Gold bulls on the march again

February 21, 2012


I read on Flipboard over night that US Hedge fund manager John Paulson is getting long gold and telling others to get on board as well because of the inflation that is coming down the road from governmental policies being run at the moment. With all due respect this sounds a little bit like what we used to call “book talking”. That is when you have a position on you love it and you talk it up – you are in effect talking your book.

The History of the types of financial crises we are having now suggests that Mr Paulson is right but frankly I have no idea when the inflation he is talking about is going to come. But to reiterate I do believe that it is on the way eventually. Equally however I believe that the globe is closer to deflation than inflation at the present time on the back of still weak aggregate demand in the private sector and a political love affair with austerity which is also dampening demand in individual and the global economies.

But something is up in gold again as I write and as you can see in the chart (from Bloomberg above).

But what’s going on?

The answer may lie in the chart above and some interesting analysis from Jeremy Grantham’s money management firm GMO which I also picked up on Flipboard this morning (link here).

it bears mentioning that OECD investment demand for gold still remains far, far below historical highs from 30 years ago. But the broader view suggests, in contrast, that reserve-accumulating economies in Asia are the larger drivers of demand, as they must offset their long exposure to OECD currencies.

Indeed, according to the GMO chart, emerging Asia has now crossed the 50% threshold as a portion of global demand. This underscores again that the current bull market in gold has few similarities to the previous example, and analysts should use caution when drawing on the experience of the late 1970′s.

I find this relationship worthy of further investigation. Certainly as I noted above I don’t think real sustainable global runaway inflation is going to happen anytime soon but equally I can’t see this demand from the emerging world  slackening off either. If you had to place your new and hard-won wealth into an asset would you buy the currencies or debt of the developed world or something harder and more substantial.  

So maybe just maybe, like the Aussie Dollar, gold is going to defy many for longer than we thought previously.

Have a great day.

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation

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2 Comments on “Gold bulls on the march again”

  1. shane Says:

    FT STory … The World Gold Council predicts it will this year overtake India as the world’s largest gold market.

    The story is an interesting perspective on why demand for gold out of China is so strong…


  2. tristencosgrove Says:

    Great post Greg, I think along the same lines, I’m still patiently waiting and watching for deflation to flip into inflation.


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