Speech presented to the SPC Precious Metal Company Seminar
Bangkok, Thailand — Monday, September 13,
What a pleasure it is to be here today in this beautiful city to talk
about one of my favorite subjects: The Outlook for Gold and Silver. I am
honored by the S.P.C. Precious Metal Company and the Thailand Stock Exchange
for sponsoring this seminar . . . and by all of you for taking time out of
your busy schedules to hear my thoughts on these metals.
So, let me begin with gold: I believe, before long, we will see gold
hit $1500 an ounce — possibly even before the end of this year . . . or
during the first half of 2011.
Not only will prices move substantially higher in the months ahead
— but the uptrend still has years to go . . . with gold very likely
reaching $2000 and eventually $3000 or even $5000 before the gold-price cycle
shifts into reverse.
However, I also expect continued high gold-price volatility with big
corrections along the way — so much so that some observers will
prematurely declare the bull market over long before its time.
Further down the road, I think the yellow metal’s price at the
bottom of the next bear market will be more than $1000 an ounce . . . and
possibly more than $1500 an ounce.
Top Nine Bull Points
Just so you know where I’m going, let me quickly list the top
nine bullish factors that, in my opinion, support this forecast — and
then, in turn, I will discuss some of these bull points in more detail.
inflationary U.S. monetary and fiscal policies — past,
present, and future — along with a recession-like economic performance
— a “double dip” or worse for years to come.
Europe’s simmering sovereign debt crisis, which has not only undermined
the euro’s appeal as an official reserve asset . . . but has also
pushed the European Central Bank to pursue inflationary monetary policies . .
. and has pushed more investors in Europe and around the world to seek the
safety of gold.
continuing — if not growing — interest by the official sector. In
particular, the central banks of a number of newly industrialized emerging
nations are seeking to diversify official reserve assets into dollar
rising long-term saving, investment, and jewelry demand for gold from China,
India, and other gold-friendly nations enjoying healthy growth in business
activity and household incomes — growth that is likely to continue at least
rising private-sector investment demand in the older industrialized nations
reflecting fear of inflation, currency depreciation, and a loss of confidence
in governments to deal effectively with today’s economic challenges.
the continuing maturation of what I call the “gold-investment
infrastructure” — in other words, the development of new
gold-investment products and channels of distribution in many important
the relatively small size of the world gold market compared to other capital
markets — such as equities or currencies — so that even small
shifts in portfolio preferences away from currencies, or equities, or real
estate, for example, may have little price effect on these big markets but
will have a relatively large, indeed profound, effect on gold.
the recent onset of global food and agricultural inflation.
stagnant world gold-mine production for the next five years
Economic Policy and Prospects
Let’s look at some of these bullish factors more closely . . .
beginning with the U.S. economy.
The danger of a “double-dip” recession is now being widely
discussed as a real possibility after many months of happy talk about
economic recovery from the Federal Reserve, the Obama
Administration, and most Wall Street economists.
The current political impasse and lack of consensus in Washington
leaves the job of reviving the economy up to the Federal Reserve.
I believe that continued recession-like business conditions will force
the Fed to press harder on the monetary accelerator — and that
unbridled monetary creation will lead to dollar devaluation and gold-price
Today’s economic malaise, at least in the United States, is the
consequence of more than two decades of easy credit, low real interest rates,
and excessive borrowing — by America’s households, businesses,
and the public sector — much of it to finance non-productive consumer
spending and military adventures the country could ill afford.
As a result, we have had excess consumption, insufficient capital
investment, and an erosion of America’s fiscal health . . . an erosion that ultimately led to the breakdown in
financial markets and the crippling of our banking system at least in the
mature Western economies.
This is a structural problem that requires long-term structural
solutions. But policy makers in Washington, no matter how well intentioned,
are pursuing cyclical policies that are incapable of producing a quick fix.
The American economy may be compared to a recovering alcoholic: We
must restrict spending, restore saving, and put our financial house back in
order . . . but the economic doctors from Washington to Wall Street tell us
the cure is not abstinence . . . but more spending, more buying, and still
World currency markets are telling us that these short-term policies
will not solve our long-term structural problems — but promise not only
a sluggish economy for years to come . . . but also higher inflation and a
continuing depreciation of the dollar.
There are a number of good reasons to expect a renewed business
downturn followed by years of sluggish growth with higher inflation and a
In recent decades, America’s economic growth depended on the
free-spending consumer — and consumer spending typically accounted for
65 to 70 percent of GDP. But clearly consumers are in no shape to continue
their spending spree. Thankfully, consumers have begun spending less and
saving more, reducing debt to rebuild household balance sheets after many
years of excessive borrowing.
