NEW YORK (
) -- Experts at the Argyle Executive Forum are making a case to buy gold despite its lackluster performance of late.
David Lamb, managing director of jewelry and marketing of the World Gold Council, made a strong case for Indian and Chinese gold buying. India consumed 657 tons of gold in 2010 and actually increased the amount it bought in rupee terms, meaning that people spent more money on gold.
India's 5-day Diwali festival begins today as gold prices are over $1,700 an ounce. Typically the festival of lights provides lots of reasons for consumers to buy gold, although initial reports indicate that buying has been modest. Lamb seems undeterred by short term trends. Indian women, for example, hold 18,000 tons of gold in jewelry form, says Lamb, versus 8,133 tons held by the Federal Reserve. "This market will
continue to move East."
Martin Murenbeeld, chief economist at DundeeWealth, also makes his bullish case for gold. First, he says the European Central Bank has increased its balance sheet by 70% versus 200% for the Federal Reserve. He also believes that the ECB will be forced to keep pumping liquidity into the market to stabilize the Eurozone.
"The more liquidity that is put in the system, the higher goes the gold price," he said. Murenbeeld also speculates that inflation in emerging markets, especially in India and China, almost 10% and 6.1% respectively, will also push prices higher. Lastly, the U.S. dollar is fundamentally weak, which means central banks might want to diversify out of dollars into gold. That trend has already been seen as central banks have become net buyers of gold rather than net sellers.
Murenbeeld says that central banks could collateralize their gold. PIIGS -- Portugal, Ireland, Italy, Greece and Spain -- collectively own 3,000 tons of gold. Italy, which owns the most at 2,400 tons, has a history of using gold as collateral. "I don't think the gold will come on the market but that it will be collateralized." Tongue and cheek, Murenbeeld speculates this could be a way to get China interested in helping Eurozone countries, swapping gold for cash.
Murenbeeld also thinks that politicians will actively try to devalue the U.S. dollar to spur growth. He points to the recent trade bill that just passed the Senate, which raises taxes on imports based how undervalued the foreign currency is deemed to be -- a direct slap at China's weak yuan. Murenbeeld also speculates that the Federal Reserve will have to pump more money into the system, perhaps by buying more mortgaged backed securities.
The one risk for a higher gold price, says Murenbeeld, is a recession. Mureenbeeld says gold doesn't do well in recessions as mass liquidation strikes all assets. But gold does well during the time after a recession when politicians desperately try to jumpstart the economy.
Another risk cited is the threat of a hard landing in China, when China slows growth too fast, which will ultimately curb gold buying. Murenbeeld says, however, that a hard landing in China, under 6% growth, has a very low probability and that growth can moderate safety at 7.5%-8%.
John Hathaway, portfolio manager at Tocqueville Asset Management, says the markets are conducive for "capital market liquidity moving into gold." Negative real interest rates are the key "if liquidity capital cannot get a return in risk free money ... that is like opening the flood gates for capital moving into gold."
Hathaway sees a period of stagnant growth and that more years of this will trigger more social unrest. "What this means is that policy is in a box," meaning that deficit spending and stimulus programs will continue. "As long as you have that you can forget the day to day headlines. It is a very positive environment for gold." Hathaway says that gold is a proactive strategy to deal with this climate and that investors should "get used" to $100 price swings.
Hathaway doesn't think that gold's 10% decline in September, which took prices from $1,923 an ounce to 1,550 an ounce, is material. Hathaway still thinks that gold is a safe haven and that investors simply needed something to sell. "It's a liquid asset with no counter party risk."
Gold stocks are trading at a huge discount, says Hathaway, who says gold stocks can be a "do-over" for those investors that missed buying the physical metal. Hathaway green lights owning the
SPDR Gold Shares
as well as gold stocks.
Until there is a unity of political will like what happened during the Reagan administration when Paul Volker, then-chairman of the Federal Reserve, stepped in and tamed inflation, Hathaway sees gold as the most solid alternative to currencies.
Written by Alix Steel in
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