Gold Prices Still Expected to Climb Much Higher

- Dugald Malcolm, Montreal

It seems that despite the record high prices of gold, buyers still purchased the precious metal in droves. According to the World Gold Council, gold demand rose 11% in the last quarter to 981.3 metric tons.

In what is becoming a familiar refrain, China was a major reason for the increase in demand. The country’s purchasing rose 47% in the quarter and the W.G.C. believes it may easily double by 2020. The demand for jewellery is one of the main reasons for the strong rise in demand for gold. Jewellery purchases in China increased by 21% in Q1.

It is no surprise then, that when Swiss luxury brand group, Richemont, recently reported earnings, they announced a 33% rise in revenue attributed to a surge in demand in Asian countries.

Richemont is the owner of 19 recognizable luxury brands such as Cartier, Jaeger-LeCoultre, IWC, Piaget and Montblanc, just to name a few. The company’s Deputy CEO, Richard Lepeu, went so far as to announce that “We are actually facing more demand than we can cope with.”

Accounting for 40% of total global gold demand, China and India are not only buying gold jewellery products from companies such as Richemont simply because they like the look of the shiny metal. Consumers in the two countries recognize the purchase of gold products as an investment with strong growth potential and it seems like there not the only ones.

It seems that Central Banks are also jumping on the bandwagon. After some in 21 years, Central Banks have once again become net buyers of gold. A driving force behind this are the Central Banks of emerging markets wanting to diversify away from their rapidly increasing holdings of foreign currencies. Another reason is European central banks that, following the recent financial crisis, are much more reluctant to reduce their gold reserves from their vaults.

So, while George Soros may be dumping his gold, their remains plenty of buyers out there for it, not only John Paulson. For those who believe that prices are too high, they may be looking at all wrong. There is another reason I mentioned Swiss luxury brand group, Richemont. When they and others in Switzerland look a chart of gold prices, they see this:

As one can see, as the price of gold seems to be flying high in US dollar terms, it is a very different story when it comes to prices expressed in Swiss Francs. While a high Swiss Franc was said to have hurt Richemont’s bottom line, it serves as a good example of how the idea of gold being overpriced is in the eye of the beholder.

For those worried about the current price pullback and volatility in commodities, the World Gold Council points out that gold is able to more easily absorb price shocks not only compared to other commodities but to the stock market as well. This means that on average, gold’s volatility remains significantly below that of the Goldman Sachs Commodity Index as well as the VIX.

Average rating
(0 votes)