Household anxiety is also on the rise, a consequence of high chronic
unemployment and worries about job security. Many families have seen a big
decline in their personal assets — a loss of wealth associated with the
fall in home prices . . . and lower stock prices on Wall Street that have
eaten away at retirement savings. Feeling less wealthy, even if losses are
unrealized, leads to less spending and more saving — what economists
call the “wealth effect.”
Some consumers who might wish to continue their old habit of borrowing
and spending are finding that credit is no longer so readily available. For
one thing, they can’t borrow against the home equity because the fall
in house prices has reduced or erased their unrealized gains in the value of
For another, banks have become risk-averse and are lending less to
consumers, not only on home-equity loans but also on credit card and other
consumer lines of credit. Moreover, some banks that would typically lend in
their local communities have become insolvent and shuttered by banking
Similarly, banks have cut lending to small- and medium-size
businesses, a vital segment of the American economy that historically has
been the engine of economic growth and expanding employment.
It’s not just consumers and small businesses that are spending
less: State and local public-sector budgets are also in crisis across
American. With most states and cities legally prohibited from operating in
deficit, falling tax revenues are beginning to trigger public-spending
restraint — including layoffs, reduced benefits to workers and
retirees, and cuts in social programs.
With consumers, small businesses, and local governments unable to lead
us out of the economic wilderness, the U.S. economy, at best, will muddle
along with at least a few years of recession-like business conditions,
unacceptably high unemployment, above-par inflation, and higher gold prices,
much like the stagflation we experienced in the 1970s.
Many economists are now adjusting downward their expectations for U.S.
economic growth . . . and, some like myself see more
recession-like business conditions ahead.
In fact, the latest GDP data indicate that the economy was in worse
shape during the past year than previously thought by mainstream economists.
Moreover, stripping away the contribution to GDP growth resulting from
business inventory adjustments and temporary Federal stimulus programs leaves
a gloomy picture of an economy that is nearly dead in the water.
This anemic performance was despite the trillions of dollars spent by
Washington on bailouts, stimulus programs, incentives for homebuyers, and
other short-lived nostrums. I would argue that counter-cyclical fiscal and
monetary policies are not capable of generating sustainable economic growth
in today’s economic circumstances.
You may be asking: “What does all this have to do with
gold?” Well, a lot, actually!
Disappointing U.S. economic activity will have serious detrimental
consequences for the Federal budget deficit . . . and, importantly, for U.S.
It will reduce tax revenues and boost both automatic and discretionary
spending, thus raising U.S. Treasury funding requirements, just when foreign
central banks and private investors are cutting back on their investments in
U.S. Treasury securities.
Not too many months ago, most Fed watchers were predicting the U.S.
central bank would have, by now, begun raising its key policy interest rate,
the Fed funds rate. But, from today’s vantage point, any interest rate
tightening still seems far off.
Instead, it looks increasingly likely that the Fed — rather than
raising interest rates or withdrawing liquidity from the financial system
— will soon be embarking on a second wave of quantitative easing,
buying Treasury securities and possibly also mortgage-backed bonds, municipal
bonds, and corporate securities.
I have no doubt that America’s central bankers will do whatever
they think it will take to turn things around. In a recent speech
Chairman Bernanke said the Federal Open Market Committee, the central
bank’s policy setting arm, “is prepared to provide additional
monetary accommodation through unconventional measures if it proves
necessary, especially if the outlook were to deteriorate significantly.”
Bernanke and his colleagues at the Fed thinks
the answer is “Quantitative Easing” — in other words,
creating massive amounts of money.
All of this will eventually produce more inflation, a weaker dollar,
and more demand for gold from individual and institutional investors . . .
and from central banks around the world.
Sovereign Debt — More Problems to Come
The United States isn’t the only major economy with big
problems. Indeed, Europe, still has rough sailing
ahead. Many of the policy mistakes taken in the United States over the past
few decades have been made by Europe’s most heavily indebted economies.
Early this year, the recognition that some of the more indebted
European countries — Greece, Spain, Portugal, Italy, and Ireland
— might not be able to continue rolling over sovereign debt —
touched off a rush of demand for physical gold investment products —
small bars, bullion coins, and gold exchange-traded funds — by private
investors, not only in Europe, but around the world.
Before too long, the rating agencies are likely to further downgrade
government debt from one or another of the most indebted European countries .
. . as well as downgrade one or more of the continent’s major banks
with too much of this poor-quality debt on their own balance sheets.
Earlier this month, a report in the Wall Street Journal questioning
the accuracy of the so-called “Stress Tests” designed to measure
bank exposure to poor-quality sovereign debt sent the price of gold up ten
dollars in a matter of minutes.
This may well be a harbinger of things to come.
In addition, I wouldn’t be surprised to see political upsets
— and possibly some social unrest — as voters say
“No” to the severe fiscal belt-tightening in one or another of
the overly indebted countries.
