Is Gold the Sponge that Absorbs All Perceived Risks?

Gold prices closed at $1,458.80 an ounce today. The demand for gold continues to rise as investors seek shelter from volatile equity markets. According to The Wall Street Journal, despite record high prices the price of gold is still below the inflation-adjusted price of $2,348.21 reached in 1980. Gold prices have increased by 146.58% in the last five years in US dollar terms.

Investors have poured billions into physical gold and other gold-related assets in recent years. For example, the SPDR Gold Shares ETF(GLD),the largest gold ETF in the world holds 1,217 tonnes of the yellow metal in its trust valued at over $57.0 billion.

In spite of the rise in gold prices in recent years, Emmanuel Painchault, deputy director and head of commodities and infrastructure, at Edmond de Rothschild Asset Management believes that gold prices will rise further. From an interview in The Asset magazine of Hong Kong:

What do you forecast for 2011?

The start of the year saw two trends. After ending 2010 on a high note (USD1,421/oz), gold price corrected quickly to USD1,313.9/oz in less than a month. It has since rebounded above USD1,400/oz and even reached a new nominal high of USD1,444.95/oz on March 7 2011. This is because the excessive public debt in developed countries does not militate for higher interest rates; the economy has improved but it remains fragile. Besides, inflation is clearly looming: oil is back above USD100/ barrel and soft commodity prices are above their highs seen in 2007 and 2008 when food riots broke out.

These factors contradict the consensus view at the start of 2011 that we would enjoy an inflation-free recovery, which meant that real interest rates could be soon on the rise. In fact, we might stay in a low interest rate environment for longer than expected and in any case, if interest rates were to be raised, it would be to fight inflation. The net effect is that real interest rates are set to stay low -and even negative, as is currently the case in the US — and this has always been bullish for gold prices.

Gold is a safe haven, and the rebound in its price has also been driven by the current upheaval in North Africa and the risk of contagion in other countries like Algeria and Morocco. It will eventually abate, but there will be other geopolitical events that will take the price of gold higher. Our world is certainly not as safe as we previously thought.

Gold is a sponge that absorbs all the perceived risks on this planet, whether they are financial or geopolitical.

Many gold bulls would agree with Emmanuel’s views on gold. Gold prices may continue to rise over the long-term with occasional downs. Some expect prices to reach $2,000 an ounce soon. In an interview last year investment guru Jim Rogers mentioned that he plans to own gold till it reaches $2,000 an ounce.

Update: MoneyWeek article The next big driver of gold’s bull market – China’s middle classes notes that in addition to rising Chinese demand for gold, demand is outstripping supply for many years now as shown in the chart below:


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