Grubb said in Beijing that the current deflation and the future inflation would not stop the bullish gold market which has already lasted for eight years.
Total gold demand rose 38%, year on year, to 1016 tons in the first quarter of 2009, according to a WGC report on gold demand trends, released on May 20, as investors continue to worry about future inflation and uncertainties on the financial market.
The global financial crisis has led to changes in the structure of the gold market. Gold investment demand in the first quarter, including ETFs, gold bars, and gold coins, rocketed 248%, year on year, to 596 tons. Meanwhile, gold for jewelry and industrial demand continued its decline, by 24% in the first quarter, due mainly to weak demand in the electronics industry.
Lack of liquidity is still the biggest problem facing the global economy. Although the Fed is busy printing new notes, the USD is still trending stronger than other currencies. Mr. Grubb believes, though, that inflation is destined to occur in future as countries are injecting vast sums of liquidity into their economies, though it won't come in the short-term. "The current crisis started in November 2007. According to rules of economic cycles, the economy will be back to a normal level in perhaps five years, so we'll see or feel the coming of inflation in 2011 or so."
Recently prices for bulk commodities have rebounded a bit, some up by as much as 20%. Crude oil, for example, is recently up to around $60 per barrel, and prices for some metals have also risen. However, Mr. Grubb doesn't think this is enough to prove the market has begun to rebound. "According to my personal experience in the financial market for over 20 years, the economic recession will be a long-term process instead of a short one, and the rebound won't come so soon. The curve for future may be W shaped."
Mr. Grubb himself has done research on how to optimize investment portfolio. "We were very surprised to find that the percentage of gold in total reserves needed by central banks is higher than the percentage of gold in total investment for individual investors, for they differ from institutional and individual investors in terms of the formation, usage, and purpose of forex reserve. Due to security concerns, this percentage should usually be two or several times of that of individual investors. We suggest 10% as a reasonable proportion."
Before the collapse of the Bretton Woods System, the US and European countries accumulated a great deal of gold reserve, often accounting for 40% to 60% of total forex reserves. With the world's No. 1 foreign exchange reserve, China's gold reserve accounts for only 1.6% of its total forex reserve even after its recent increase, still a very low percentage.
Although the global monetary system led by USD is under constant fire, Mr. Grubb thinks it impossible for the world to go back to the age of gold standard. "Financial crisis under a gold standard would be even worse, for without enough monetary stimulus, the economy would not be likely to revive."
He still thinks gold should play a role in the new international financial system, however, and stated three reasons.
First, he thinks the suggestion to reinforce the IMF's Special Drawing Rights, raised by Zhou Xiaochuan, governor of the People's Bank of China, the country's central bank, at the G20 meeting, is a good idea. According to this suggestion, gold will play an active role in the international financial system, just like other mainstream currencies including USD, euro, and RMB.
Second, the chain crisis spreading from credit sectors to the financial derivatives market shows that a lack of reserve funds is a problem for the banking system. The government may ask commercial banks to add a certain percentage of gold into their capital funds.
Third, after the crisis, the current mode for individual investment and asset management should be analyzed and corrected. Assets managers will naturally prefer products with lower risk, and gold is a good choice for long-term investors.
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