Another round of European sovereign debt problems is likely to erupt
sooner or later . . . and, with it, I expect another flight from the euro and
another wave of gold buying by worried investors everywhere.
In addition, some central banks are also reducing their exposure to
euro risk in favor of gold and other currencies that heretofore were not
considered acceptable reserve assets.
Banks and the Official Sector
This brings me to the official sector — and the increasing
interest among some central banks to hold gold as a reserve asset, dollar
alternative, portfolio diversifier, and investment asset.
Even before the euro’s sudden demise, some central bankers had
already begun to take a fresh look at the yellow metal. Last year, in 2009, a
few note-worthy countries began adding gold to their official reserves or
announced previous but unreported purchases. Moreover, some countries that
were sellers in past years decided it was wiser to hold gold than the
After two decades of selling, at an average annual rate of some 400
tons per year, the official sector became a net buyer of gold in 2009, adding
more than 400 tons to total official-sector holdings.
I believe the official sector continues to be an important net buyer
of gold — and could easily add another 150 to 300 tons — or
possibly more — this year with sizeable net purchases continuing for
years to come.
Last year, in April 2009, China’s central bank, the
People’s Bank of China (PBOC), announced that it had purchased 454 tons
of gold from domestic mine production in the six years beginning in 2003 . .
. but it did not include these acquisitions in its official reserve accounts
until last April. Since then, official reported reserves have stood steady at
1054 tons making China the sixth largest holder of reported official gold
reserves. Only the United States, Germany, the IMF, Italy, and France hold
China’s positive attitude toward gold is matched by its desire
to reduce exposure to U.S. dollar risk. Beijing has stepped up its purchases
of Japanese, South Korean, and even Thai debt . . . while recent statistics
show a decline in China’s holdings of U.S. government debt by roughly $100
billion to about $844 billion. Meanwhile, China is spending depreciating
dollars and other questionable currencies to acquire hard assets including
strategic reserves of oil, coal, and a variety of industrial metals.
I believe that China has continued to buy gold discretely from
domestic mine production — but chooses to hold this metal “off
the books” as periodic announcements of PBOC purchases and inclusion of
this metal in its official reserve accounts would probably result in higher
world market prices making subsequent purchases that much more expensive.
In contrast, Russia, Kazakhstan, and the Philippines have bought gold
from their own domestic mines — but unlike China have chosen to
publicize their purchases, perhaps as a matter of prestige or to improve
their appearance of creditworthiness in world financial markets, something
that China and the PBOC need not consider.
Last year, in a move that surprised most observers, India bought 200
tons “off the market” directly from the International Monetary
Fund. This was nearly half the total quantity the IMF was obliged to sell
over several years to raise cash for its operating budget as well as to aid
some of its poorest member countries.
Sri Lanka and Mauritius also purchased small amounts last year from
the IMF. All three announced their purchases, most likely to benefit from the
publicity and prestige that comes with owning gold . . . and, in the case of
India, perhaps to make a statement that they’ve arrived as a big-league
This past June it was Saudi Arabia’s turn to announce
substantial gold purchases by its central bank. SAMA, the Saudi Arabian
Monetary Authority, purchased nearly 180 tons in the first quarter of 2008
but chose not to report this addition to official reserves until this past
June. I would not be surprised to learn that the Saudis — and possibly
other oil-rich Arabian Gulf countries — have made subsequent, sizable,
but so far unreported purchases.
Turning from one of the world’s wealthiest countries to one of
the poorest, just a few days ago, the IMF announced its latest
“off-market” sale — this time 10 tons to Bangladesh, a
relatively small quantity in the scheme of things but a big purchase for
Bangladesh, bringing its total gold reserves up to a still-meager 13.5 tons.
More importantly, from a global gold-market perspective, like the
purchase by the Saudis last year, and other central banks in 2009 and 2010,
it highlights gold’s growing appeal as a reliable official reserve
To recap, this brings total IMF sales under its gold-sales program to
310.3 tons, of which 222 tons went directly to a handful of central banks and
another 88.3 tons since February has been sold into the world market.
It is possible that some or all of these “on-market” gold
sales found its way into the vaults of one or another central bank preferring
anonymity. In any event, IMF sales so far this year have been easily absorbed
into the market without detrimental effect on the price.
Another sign of gold’s rising importance and rehabilitation as
an official reserve asset has been the use of gold swaps early this year by
the Bank for International Settlements as a vehicle to facilitate the
mobilization of central bank gold without having to sell metal in the open
market. Between, last December and April, the BIS took some 378 tons onto its
balance sheet from one or more anonymous central bank — possibly
Greece, Ireland, Portugal, Spain of another heavily indebted European
The BIS serves as a sort of central bank for central banks and as
counterparty to national central bank financial transactions. In a gold swap,
the BIS exchanges currencies — the dollar, the euro, the yen, perhaps
even the yuan or other national currencies —
for physical gold usually for a fixed maturity.
Whatever country or countries may have used gold swaps as a form of
bridge financing, it suggests reluctance on the part of central banks to sell
gold into the market . . . and a desire to maintain gold holdings over the
Demand in the Older Industrial Nations
Another very important factor — one that has been very apparent
this past year — has been rising private-sector investment demand for
gold from across the old industrialized world, what I call the
“mature” economies to distinguish these countries from the
“emerging” or “newly industrialized” economies.
Private investors in the United States and Europe, both individuals
and institutions, are buying more gold reflecting the same concerns and fears
that are driving central banks to accumulate the metal.
They are increasingly concerned about the huge deficits and debt of
governments on both sides of the Atlantic . . . and they are worried that
accelerating inflation and depreciating currencies will eat away at their
other savings and investments.
In addition, the European sovereign debt crisis triggered a
substantial rise in physical investment demand across Europe — from
Germany, Switzerland, France, the United Kingdom and other countries —
and from the United States.
Importantly, as in earlier big advances in this gold bull market,
these are mostly long-term investors — and their purchases of physical
metal, unlike those of traders and speculators, are not likely to return to
the market anytime soon.
Demand from China, India, and the newly industrialized emerging economies
Similarly — and equally if not more important to the long-term
outlook for gold — we have seen rising investment demand from China,
India, and other emerging economy nations.
Gold has historically been a preferred medium of savings in India,
China, and many of the other Asian countries including — as you know
better than I — Thailand. As incomes and wealth rise, as more people
enter the middle class, and the numbers of millionaires and billionaires
increase, it is only natural to see some of their money flow into gold.
Both India and China, because of their huge populations and the
movement of millions of people each year from poverty to middle class, and
from rural areas to the cities, have tremendous potential in terms of the
volume of gold investment that will likely be purchased in future years.
Rising inflation or financial market uncertainties are not required to
generate a continuing rise in gold demand in these countries. What is
required is simply moderate economic growth along with rising incomes and
I believe the economic outlook for China, India, and other emerging nations is especially propitious for gold. Cautious
economic-policy measures in one country or another to prevent overheating,
restrain inflation, and counter excessive speculation (in real estate or
equities, for example) will help keep these economies humming at moderate
rates of growth that will benefit gold demand in the years ahead.
Forget all the other reasons to be bullish. This trend alone —
the growth of investment demand in China and India — has the potential
to push gold higher in the years to come, even if the other bull points for
gold prove disappointing.
Let’s take a closer look at each of these countries so important
to the very bullish long-term outlook for gold.
What can we say about China? We can say that China loves gold!!
The country is the world’s leading gold-mining nation —
with officially reported production of 313 tons last year. Counting
“unreported” production (from small-scale mines and mines
operated by the military) actual output was probably much higher. Some
estimates I’ve heard put 2009 annual output well over 400 tons.
China is the second-largest gold consuming nation. Combined jewelry,
investment, and industrial demand last year was
reported to be 461.9 tons — but actual consumption was probably
somewhat higher. Importantly, both jewelry and investment demand are
continuing to grow by leaps and bounds.
And, as I’ve mentioned, its central bank, the People’s
Bank of China, already the sixth largest holder of official gold reserves, continues to buy significant quantities.
After more than five decades of prohibiting private gold investment,
the Chinese government legalized private gold investment only a few years ago
. . . and today private gold investment is not just legal, but it is
encouraged and endorsed.
A number of national banks have been authorized to trade gold and make
gold investment products — small wafers, bars, coins, passbook programs
and accumulation plans — available across China. In addition to these
banks, physical gold is also available to investors at specialized gold
investment retail shops, at jewelry stores, and at department stores.
Just recently, the People’s Bank of China announced even more
gold-friendly policies to encourage private investment in gold. As a result,
it is likely that:
· More commercial banks will soon be allowed
to buy and sell gold in a variety of physical and paper forms, making gold
more accessible to more investors across the country;
· Some larger banks will be authorized to
trade and hedge in international markets;
· The Shanghai Gold Exchange will expand its
· Yuan-denominated derivative and paper gold
products will be introduced;
· And, importantly, a local gold-exchange
traded certificate will be launched on the Shanghai Gold Exchange, possibly
in the next few months, and the Shanghai Stock Exchange will probably follow
with a gold-exchange traded fund sometime in the next year or so.
The gold exchange-traded certificate (or ETC) is
intended to facilitate gold investment by institutional investors including
banks, funds, and insurance companies. It will track the spot price on the
Shanghai Gold Exchange and will be fully backed by physical bullion held in trust
by the exchange.
