Sovereign Wealth Funds Could Boost Gold Price

China’s state fund is currently about US$237 billion, and growing every day. “The sheer size of the fund has sparked concerns about its wider effects on financial markets and its potential to fuel inflation in asset prices at a time when a pickup in global inflation is already a concern,” writes Geoffrey Newman in today’s Australian.

It does raise an interesting problem in this age of mega-funds. When you’re sitting on so much cash, how do you invest in anything without immediately causing a huge spike in prices?

One solution might be to engage in projects of enormous scale. Another is to dish out the billions to separate money managers and funds, letting them allocate your capital for you. China will probably do a little of both, developing new projects and investing in publicly listed companies with current projects.

What are those projects? Hmm. Excellent question. This morning we perused a report that detailed mining projects by type and by state in Australia. The really interesting observation in the report is that Australia might be ripe for a whole new age of exploration – but this time with high-tech exploration tools. It would be a whole new level of intensity for the resource boom.

The emergence of Sovereign Wealth Funds could be good news for gold. ScotiaMacotta, the bullion division of the Bank of Nova Scotia, issued a new report predicting an increase in investment demand for precious metals, especially gold.
The bank wrote that, “Going forward, it looks as though interest across the commodities is picking up again and this should see a renewed interest in gold, especially as the fundamentals for the metal remain broadly supported. In addition, the dynamics of sovereign reserves seems to be changing and these could have fear-reaching implications for the dollar, all of which could be bullish for gold.”

A pickup in investment demand would be a relief for the gold price. Holdings of bullion by gold ETFs actually declined in April from 651 million tonnes to 635 million tonnes. After the initial loading up, institutions had their fill and have backed off.

At best, gold is treated as a curiosity by today’s money shufflers. It’s shiny. It’s heavy. And it’s not paper. But as an asset, it occupies a very small percentage of professional portfolios. And as a commodity, gold doesn’t enjoy the strong economic demand of base metals.

Gold’s true calling – its purpose in economic life – is as money. Money itself, of course, is just a commodity, a medium of exchange between traders. We’ve said it before but it’s worth repeating. Gold today is about where it was in 1977, before the big run up in 1979 and 1980. The world economy is on the doorstep of great inflation. The US dollar is going to fall apart faster than Michael Jackson’s face. But that could still be a few years away.

Dan Denning
Markets and Money

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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