While $10,000 may seem outrageous, gold rose nearly 2,500% from 1971 to 1980 but is only up 550% from the lows of 12 years ago, says analyst John Ing.
What follows is excerpt from John Ing’s January gold report.
Ing is a gold analyst and President of Maison Placements Canada in Toronto.
Gold was up last year for the 12th consecutive year, the longest in at least nine decades. Gold rose 7% last year, spurred by ETFs as well as central bank buying.
Gold has rallied from $250 an ounce, moving almost eight times to a high at $1,920 in 2011, but still shy of the inflation adjusted price of $2,500 an ounce.
However, gold lately has not been as precious, frustrating both bulls and bears despite fears about the US economy, political gridlock and more quantitative easing. In the past, these influences would act as a catalyst for stronger prices.
Central banks are the largest official holders of gold with some 31,000 tonnes of gold in their vaults. In fact, they have been big buyers with more than fifteen banks on the buy side in an effort to diversify their reserves in response to growing concerns about a weaker US greenback.
Under Basel 111, gold was rerated from a Tier 3 asset to Tier 1, allowing banks to buy or hold gold instead of sovereign bonds.
Central bankers will continue to be big buyers of gold. However, ETFs or the people’s central bank established in 2003 bought some 2,632 tonnes, holding slightly less than the IMF with 2,814 tonnes.
Although nearly 40% of the world’s supply is recycled, the only source of new supplies are the gold miners, which lost nearly 25% [of stock market value] since late 2011. Miners’ cash costs are a concern as mega-billion projects bring mega problems.
But the industry has got religion. Most will emphasize profits over growth. Dividend hikes are likely and M&A actually will see the cast-offs of higher cost mines.
Growth has given way to profits. Moreover, we expect emerging signs of a shortage of physical gold as gold miners’ production peaked. To supply this demand, the gold miners produced only 2,700 tonnes of gold annually.
The only other source of gold is the estimated 22,000 tonnes in-situ reserves held by the gold miners in the ground, but that must be extracted at a cost of $1,000 an ounce.
We believe the in situ-reserves will be more highly valued, causing a reversal of the equity downtrend.
The bull market for gold shares has just begun.
Gold stocks have never been so cheap
Chinese gold demand fell in the third quarter due in part to the lull before the leadership change.
We expect a resumption in demand that will see China consume more gold than any other nation, beginning in the current quarter.
China alone has 1,084 tonnes, however that represents less that 2% of its reserves.
If China were to increase its holdings to 10%, that could represent at least three years of the world’s output.
Still, China is the fifth largest holder behind the United States.
It remains the largest holder with 8,133 tonnes held at Fort Knox. It doesn’t matter then, who owns the gold, whether a central bank, ETF or my wife. Gold has the same value whoever owns it. Gold has been range bound. In the short term, gold needs to break through $1,700 an ounce.
Gold is a hedge against the consequences that the world’s central banks will eventually ignite inflation.
This fear also explains why the idea of a return to a gold standard has appeal, particularly when every major currency has fallen against gold.
Gold has simply become the world’s new global currency.
Gold is a hedge against debasement of currencies as well as an asset of last resort among central banks and investors.
As such, we have raised our new target to $10,000 an ounce.
While $10,000 may seem outrageous, gold rose nearly 2,500% from 1971 to 1980 but is only up 550% from the lows of 12 years ago.