Save your cookie preferences

We use cookies to remember your site preferences, record your referrer and improve the performance of our site. For more information, see our cookie policy.

Please select an option below and 'Save' your preferences.

Save

You can update your cookie preferences at any time from the 'Cookies' link in the footer.

We use cookies (including third-party cookies such as Google) to remember your site preferences and to help us understand how visitors use our sites so we can improve them. To learn more, please see our privacy policy and our cookie policy.

To agree to our use of cookies, click 'Accept' or choose 'Options' to set your preferences by cookie type.

Options Accept

  • English
  • Deutsch
  • Español
  • Français
  • Italiano
  • Polski
  • 日本語
  • 简体中文
  • 繁體中文
  • Daily audit
  • Help
  • Contact
  • Deposit
  • Login
  • Open account
  • ABOUT US
    • About BullionVault
    • In the press
    • Reviews
    BUY/SELL BULLION
    • Live order board
    • Daily Price
    • Regular Investing
    INVESTMENT GUIDE
    • Guide to gold
    • -How to buy gold
    • -Gold investment
    • -Gold investment plan
    • -Investment insurance
    • -Compare asset performance
    • Guide to silver
    • -How to buy silver
    • Guide to platinum
    • -How to buy platinum
    GOLD NEWS
    • Gold news front page
    • -Gold price news
    • -Opinion & analysis
    • -Market fundamentals
    • -Gold/Silver Investor Index
    • -Infographics
    CHARTS
    • Gold price
    • Silver price
    • Platinum price
    • Price alerts
  • Login
  • Open account
  • BUY/SELL BULLION
  • Live order board
  • Daily Price
  • Regular Investing
  • INVESTMENT GUIDE
  • Guide to gold
    • ⤷
    • How to buy gold
    • Gold investment
    • Gold investment plan
    • Investment insurance
    • Compare asset performance
  • Guide to silver
    • ⤷
    • How to buy silver
  • Guide to platinum
    • ⤷
    • How to buy platinum
  • GOLD NEWS
  • Gold news front page
    • ⤷
    • Gold price news
    • Opinion & analysis
    • Market fundamentals
    • Gold/Silver Investor Index
    • Infographics
  • CHARTS
  • Gold price
  • Silver price
  • Platinum price
  • Price alerts
  • ABOUT US
  • About BullionVault
  • In the press
  • Reviews
  • Help
  • Contact
  • Daily audit
    • English
    • Deutsch
    • Español
    • Français
    • Italiano
    • Polski
    • 日本語
    • 简体中文
    • 繁體中文

Gold News

Live support

NEED HELP? ASK US NOW

Search form

Gold News front page

Gold Price News

Gold Prices Rise Again as UK Tory Party Splits, Putin Threatens US, China Jewelry-Makers 'Sold Out'

More...

Gold Investing In Depth

Learn about gold bullion bars

Learn about gold bullion coins (and costs)

Gold investment: Why & how?

Gold Investment Analysis

  • Latest Gold Investor Index
  • Diversification: Gold as investment insurance
  • 40-year Asset Performance Comparison Table

Gold Articles

Opinion & Analysis

Gold Price News

Investment News

Gold in History

Gold Books

Gold Investor Index

Gold Infographics

Archive

  • February 2019 (26)
  • January 2019 (33)
  • December 2018 (28)
  • November 2018 (39)
  • October 2018 (38)
More...

List of authors

Gold and Silver Prices in a Growing Economy

Monday, 7/09/2012 15:18

If we do see economic recovery, what might this mean for gold and Silver Prices...?

THERE HAS grown up a perception, writes Julian Phillips at GoldForecaster.com, that in a recovering global economy and in particular a growing developed world economy, the gold and Silver Prices will fall because right now their prices reflect economic uncertainty and fear. 

Any recovery will therefore remove that uncertainty and fear, so gold and Silver Prices should then fall. This article looks at that concept and its validity. 

Gold and silver (because silver's price follows the Gold Price) are driven by a diverse range of factors from all over the world. The tendency to use simple links like this can prove an expensive mistake. It's imperative that investors understand not just individual 'links' but in what proportion they affect the Gold Price. It's that overall perspective that affects the price and investors' success.

For the last few years, silver has followed the Gold Price, rising and falling, further and faster than gold. In so doing it has shown that the monetary influences on precious metals are more of an influence than the fundamental demand and supply factors. The fundamental supply and demand factors show a strong demand, based on electronics and on its various medical applications. In following gold so closely silver has seen investment demand dominate the price moves. 

While silver is not considered a monetary metal by central or commercial bankers, the general investing public sees silver as having the wealth-preserving qualities that a monetary metal needs to have to qualify as such. This explains why silver follows gold so closely.

Gold on the other hand is most certainly a monetary metal and considered as such by bankers in general and in particular central bankers. In the reserves of the US it comprises 70% of those reserves. For the purposes of this article we will therefore consider silver moving as a monetary metal. When gold does become visible as a monetary metal in banker's hands (and this may become particularly so at the start of 2013) only then will we see a separation of the two metal's price behavior. 

Please note that both gold and silver monetarily-influenced price movements have absolutely no link to economic growth. It has everything to do with the structural condition of the developed and emerging world's monetary system's condition and structure.

The developed world is currently experiencing flat economic growth or recession. Many feel the US could enter recession next year. The Gold Price on the surface appears to be reflecting this as it sits around $300 below its peak at present. Some traders see stronger US economic growth as undermining the 'safe-haven' value of gold and silver. But do the facts bear that out and does history do so?

