The golden horse has yet to bolt

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March 31, 2011 – With the gold price again testing all-time highs, forecasters and observers are – again – speculating on whether this is as high as it will go, or whether bullion is preparing itself for another strong bull run.

There are almost as many (differing) views on the direction and extent of the next move as there are political commentators.

In just such a political context, there can be little doubt that recent strength has been prompted by the upheavals in the Arab world. The resultant threats to oil flows have, predictably, shot the oil price higher, prompting renewed fears of heightened global inflation.

Even in our small and remote neck of the wells, the fear of oil-induced inflation is threatening to place upward pressure on prices across the board, in the process scotching hopes of an interest rate cut. The one gilded lining is that the value of the rand tracks that of bullion, thereby alleviating inflationary influences from foreign sources.

We are all well aware that gold made its move well before the outbreak of the Arabian uprisings. It was a bull run prompted largely by the many trillions of dollars pumped into the global financial system to stave off economic depression. More money, unsupported by additional production, equals inflation, equals greater demand for gold, the ultimate inflationary life jacket.

Intriguingly, oil, like gold, began stirring before the Arab populace stirred, perhaps underlining the uncanny penchant for all markets to behave as anticipatory mechanisms.

Be that as it may, we currently have a situation in which the fear of the impact of excessive international liquidity is juxtaposed upon civil unrest in many of the world’s primary oil-producing regions; unrest that promises to degenerate before calm is restored.

The evidence, I would therefore suggest, points convincingly to a prolonged extension of the current gold bull market.
Yet that’s but one – possibly subjective – view. A more convincing argument is at hand in the manner in which the underlying demand/supply fundamentals are developing.

The China factor, as has so frequently been the case in recent years, should be carefully considered. Not long ago, Wang Lixin, the Chinese representative for the World Gold Council, predicted that China’s gold investment demand would grow 40% to 50% this year.

The World Gold Council itself reported that gold investment in China jumped 70% last year and consumption by the jewellery sector gained to a record as investors stepped up purchases of the precious metal as a store of value. Investment demand in China jumped to 179,9 metric tons last year, surpassing Germany and the US.

The Council maintained that demand had been prompted by concern over domestic inflation pressure and poor performance of alternative investments. And that was before the world began to witness the spate of Arab unrest.

Turning to India, the World Gold Council Gold characterized jewellery demand in India as “outstanding”, with high prices are no longer “a barrier” for consumers in the world’s largest user of bullion. Consumer demand for bullion in India rallied 66% in 2010 to 963,1 tons by volume from a year earlier and more than doubled in value to $38,2 billion.

Technical speaking, any move to a new all-time high is more often than not accompanied by a steep advance, since no selling resistance to that rise is forthcoming from buyers, having previously purchased at that price, looking to get their money back.

Interestingly, the highly regarded American analyst Robert Prechter considers that in technical terms gold is looking “better and better”.

My humble advice to investors is to obtain a stake in the current and unfolding action by accumulating Krugerrands. Each coin is the equivalent of one ounce of gold, is immediately and internationally marketable, avoids the potential traumas attaching to gold shares, and is easily stored.

The prudent investor should structure his investment portfolio such that 15% of the total value comprises Krugerrands and a small percentage in collectable coins, with the less risk-averse looking at a few percentage points more.

In short, it isn’t too late to benefit from a gold run that has by no means exhausted itself.

by Alan Demby

Alan Demby is executive chairman of the South African Gold Coin Exchange