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
