Rumours of U.S. Fed tapering drive the gold price down. Decisions not to taper see it rise again, although often not to the level from which it has fallen. Meanwhile, the general stock markets continue their upwards paths. Detractors say gold is in a bear market, if not deflating from a bubble situation. Yet perhaps the markets in general are in more of a bubble situation than gold – and should be seen as being even more vulnerable to tapering than the gold price.
What much of the investment community seems to ignore is that the big increases we have seen in the Dow, the S&P, the FTSE, the Dax etc. since 2008 have really been driven most by Quantitative Easing in the U.S. and Europe. All the extra liquidity being pumped into the markets has not been filtering down to the lower levels of society – unemployment remains at horrendous levels in the PIIG economies in Europe for example, and is still – even on highly manipulated government statistics – at unacceptable levels in the U.S. Indeed, the numbers of Americans on food stamps is higher than it has ever been if I have been reading items on the web correctly.
Take this offering from Workers World – OK a very left wing website with its own political agenda to pursue, but one which produces some damning statistics in respect to poverty in the USA – supposedly the world’s richest nation.
“The Census Bureau reports that nearly 47 million people — 15 percent of the population and 22 percent of those under 18 — lived in poverty in 2012. On Sept. 4, the Department of Agriculture stated that last year 49 million people lived in households where some members didn’t get enough to eat due to lack of funds, despite many getting food stamps.
Last year, a near record 47.76 million people got food benefits averaging $133 a month — about $1.40 per meal. Half were children and teenagers living in low-income families, many with an underpaid employed parent; 10 percent were seniors; others were people with disabilities; some unemployed adults and veterans.”
QE certainly isn’t working for this section of the population – indeed their plight seems to be getting worse. But that for the investment community – perhaps those who really need government stimulus least – seems to be getting ever better, although there will be a section of what we might call the middle classes which may well be rapidly moving towards the poverty level.
Now tapering, or complete withdrawal over time, of QE will likely severely dent stock market growth, indeed is likely to see markets begin to collapse and although gold may be brought down initially with them it will also likely recover fastest, as it did at the end of 2008/early 2009 as we saw at the time of the last major collapse – the collapse which initially led to QE programmes being implemented around the world to support the economy.
At the moment, the investment community seems to be under the impression that markets will rise regardless – a mistaken view which has been seen many times in the past and has usually ended with the market crashing down.
Gold, on the other hand, has been something more of a constant protector of wealth – not necessarily in the short term, it has its ups and downs too – but over time. That is why it is seen as a safe haven investment and an excellent portfolio diversifier, and is why, ultimately, it is less likely to be affected by any tapering decision than the general stock markets.
But, it also has other factors working in its favour which just don’t apply to the general markets, which suggests in the medium to long term it will outperform them – indeed factors which could lead to a huge surge in price over time. World gold production is flat – and will likely start to fall if a lower price scenario persists for a year or so – and when prices rise it will take time for the industry to bring closed production, or new mines, back on stream.
It is also likely that the best gold deposits have been discovered and mined. The new mega deposits are of very low grade by historical standards and cost enormous amounts of money to develop, mine and process. We noted here a week ago in an article on Sibanye Gold in South Africa that one of its mines, Driefontein, has already produced over 100 million ounces of gold in its life to date and another, Kloof, over 70 million ounces. How many new gold discoveries even have resources (not even mineable reserves) approaching anywhere near those levels. Perhaps the biggest new potential mine under development – Barrick’s controversial Pascua Lama project on the Chile/Argentina border – has a total resource of only 32 million ounces of gold (admittedly with plenty of silver and copper too) – and that will probably end up costing perhaps as much as $10 billion to bring into production. Other known mega deposits mostly have less gold than that in their resources – and many of the newer gold mines coming on stream have only 1-5 million ounces or less. None have anything anywhere near approaching Driefontein’s 100 million plus ounces.
But this apart, the most significant factor affecting gold and its future price is, as we have noted here before, the enormous and continuing appetite for the yellow metal in Asia and elsewhere which currently exceeds total new mine production. China alone is soaking up far more gold than the West is continuing to offload. This may wax and wane, although it has been in waxing mode for several years now, but overall this demand growth is likely to continue as more and more of the Asian Dragon’s populace moves into the middle classes – a process which is virtually unstoppable bar war or revolution – and the Chinese middle classes invest in gold. It’s built into their DNA. At the rate this is happening, the West will hardly have any gold at all before many years are up and those who do want to possess it – as jewellery or investment – will have to bid the price up dramatically to get it. And it’s not only China that is building gold ownership at a rapid rate. Many other Asian nations are joining the rush too – and they too are seeing surging income growth down the population line.
India, the traditional soaker up of global gold production, is desperately trying to put a lid on gold imports as they are so high as to have a hugely unwanted impact on its balance of trade – official imports are perhaps worth $40-50 billion a year at current prices. But one suspects that because gold is so inbuilt into Indian traditions, this will be a losing battle with any fall in official imports being at least partially offset by smuggled gold.
So tapering, if it ever actually happens, may only have a limited, short-term adverse effect on the gold price. Meanwhile there are other underlying, and far more basic, trends at play which are arguably way more important than whether the Fed tapers or continually ducks winding down QE. As physical gold continues to disappear from the U.S. and head east whether the Fed tapers or not may become irrelevant for gold, but not for the stock markets.