Gold appears sound investment given low interest rates

News - Latest

Friday, 08 January 2010 13:29

Central-bank watchers are split as to when the Federal Reserve, ECB, Bank of Japan and Bank of England will start raising rates. But whatever nominal hikes (or the mere threat) do to gold prices short-term, strong returns to cash savers remain a long way off. Consumers’ natural response to the downturn, paying down debt and building new savings, is being overtly rebuked.

Global demand

Outside the developed world, the Reserve Bank of India made headlines (and a 17% rise in gold prices) with its decision to buy 200 tonnes of gold from the IMF in November. The People’s Bank of China (PBoC) has been quietly building its reserves all during the decade, and Russia overtook the Netherlands in December as the world’s sixth-largest hoarder. Long-term planners in both Beijing and Moscow will be wise to history’s golden rule – ‘He who has the gold makes the rules’ as Bretton Woods proved – but the real story going into 2010 is China’s private demand. Over the last five years Chinese households bought four times as much gold as the PBoC bought between 2003 and 2009, a massive 1775 tonnes equal to more than 2% of China's famously huge personal savings.

All told in 2009, the world’s total stock of mined gold rose in value to almost 11% of global GDP. It last peaked in 1980 equal to 18%, but that was when real interest rates were high, Western finance and labour markets were being deregulated, and East Asia’s demand for gold – an end-in-itself, rather than an investment vehicle; the aim of accumulation, not the means – was suppressed.

The bull market in bonds – gold’s nemesis last time around – has now run for 28 years. The risk of a major sovereign default looks set to draw more worried money into gold in 2010.