In recent weeks, the gold market experienced a notable downturn, plummeting from $1,540 per ounce on May 4 to around $1,480 per ounce by May 17. However, it has since gradually climbed back up, reaching approximately $1,520 yesterday.
Gold has been on a bullish trajectory since early 2001, when it was priced at less than $275 an ounce. It was then unimaginable that gold could rise by 560 percent over the following decade. At that time, gold was often regarded as an outdated relic from a less sophisticated era, with faith in paper currency and the influence of central bankers deemed the way to economic prosperity.
Fast forward to less than two decades into the new millennium, and it is paper currency that seems to be faltering. The value of this currency, along with the influential figures who control it, has been compromised by excessive monetary policies and stimulus measures.
Another significant trend in the first decade of the millennium has been the substantial transfer of wealth from the West to the East, most prominently observed in the rise of China. Now the world’s second-largest economy, China is rapidly approaching the United States in economic stature.
Taking a step back can often provide clarity, illuminating major trends that were previously overlooked. The concurrent rise of gold and the exponential growth of China’s economy are two such trends that deserve attention.
It is difficult to predict where these trends might lead, or what their ultimate outcomes will be. Gold and China’s economy could encounter unforeseen challenges tomorrow. However, to provide insights into current trends and how they could be advantageous, we present a guest essay from David Galland, Managing Director at Casey Research.
Enjoy,
MN Gordon
Economic Prism
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Why Gold Is Going Higher
There are numerous factors contributing to the continued rise of gold and silver as fiat currencies decline. During our recent Casey Research Summit in Boca Raton, faculty member Mike Maloney highlighted a crucial point that, while clear in hindsight, had previously gone unnoticed by many.
In the last major bull market for precious metals in the 1970s, only about 10% of the global population could own gold, primarily due to legal limitations and a lack of financial resources.
Today, very few countries enforce restrictions on gold ownership, and a significantly larger portion of the population has emerged from poverty, ready to invest in precious metals.
China serves as a prime example, having legalized the private ownership of gold and silver in 2004. The country’s remarkable GDP growth has led to a dramatic increase in gold purchases.
A recent article from the Wall Street Journal confirms this trend:
Chinese investors are aggressively acquiring gold bars and coins, surpassing their Indian counterparts as the world’s leading purchasers in the first quarter of 2011.
The burgeoning middle class in China has fueled this demand for gold.
Investment demand for gold in China more than doubled to 90.9 metric tons in the first three months of this year, outpacing India’s modest rise to 85.6 tons, according to the World Gold Council’s quarterly report. China now makes up 25% of global gold investment demand, compared to India’s 23%.
This report reflects the growing appetite for gold among China’s expanding middle class. As inflation concerns rise, many are turning to gold as a reliable investment, aided by increased marketing of the precious metal.
“I believe people will be surprised by the strength of demand coming from China, and we expect this trend to continue,” said Eily Ong, an investment research manager at the Gold Council.
Chinese citizens, known for their high savings rates—often saving about 50% of their income—are increasingly choosing gold over the renminbi as a means of preserving their wealth.
To appreciate the significance of this shift, consider that in 2007, just before gold investment surged, India’s gold demand accounted for 61% of the global total, while China’s was merely 9%.
India is no longer the sole major player in the gold market. Investors around the globe are now willing and able to acquire gold as a safeguard against the inevitable decline of depreciating fiat currencies.
While we may not have fully navigated the recent commodity corrections, numerous unpredictable factors could lead to sudden changes. Therefore, purchasing gold in increments during market pullbacks over the next four to six months remains a prudent strategy.
In the broader context, gold appears poised for persistent upward movement in the long term.
Sincerely,
David Galland
for Economic Prism
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