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According to a study by Amit Bhartia and Matt Seto of US fund manager GMO,
conventional wisdom has it wrong.
“The prevailing view is
that the rapid rise of gold prices over the past 10 years has been caused by
monetary authorities in the developed world debasing their currencies.”
That doesn’t fully add up
to them because while gold climbed from US$300 per oz
to US$1,700 during the period, “inflation remained very well
behaved”.
According to their report, the missing
factor is emerging markets consumption.
With data from GMO, GFMS, World
Gold Council and Bloomberg, they show that Asia’s percentage of global
gold demand grew from 39% in 1999 to 57% in 2010.
Despite all the media attention
they attract, ETF purchases of gold accounted for a relatively small part of
the total demand.
Explaining the development, the
authors say that while savings in emerging markets (primarily China and
India) rose dramatically over the period, retail investors had few options to
create wealth. “Essentially, there was an enormous increase of money available
to invest and, given the lack of good alternatives, gold was a preferred
choice,” they say.
So why publish their while paper
now? “Our intent is not to make predictions about the price of gold,
but to create awareness that emerging markets represent a significant factor
in how gold is being, as well as will be, priced in the future."
 
Download "Emerging Consumers Drive Gold
Prices: Who Knew?" from GMO homepage
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