Short term—and this news-packed summer week more than most—precious metals owners who don't like volatility should look away now. But further ahead, there are lots of good reasons to buy gold or silver. Chief among them is the unique exposure it gives Western investors to Asia's long-term growth.
China, for instance, is set to overtake India as the world's No. 1 gold consumer this year. Buying perhaps 1,000 tonnes of gold—around 1 ounce in every 4 sold worldwide in 2013—China is growing its jewelery demand, but not as fast as it's hoarding investment gold bars and coin. So says Marcus Grubb of market-development organization (and BullionVault shareholder) the World Gold Council. And with the Shanghai Gold Exchange delivering 1,000 tonnes in the first half of 2013 alone—more than its users took in, in all of 2012—that switch looks a good call already.
Marcus isn't the first person to forecast this switch. We tried it in 2009, as did other better-informed analysts. We were all wrong then. But 2013 looks more certain, as Marcus notes. Because compared with China's surging demand, Indian buying is being crimped by the government's attempts to cut demand. So far, all it's managed is to crimp supply, boost prices and unleash a return to smuggling.
Why does this matter to Western investors? First, because behind the noise of U.S. futures trading, physically settled metal is what counts in the end. And China, like India, continues to buy more gold at rising prices. Secondly, and longer term, the economic future of Asian households looks a lot like the developed West in terms of disposable income. But unlike the modern West, the first thing that Indian and Chinese families with cash left over at the end of the month choose to do—their primary savings choice—is very often to buy gold.
Take note: The path between the last 20 years of Chinese economic growth and the much-lauded "Chinese century" before us may not prove smooth. Western analysts have long predicted a "hard landing" in China. But the near-term risks look plain (huge local government debts, massive property bubble, misallocation of national funds in pointless infrastructure). The upshot for gold and by extension for silver prices might not be pretty. It's worth reviewing what SocGen's latest Cross Asset Strategy note says on the subject of gold and a China hard landing.
The decline of the West has also long been forecast by misery-guts like ourselves. But rising prosperity in Asia will likely mean stagnant or falling standards of living here, on a relative basis if not absolute. And as we've long suggested, buying a little of what China uses to store its growing wealth makes sense long term.
But blocking out the noise won't be easy meantime.
Adrian Ash is head of research at BullionVault—the secure, low-cost gold and silver market for private investors online, where you can buy physical gold and silver ready-vaulted in Zurich or Singapore for just 0.5 percent dealing fees.
