Andy Xie wrote an article in CaixinOnline where he shared his insights on the gold prices. Andy predicts that, despite its recent setback, gold remains a big beneficiary of the current macro environment. It could make a new high in the current year and rise much higher in 2014. The gold bull market will end when an inflation crisis pushes central bankers around the world to tighten aggressively.
The Enduring Glow of Gold
A ripple of skepticism recently hit prices of the yellow metal, but gold remains the ultimate hedge on inflation
By Andy Xie
The global economy has already entered into stagflation with a growth rate of 2 percent and inflation at 3 percent. The inflation rate is likely to rise above 4 percent in 18 months while the growth rate will remain stuck in the same range. With inflation twice as high as the growth rate, the global economy will slip deeper into stagflation.
The recent decline in commodity prices does not signal a reversal in the inflationary trend. It is a onetime redistribution of mining income to consumer purchasing power. The prevailing negative real interest rate channels monetary growth above economic growth into inflation wherever there is shortage. Manual labor in emerging economies, skilled labor in the developed economies, agricultural commodities, rent, healthcare, education, etc., are leading the inflationary trend.
Inflation expectations are already a self-reinforcing influence on emerging economies such as India. It will take root in developed economies. When this occurs, the global economy will run into an inflationary crisis as a result of wrong-headed policies used to deal with the financial crisis.
Multinational companies remain the biggest beneficiaries of the current global environment. The macro instabilities give them opportunities to arbitrage the frequent fluctuations in demand and production costs across the globe. The negative real interest rate has boosted their profits significantly, too.[…]
Gold Still Glitters
The recent sharp decline in gold prices has shaken the confidence of many people. Don’t worry. The price of gold has dipped, but will rise to new heights soon. In the long term, gold prices will rise far more than inflation. For the masses, gold is the best inflation hedge. It is the best weapon for the little guy to fight central banks that help a few to rob many.
Yes, gold doesn’t bear interest. Many, including Warren Buffett, belittle its investment value. But, paintings or antiques don’t bear interest either. When money supply is rising, anything scarce tends to rise in value. Gold is the best scarce commodity in the world. There are more artists that can paint more paintings every day. Eighty percent of the world’s gold has already been extracted. The remaining 20 percent will be dug up in the next 20 years. The money supply will grow forever. But the gold supply can grow only by 25 percent and no more.
The income growth in emerging economies will vastly increase with gold demand. When people realize how little gold the world has left, the price will skyrocket. If you don’t know how to preserve your wealth in an inflationary environment, you should accumulate gold. When the price comes down, just as it did two weeks ago, just buy more.
Read the entire article at CaixinOnline
Dr Andy Xie 謝國忠 is Shanghai-based independent economist specialising in China and Asia. He is currently director of Rosetta Stone Advisors and of China Boqi Environmental Science and Technology.
Dr Xie is one of the few economists who has accurately predicted economic bubbles including the 1997 Asian Financial Crisis and the more recent subprime meltdown in the United States. He joined Morgan Stanley in 1997 and was Managing Director and Head of the firm’s Asia/Pacific economics team until 2006. Prior to that he spent two years with Macquarie Bank in Singapore, where he was an associate director in corporate finance. He also spent five years as an economist with the World Bank.