Five decades of pent-up and unrealized gold demand; the development of
gold spot and futures markets; the evolution of a national gold-investment
distribution system through banks, other retail outlets, and soon the
Shanghai Gold Exchange and the Shanghai Stock Market; the expanding Chinese
middle class and the growth in the number of super-rich millionaires and
billionaires; and the country’s long-standing cultural affinity to gold
assures that China will have an increasingly important influence on global
gold-market trends — and a powerful effect on the metal’s price
for years to come . . . and this doesn’t even take into account the
on-going “official” or “government-related” purchases
that I’ve already mentioned.
I believe that the Chinese government is encouraging gold investment
for three reasons:
· First, it is obviously bullish on gold and
believes it is a valuable component of private saving;
· Second, it is using gold as an instrument
of domestic monetary policy, encouraging private gold investment as an
alternative to overheated equities and real estate markets;
· And, third, because it views gold held by
private citizens as a substitute for central bank purchases —
quasi-reserves, if you will — and a component of national wealth.
In another twist, the China Investment Corporation, China’s
largest sovereign wealth fund, early this year announced market purchases of
about 4.5 tons. While not a unit of the central bank, it is likely that the
investment had the blessing of the PBOC. Interestingly, the CIC purchased
this gold via the SPDR Gold Exchange-Traded Fund traded on the New York Stock
At the very least, even if a one-time isolated purchase, it further
signals China’s very positive “pro-gold” official attitude
. . . and gives private investors greater confidence to buy gold for their
own saving and investment programs.
In addition, Chinese banks and gold-mining companies are being
encouraged to finance mining ventures around the world via loans to or direct
equity stakes in foreign mining companies. These investments may include
purchase agreements promising China a claim on future production, leaving
less gold available in the world gold market for the rest of us.
China is not the only Asian giant with a huge appetite for gold.
Historically, India has been the world’s largest gold-consuming nation
. . . and, lacking any significant domestic gold mine production, the
world’s biggest importer of the yellow metal.
As long as I can remember, Indian gold demand has always been
extremely price sensitive — with rising prices quickly restraining
purchases and often evoking a return flow of old scrap as holders of gold
seek to take profits. As a result, the ebb and flow of India gold interest
has often had a significant effect on the world market — stopping
strong rallies when Indians think the price is too high and establishing
floors when they think prices have fallen enough.
But, importantly, in the current bull market, we’ve seen the
Indian gold buyer gradually adjust to higher and higher price levels. A year
ago, reflecting India restraint, the world market had difficulty moving
higher when prices neared $1000 an ounce. Today, Indians are eager buyers
$1200 an ounce . . . and believe the metal is a bargain under this level.
I foresee this behavior of adjusting to higher and higher price levels
continuing over the next few years.
But it’s not only price that governs Indian gold buyers. Indian
demand is now improving thanks to the country’s strong economic
recovery, growth in personal incomes, and new distribution channels that are
gradually “westernizing” India’s gold market.
Last year, in 2009, gold demand was hurt, not just by resistance to
rising prices, but from poor monsoons, low crop yields, and greatly
diminished demand from the gold-friendly agrarian sector for whom gold has
always been a traditional form of personal saving.
Now, the stars seem more positively inclined. This year’s good
monsoons, healthy autumn harvests, and high world agricultural prices should
support an above-average seasonal pick up in India gold buying. An added
positive wrinkle is the introduction this month of coin-like gold medallions
that will be distributed in rural communities by the Postal Service, making
gold more readily available to those with the most affection for the metal.
Institutional and structural developments occurring in the major
gold-consuming markets have great, but largely unrecognized, significance to
the metal’s long-run price. New gold investment products and channels
of distribution are making gold more readily accessible to more investors,
both individuals and institutions, in more markets around the world.
For example, gold exchange-traded funds, that allow investors to
purchase gold via an equity-like vehicle, were introduced only a few years
ago. Now there are more than 18 such funds traded on many stock exchanges
around the world — and a new gold ETF has just been launched in Japan.
Since their introduction, the total quantity of gold held on behalf of ETF
investors has grown to more than 1900 tons. To put this into perspective,
this is more gold than is held by the central banks of all but four
I’ve already mentioned new investment products and channels of
distribution in China.
In India, we are also seeing the introduction of new products in the
past few years, including a gold ETF traded on the Mumbai Stock Exchange, as
well as internet-based physical investment products offered online by a
number of financial service firms.
And, as I already mentioned, India’s postal service is beginning
to sell small coin-like medallions at post offices in rural agrarian
communities where there is great interest in gold but a paucity of banks and
financial firms for savers to purchase the metal.
These new products, distribution channels, and other advances in the
gold investment infrastructure are resulting in a permanent upward shift in
the demand curve for gold — and this is one reason why I believe that
the average price of gold in future years, stripping away the big cyclical
swings, will be much higher than most of us would now imagine possible.