The Gold Price experienced its greatest rises from 2005 to mid-2007, from $300 to $1,200. It then slipped back to $1,000 when general 'investor stress' forced investors to sell almost everything to lessen their leverage and indebtedness. Once this was out of the way, gold resumed its rise, reaching $1,900+ in 2011 before correcting again to current levels. During 2005 to 2007 economic growth was robust in the developed world. The rise from $1,000 to $1,900 coincided with a stumbling recovery, whereas the current period of falling gold and Silver Prices has coincided with flat to falling growth in the developed world. So, just looking at the developed world during the last 7 years shows that gold and silver rise while the developed world is growing economically. 

But is this a valid link? As the developed world grows, do people Buy Gold because they have more disposable income? We think not. The advent of the gold Exchange Traded funds in the developed world saw gold investors choose that route over investments in gold mining shares, simply because it was the first time they could buy an investment simply and unequivocally linked to the Gold Price itself and having the ability to influence the Gold Price directly. This accounted for not far short of 2,000 tonnes of investments into gold. Again economic growth was not a factor. It was a structural change in the gold market.

To see a direct link between economic growth and the gold and Silver Prices, we look across at the emerging world. In Asia, i.e. China, India the Philippines and other emerging lands, economic growth has enriched poor people on a broad front. People emerging from poverty are keenly aware of the need for savings to shield them against returning to poverty. They are not convinced that banks are the place to keep ones cash savings as inflation has whittled away its buying power over time in every country and, intermittently, currencies have been swallowed up in war and runaway inflation. 

Therefore, gold the time-trusted, investment, free of human interference, in itself has been where individuals have placed their savings. In China this has been with the encouragement of the government. In India the government is unhappy with so much of GDP being absorbed by gold, but because of distrust in government and its officials, the Indian investor favors gold as protection against Indian institutions and inflation and always buys gold and silver, over time. The rise in disposable income in Asia has led to a steady and growing investment in gold and silver. So here, economic growth triggers investment in gold. 

So, yes, gold and silver investments can be directly linked to economic growth in Asia and contribute to gold demand and rising Gold Prices.

Will more central bank reserves find their way into gold in times of economic growth? Again, we have to separate developed world from emerging world central bank activity. 

In the developed world, central bankers stopped selling gold as a component of reserves in 2009. Since then they have not added gold to their reserves. But the issue is now very firmly on the table amongst the banks. Both in the US and in Europe, bankers are deciding whether to treat gold as a Tier I asset up from the current Tier II level, where banks can only add 50% of its value as an asset on their balance sheets. Under a Tier I definition this will rise to 100%. As we saw in the credit crunch and in the Eurozone debt crisis, banks will unload asset from the Tier II category in favour of Tier I assets –such as US Treasuries—to boost their creditworthiness. 

If (in the US and through the Basel discussions in Europe) gold is re-defined as a Tier I asset, then it will serve the commercial banks to switch into gold from other Tier II assets in times of credit stress. With a prudent diversification in mind, it will also serve to place some of the emphasis they now place on US Treasuries onto gold. After all, even a central bank as august as the Bundesbank, has the opinion that "gold is a counter to the swings in the Dollar".

The impetus this will give to gold demand will be significant to the Gold Price and by extension to the Silver Price. 

In the emerging world, the rise of both central and commercial bank reserves has, for the first time, given the central banks levels of reserves that need to be diversified. It's clear that the emerging world is unhappy with its concentration in the US Dollar and needs to have a wider spread of investments to counter not just the uncertainties facing their own countries but the countries of the reserves they hold. 

Over the last couple of years we have seen emerging world central banks buying significant amounts of gold both from local production and in the open market to raise the percentage of gold they hold in reserves. At the moment, the percentage of gold in their reserves is nowhere near the levels seen in the developed world's central banks. It's this shortfall that's prompting their interest in gold now. 

In total, central bank demand is a very significant contributor to gold demand and will continue to be so for the foreseeable future. In this case then, economic growth has a direct link to the Gold Price. With the emerging world's demand for gold accounting for around 60% of total gold demand, on this demand alone we have to say that, yes, gold and Silver Prices will continue to rise in a growing global economy.

While the conclusion of this article has to agree that gold and Silver Prices will continue to rise in a growing global economy there is also a very strong case to be made for them rising in an increasingly debt-distressed developed world. 

Buy Gold and Silver Bullion – sales tax free – at the lowest possible prices when you buy through BullionVault...

  • Reddit logo
  • Facebook logo
  • Twitter logo
  • Google logo
  • Yahoo logo
  • LinkedIn logo
  • Digg logo
  • StumbleUpon logo
  • Technorati logo
  • del.icio.us logo

JULIAN PHILLIPS – one half of the highly respected team at GoldForecaster.com – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

See full archive of Julian Phillips.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News, RSS links are shown there.

Follow Us

Facebook Youtube Twitter LinkedIn

 

Mobile apps

 - live trading 24/7

 - buy & sell instantly

 - up-to-the-second charts

 

 

 

Daily news email
Go to 'communications settings' 

Get the latest daily gold price news free by email

Latest gold news by email

 

 

 

Gold Investor Index
5 February 2019

Gold Investor Index

Gold up, investing up!

 

 

 

CNBC TV-18
3 January 2019

CNBC TV-18

Gold jumps into New Year

 

 

 

Portfolio Adviser
19 October 2018

Vaulted large bar gold. Source: BullionVault

Beyond gold 'chatter'

 

 

 

Money Observer
6 August 2018

Bitcoin ain't gold

No, Bitcoin isn't "new" gold

 

 

 

  •  Email us

Market Fundamentals

  • Gold 'Set to Drive' Silver Price Gains in 2019
  • LBMA Gold Price Forecasts See Tight Range in 2019
  • Gold Mining M&A Now 'Easier' Than New Exploration
More...
  • Cost calculator
  • Cookies
  • Terms & conditions

©BullionVault Ltd 2005-

  • Twitter
  • Facebook
  • Google Plus
  • LinkedIn
  • YouTube