likely to underpin gold until we see some sign of reinvigorating growth, or higher inflation. What’s interesting, is that if the inflation goals are met, that too should be favorable for gold.
Another tailwind for the gold market continues to be central bank gold demand. China and Russia are the main actors at this point, but other central banks have been active as well. Famed economist Kenneth Rogoff recommended this week that emerging market countries step up their gold purchases even more.
“I am just proposing that emerging markets shift a significant share of the trillions of dollars in foreign-currency reserves that they now hold (China alone has official reserves of $3.3 trillion) into gold.” — Kenneth Rogoff
Rogoff believes “there is a good case to be made that a shift in emerging markets toward accumulating gold would help the international financial system function more smoothly and benefit everyone.” He seems to believe that emerging countries would benefit from the the reserve diversification and being less dependent on the bonds of rich countries, which happen to (surprise, surprise!) own a lot of gold!
“…there is a case to be made that gold is an extremely low-risk asset with average real returns comparable to very short-term debt. And, because gold is a highly liquid asset – a key criterion for a reserve asset – central banks can afford to look past its short-term volatility to longer-run average returns.” — Kenneth Rogoff
As Rogoff points out, emerging countries have trillions in FX reserves. Imagine the demand implications if these countries start shifting their reserve allocations even a little!
In addition, most of the physcial gold making its way to places east in recent years has been coming from London. The source is logically believed to be the ETPs backed by gold, which saw significant outflows as the price of gold was under pressure in recent years. Suddenly, with the price of gold back on the rise, there is renewed interest in these securities indexed to the price of gold.
Just this past Monday, GLD, the world’s largest exchange-traded fund backed by gold, saw 20.8 metric tons of inflows. It was the biggest one-day expansion since 2011.
If other emerging countries do indeed join China and Russia in bolstering their gold reserves, they may find that their primary source for physical is no longer available. That too would likely have a very positive impact on price.