What kind of stocks do you want to own in a stagflationary economy? Well, here in Australia it might not seem like it matters. The ASX/200 is back over 6,000. Banks are up. Retailers are up. Media stocks are up. Resource stocks are up. In this kind of market, even down would be up, if it had a listing.
Still, we think gold stocks represent intriguing value. The gold price hovers near the number of the beast at USD$666. And meanwhile, gold production is falling all over in the globe. Both Australia and South Africa, two of the world’s three largest gold producing nations, experienced declines in production in 2006. And today we read that gold production in Peru has fallen 25% in the last year.
Peru is the world’s fifth largest gold producer. Hmmn. We’re not prepared to make the case that world gold production has “peaked out” the way world oil production may have peaked/be peaking out. But a couple of obvious things are going on in the gold market. First, the supply of paper money, especially U.S. dollars is rising. Gold is priced in dollars. Thus, the gold price is rising.
Second, investment demand for gold is growing, mostly via exchange traded funds (ETFs). ETFs buy physical gold as security for paper units which give the owner a share of the physical stuff. They have become an easy way for large money managers to own gold as an “alternative asset class” without owning gold company stocks. And because gold ETFs correlate to the gold price, they are a kind of one-stop-shopping for long-term gold bulls. Two new gold ETFs are preparing to list in India, all of which means that some of that non-central bank global liquidity we mentioned earlier may continue finding its way into gold in the next few months.
Finally, the basic problem with gold – and any commodity – is that it’s harder to produce on demand than, say, U.S. dollars. You’ve got to find it. And these days, the places you can find it pose increasing political risks. That adds to the difficulty of bringing on new supply to meet growing investment demand. And that, as far as we can tell, is a formula for rising gold prices.
Of course, gold has not exactly enjoyed the “safe haven” status it’s been known for in the past. Markets seem to have largely discounted or ignored the volatile possibilities of a U.S.-China trade war or a Sunni-Shiite power struggle in the Middle East. Or maybe the markets know something we don’t. And that wouldn’t be a surprise.
Markets and Money