Emerging markets have transformed the demand-side equation for dozens of commodities, from oil to lean pork, but nowhere has the change been followed quite so closely as in the gold market. China and India have had a taste for gold jewelry for decades, but evolving income distributions and a tumbling U.S. dollar have turned gold into an attractive financial investment for the first time for millions of new buyers.
And the trend shows no signs of slowing anytime soon, says Jeff Nichols, managing director of American Precious Metals Advisors and senior economic advisor to retail gold dealer Rosland Capital. Nichols is a widely recognized expert in precious metals and global economics, and has worked with several mining companies on financing and investor relations.
Recently, Index Universe Managing Editor Olivier Ludwig chatted with Nichols about his thoughts on the global gold markets, including what's really driving Chinese and Indian demand, why South Americans aren't buying and why he thinks gold could go to $2,000/oz—or higher—soon.
Ludwig: So what's your sense of the gold market in general at this time?
Nichols: I think the price is going to go much higher over the next few years based on a variety of forces at play currently or in the near future. What's really important, apart from U.S. inflation, are the fundamentals as they're being affected by things going on in India and China, and elsewhere in Asia. Those are trends that will simply overwhelm the gold market in the next few years.
Ludwig: Are you talking about these countries increasingly turning to gold to park their reserves? Or are you talking about growing industrial demand?
Nichols: Both. Most important is the nature and size of investment demand in India and China and the potential that demand has to affect the world market for gold.
China, for example, legalized private gold investment only about 2 1/2 years ago. For many decades during the Communist era, private citizens were prohibited from investing in gold. That doesn't mean they didn't buy gold jewelry and consider that an investment. But there was no real investment market. About 2 1/2 years ago, the government changed all of that and subsequently went so far actually as to endorse private gold investment. I think the government sees gold accumulation by its citizens as a form of national wealth.
In the last couple of years in China, we've seen the development of what I call a gold investment infrastructure. There were no outlets for gold a couple of years ago. If you wanted to buy a gold bar, there wasn't a mechanism in China for somebody to do that. But now, a Chinese individual can go into a bank across the country and buy a small gold bar or a gold coin. Or the working-class person with not a lot of funds can open up a passbook- or a savings-type account denominated in gold and make very small contributions or deposits into that virtually of any size. You might find somebody adding a few grams every month.
Ludwig: Are Chinese buyers purchasing gold because they perceive it to be a better investment or a better way to preserve wealth?
Nichols: Part of it is the cultural phenomena in which gold has for centuries been perceived as a store of wealth and a form of saving. So if income is rising in China, and savings are increasing, then I think there's a natural inclination for some portion of that savings to find its way into gold. It may not be necessarily that Chinese are concerned about hyperinflation or political upheaval. It's simply a natural thing for them to do.