I read on Flipboard over night that US Hedge fund manager John Paulson is getting long gold and telling others to get on board as well because of the inflation that is coming down the road from government policies being run at the moment. With all due respect this sounds like “book talking”.
The history of financial crises suggests that inflation is a likely outcome at some point. I don’t know when Paulson’s inflation will arrive, and at the moment the globe is closer to deflation as weak aggregate demand in the private sector and a political love affair with austerity keeps the genie in the bottle. Still, something is up in gold as you can see in this chart from Bloomberg:
But what’s going on? The answer may lie in the next chart and some interesting analysis from Jeremy Grantham’s money management firm GMO, which I also picked up on Flipboard this morning (link here):
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…it bears mentioning that OECD investment demand for gold still remains far, far below historical highs from 30 years ago. But the broader view suggests, in contrast, that reserve-accumulating economies in Asia are the larger drivers of demand, as they must offset their long exposure to OECD currencies.
Indeed, according to the GMO chart, emerging Asia has now crossed the 50% threshold as a portion of global demand. This underscores again that the current bull market in gold has few similarities to the previous example, and analysts should use caution when drawing on the experience of the late 1970′s.
This relationship is worthy of further investigation. Even is runaway inflation isn’t going to happen anytime soon, this demand from the emerging world isn’t going to slacken off either. If you had to place your new and hard won wealth into an asset, would you buy the currencies or debt of the developed world, or something harder and more substantial?
So maybe just maybe, like the Aussie dollar, gold is going to defy many for longer than we thought previously.
Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse S ecurities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation
