Gold 2048 is the name of a report recently released by the World Gold Council. It answers the question: what do the next thirty years hold for gold?
The price of gold, and therefore its value as an asset in future, hangs upon the demand for it, given almost static supply. And the principal underlying driver for the price of gold are the changes in the global economy. A few trends may be predictable but the best remains covered with uncertainty. It was the same thirty years back but now, more than before, less is perceptible. It is in such a situation that George Magnus, Associate at the China Centre, Oxford University, and a senior economic commentator, respected by policymakers and market-makers alike, tries his hand at crystal gazing.
As expected what is at top of Magnus mind is the importance of the emerging markets. For, according to him, ‘advanced economies still languish in the long shadows of the financial crisis.’ And among the emerging economies, he zeroes down on China and India, for ‘Brazil, Argentina and Venezuela have actually regressed and Malaysia and Thailand may now be trapped.’ But neither is his optimism for China and India entirely unqualified. He feels China has more-or-less plateaued. Further growth for China can come only if it ‘focuses hard on the institutional, technological and organisational reforms that sustain high productivity growth.’ Advances in technology and innovation may be achievable with relative ease; but organisational reform may prove more challenging.
India, on the other hand, is buffeted by headwinds that Magnus calls ‘of its own making’ – complex labour laws, regulations and subsidies that depress employment, and a manufacturing and services technology environment that is myopic. But he is positive about the policy shifts that will ‘serve the economy well in the future’, though these measures have caused short-term problems and economic growth has dipped in 2017. Magnus specifically lists measures to formalize the grey economy, to eliminate ‘black money’, to improve corporate and financial balance sheets and to roll out a nationwide, efficient Goods and Services Tax. “In the long run, however”, feels Magnus, “they have the potential to make India more efficient and boost economic growth.”
Magnus believes that periods of macroeconomic instability and geopolitical crisis are in no way behind us. A multilateral world order from which the US is retreating as a benign hegemon, and in which China, Russia, Iran and Turkey want to assert their presence, ‘is a recipe for disorder’. Europe has survived its first crisis, but Brexit and unresolved political and banking issues remain to be addressed. Keeping all this in mind, Magnus feels, one word that best describes the next thirty years is : uncertainty.
Looking at the sectoral level, one thing which is certain, according to John Reade, Head of Research and Chief Market Strategist at the World Gold Council, is that ‘the axis of the market has shifted definitively East’. Back in 1980s, jewellery was a crucial aspect of gold demand centred definitively in the West. Today, there are considerably more ways to access gold than there were thirty years ago and jewellery demand has shifted east. Historic buyers of large amounts of jewellery in higher income markets are ageing and the young have stronger preferences for other possessions rather than gold. Even in China, traditional 24-carat gold jewellery is going out of fashion, in favour of 18k, 22k and modern 24k jewellery.
It is the investment demand that may pick in the next thirty years. There are two factors driving this trend. Back in the 1980s and 90s investment in gold was limited to coins, physical bars and the over-the-counter market. The development of physically backed exchange traded funds has revolutionized the investment market, greatly reducing transaction costs for smaller purchases and allowing institutional investors easier and more compliant access to gold.
The other factor is what we have already discussed in the context of the expectations for the global economy : uncertainty. Returning to the non-inflationary, constant expansion times of the 1990s and early 2000s, is a now a fool’s dream. According to Reade, large debt levels and unresolved structural problems dating from the 2008–09 global financial crisis, hang as Damocles’ sword over the global economy. Additionally, the US is likely to lose its position as the largest economy to China. This may well incur volatility within currency and asset markets and the associated uncertainty should favour gold. Similarly, Reade believes that the climate change will play an increasing role in the global economy, with the potential for large-scale weather-related insurance losses a potential driver of volatility.
So the future of gold over the next thirty years is truly uncertain; uncertainty about the global economy is likely to dampen the demand for it, and the same uncertainty is likely to boost the demand for it.
*The author is an investment consultant. Readers can send their comments and queries to email@example.com