It’s important to recognize that world investment demand is not
homogenous. What motivates one investor to buy gold may be not be shared by
The current bull market has seen lots of individual
“retail” investors in Europe and the United States buying small
amounts of bullion coins, small bars, or a few shares in a
gold ETF. Motivation here is fear: fear of inflation, currency
debasement, bank failures, and a breakdown in other investment markets.
For similar reasons, we have also seen greater participation by hedge
funds, pension funds, wealthy family funds, and other institutional investors
— a few of whom have purchased gold by the ton rather than by the
In contrast, Asian investment demand — in China, India, and here
in Thailand — is less a reflection of fear and more a consequence of
rising incomes and a cultural tradition of gold as a vehicle for long-term
saving. Investors buy small bars in sizes that are popular in one country or
another . . . and they buy high-karat jewelry, which is purchased not only as
a store of wealth but for religious and cultural motivations . . . and as a
conspicuous show of wealth.
Institutional traders and speculators play an important role as well.
These “players” — and that’s what they are —
have no long-term allegiance to gold. They “go long” one day,
only to sell the next. They view the metal as one more trading vehicle (like
currencies, oil and other commodities, bonds, etc.). However, these players
much of the two-way volatility, especially some of the big gold-price
reversals of the past year.
Importantly, the gold market remains a relatively small market —
in terms of aggregate asset value as well as investor participation —
compared to world equity, bond, real estate, commodity, or currency markets.
As a result, a small reallocation of assets may hardly affect asset prices in
these bigger markets . . . but can, and will, have a much bigger impact on the
price of gold.
Another recent development that may prove important in the months
ahead is the rise in agricultural inflation — what I call “ag-flation.”
In recent weeks, rising world food prices have begun to capture the
attention of the news media . . . and, although not yet much discussed within
the gold community, could soon be one more bullish factor affecting the gold
market during the months ahead. According to the United Nations, global food
prices rose five percent in August — and food-price pressures will
likely continue well into next year.
Agricultural experts and economists are so far focusing their
attention on the Russian grain harvest and prospect for next year. Early this
month, Prime Minister Putin said that Russia’s month-old ban on grain
exports would be extended well into 2011 as severe heat and drought, the
worst on record, cut Russia’s grain harvest by 25 to 35 percent.
Russia is the world’s third-largest exporter of wheat after the
United States and Canada — and the ban on grain exports is pushing the
cost of wheat and other grains sharply higher in world markets.
In addition, flooding or droughts in other important farming regions
are raising more doubts about agricultural output in a number of important
farming countries including Germany, Canada, Argentina, and Australia. Even
across the United State corn and grain crops are suffering from the pervasive
heat and dryness in recent months.
Meat prices are also surging around the world, in part reflecting
drought and rising feed prices — but also due to the longer-term trend
of rising demand from a number of emerging or newly industrialized nations.
With rising personal incomes, the growing middle classes in countries like
China, India, and Brazil are demanding richer protein Western-style diets.
The United Nations Food and Agricultural Organization, the FAO,
reports that world meat prices were up 16 percent in August from a year
earlier to their highest level in two decades.
Other staples — like coffee and cocoa — are also under
price pressure: Coffee is up about 30 percent this year to a 12-year high and
cocoa recently hit a 33-year peak.
It’s not just food prices that are rising down on the farm.
Cotton prices this month hit a 15-year high . . . and are threatening
consumers around the world with higher clothing prices.
Rising agricultural prices are already showing up at America’s
super markets and at grocery stores around the globe. It is only a matter of
time before high and rising ag prices trigger more
inflation-hedge demand for gold and contribute to the rise in gold prices we
anticipate in the months ahead.
One more relevant point: India has traditionally been the
world’s largest gold-consuming nation . . . and India’s’
farmers and agrarian workers are often at the front of the line to buy gold
jewelry, small bars, and coins. In years of good harvests, high agricultural
prices, and robust farm incomes, India’s appetite for gold is strong.
This year, India has seen good monsoons, is enjoying healthy harvests, and
farmers are benefitting from higher world prices for much of their output.
Consequently, stronger Indian gold buying in the next few months could give
the yellow metal’s price a surprising boost.
I’m often asked about the prospects for gold-mine production:
Won’t new discoveries and mine expansions limit or even reverse the
rising price of gold? What many observers fail to see is that mine production
is declining rapidly in the historically important gold-producing nations.
Historically, the big four producers have been South Africa, the
United States, Canada, and Australia. All are suffering from the depletion of
existing mines, a trend that will continue for years to come.
Meanwhile, new developments in China, Russia, Kazakhstan, Indonesia,
and Latin America, while significant, will not be sufficient to offset lost
Global gold-mine production has been in a downtrend for the past
decade, having reached a peak of about 2,600 tons in 2001. Despite a small
uptick last year and possibly again this year, world gold-mine output will
continue to languish for at least for the next five years . . . and probably
for years longer.
