Monday, April 11, 2011

Tim Cohen Examines Standard Chartered Forecast

Standard Chartered reversed itself last Thursday, shifting from a bearish perspective on gold to a bullish one that calls for $2100 gold in 2014. Its reversal got Tim Cohen wondering about their reasoning, as he's more used to mainstream investment analysts saying gold's rises were unjustified. Used to seeing gold as a hedge against trouble, he finds Standard's argument a little counterintuitive but accepts it.
Before hedge-fund managers, gold investors were, and in some ways remain, the gloomy side of investing. This is in itself is a contradiction in terms. To be an investor is almost by definition to be positive about the world.

But for a gold investor, the end of the world is always right around the corner, and the sky is definitely going to fall, right now. At least, if you don’t have gold shares. If you do, you’re fine....

So what justifies this change [that links gold with prosperity]? The problem is not that the gold price explosion has no explanation. Just the opposite: it has too many explanations. Among these, the report suggests, are persistent dollar weakness, safe-haven inflows due to the credit crunch, a reduction in sales by central banks, and producer de-hedging.

Yet beyond these immediate issues lies something stronger and more underlying: a really strong correlation between income levels in China and India and the gold price, the report claims. If this is true, then why is it that the gold price declined in the period 1980- 2000 while incomes were rising in India and China? The answer is that in this period both countries were too small in terms of income per head to make a big dent on the gold price. Income per head was 2% of average income in the US.

This year, China and India together will import about half the world’s gold, and income per head will reach about 6% of US levels.
His only demur is based on a hunch that Asian demand is motivated by a little more than prosperity meeeting tradition. In mainland China, particularly, negative real interest rates are meshing with rising inflation. Cohen also mentions that the report says gold demand will eventually diminish as trust in financial institutions solidifies.

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