Fundamentally, you have to be an optimist on gold

Written by Owen Hegarty, Vice Chairman, G-Resources Group

Gold watching may just be the world’s most crowded profession. In every financial capital there are scores of people developing their charts, their theories and their forecasts about where gold is headed.

I have been asked to add to that cacophony by presenting my view to the Gold Investment Symposium in Sydney October on 16-17. Given the number of specialists in this field that might seem daunting, but when you take the long view the gold outlook is overwhelmingly shaped by four fundamental factors, three of which are virtually immutable.

Those three are:

•   Gold is getting harder to find.   Big discoveries are rarer, grades are lower and depths are increasing. New finds are not keeping pace with demand growth. That is not going to change.

•   Costs are rising, both discovery costs and production costs (for all the reasons outlined above). That won’t change either.

•   The use of gold is unlikely to collapse. World living standards are rising (particularly in Asia and Africa) as is world population; it takes some stretch of the imagination to see jewellery demand or even industrial demand shrinking.

Speculators can pay havoc with the market in the short term, but ultimately they cannot override fundamentals and the three fundamentals outlined above all suggest prolonged upward pressure on price.

That leaves just one wild card: The role of central banks.

The gold held in these national accounts is large so any inventory shift by them — upwards or downwards – can have a dramatic effect on world markets.  Understandably, bodies like the World Gold Council and the bigger investment houses have teams of specialists devoted to predicting the next move.

Their knowledge base is awesome and I am certainly not going to try to second guess them. Instead I am going to go back to fundamentals again and look at the forces in play.

Gold is held essentially as a hedge against currency failure. At the peak of US supremacy the greenback seemed such a secure and globally-accepted measure of value that some bankers questioned the need to hold gold at all.  A number did sell down and the gold price fell accordingly.

There is no question the turmoil of the past few years has undermined that view. Governments have cranked up the printing presses for three of the world’s most traded currencies – the US dollar, the Euro and the Yen – under the mantle of quantitative easing.  That would be in effect a devaluation of them all, except that the fourth pillar of international trade, China, has resisted commensurate revaluation of its own currency for fear of being priced out in a trade war.  That game has not been fully played out yet

From where I sit all this would seem to cast gold back into the role it has held for centuries: A store of value that can’t be diminished by simply rolling the presses.

So while I defer to the specialist analysts and chartists about where the gold price may be next week or next month, I can’t see a medium-term trend that is anything but up:

It is getting scarcer to find, dearer to produce and surely, in the light of recent events, more desirable as a store of value.

I have got eight weeks or so to refine that view before I present in Sydney and I will be taking counsel from many wise people in that time, but I will take some persuading that the medium and long term outlook for gold is not….well, to coin a phrase, stronger for longer.

Owen Hegarty is part of this year’s stellar line up of keynote speakers at the 6th annual Gold Investment Symposium in Sydney, 16-17 October 2013, Australia’s leading precious metals event. 


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Precious Metals Investment Symposium