VANCOUVER (miningweekly.com) – The growth in investment demand for gold is still in its “early days”, and the price of the precious metal is not in a bubble, Dundee Wealth economist Martin Murenbeeld told delegates at the Canadian Institute of Mining, Metallurgy and Petroleum conference in Vancouver this week.
Like other market watchers, Murenbeeld pointed to the fact that, on an inflation adjusted basis, the gold price, which set new records above $1 200/oz this week, still has a way to go before topping the lofty levels reached in January 1980, which would equal about $2 300/oz in today's money.
And he said he believes that the 1980 record will be breached on an inflation adjusted basis.
“So, in other words we're going to go, over this long cycle, beyond $2 300. But I'm not smart enough to know when.”
Murenbeeld, who describes himself as a 'gold bull, not a gold bug', said he is not concerned about declining jewellery demand, as investment demand for the metal will remain strong.
His views are in contrast with researchers at metals consultancy GFMS, which has raised concerns over the market's reliance on investment demand.
“I always tell this to my friends at GFMS: jewellery wasn't always the big demand in gold,” Murenbeeld said.
“That's a relatively recent phenomenon, that jewellery was the market. So I don't worry so much about jewellery demand decline.”
Central banks rediscovering the importance of gold holdings, the private sector starting to worry about the nature of Fiat currencies and the likelihood of currency debasement, and investors awakening to gold's portfolio characteristics all mean that “we are in the early days of investment demand,” he said.
“I believe commodities in general, gold specifically, are morphing into an investment asset class, so they're going to be held in portfolios.”
The total financial assets in the world stand at about $117-trillion, including equities, debt, government debt and so on, with managed assets at $40-trillion, including just $280-billion of managed commodities, Murenbeeld said.
“My point is, that if commodities are going to become an investment asset class, we are looking at a minimum of three per cent of the managed space.
“And three per cent of $40-trillion is $1,2-trillion, so I think this thing has a factor of five or six to go. That's not going to happen tomorrow, but is going to happen over time.”
He also pointed to historical data of commodity cycles, with the shortest copper cycle at 16 years.
“We are now only in the ninth year of this cycle. You cannot convince me that this is going to be the shortest cycle on record,” Murenbeeld asserted.
On the supply side, new gold production is constrained by governments wanting a bigger share of the pie, environmental hurdles, and there is also a growing sentiment that the “low-hanging fruit' in terms of gold deposits has been picked.
All this suggests gold supply will be flat or declining, and the costs to build and operate mines will rise, supporting prices.
Of course, there are some bearish factors to consider, including policy exit strategies that will need to be implemented by governments, a strong dollar and a weak euro, a potential absence of deflation, and the fact that producers have finished dehedging their gold production, Murenbeeld said.
If central banks did not print money, it would weigh on the gold price and the policy response of the Chinese government to an eventual economic “hiccup” will be crucial.
But Murenbeeld believes that the likelihood of the 'gold positive' scenarios playing out are much more likely.
The spot gold price, which touched $1 248/oz on Wednesday, buoyed by concerns over European sovereign debt, was trading around $1 234/oz on Thursday afternoon.