Business World

Tuesday 27 June 2017

Consumer demand in India and China will be long-term driver of stable high prices

John Mulligan

John Mulligan

With the price of gold continuing to test record nominal highs, it would be easy for investors to think they've already missed the boat if they're seeking decent returns.

After all, in dollar terms, at over $1,500 an ounce, the price has risen two-and-a-half fold in the past five years; and even over the past 12 months, it's up 37pc.

Geopolitical turmoil, a yawning US deficit and concerns over its credit outlook, as well as instability in the euro region, are all elements that are helping to underpin gold prices.

This week, Evy Hambro, who manages the $17bn (€11.7bn) Blackrock World Mining Fund, said that he believed gold prices may keep rising for "some years into the future".

"When you look at the underlying fundamentals in gold, they're all very supportive of today's pricing points and of pricing points higher than where we're trading right now," said Mr Hambro.

"So we would expect to see this positive, gradually rising price trend in gold to continue for some years into the future. I think some of the uncertainty that exists around exchange rates, quantitative easing, what paper money will buy you in the future, all of that is only helping gold from a financial point of view."

But it's simple consumer demand that is also expected to sustain high gold prices. The World Gold Council (WGC) -- a London-based organisation that promotes the use of the metal -- recently estimated that by 2020 cumulative annual consumer demand for gold in India -- the largest market in the world for gold jewellery -- will increase to in excess of 1,200 tonnes.

"India's continued rapid growth which will have significant impact on income and savings, will increase gold purchasing by almost 3pc per annum over the next decade," the WGC forecast.

"In 2010, total annual consumer demand reached 963.1 tonnes [in India]," it noted. "As seen in the last decade, Indian demand for gold will be driven by savings and real income levels, not by price."

Mark O'Byrne, the founder of Dublin-based GoldCore, a company that acts as a broker for well-heeled clients wanting to buy gold bullion and which also has a wealth management arm, also believes that consumer demand in India and China will be the long-term driver for sustained high gold prices.

In China, citizens weren't permitted to own gold from 1950 until 1982 -- although significant amounts of gold were reportedly smuggled into the country from Hong Kong and Singapore.

Commercial gold trading only resumed in China in 2003. It's only in recent years, however, that as the country's middle class expands, that gold jewellery has become an affordable luxury for many.

Mr O'Byrne also points out that the price of gold might be at a nominal high, but it's still way off what has previously been reached in real terms.

Around 1980, gold almost reached $2,400 an ounce in real terms when adjusted for inflation; and today's price would probably have to touch $2,200 an ounce or so to match that performance. Mr O'Byrne thinks $2,400 an ounce remains a realistic long-term price target.

But more than just buying gold in the hope of big returns, Mr O'Byrne says he and his team advise clients that about 5pc of their investment portfolio should be gold, helping to provide a shield against the vagaries of inflation, currency and equity fluctuations.

"With interest rates remaining low in most countries, there is little reason not to own gold, as the metal currently offers the best returns around," according to Gavin Wendt, founding director with Australia-based MineLife.

He believes that coupled with the debt turmoil in Europe and violence in the Middle East, "it's a perfect storm for precious metals, including gold and silver".

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