Stagnant gold-mine production reflects many factors, including the
depletion of existing deposits, the continuing drop in ore grades, the
decline in operating depths at many mines, the big rise in both energy and
labor costs, the expense and time required to meet increasingly restrictive
environmental regulations, unfriendly government attitudes toward foreign
investment in some gold-producing countries, and the lack of financing
available to many gold-mining exploration and development companies.
Even if the expected leap in the price of gold triggers more
exploration and development . . . and even if new significant economic
deposits are discovered . . . it can take five to ten years or longer to
bring a large discovery into sizable production.
As a consequence, I see little chance of mine production offsetting
the expected rise in gold demand, at least not over the next five years. Any
discoveries that may be announced this year or next year or for several years
to come just won’t be sufficient or come on stream soon enough to have
a significant negative price effect for many years to come.
Outlook for Silver
I’d like to spend just a few minutes talking about the long-term
outlook for silver.
The now decade-long bull market in precious metals has seen the price
of gold move up well beyond it previous historical
peak of $875 an ounce reached briefly in January 1980.
But silver has still not surpassed its all-time high of $50 an ounce
— and today remains below its recent high of $21 an ounce reached in
Even as investment demand for silver has soared — in part due to
the introduction of silver exchange-traded funds in 2006 — global
macroeconomic trends have cut deeply into silver jewelry and industrial use.
In addition, silver-based photography, once the largest consumer of silver,
continues to lose ground to digital photography. As a result, silver has just
failed to keep up with the yellow metal.
I suspect silver’s underperformance has now run its course
— and we can expect the white metal to outperform gold over the next
five to ten years.
For one thing, a number of new end uses for silver are likely to boost
industrial demand while investment demand for silver will continue to many of the same forces benefitting gold.
Meanwhile, silver-mine production will remain relatively inelastic. To
a large extent, silver is mined as a by-product or co-product of other metals
(lead, zinc, copper, and gold) — and is dependent on mine-supply
situation for these other metals and less on its own positive fundamentals.
Only about 30 percent of total silver-mine output is from primary
production — that is from mines that are primarily silver producers
— where mine exploration, development, and production decisions depend
on the metal’s own price.
About 15 to 20 percent of silver mine supply is co-product —
mostly of copper, zinc, lead, and gold.
And, about 50 percent of silver mine output, is a by-product where the
price of silver has little influence on mine economics and decisions to
invest in exploration and development.
In addition, like gold mining, new discoveries and mine expansions for
any of these metals take many years to put into production. This means that
the expected rise in the price of silver will not be countered by a rise in
mine supply any time soon.
Investment Remains Strong
Looking ahead, physical investment demand — for bullion coins
like American Eagles and Canadian Maple Leafs, for small investment bars, and
ETFs — will continue to expand in tandem with gold as growing numbers
of Western investors seek safe-haven and hedge assets.
At the same time, growing numbers of Eastern investors and jewelry
consumers — in China, India and elsewhere — will also accumulate
physical silver, reflecting rising personal incomes, silver-friendly
government policies, and the maturation of precious metals market
institutions and infrastructure.
The perception of silver as a cheaper alternative to gold — as
“poor man’s gold” as the metal is often called — and
a growing recognition of the white metal’s increasingly bullish
supply/demand fundamentals will also foster rising investor interest around
On the investment side, gold has benefitted from a significant step up
in institutional participation from hedge funds, pension and retirement
funds, insurance companies, and sovereign wealth funds. So far, silver has
not enjoyed equal recognition from these large players. But this is beginning
to change as fund managers are recognize silver’s bullish market
fundamentals, its relative value, or simply wish to diversify their precious
metals exposure beyond gold.
The biggest silver end-use sectors are first, jewelry and silverware,
followed by electrical and electronics, where the metal’s outstanding
conductive properties are unparalleled. Both categories were tarnished by the
global recession . . . but thanks to the economic recovery in the Asian
economies and the tenacity of computer and consumer electronics demand
everywhere, silver usage by these industries is beginning to pick up.
In addition, we anticipate growing price-inspired substitution of
silver for gold by jewelry manufacturers seeking to remain competitive with
costume jewelry and other consumer purchases.
The really exciting news for silver, in addition to the strength of
investment demand, is the advent of new industrial and commercial
applications. Together, new applications may not amount to much this year or
next . . . but within a few years the ounces will begin to add up.
Its outstanding qualities as an electrical conductor, its unique
anti-microbial properties offering protection against infection and disease,
its excellent reflectivity, make silver a 21st-century metal.
