By Nik Kalsi
Price of gold could reach US$5k in 5 years, says Nik Kalsi
Does this only happen to me, but every time I meet someone new, we get chatting and then somewhere in the conversation, I get asked the question - what do you do for a living?
When I tell them I’m a professional gold trader, I always get asked the exact same question without fail. Is gold in a bubble?
I always wonder whether this is genuine curiosity or are people just obsessed with bubbles?
Either way, I don’t blame them. After all, the global economy has undergone three massive bubbles in the past decade alone - stock market, dotcom and real estate.
After the recent pullback in gold price seen on February 29, infamously labelled the ‘flash crash’, gold fell by US$100 overnight.
The primary catalyst for the decline was Ben Bernanke’s semi-annual testimony to Congress, in which the Fed Chairman indicated that the central bank was not prepared to launch a third round of quantitative easing in the near future.
This resulted in two things - a huge sell-off in the gold market and many commentators reopening the ‘great gold debate’, calling this the end of the gold market bubble.
This is not an opinion I share. The factors driving gold price persist and are likely to do so for many years to come. It is my opinion that in the next three to five years gold will reach US$3000 to US$5000 an ounce, and possibly much more.
However, I admit, the latest pullback in gold was sudden, but it was nothing unusual. Gold has had three 20 percent corrections since this bull market began in 2001. Once in 2006, again in 2008, and just six months ago in September - yes, just six months ago.
If you look at intra-day prices, it fell from a high on 6 September of US$1,923 to a low on 26 September of US$1,535 before returning to the long-term bull market. I think this current move will be no different.
At the Middle East Investment Summit at Jumeirah Beach Hotel in Dubai a few weeks ago, I heard Marc Faber (a Swiss gold investor and advisor to a number of investment funds) make a very important point. He said “corrections of 40 percent are nothing unusual in a bull market”.
That makes my statement of 20 percent seem extremely conservative in comparison.
So despite Mr Bernanke’s “no more quantitative easing” - the economy’s back to normal again statement, I don’t believe quantitative is finished. Not by a long-shot. You don’t need to be an economist to work out that Mr Bernanke and his friends at central banks will be back at the printers again, before we know it.
But quantitative easing isn’t the only thing that’s been driving the gold market. I want to show you three good reasons why gold hasn’t reached the top and isn’t in a bubble.
Firstly, Inflation. Gold is renowned as a hedge against inflation. The most consistent factor determining the price of gold has been inflation - as inflation goes up, the price of gold goes up along with it.
Today, a number of factors are conspiring to create the perfect inflationary storm: extremely stimulative monetary policy, a long term decline in the dollar, a spike in oil prices and US’s status as the world’s biggest debtor nation.
Secondly, demand from the China, India and Middle East, who see gold as a wealth-preserving asset that serves the purpose of money. Today, between 1 percent and 2 percent of global investable assets are gold related, which are mainly owned by Asian and Middle Eastern investors.
Gold is owned by a minority: the smart minority. For a bubble you need widespread ownership, like we saw during the dotcom craze.
Finally, there are many independent trends that are having a direct impact on the price of gold. The most prominent are central banks buying gold at record levels.
Central banks were net sellers for nearly two decades until 2009, when they officially became net buyers. India has also recently purchased oil from a Gulf nation using gold, not dollars. These trends are significant and have an indirect impact on the price of gold.
In conclusion, gold is in a period of consolidation. There’s no reason to believe we’re in a bubble - gold will continue rising in value for years to come. Investors shouldn’t be surprised by the pullback, and should use this latest move down to increase their long-term exposure to gold.
This dip is a buying event and nothing more. If anyone is hesitant to buy as they feel they have “missed the boat.” Perhaps this Chinese proverb will help:
"The best time to plant a tree is twenty years ago. The second best time is today."