Silver investors and analysts will be hearing more and more about
solar energy, medical applications, antibacterial textiles, radio frequency
identification devices, new battery technology, water purification, and even
Very importantly, the quantities of silver used per solar cell,
kitchen countertop, surgical appliance or bandage, fabric garment, RFID,
plasma screen, and other emerging end-use products are infinitesimal —
measured in microns or nano-units. But, in not too
many years, these will add up to many millions of ounces a year in silver
The fact that silver content per product is so small means that
industrial demand for silver in these applications is highly price inelastic
— so that even a doubling or tripling in the metal’s price will
have little significant impact on consumption. What’s more, the rise in
silver usage from these emerging industries should continue even if the
Western economies remain lackluster — or worse — over the next
five or ten years.
on New Uses
The most immediately promising high-growth end use for silver is from
the rapidly growing solar-energy industry where the metal is used both as a
conductor in solar cells as well as a reflector in mirrors. The industry is
on a high-growth trajectory — thanks to government tax incentives, the
drive for greater energy independence in some countries, and the desire among
many consumers for alternative, clean energy.
Another new and already growing use on the cusp of rapid growth is
radio frequency identification devices (or RFIDs) in place of printed bar
codes that require visual scanning. RFIDs can be scanned through shipping
boxes, grocery bags, and even bulk containers. What’s more, RFIDs are
already in significant use by a number of nations for personal identification
in passports and other documents, including air and rail transportation
tickets in China at a rate of billions per year.
Another prospective growth area for silver is the health-care and
medical sector — where silver is increasingly appreciated for its
remarkable anti-bacterial qualities. Surgical bandages, wound treatments,
catheters, surgical and hospital garments and blankets, catheters and
pacemakers are all new and important end users for what some may consider a
Silver’s biocidal properties are
leading to new uses in culinary products — to promote food and kitchen
hygiene with countertops and surfaces, cooking utensils and appliances,
vending machines, and food packaging that contain tiny amounts of silver.
Similarly, textile and clothing manufacturers — particularly sportswear,
athletic clothing, and footware — are also
beginning to look to silver as an effective preventive of bacterial odors
that thrive on sweat and body heat.
I mention these emerging new uses not because any will influence the
silver price this year or next . . . but together they will take more and
more ounces in the years to come with eventual significant implications for
aggregate silver demand and future price prospects.
What about silver price prospects?
By historical standards, the gold/silver price ratio suggests that
silver is an undervalued precious metal. Today around 68, the ratio simply
means it takes 68 ounces of silver to purchase one ounce of gold.
Some silver enthusiasts take comfort in the fact that over thousands
of years the ratio held fairly steady around 15 or 16. Other’s
point to the geological fact that the Earth’s crust, as best as
scientists can measure, contains some 17 or 18 times more silver than gold.
Over the past decade the ratio has been as low as 45 in 2006 and as
high as 82 in 2008. Recently, it has been near the middle of this range
To my way of thinking, the gold/silver ratio has little predictive
value — except to the extent that expectations of a return to the
historical norm may be a self-fulfilling prophecy.
What counts most are the supply/demand fundamentals in each market and
the intensity of investor interest in one metal relative to the other. Yes, investor interest in one metal versus the
other may be influenced by the perception among some investors and
speculators that the gold/silver ratio is above (or below) some historical
mean — but that will go only so far and last only so long.
Ultimately, it is relative market fundamentals that matter most
— and I believe the fundamentals now favor silver. These fundamentals
· First, the recovery of worldwide jewelry
and industrial fabrication demand,
· Second, the emergence of significant new
uses in the years ahead,
· Third, the inelasticity of demand relative
to price in some end-use industries,
· Fourth, the inelasticity of mine supply,
given that at least 70 percent of silver mine output is a co-product or
by-product of other metal mining, and
· Fifth, rising investor interest among both
retail and institutional investors in the old industrial world and the newly
industrialized Asian nations.
Based on silver’s own improving supply/demand fundamentals, I
expect much higher silver prices in the months and years ahead. Consistent
with my forecast of $2000 gold in the next few years, I expect silver to hit
and surpass its 1980 all-time peak around $50 an ounce. For those who want to
know, this works out to a gold/silver ratio of 40. From an historical
perspective this is certainly not an unrealistic relationship between the two
Ladies and gentlemen, thank you very much for your kind attention. I
think I have already talked long enough . . . and I want to leave some time
to answer your questions and hear your thoughts on the outlook for gold and
Once again, my thanks to SPC Precious Metals and the Stock Exchange of
Thailand for inviting me to speak today . . . and to all of you for joining
me this afternoon.
Managing Director, American
Precious Metals Advisors
Senior Economic Advisor, Rosland Capital
Jeffrey Nichols, Managing Director of American Precious Metals
Advisors, has been a leading gold and precious metals economist for over 25
years. His clients have included central banks, mining companies, national
mints, investment funds, trading firms, jewelry manufacturers and others with
an interest in precious metals markets. Please check his website and register
to his free newsletter by clicking here.